Anushka Wijesinha takes us through Sri Lanka’s fits and starts trade reforms journey, challenges to get them back on track, and the hard decisions that must be made if the country is to realise its potential and bring prosperity to its citizens. Wijesinha is an economist with expertise in economic research, policy advisory, strategy formulation and implementation. He was formerly the Advisor to the Minister of Development Strategies and International trade. Currently he works for international organizations on trade, competitiveness, private sector development, and innovation, in Pakistan, Myanmar, Maldives and Sri Lanka. He is on the Boards of several Sri Lankan financial services companies.

W e had a closed economy that ended up in food rationing and bread queues until we liberalised in the 70s. How far has Sri Lanka come? We have certainly come a long way since then – we are more integrated with the global economy, we have some world-class exporters, and we have attracted some foreign investors in key sectors. But if you look at the entire period up to now, a good way to describe Sri Lanka’s trade policy journey is one of fits and starts and policy backsliding, in contrast with some of the impressive gains by other countries in the region like China, Singapore, Thailand and Vietnam. These countries have recalibrated their trade policies from time to time, but the trajectory has always remained towards openness and reform.

The Trade-to-GDP ratio is a good indicator to measure progress. The ratio gives us the combined contribution of exports and imports to the economy. In 2000, Sri Lanka had a Trade-to-GDP ratio of 88% and declined sharply to 50.5% over the two decades since. Comparatively, how do some other countries in the region compare? Today, Vietnam’s Trade-to-GDP ratio exceeds 200%, Malaysia 146%, Thailand 132%, South Korea 85%, and Bangladesh is at over 48%. Our exports have remained stable and even growing, but exports have not diversified substantially. Just ten product categories to the same markets generate 80% of total export revenue. Sri Lanka’s share in global exports has not grown in decades either – except for services it has remained pretty much flat. It means that while we might be seeing modest export growth year-on-year, we aren’t making a big dent on the world stage.

It is now well-known that when Sri Lanka introduced liberal economic policies in 1977, it was one of the first countries in Asia and the global south to do so. Trade policy reforms were a big part of that effort and generated considerable foreign investor interest. In the early 80s, the Greater Colombo Economic Commission attracted further investments. Around seven MNCs, including US-based Motorola and Harris Corporation, had their investments approved to set up production facilities in Sri Lanka. These would have created several thousand jobs in the country. Motorola had incorporated a fully-owned subsidiary and planned to employ about 2000 people initially. Harris Corporation had similar plans. But both companies left Sri Lanka for Malaysia because of the outbreak of the armed conflict and they never returned. The 1977 trade reforms did cause some concerns about the fate of domestic industries, and a tariff commission appointed thereafter relooked at how best to recalibrate some of the tariff liberalization. Interestingly, Sri Lanka did not give up on trade reforms, and we had a second wave of reforms in the 1990s.

The Greater Colombo Economic Commission became the BOI (Board of Investment) with greater scope to facilitate investments, resulting in several foreign investments from large and medium-sized companies, particularly to apparels and manufacturing parts and components. Sri Lanka then embarked on some free trade agreements, the first of which was the IndoLanka FTA covering goods, the first bilateral FTA for both countries. Sri Lanka followed that up with an FTA with Pakistan and joining the South Asia Free Trade Agreement, or SAFTA. From that point, while other countries in the region continued to run much faster, entering into multiple bilateral and regional FTAs, Sri Lanka took a break and continues to take a break!

Why has Sri Lanka failed to make progress in terms of trade integration?

Sri Lanka has become more and more protectionist, and over the years, we lost sight of what we wanted and lost the ability to formulate a meaningful trade policy. When we tried to expand the FTA with India and enter into an FTA with Singapore in 2018,it always seemed we were walking around on eggshells, rather than boldly moving forward with what needed to be done, while of course meaningfully and systematically addressing stakeholder concerns.

As a country, we struggle to build consensus between different political groups, industries, labour unions, and special interest groups, preventing us from formulating any clear strategic policy

As a country, we struggle to build consensus between different political groups, industries, labour unions, and special interest groups, preventing us from formulating any clear strategic policy. Take the case of Australia, once a protectionist economy from a trade point of view. It was hard to roll back their trade protections, but when they saw that protectionism was getting them nowhere and that trade reforms were necessary for growth, they built tripartite consensus, pushed for reforms, and have not looked back since. Sri Lanka now needs that kind of consensus-building to happen for trade reforms and for economic growth to take off. Sri Lanka was fortunate to have benefited from two preferential trade regimes offered by the EU and the US, or exports would have suffered due to the protectionist, inward-looking policy regime we had here. Also, while we continued to neglect trade reforms, we have pursued FDIs. I often found a kind of cognitive dissonance between what we wanted to do with FDI with what our trade policy was doing and what our trade policy was offering. We have tried to promote FDI in export-oriented, high value-added manufacturing segments, but our trade policy was not up to it!

There is a strong nexus between investment and trade. Sri Lanka used to be a country that did ambitious and bold things on the trade and FDI front. We opened the economy, created the Greater Colombo Economic Commission and then the BOI, set up free trade zones, launched the 200 garment factories programme, and pioneered FTAs in the region. We even had progressive policies and sound institutional frameworks in place, but we have not used any of these to our benefit. I work with some international trade organizations at a UN-level and I was proud to hear them recognize how visionary Sri Lanka’s Export Development Board Act of 1979 was and how they are recommending similar models to developing countries to this very day. Sadly, we have not done enough to build better from there, with institutions keeping up with the times and evolving. Singapore, on the other hand, has done that. Their trade and export promotion organization is now merged with their enterprise competitiveness and innovation, recognizing that all these need to be aligned and in sync in order to have greater impact.

Where do we find ourselves now? Have we made any progress or regressed further?

Today, everyone agrees exports need to grow, that we need to be more competitive and diversify the export basket. Policymakers are talking about all this more than ever. Yet, we don’t seem to have a coherent approach to trade policymaking that is conducive to growing exports, and promoting export-oriented FDI. I see a disconnect in what we want – to be export-oriented and attract more FDIs, but not recognizing that we don’t have the right trade orientation to enable all that and grow exports as aggressively as our regional peers. For instance, we did not see the importance of the FTA with Singapore, where for the first time, we included investments and services. There was considerable opposition to the FTA which was signed in 2018. We tried to extend the FTA with India to include investments and services but it did not stick.

There has, however, been some positive steps taken over the last decade. Sri Lanka acceded to WTO’s Trade Facilitation Agreement which means that it has committed to streamlining trade processes. While we have not progressed on the trade integration front, trade facilitation reforms are gaining traction among the public and private sectors. Sri Lanka launched a national trade information portal, commenced work on a national single digital window at our borders, and simplified some trade processes. There is now an FTA with Singapore, which for the first time gives Sri Lanka an agreement that includes investment, services and economic cooperation – it’s quite groundbreaking. And it signals to the world that if Sri Lanka can do a free trade agreement with one of the most open and dynamic economies in the world, it must mean that Sri Lanka is ready for something great. Another is the landmark piece of legislation that got passed in 2018 – the Anti-Dumping and Countervailing Measures Acts. Sri Lanka has not had laws that guard against anti-dumping and import surges and provides the framework for protecting industries against unfair external trade practices. We finally have that now – I don’t know how many domestic industries that often call for import protection, actually know about these frameworks available and welcomed these being legislated.

Amidst all the uncertainties caused by the unfolding pandemic, one thing is clear: Covid-19 has not rolled back globalisation

However, many other reforms failed to be followed through, consistently. The earlier government had proposed to phase out para-tariffs over a certain frame, and a first wave was done, but that unfortunately stalled. Once again, the issue of fits and starts and policy backsliding. There was another promising development that I was very passionate about and was disappointed when it fell through. It was around efforts to establish a Trade and Productivity Commission and Trade Adjustment Programme to phase out the para tariffs. But this is some – thing that can be picked up even today.

One of the big reasons why there is private-sector opposition to liberalising the para-tariff systems was that they were worried about the impact on their businesses. They made a case to the government based on very little evidence that they should continue to enjoy protection. Under the Trade Adjustment Programme and the Trade and Productivity Commission, the private sector would have had the opportunity to demonstrate why they needed to have protection for their sectors. There was to be independent analysis and consultation with the private sector before arriving at any conclusions. For example, let’s say a specific industry was asking for protections to be continued for another five years on the basis that they generated a considerable amount of jobs and had many businesses that needed support. The com – mission would have had all the data on growth, employment, number of businesses in the sector, and supply chains to see if this argument for protection held. Also, the commission would have had data for the past decade to see if there have been any productivity gains, leave alone becoming competitive enough to start exporting. If the data suggested that tariff liberalisation could lead to a significant employment impact, socio-economic implications, and that protections have indeed helped to grow the sector, and that some businesses within the sector are now even exporting, which were not before, then tariff liberalisations could be postponed for a specified number of years.

This was just one aspect of the Trade and Productivity Commission and Trade Adjustment Programme and unfortunately, that came at the tail-end of the last regime and did not stick, but that is very relevant even today because it provides a framework within which to do the reforms which make people a little bit more comfortable.

Why is it critical right now to revisit trade reforms and improve trade intergration?

Amidst all the uncertainties caused by the unfolding pandemic, one thing is clear: Covid-19 has not rolled back globalisation, and neither has protectionism taken hold, as some may think. A few countries did take protectionist measures on certain types of exports like medical devices, pharmaceuticals, and personal protective equipment. But by and large, we haven’t seen a massive erosion of global integration. Therefore, it is misleading to assume that we shouldn’t focus on trade at this juncture. We have no option but to strive to improve our trade connectivity with the rest of the world. Sri Lanka has to export because we have a small domestic market. Whether that means more exports of the same things to the same old destinations in Europe and the US or expanding our reach, is another challenge altogether.

There are two reasons why we should also aggressively pursue export-oriented FDIs. For one, not only has globalisation prevailed, but global supply chains are reconfiguring. It started with the US-China trade war, when countries that had overwhelmingly relied on offshoring much of their production to China and production networks around China, have begun to de-risk their supply chains. They are looking to migrate supply chains to alternate and additional locations else – where in Asia. Some global industries are also looking at reshoring and nearshoring their production closer to the home market.

Second, the focus is also shifting from efficiency to resilience. Earlier, there was a ruthless focus on efficiency where businesses looked for the most cost-effective destination to relocate production. With the China-US trade tensions and now Covid-19, global firms are now shifting focus to locations that offer resilience and stability. They are now willing to look for destinations that they may not have looked at earlier because they were a little more expensive. So Sri Lanka has new opportunities to latch on to some of those shifting investments, provided we put our house in order.

What are some misconceptions about trade reforms and trade integration that continue to circulate, misleading and muddying the policy discussion?

Well, the first and most prevalent misconception is trying to promote exports while stopping imports. It’s not just a myth but a fallacy. Exports and imports are two sides of the same coin. A protectionist policy will not allow us to tap into emerging global supply chain opportunities. It won’t attract FDIs into new industries either, so we will only have the same goods to export to the same markets. Another myth is that all FTAs are the same and equal, in purpose. For instance, we approached Singapore for an FTA, not for market access for goods exports but to attract FDI and to integrate and modernise the services sector. Similarly, the FTA with India has given us access to a large market but how we’ve utilised it with effect is another matter. We need a portfolio of strategic FTAs, serving different purposes – to fit an overall goal of trade competitiveness. A dangerous misconception is that FTAs need to deliver favourable trade balances all the time. If it was all about ‘balancing trade’, then our markets in Europe and the US may not want to trade with us any longer! We have a trade surplus with them, while we may have a trade deficit with India. What matters is overall more trade.

The idea is to be more strategic. A trade deficit should not matter if we are trading and we are in productive sectors. A trade deficit should not matter if businesses have the freedom to source inputs that leads to cost-efficiencies and growth, better still if it leads to competitive gains for exports. A trade deficit should not matter if citizens have better choices and the freedom to consume. Not all FDIs are equal either. We may attract FDI to start a manufacturing plant or develop infrastructure, whereas an investment into an apartment complex will not create the same economic gains. We need to figure out what we want to gain with FDI – what are our priority policy goals we want to achieve through FDI, and accordingly target our approaches. In Vietnam’s case, they aimed to plug into global supply chains and improve export diversification. So, they aggressively pursued FDI that would satisfy those specific objectives – and with hard work, they bagged Samsung! Samsung is now Vietnam’s largest investor, with US$ 17 Billion since 2008, 6 factories and 1 R&D centre.

When we have Balance of Payments problems, which we frequently do, the first step is to impose import controls. Is that the right way to go about things?

 It’s not unusual that in times of shocks, like the Covid-19 pandemic, for governments to take measures to control trade and perhaps even the capital account because you’re worried about the balance of payments. The WTO rules have provisions for such shocks and allows such controls within a framework.

 My concern now is that what started as measures to help buffer the current account to see through the Covid conditions are slowly becoming de facto industrial policy measures. And I think that’s a slippery slope and very dangerous. And it’s likely to lead to suboptimal outcomes and a terrible misallocation of resources to benefit a small segment of industry or business. I think it goes back to what I said earlier about trade and investment. It is a perpetuating myth that we can aggressively promote Sri Lanka as an FDI destination while continuing to have the kind of trade regime that we have. We can attract FDI, but that will only benefit a small section of the economy. So yes, we will see FDI numbers improve, but will they deliver the multiplier effect we expect? It won’t happen.

Can you tell us about emerging trends or factors shaping the future of global trade?

The recalibration of global supply chains is one, and I have already discussed that. There is another trend that started even before Covid around sustainability and traceability. The idea of traceability and consumers wanting to know a lot more about the provenance of products, and transparency in supply chains is one of the biggest trends shaping international trade.

The second reason why trade reforms are hard is this: domestic businesses genuinely feel that parts of the playing field are not even

And that is where some businesses have already been able to come out on top because they have done quite a lot to show traceability and acquire credible certifications. I think this is something we have to latch on to because that is an added way to compete even when our actual unit costs will be higher than some of our competitors. We could create better advantages for our exports by latching on to this traceability and sustainability agenda. Within that, I think one opportunity from the technology angle is blockchain. There is more to blockchain technology than cryptocurrencies like Bitcoin. There are transformative opportunities blockchain technology can offer trade. Sri Lanka already does a lot in sectors like tea and rubber that blockchain can bring added value to. Blockchain trade experiments have already covered these commodity type exports. So, I think we can already start with some of those transactions because blockchain offers opportunities for improving traceability, transactionspeed, and trade finance costs. So I would say that’s a big exciting trend. Another factor shaping the future of trade is the fast-growing Asian middle-class consumer segment that has exceeded the middle-class population of Europe and the US combined. Earlier, global trade was all about producing in the East for consumption in the West, but now there’s enough consumption in the East alone, and that’s something to ponder. However, can Sri Lanka shift its export markets from West to East overnight? It’s not easy because building new relationships in the East and adjusting business approaches will take time. We need to look at India, as a market just next door, and despite current concerns about economic growth given the country’s struggles with containing the Covid-19 pandemic, the fact remains that it will be a dynamic, large market with a young population. So India will continue to grow. Its middle class alone is around 200 million, ten times the size of Sri Lanka’s entire population, and just at our doorstep. Southeast Asia is another region that can offer exciting opportunities for us. The ASEAN bloc, for instance, is well integrated and comprises markets of varying sizes and sophistication. It is home to a relatively young population, and consumption is growing, and Sri Lanka needs to explore opportunities to enter those markets and supply chains.

These opportunities can vary:for instance, Japan can be a source for investments and Thailand for technology transfers. The region is also home to frontier markets where Sri Lankan companies can invest, like in Myanmar. We already see companies in logistics, IT, and in finance doing well in Myanmar.

What policy reforms can you recommend? Where should we start? And what makes reforms hard?

We need structural reforms across the economy but let me stick with trade because that is one area we have fallen furthest off the wagon. Sri Lanka has regressed considerably from where it used to be, compared to peer economies. I believe that trade reforms should be top of the list of priorities, but having said that, I need to be clear that FTA’s alone, while necessary, won’t solve our problems. It’s not as simple as improving on trade facilitation, getting investments, and setting up more factories, either. If Sri Lanka is to grab the world’s attention, we will need to make paradigm shifts, and unilateral liberalisation might get us some much needed attention.

Of course, many would argue about all the harm that can come to domestic industries. There will be adjustment costs arising from trade reforms, but there are also mechanisms to minimise the pain – like what I mentioned earlier about the Trade Adjustment Programme. What makes reforms hard? First, we have not built consensus, and I touched on that earlier and gave the Australian example.

We almost need to build a new consensus around why we need trade reforms. And if we do not do that there will always be so much room for resistance and myth propagation and all kinds of tricks. We need to create this consensus like other countries have done to get trade reforms going. The second reason why trade reforms are hard is this: domestic businesses genuinely feel that parts of the playing field are not even. The reason for their opposition to FTAs and trade liberalization, and why they want to keep protections, is that there are things our government, administration and systems do to hurt their business prospects. I wrote more comprehensively on this for the Bar Association Law Journal – instances of outdated, confusing, or missing laws and regulations that affect private enterprise activity in Sri Lanka, drawing from the work we did for the National Export Strategy. For example, faulty administrative structures in the Food Act of 1980, which then affects enterprises in the processed food and beverages sector. Conspicuous gaps in cosmetics regulation, when the NMRA Act was introduced, and absorbed only parts of the provisions in the Cosmetics Devices and Drugs Act of 1980.

If you are in the boating industry, you have to deal with laws and regulations that are so dated, like the Ceylon Boat Ordinance that is 121 years old, and the Merchant Shipping Act that is some 50 years old. In every sector, you will find outdated, unfit-for-purpose regulations or procedures that hold our entrepreneurs back. So, it is almost a rational feeling among those entrepreneurs to want special privileges and protections because they feel so disadvantaged on their own turf that they cannot compete if opened up to foreign competitors. The longer we take to resolve those issues, the harder it will be to get that consensus around trade reforms.

For a long time, I used to think reforms got derailed or postponed because we did not have a strong electoral mandate and political leadership. But now I understand that it is not political leadership that is lacking. People cannot perceive what is at stake, or they cannot imagine the possibilities either, and that to me is even more disconcerting. I am often surprised and perturbed when I encounter folks who seem oblivious to the fact that Sri Lanka is falling far behind. Even people who talk about Singapore and other Asian miracles for Sri Lanka to emulate leave out the broad reforms and trade liberalisation that these countries undertook. We have corporate leaders who have benefited from globalisation. They have benefited from other countries not caring about trade deficits, and they have gained from more open trade regimes elsewhere, even open borders for immigration in those other countries. Yet, even among these corporate leaders, there are business leaders who continue to insist on continuing with the inward-looking protectionist trade policy of the day. It is troubling. I honestly don’t know where the change needs to start.

Do we still have space to build the manufacturing base? Should we focus more on services?

I think we have the opportunity to build manufacturing. But it can’t be in the same way that we did the 200 Garment Factory Programme. We need to play in more technology and innovation-driven niche areas. It may be specific parts of a supply chain. Why we should continue to focus on manufacturing is twofold. One is because I think we can, and we have companies here doing it already. And they point to the possibility of doing more. But secondly, because we have to. If we assume that the only way to grow the economy and create jobs is through services, we will leave many people behind. Because you are then expecting a transition of 30% of our population from agriculture into services, leapfrogging more like, and there has been no country that has done that in a short period of time. So we cannot expect to get broad-based inclusive growth without a manufacturing base.

If you look at where we are in terms of manufacturing, it points to what’s possible. We don’t have a single sector with a thousand firms. Apparel manufacturing comes the closest with probably around 300 firms, but no other industry comes close. But we certainly can create better opportunities in manufacturing provided we diversify into multiple sectors and build competitive advantages around standards, quality, sustainability, and innovation. We need to start targeting some specific value chains that we want to be in and then look for anchor investors for support.

Is there a case for relaxing migration controls, especially to attract high-skilled professionals?

Absolutely! And I don’t think it’s only high-end skills that we need. We may need to take a closer look at skills gaps across the economy, where a shortage of skills can hurt growth, and already construction workers from abroad are allowed under specific conditions. When it comes to high-skilled professionals, these will have to be people who can help our firms to innovate and become globally competitive. We cannot continue to grow by doing the same exports to the same markets. We need to diversify our exports basket and get into highvalue-added services. To achieve this, we need to attract the best talent. Ricardo Hausmann of Harvard University’s Centre for International Development said it best: he said it was easier to move brains into countries than moving new know-how into brains.

Where do you want Sri Lanka to be ten years from now?

 I would hope that we would have moved away from this fallacy or this flawed idea of what it means to grow domestic entrepreneurs and domestic industry – there’s much more to it than what Sri Lanka keeps revolving around and reverting to, which is import controls. I would like to see us focus more on driving productivity improvement, investing in skills development and technology. We need to create a level-playing field for them by removing unnecessary legal and regulatory impediments and updating archaic laws. Our borders can be more efficient.

We cannot continue to grow by doing the same exports to the same markets. We need to diversify our exports basket and get into high-value-added services

With so much dependence on import substitution, we miss out on doing so much more to help the domestic industries grow and become globally competitive. I would like to see that we have added new export categories into our export basket by tapping into new value chains. Post-war, most of the FDIs went into the non-tradable sector, so I hope to see FDIs driving Sri Lanka’s exports to a new age instead. Sri Lanka doesn’t have a lot of cost advantages, so I am hopeful that we will realise the gains of a stronger focus on sustainability and biodiversity. In every sector, we will have an advantage if we focus on gaining green credentials on protecting the environment and using that as a new competitiveness factor along with traceability, sustainability, and all the good things that discerning consumers want. And finally, and I think this is a big wish, I would like to see some consensus around trade reforms. And for anyone who says that it’s kind of naive to expect that kind of consensus, I would argue that plenty of countries have done it. We simply cannot afford not to.