Sri Lanka has concluded an FTA with Thailand, expanding its bilateral FTA portfolio which includes India, Iran, Pakistan, and Singapore. This is all we’ve managed since independence demonstrating an aversion to ingenuity and competition. Singapore has 51 FTA (bilateral and regional), according to the ADB’s Asia Regional Integration Centre, while India has 47, South Korea 46, Malaysia 36, Thailand 39, and Pakistan 35.
Sri Lanka finds itself at a make-or-break moment in its quest for economic revitalization. The path ahead demands bold action and strategic decisions. Embracing change, driving innovation, and bolstering competitiveness are not mere options but imperatives. To unlock its vast economic potential and stake its claim as a significant global player, Sri Lanka must aggressively pursue Free Trade Agreements, enact crucial legislative protections, and strategically position itself to tap into the thriving Asian growth story and global value chains.
An Appropriate Starter:
Why Thailand? Consider the size of its economy. Thailand’s GDP in 2022 hit $536.16 billion, ranking second in ASEAN, just behind Indonesia, ninth in Asia overall, and 24th globally. It is also a significant player in exports, shipping goods worth $283.8 billion in 2022, the third highest in ASEAN and ninth in Asia. Foreign Direct Investment (FDI) into Thailand hit $10 billion in 2022, making it the third-largest recipient in ASEAN, according to Lloyds Bank Trade. The ASEAN powerhouse also had outward FDIs amounting to $8 billion, according to UNCTAD, a key area of interest in the FTA.
A September 2023 paper from the Institute of Policy Studies shares some insights into what was then work-in-progress negotiations. It indicated that the Sri Lanka-Thailand Free Trade Agreement (FTA) presents both challenges and opportunities for the two nations, given their structural differences in economies.
Despite variations in comparative advantages and the complexity of export/import product baskets, an FTA between Sri Lanka and Thailand offers numerous benefits, particularly in enhancing consumer welfare access to a wide range of low-cost imports, the IPS noted.
Thailand, with its comparative advantage in numerous products and a more complex production structure, stands to gain significantly from increased exports to Sri Lanka. On the other hand, Sri Lanka can benefit from importing low-tech manufacturing products and agricultural goods from Thailand. However, both countries must navigate significant adjustments in domestic production sectors to fully leverage the FTA’s potential.
While the bilateral trade between the two nations is currently imbalanced, with Thailand exporting significantly more than Sri Lanka, there is potential for growth in both directions. Despite challenges such as high tariffs on Sri Lanka’s significant exports, the removal of tariffs through the FTA could lead to substantial increases in bilateral trade, benefiting both countries’ economies.
The think tank suggested that while the FTA holds promise for enhancing bilateral trade and consumer welfare, further analysis is needed to assess its economy-wide effects, including employment, GDP, and wage effects. Additionally, the potential for service sector liberalization and its impact should be explored further, indicating the need for a comprehensive approach beyond tariffs on goods trade. Overall, the IPS study suggested that the Sri Lanka-Thailand FTA has the potential to significantly boost trade and economic cooperation between the two nations if implemented strategically and with careful consideration of all stakeholders’ interests.
K.J. Weerasinghe, the Chief Negotiator of the International Trade Office, speaking at the Ceylon Chamber Forum in February 2024, emphasized the significance of the Free Trade Agreement (FTA) between Sri Lanka and Thailand during a seminar at the Ceylon Chamber of Commerce. He said that the FTA with Thailand is part of a larger strategy to enhance access to the ASEAN region and eventually gain entry into the Regional Comprehensive Economic Partnership (RCEP), which is the largest trade bloc globally.
The Regional Comprehensive Economic Partnership (RCEP) is a significant free trade agreement involving 15 Asia-Pacific nations: Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. Together, these countries represent about 30% of the world’s population (2.2 billion people) and 30% of global GDP ($29.7 trillion), making it the largest trade bloc in history.
Weerasinghe highlighted that President Ranil Wickremesinghe’s government prioritized restarting stalled trade negotiations with various countries upon taking office, including Malaysia and China. With Singapore and Thailand concluded, Weerasinghe hopes negotiations with Malaysia and China will resume later in 2024.
He stressed the importance of FTAs for Sri Lanka’s economic growth, noting that they provide predictability and certainty crucial for participating in the global value chain and attracting significant investments. Thailand was selected for an FTA due to its robust economy and strategic position as a gateway to the RCEP market. However, accessing RCEP will require negotiating separately with member countries, so we need to sharpen our negotiating skills, but more than that, we need a bold, vibrant private sector.
The Thai FTA covers various sectors, including trade in goods, and services, investment opportunities, and economic cooperation. Sri Lanka aims to export products like diamonds, gems, apparel, textiles, and agricultural goods to Thailand, while Thailand exports rubber products, apparel, chemicals, and more to Sri Lanka. Weerasinghe dismissed the focus on bilateral trade balancing, highlighting the significance of overall trade balance in international trade. He explained the tariff liberalization process under the FTA and outlined specific products that would receive early market access and duty concessions.
The FTA also addresses rules of origin, ensuring that products qualify for duty concessions by meeting specific criteria. Additionally, it facilitates market access opportunities for services sectors in both countries, such as professional services, telecommunications, and tourism.
Regarding investments, the FTA aims to promote Thai investments in Sri Lanka, particularly in manufacturing sectors like electronics, auto components, and pharmaceuticals, as well as services like tourism and IT. Economic cooperation between the two countries spans various sectors, including trade promotion, infrastructure, agriculture, tourism, and SME development while dispute settlement mechanisms and the establishment of a Joint Commission are also outlined in the agreement to address any conflicts and monitor its implementation.
Crucial Next Steps
Locking down FTAs is one thing, but it is up to Sri Lankan businesses to do the rest. Duminda Hulangamuwa, Chairman of the Ceylon Chamber of Commerce, expressed support for the Sri Lanka-Thailand Free Trade Agreement (FTA), emphasizing the Chamber’s stance in favour of increased trade. He stated that achieving a high growth rate of 5-6% in Sri Lanka is contingent upon expanding external trade. “The government has done its part now it’s up to the private sector to be competitive,” he said.
Supporting this view, Deshal De Mel, Head of Service Chapter and Advisor to the Ministry of Finance said Sri Lanka’s economy was driven by debt and not productivity. Exports of goods and services which peaked at 39% of GDP in 2000 more than halved to 15.4% in 2020, according to World Bank data. It has since recovered to 21.5% in 2022, but recovery is a misnomer given the state of the economy since 2019. Also, Sri Lanka’s over-dependence on EU and US export markets is risky.
Sri Lanka has had long-standing FTAs with its neighbours India and Pakistan which remain underutilized. Of course, barriers persist from bureaucratic red tape to quality testing and fulfilling rules of origin requirements by local value addition. However, the utilization of the FTA is remarkably low given that Sri Lankan exports to India outside the FTA outnumber exports that fall within the concessions of the FTA.
In 2001, only 16% of Sri Lankan exports to India fell within the FTA, but that has steadily increased to 64% by 2021. FTA imports as a share of total imports from India had fallen from 9% to 4.7% in the same period.
In this period, total imports from India grew by 636% while Sri Lankan exports to India outpaced India growing by 1,065%. Clearly, Sri Lanka has benefitted from the FTA.
Apprehensions or Misconceptions?
A lack of ingenuity and competitive vigour among a majority of businesses is the malaise for underutilized global trade concessions. Standing in the way are many misconceptions about FTAs, perpetuated by ignorance and special interests. Let’s consider some of these misconceptions, but let’s call them apprehensions if only to ease some troubled minds.
Apprehension Number One: FTAs primarily benefit larger economies. However, they also offer significant opportunities for developing countries to access broader markets and enhance their economic growth. While there is a perception that FTAs favour developed nations, the reality is that they can be advantageous for all parties involved.
Apprehension Number Two: Many argue that FTAs inevitably lead to job losses. While it is true that they may result in shifts within job markets, the overall impact can be positive, with the creation of new employment opportunities in more competitive industries, opportunities to upskill and improvements in wages across the board. Also, Sri Lanka’s FTAs, including the ones with India and Thailand, limit the number of professionals that can enter Sri Lanka, and they must be accompanied by the specified quantum of investments.
Apprehension Number Three: Concerns about FTAs eroding national sovereignty are common, but we can recognize that these agreements are voluntary and mutually beneficial arrangements between participating nations. They are not mechanisms for relinquishing control over trade policies but frameworks for cooperation and mutual benefit.
Apprehension Number Four (and this is nothing but a misconception): Trade deficits can indicate a strong economy with robust consumer demand, as indicated by the positive trade deficits we have with the EU and US.
Apprehension Number Five: There is a fear that FTAs may flood local markets with cheaper foreign goods, potentially harming domestic industries. While increased competition is a reality, it can also drive innovation and efficiency within local industries, ultimately benefiting consumers and the economy as a whole. Sri Lanka does have laws, and landmark legislations like the Anti-Dumping and Countervailing Measures Acts that provide essential protection against unfair trade practices, addressing concerns previously unaddressed. However, Sri Lanka needs mechanisms to provide a platform for the private sector to demonstrate the necessity of protection for their industries through independent analysis and consultation. By assessing factors such as employment, sector growth, and productivity gains, the commission would determine the impact of tariff liberalization and could postpone it if deemed necessary. This approach aimed to balance the interests of domestic industries while fostering competitiveness and export opportunities, Anushka Wijesinha told Echelon in a 2021 interview.
In the harsh reality of economic competition, Sri Lanka’s future hinges on its ability to act decisively. Through a no-nonsense approach—embracing change, fostering innovation, and enhancing competitiveness—the nation can pave a path towards sustained growth and prosperity. By actively seeking Free Trade Agreements, implementing essential legislative safeguards, and strategically aligning with the Asian growth trajectory and global value chains, Sri Lanka can solidify its position as a beacon of opportunity and progress in the region, ensuring a brighter tomorrow for its people and economy.