CEPA: It is like ‘If you cannot beat them, join them’



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By Jagath C. Savanadasa


This writer was reminded of the famous adage – "if you cannot beat them join them" when he learnt that the former CEPA busters wanted to boost ties with India (Island – Financial Review, 13th August, 2012).


For years there had been an acrimonious debate between those who were for the Comprehensive Economic Partnership Agreement between Sri Lanka and India and those who opposed it.


The latter felt that it would lead to economic capitulation. They opined that Indian trade and industry would enter the Sri Lankan market on a big way. This would only not only pave the way for dominance over the local industry but also other sectors crucial to us.


As far as CEPA is concerned, to an extent such fears especially the service sector seemed justified looking at it superficially. But you need to study the full agreement in depth to realize that this may not necessarily be so. Especially if the intended treaty is monitored and its checks and balances adhered to the letter.


What did the Treaty broadly cover at the outset of the negotiations in 2005?


1. Expansion of economic co-operation


2. Formation of a joint study group to widen co-operation (through CEPA)


3. Inclusion of broader areas in services in addition to trade in goods


4. Enhanced policy framework in goods building upon the experience of the Indo-Lanka Free Trade Agreement


5. Examination of the opportunities for enhancing economic co-operation in other areas of mutual interest.


These are interesting parameters that will cross borders of the existing Agreement and if we negotiate and watch development carefully we could be in for major gains.


Though several rounds of discussion had been held since 2005 in respect of CEPA no finality has been reached even to this day.


Has the Treaty been adequately examined and dissected in association with the private sector stakeholders? I do not think so. There needs to be complete exposure if one may use the word of every aspect of the treaty primarily to alley fears that persist about Indian domination.


A similar fear syndrome was prevalent just before the India-Lanka Free Trade Agreement (ISFTA) was implemented. History after 12 years following the Agreement which really got going in 2000, proved that the fears of India dominating the economy of this country and causing extensive damage to if have of course proved to be wrong. Maybe in arriving at the initial assessment detractors or more particularly those who out-rightly condemned the treaty did not get their facts right.


Let us look at a few of them.


Historical backdrop to Indo-Lanka Trade


From the 1960 and towards the 70’s there persisted the view that bilateral trade with any nation should have a balance. As a result it was felt that if Sri Lanka entered into trade treaties with other nations they should be so designed as to reduce existing deficits.


It was during the time of the J R Jayawardene regime (post 1977) that Sri Lanka opened her economy. Such a radical change rested basically on pragmatic policy perceptions since a market orientation of an economy and the interplay of supply and demand unencumbered by dogma had proved to be a boom to many nations. In the modern context East Asia is an outstanding example of this new economic phenomenon which is an intrinsic part of globalization -Trade sans barriers.


The result of this country adopting a free market policy led inter-alia to expansion of trade between some countries. Around the mid 1980’s India too to some extent freed her economy from stringent controls that had crippled her growth.


In the meantime in Sri Lanka the 1980’s and 1990’s were characterized by a distinct import diversion. Sri Lanka which had been buying a range of goods from Japan, began to import from India. This direction change in imports led to the country importing products like motor cycles buses and jeeps from India. In addition there were a number of light engineering items that too were imported. Significantly the prices of the Indian products were much cheaper than the Japanese ones. To cite one example a 30 seater Tata bus was purchased for Rs. 1.5 million whereas a Mitsubishi bus with the same number of seats cost Rs. 3 million (1998 prices). It should be noted that all such imports later did not come within the FTA.


Yet another feature of Sri Lanka-India trade even (before the FTA) was its heavy component of informal trade out. Of the total trade estimated at US$ 475 million by mid 1990’s a major component was informal trade. The agreement therefore also had its sights on at least a part of the informal trade coming under formal or normal form of trade.


Asymmetries


The overall size differential between the two countries India and Sri Lanka has been a factor of deep concern to Sri Lankan trading interests and also to other nationalist leaders. The traditional belief that such a huge disparity between the respective nations may lead to the dominance of the smaller country by the bigger state persisted.


This necessarily has not been so Sri Lanka has been far long conducting trade with quite a number of the largest economies in the world and though we need not have FTA.s with them, they never tended to be dominant and controlling our economy. Such trade especially under a Free Trade Agreement (despite asymmetries) could be worked out to our advantage if "The Special and Differential Treatment" (SDT’s) is incorporated into the agreement. This was indeed done in the ISFTA.


It should also be noted that multilateral or regional treaties sometimes incorporate SDT with the idea of helping economically less empowered countries to overcome disadvantages arising out of the strength of the former.


Imports from India after 12 years


Looking back over 12 years of the FTA with India, one could without examining technicalities too much, say that Sri Lankans which means the local consumers have achieved quite a number of gains consequently. Primarily as, has been pointed out by experts we have been able to access cheaper yet qualitative imports from India, mainly products like pharmaceuticals, a range of motor driven products like jeeps, three-wheelers, scooters, motorcycles, plus spares for railways, office equipment etc.


Import Substitution


On the other hand the ISFTA had also ensured that Sri Lankan import substitution sectors were not exposed to competition from India since such sectors like agriculture, fisheries, two principal areas of the Sri Lankan economy came under the "negative lists" in respect of India. This implied that they were not within the Treaty and Tariff concessions lists or were excluded from it.


Main Trading Partners


India today is Sri Lanka’s main trading partner. In 2011, 16% of our trade was conducted with India. She is also our largest source of imports, followed by China and Singapore. Continuing to sources imports from India has been and is logical since she is the closest nation to us geographically. Similarly though to lesser degree is the vocational significance of both China and Singapore. Apart from this it’s the traditional ties we have with India that makes her our leading partner in trade. As already mentioned another pertinent factor is the lower cost of our imports from India. Similarly Chinese imports too are low in cost.


Sri Lanka’s exports to India – post FTA


In comparison to Indian imports to Sri Lanka, our exports to India are relatively small. However after the FTA was operative they have shown an encouraging increase besides diversification. In 2011 there was a 9% increase in Sri Lanka exports to India.


We need to pay special attention to the word diversification in an economic sense and in respect of two principal aspects of the export trade. We first need to diversify our product range which is at present too narrow and secondly we need to diversify our export markets which currently are largely confined to the Western countries.


In respect of both these key elements the Comprehensive Economic Partnership Agreement could be a powerful instrument of progress.


One needs to only take a cursory look at the history of the FTA to realize this. In this connection the term multiplier effect is perhaps appropriate in describing the spill-over effect of the FTA. In other words the FTA and the greater trade and allied exchanges it entailed led to Indian Investments in Sri Lanka and vice versa, though the latter may not be a adequate development to write home about


Capitalizing on Sri Lanka potential in service sectors


India perhaps consequent on the FTA realized that this country had potential in especially certain areas like the service sector. And they capitalized on it in a big way. Myopic critics should realize that it was not at all a one way street. There was mutual gain Airtel is one shining example of Indians taking advantage of the Sri Lankan thirst for communication expansion. Secondly approximately 70% of the income derived from the Port of Colombo is derived from transshipment earnings through the Indian subcontinent.


Indian oil is now a major presence the Sri Lankan market whilst Indian tourists who numbered nearly 175,000 last year indeed the highest single country-arrivals has inter-alia enabled the revenues of Sri Lankan Airlines our principal carrier to earn much as 40% of its overall revenue Two Indian Airlines have operations in Sri Lanka and this has helped the local Aviation industry to gain some recognition.


The post FTA era has led to considerable investments, and India today ranks the second in number after Malaysia in terms of Foreign Direct Investment. We have of course not yet fully exploited our B.P.O capacity with Indian collaboration. It is true that we are a growing South Asian hub in this field and more could be achieved in this direction with Indian participation.


Beyond frontiers of trade and major service sectors


CEPA incorporates tangible policies to proceed in an economic partnership beyond that of trade. To any discerning observer it would seem a natural and practical development. But in this connection what has caused anxiety and apprehension among certain segments of the local industry is again the old phobia in respect of India’s economic strength. Also the Sri Lankan service sector too is concerned that they would be destabilized by the Indian service sector if the CEPA incorporates expansion of the treaty to include services. It is simply not a case of major sectors like Telecommunications or shipping that causes concern but the professional fields. On the other hand as far as we are aware there are several safeguards inbuilt into these sectors with the CEPA. Above all CEPA has an "escape clause" which implies that the Agreement could be dispensed with a few a period of 6 months notice is given by either side. Also all bilateral treaties are subject to W.T.O rules and regulations. Both Sri Lanka and India are members of the World Trade Organization (W.T.O).


Service sectors


We are in total agreement that these safeguards need to be reexamined and perhaps made more transparent. To cite an example if Indian Health Sector is allowed to establish hospitals in the outstations or in the Provinces will the Indian doctors who will serve in such Hospitals allowed private practice outside the hospital. They should not be. Similarly should CEPA permit entry into the Civil Construction sector in which Sri Lanka? Have an adequate number of local players. Of course Indians could construct their own buildings for their own projects, but there should in this instance to a clear line of demarcation in terms of both professional tasks and also labour.


It is the delineation of services and the practice of professionals in addition to employment that has to be worked out to the satisfaction of local service interests.


CEPA – SOME INSIGHTS AND PROSPECTS


The basic idea of CEPA for Sri Lanka should be further normalization of trade and investments whilst at the same time safeguarding its domestic interests.


Having the above perspectives in mind it should not be thoughts of reciprocity and parity of trade and investments that should drive us forward.


Integrating with the Indian market on the other hand is important for our economy. Though CEPA is now stalemated we find that Indian investments continue to flow into Sri Lanka. The latest information pertaining to this is the intention of Mahindra and Mahindra a leading group of companies to extend their ties in this country.


We should also encourage other car manufacturers like Maruti which sells in Sri Lanka more vehicles than any other motor car manufacturer to invest in a plant in Sri Lanka perhaps on a joint venture basis.


Pharmaceutical Zone


In the Budget of 2011/12 the government proposed to encourage the private sector to venture into the production of pharmaceuticals. The country will probably expend approximately US $ 500 million in the importation of pharmaceuticals for fiscal 2012/13.


Included in the proposal was the establishment of a pharmaceutical zone. Whilst this is a proposal that should lead to the saving of valuable foreign exchange if CEPA becomes a reality Indian pharmaceutical firm should be able to collaborate with local firms in the proposed zone effectively.


Indian Retail Sector


The government of India recently opened the retail sector though not completely but partially to Direct Foreign Investment. Many global retail giants had been eagerly looking at the huge retail sector in India with its vast and growing middle classes. In fact they had been urging for that sector be opened to foreign investment which had languished for the want of proper supply chain management. Billions dollars worth of retail products largely perishables like vegetable and fruits were wasted for the want of quick modes of transport and modern methods of preservation.


Sri Lanka too has at least two or three large public companies in food or allied production who should examine closely the potential in lesser known Indian cities so as to establish operations. Such an idea is not far fetched given our proximity and the advantages that a comprehensive economic partnership agreement may lead to.


Market Penetration


Has Sri Lanka truly examined the Indian market not only in terms of trade expansion but also in respect of investment potential? The answer is a clear no. And this needs to be done if we wish to exploit the market potential in the vast sub-continent. Sri Lanka has unfortunately been lagging behind in this respect. We cannot and should not think in terms of the totality of the Indian market. Our aim perhaps should be identify which products are capable of entering selected markets and carving a niche for such products. One solid example of a firm taking on this challenge of entering the Indian market and making big investment therein is Brandix. It was an identification of opportunity possibly through a carefully examined market analysis.


India has many NTB (Non-Tariff Barriers) which not only stands on the way of market entry but is also a discouraging feature to potential exporters and investors. It has also not yet got rid of its old web of rules governing trade and investment which differs from state to state.


CEPA and its provisions may come in handy when thinking in terms of investments in India.


Though the ISFA did afford a wide range of business opportunities for both countries, Sri Lanka could not take advantage of offers which gave duty free access to some 4500 products which included the likes plant & foliage, cereals & preparations, confectionary, pipes, hoses and vulcanized rubber, surgical and other gloves, wood and articles of wood, fish and fish products, dairy products, coffee, cocoa and spices, tobacco and tobacco products. Only one two of the above products were exported to the Indian market.


Could the comprehensive Treaty facilitate investments in these products on a J V basis in either India or Sri Lanka. This will take the collaborative endeavour both parties look forward to in terms of investment generation, on to new a plane. It is interesting to watch developments.


Before we end this presentation we wish to place before the reader the proposed SAARC Agreement in Trade and Services signed by the members states at the 16th Summit held in Bhutan in April 2010. In early 2012 negotiations commenced on specific commitments under this Agreement.


Under the proposed SATIS (the abbreviation of this agreement) there is what is known as a request list and an offer list from each of the 8 member SAARC grouping.


Yet again within this Agreement falls several sectors like business services, communication services, financial services, construction and engineering services etc, which each nation has requested entry into of course on a reciprocal basis and I feel has a greater implication on the smaller of SAARC members than the larger ones.


Whilst in respect of CEPA we need to examine the question of reciprocity and /or give and take with a single country in regard to services, the proposed Agreement on Trade & Services covers eight nations and need careful assessment though there is a mechanism known as the mode of supply which has 4 components and defines the extent of the request for participation in the services rendered by one country in another.


 
 
 
 
 
 
 
 
 
 
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