by Kanes
The United States is Sri Lanka’s largest export market accounting for 37.5 per cent or more than one-third of the country’s total exports - Rs.168,768 million out of a total of Rs. 449,850 million in 2002. The second largest is the UK accounting for Rs.56,469 million or 12.6 per cent of total exports. Thus, the U.S. export market is three times as large as the second largest. Sri Lanka’s principal export is garments amounting to Rs.214,895 million or $ 2245 million or 47.7 per cent of total exports. The U.S. is the largest buyer of Sri Lanka’s garments exports; in 2002 it bought Rs.135,946 million of these exports or 63.3 per cent - nearly two-thirds.

The second largest buyer is the UK with Rs.42,861 million of exports or 19.9 per cent. Thus, the U.S. market for garments exports is more than three times as large as the second largest. The U.S., however, is not one of the major suppliers of imports to Sri Lanka. In 2002, Sri Lanka’s imports from the U.S. amounted to Rs. 20,904 million or 3.6 per cent of total imports as compared to Rs. 20,904 million of imports from India or 13.7 per cent - the largest imports supplier. Sri Lanka’s trade surplus with the U.S. in 2002 was Rs. 147,864 million - the highest of all countries. See Table I

Duty-Free Access to Garments

The main reason for studying the possibility of a Free Trade Agreement with the USA is to protect and expand Sri Lanka’s garments exports to the U.S. market. As garments comprise 80.6 per cent of Sri Lanka’s total exports to the U.S. market, they are the main concern. Imports of garments and textiles to the U.S. and other developed countries are at present subject to quotas under the Multi-Fibre Arrangement, but these quotas will end at the end of 2004 The quotas provide a sheltered market for garments exporters but with the end of quotas, Sri Lanka will have to compete with other garments exporters in the open market. Some of these exporters such as China, Vietnam and Bangladesh can supply garments at lower prices than Sri Lanka owing to their lower costs of production. Sri Lanka therefore fears whether it will lose the American market to these lower cost exporters. It believes that its competitiveness will be strengthened if it can remove the import tariffs and gain free entry to the U.S. market by means of a Free Trade Agreement.

Textiles and garments imports to the U.S. are not only subject to quotas but also tariffs. Tariffs on selected items of garments imports to the U.S. are as follows: See Table II

The removal of import tariffs ranging from 16 per cent to 32 per cent will no doubt add to Sri Lanka’s competitive strength, but will the FTA remove the import tariffs? It needs to be recognized that import restrictions through quotas and high tariffs were imposed in the U.S. to protect the domestic garments industry and in addition anti-dumping measures are being used as protectionist measures. There can also be strings attached to free trade agreements. The U.S. grants trade preferences under the Andean Trade Preference Act to American countries like Colombia, but to qualify, 70 per cent of Colombia’s clothing exports must be made with U.S. cloth. The U.S. domestic garments industry is likely to oppose duty-free entry of garments and the U.S. authorities will have to overcome this opposition.

Opposition can be gauged by the fears the U.S. textile manufacturers have expressed that the scheduled end of textile quotas in 2005 could spell the end of their industry. The Senior Vice President of the American Textile Manufacturers’ Institute, Cans Johnson, states: "We have got to put political pressure on this administration or we are not going to survive the removal of quotas. We are literally transporting our manufacturing sector to China". If the opposition to duty-paid imports of textiles from China is so great, one can imagine what the opposition would be for duty-free imports!

Even if the authorities in the U.S. resist domestic opposition and extend duty-free entry for Sri Lankan garments, there are other problems to face. The U.S. is signing bilateral free trade agreements with many countries; it has already signed free-trade agreements, apart from Canada and Mexico under NAFTA, with Jordan, Israel, Ecuador, Cambodia and Singapore and is considering signing more with countries such as the Dominican Republic, Columbia, Bahrain, Morocco, Middle East and ASEAN countries. The U.S. Trade Representative Robert Zoellick stated "An FTA with Bahrain will promote the president’s initiative to advance economic reforms and openness in the Middle East and the Persian Gulf, moving U.S. closer to the creation of a Middle East Free Trade Area".

Some of these countries are garments exporters, and if they are given duty-free entry to the U.S. market they will be on the same footing as Sri Lanka and it will not have a competitive edge over those countries. The U.S. may even consider negotiating FTAs with Bangladesh, Vietnam and China, in which case the situation will be worse and Sri Lanka will have no net competitive advantage over the others. The other factor is that the U.S. has been importing more from neighbouring countries in Latin America than from Asia in recent years because of nearness and lower costs. Consequently, Asian countries have been losing out to Latin American countries, whose market share nearly doubled during 1990-1997, accounting or almost all the decline in the share of imports from Asia. The proposed free-trade agreements with some Latin American countries will lead to more imports from Latin America.

Duty-Free access of American goods to Sri Lankan market

The Free Trade Agreement will oblige Sri Lanka to provide duty-free and restriction-free access to American goods and services to the Sri Lankan market, and this is likely to help American firms to capture this market for their products. The U.S. is aware that Sri Lanka purchases only 12 per cent of what it buys from Sri Lanka and it would like Sri Lanka to increase its purchase from U.S. The FTA is expected to help in this matter. Unlike Singapore, which is a duty-free port and warranted no duty reduction, Sri Lanka will have to reduce tariffs to American goods under the FTA. Whether all tariffs have to be removed or only some and whether there will be negative lists is not clear, but the U.S. authorities normally demand duty-free entry to the products of export interest to them.

Apart from revenue loss to the government from the removal of import tariffs, inflow of American products, now made cheaper, is likely to have adverse effects on some local agricultural and industrial sectors. The import of surplus agricultural produce heavily subsidized both in production and export, in particular may undermine rural farming operations such as dairy farming and paddy and maize cultivation. This has happened in some other countries like Mexico, Haiti and the Philippines.

Corn (maize) is Mexico’s staple food. Since the signing of the North American Free Trade Agreement (NAFTA) in 1994, Mexico has been flooded with corn grown by U.S. farmers with the help of massive subsidies.

Between 1993 and 2000 corn imports from the U.S. increased eighteen-fold. About a quarter of the corn consumed in Mexico now comes from the U.S. and that share is projected to increase. Small Mexican corn farmers who are not subsidized cannot compete with cheap corn imports from the U.S. and have consequently lost their livelihood and are migrating to the cities in search of employment. All these changes have come about at breakneck speed. NAFTA projected that the price of Mexican corn would fall in line with international prices over a 15-year period. It happened in just 30 months.

Sri Lanka is nearly self-sufficient in rice and cheap imports of subsidized American rice if allowed, can undermine domestic production and destroy the livelihood of the rural population. Cheap American rice is threatening the livelihood of hundreds of rice farmers in Haiti. Sri Lanka’s maize production was 27,700 metric tons in 2002; maize is grown by the poorest of farmers and they will not be able to compete with cheap corn imports from the U.S.. They may suffer the same fate as the corn farmers of Mexico and the Philippines. Dairy farming is another vulnerable sector. The Sri Lankan domestic dairy industry is already in difficulty on account of competition from cheap milk powder imports from Australia and New Zealand, which are charged only a 10 per cent tariff. If subsidized U.S. dairy products are allowed under the FTA the domestic dairy industry will face even a bigger problem.

TRIPS

Sri Lanka needs to ensure that the proposed FTA with the U.S. does not impose more stringent conditions on intellectual property rights than TRIPS. Free Trade Agreements with the U.S. are more stringent than the Trade Related Intellectual Property Rights Agreement of the WTO and provide greater protection for intellectual property rights and considerably diminish the room for manoeuvre for developing countries. The Bilateral Free Trade Agreement between the U.S. and Jordan, for example, limits the scope of compulsory licensing to remedies against anticompetitive practices, for non-commercial, government use, or in the case of an emergency when the licensee is either a government agency or a government designee, and for failure to meet working requirements. By signing these treaties, developing countries are restricting their policy options without adequate evidence on the impact of those higher standards on human development outcomes.

Other such bilateral agreements that go beyond TRIPS include U.S. agreements with Cambodia, Ecuador and Singapore. These agreements are setting a dangerous precedent. By committing to higher standards of protection than mandated under TRIPS, these countries become unable to take advantage of the flexibility offered under TRIPS. Any attempts to make TRIPS more human development friendly, therefore, will be meaningless for these countries unless they can ensure that their commitment to TRIPS overrides their bilateral and regional commitments.

The FTA may also provide easier access for American companies to banking, insurance and other financial services as in Singapore. It may include labour and environmental standards that are likely to be demanded by the U.S. Congress but that may be difficult for Sri Lanka to accept.