Sri Lanka’s FTA exports to India have grown 40-fold from 2000 to 2013 while imports from India under the FTA grew six-fold. Policy makers have been trying to replicate this success in the services and investment sectors through a Comprehensive Economic Partnership Agreement (CEPA), but an anti-India trade lobby prefers to see things differently.
CEPA was to be signed in 2008 by former President Mahinda Rajapaksa but an anti-India lobby thwarted it after a few business leaders expressed concern that Indian workers would swamp the island and create mass unemployment.
Sri Lanka’s professionals and services sector are now bracing themselves for a possible resumption of negotiations for a Comprehensive Economic Partnership Agreement (CEPA) with India after seven years. In March 2015, India’s premier Narendra Modi became the first head of state from across the Palk Strait to visit Colombo in nearly three decades and he invited Sri Lanka to bring CEPA back to the table.
This reactivated the anti-CEPA and anti-FTA lobby, the most vocal among whom are exporters and manufacturers who claim FTA failures would be magnified by CEPA. None object to Indian investments, which have grown to over US$ 1 billion since 2000.They claim that the CEPA would be irrevocable leaving Sri Lanka at India’s mercy.
But a closer examination of trade data suggests the FTA was a success as far as Sri Lanka’s exports are concerned. Trading with India is a bureaucratic nightmare but many exporters have enjoyed success there and CEPA included measures to deal with barriers besides import duty (called non-tariff barriers) at federal and state level. Technocrats familiar with CEPA had shared this and other positives of the proposed deal from time to time. As a practice, details of bilateral and multilateral trade agreements are not discussed with stakeholders to prevent special interest groups scuttling them.
A LOOK AT CEPA…
CEPA is not a fixed document and it cannot be if it proposes to be a comprehensive economic agreement. Negotiating the deal could take years. The plan was to formalize a basic agreement and then keep building upon it; both countries have the ability to negotiate around areas of trade, services, investment and labour mobility and include them as schedules to the CEPA document. This also allows schedules to be removed. “So if Sri Lanka is unhappy with a certain arrangement it can be removed from CEPA,” says Dr.Saman Kelegama, Executive Director of the think tank, the Institute of Policy Studies and leader of the CEPA negotiating team for the services sector.
Sri Lanka’s technical negotiating team had insisted that India needed to make allowances for Sri Lanka’s small size, and the Indian negotiators agreed to deal with this asymmetry by granting “special and differential treatment” to Sri Lanka as it did with the India-Sri Lanka FTA. This was a crucial development. Policy makers, technocrats and business chambers that had followed the formulation of CEPA failed to educate stakeholders about this crucial point and the vocal anti-CEPA lobby benefitted by this. Moreover, CEPA also did not fit the political leadership’s nationalistic stance in 2008.
TRADE IN GOODS
Opponents of CEPA point out that India had benefitted unfairly under the FTA. But this is not the case. Under the free trade agreement, Sri Lankan exporters clearly benefitted.
In 2000 of Sri Lanka’s US$ 55.6 million exports to India 16% or US$ 8.6 million was under the FTA. By 2013, total exports to India had grown to half a billion US dollars with the FTA accounting for 65% of this or US$ 354 million. Compare this with how India fared under the FTA. Imports from India amounted to US$ 600 million in 2000 of which 9% or US$ 53.9 million was under the FTA. By 2013 imports from India ballooned to US$ 3,092 million but imports under FTA amounted to just 13% or US$ 393 million. Clearly, Sri Lanka’s exports had grown because of the FTA whereas it relied heavily on Indian imports that fell outside the scope of the FTA. Copper and vegetable oil had dominated Sri Lanka’s FTA export basket, but by 2005 a dispute with India ended this, resulting in a near US$ 100 million decline in exports to India the next year. But Sri Lankan exports have since recovered and diversified into value-added tea, insulated wires and cables, intimate garments, furniture, tableware, rubber gloves and machinery. Sri Lanka’s exports under the FTA had grown 877% from 2000 to 2013 whereas imports from India had grown by just 415%. The trade deficit as a ratio of imports to exports under the FTA had shrunk sharply from 6.2 times to 1.1 times. These trade figures fail to convince CEPA’s opponents who claim that India is rife with non-tariff barriers and bureaucratic red tape. This is true, but CEPA was intended to address these issues. Scuttling CEPA leaves FTA problems unaddressed. Technocrats close to the CEPA negotiations claim several measures were taken to incorporate hassle-free trade across India’s border and at state borders.
THIS WAS WHAT THE CEPA NEGOTIATORS HAD AGREED
India agreed to remove 114 items off its negative list while Sri Lanka agreed to remove 36 items off its negative list in a stakeholder driven process. The Indians had earlier relaxed quotas on up to eight million pieces of ready-made garments from Sri Lanka of which three million is allowed in to India duty free with no entry restrictions as long as the fabric is of Indian-make.
During the final round of deliberations India said they would increase the duty free component to six million pieces while the balance was to receive a 75% margin of preference.
India also decided to relax Rules of Origin, which impose limitations of exporting goods produced with imports by several Sri Lankan industries, in a bid to assist the country. Over 436 products have been classified into this new category, an increase from 5% to 75% of total Sri Lankan exports to India.
Both countries agreed to review their negative lists each year. The negative lists include goods for which preferential treatment are not given.
The two countries would have been required to bring about a convergence in their regulatory frameworks. Different systems, especially at customs and clearance undermine the deal and a need to develop a legal framework for customs integration and cooperation was identified. CEPA also proposed to develop mechanisms for better protection, dispute settlement and prevention of antidumping. These agreements were widely circulated, but unfortunately after the anti-CEPA lobby gathered steam then President Mahinda Rajapaksa decided to abandon the deal, and information was withheld. Proponents of CEPA could not make a meaningful case without data to show and the fear mongering anti-CEPA lobby thrived.
While India may have been noble in not insisting on reciprocity on account of Sri Lanka’s small size, its officials were prone to bullying too. Proponents of CEPA who had dealings with officials across the Palk Strait say bureaucratic arrogance made it difficult to engage. Also, India had not taken enough steps to make meaningful concessions for Sri Lanka’s export strengths such as apparel and tea. However, these were minor irritations, and Sri Lanka’s negotiators were able to make some meaningful inroads in the areas of services, movement of people and investments.
CEPA was first mooted in 2002. The following year a Joint Study Group was formed and an initial report was exchanged by the leaders of both countries in October that year. The plan was to get CEPA underway by 2004 but both countries were in election mode that year and technical discussions commenced only in 2005. President Mahinda Rajapaksa had pushed for this. After 13 rounds of negotiations the agreement was ready to be signed in 2008 on the sidelines of the SAARC summit in Colombo. By 2008, the following schedules had been included after negotiation and it was felt the initial agreement was ready for signing and implementation, although these schedules required more work and fine tuning.
SERVICES AND MOBILITY OF PERSONS :
India offered to open 40 services sectors to Sri Lankan businesses. Sri Lanka committed to opening up just nine sectors. India’s Commitments: Architecture, Medical and Dental, Veterinary, Research and Development in Natural Science, and Social Science, Real Estate Services, Rental and Leasing Services, Management Consultancy, Technical Testing and Analysis, Services related to Energy Distribution, Maintenance and Repair of Equipment, Building Cleaning Services, Packaging Services, Convention services, Telecommunication, Construction, Wholesale Trade, Environmental Services, Higher Education and Tourism.
Sri Lanka’s Commitments: IT, Naval Architects, Skilled Welders and Fitters, Project/Ship Managers, Repair Engineers, Convention Services, Healthcare (outside the Western Province), Tourism and Travel and Audio Visual Services. India agreed to open its borders to Sri Lankan workers and professionals in the above sectors under the following conditions: A stay of 180 days was allowed to start-up operations in India and once a Sri Lankan company was set up there, Sri Lankan professionals could be employed for tenures not exceeding five years. Sri Lankan professionals could also work for Indian companies in engineering and IT related industries for a period of one year. While Sri Lankans can open companies in the rental and leasing sectors, accounting and research and development in agriculture, labour mobility was to be restricted.Sri Lanka’s Commitments: In Computer Related Services Sri Lanka will allow Indians who are expert trainers and technical staff not more than 10 percent of the total staff for every US$ 100,000. Naval Architects, skilled welders and fitters, project/ship managers, repair engineers, automation engineers and technicians are the other professionals who would be allowed into Sri Lanka under CEPA. Those who had seen the CEPA documents claim that Sri Lanka had mostly listed its existing law governing the movement of people into the country as was the usual practice. But the sudden withdrawal of documents from the public made it difficult for the pro-CEPA lobby to convince anybody nor to verify the accuracy of this claim.
INVESTMENTS
The anti-CEPA/FTA lobby has little complain about Indian investments in Sri Lanka amounting to a little more than US$ 1 billion with another US$ 1 billion in the pipeline. Under CEPA, Sri Lanka’s commitments saw Indian companies receiving the same status as a national company in the pre-establishment period during the process of making an investment. However, Sri Lanka could decide on a case-by-case basis whether or not investments from India to a particular sector would be allowed. The scope of application would include a broad range of investments including movable and immovable property, shares, stocks and debentures, contracts for turnkey, construction and International Property Rights. All stages of the investments, pre-establishment and post-establishment, were covered by CEPA. Taxation, incentives and grants and government procurement had been excluded so as to allow policy space. While Sri Lanka makes a commitment that no foreign investment would be acquired unfairly, a safety clause was to be added that the government could acquire such investments for a public purpose with an obligation to compensate the investors. An Investor-to-State Dispute Settlement Mechanism was to be established. Under this mechanism Indian investors would be able to seek recourse at a neutral forum and is open to international tribunals. However, investors in the pre-establishment stage will not be able to access international tribunals as investment would not have arrived.
THE PROBLEM…
Despite the success of the FTA and safeguards incorporated into CEPA, its vocal opponents are not convinced that it could help Sri Lanka. The underlying problem is the trust deficit. The anti-CEPA lobby did not trust Mahinda Rajapaksa’s motives and successfully stalled CEPA. Policy makers need to build trust if CEPA is to work and benefit the Sri Lankan economy. There is also a sinister reason why CEPA is opposed. Some manufacturers have been hurt by Indian bureaucracy and some of them have been hurt by Indian imports to Sri Lanka. They ignore the success stories of Sri Lankan exporters and manufacturers in India, resort to fear mongering and selective use of data to further their agenda. What is worse, they seem to want to deny the people of this country their economic freedom to choose goods and services for themselves. Since they like using the nationalism card perhaps their rallying cry ought to be this: To offer better value for money for their fellow citizens than their competitors across the Palk Strait could.