Anti-Sri Lanka CEPA Morphs in to a ETCA?

By Dr Palitha Kohona

(Former Permanent Representative of Sri Lanka to the United Nations in NY, previously Head of the UN Treaty Section. Dr Kohona was closely involved with the Uruguay Round of Trade negotiations).

Q. 1. There is considerable uncertainty, especially in the business community, about what sort of treaty arrangements will be put in place to enhance our bilateral economic relations with India. Where does this confusion originate?

A. It is true that much confusion and speculation prevails with regard to the proposed economic cooperation arrangements with India.

The origins of this uncertainty could be traced back to developments connected with the now disowned effort to conclude a Comprehensive Economic Partnership Agreement (CEPA).

In 2002, Sri Lanka and India agreed to expand the existing India Sri Lanka Free Trade Agreement in to the CEPA. Closer linkages with the rapidly expanding Indian economy were considered to be in Sri Lanka’s interest. Negotiations commenced in earnest.

The CEPA was originally scheduled to be signed in 2008 during the SAARC summit.

Under pressure from nervous industry and professional circles, the then Government of Sri Lanka balked and did not proceed to conclude the CEPA. Latent nationalist tendencies and a fear of being swallowed by Indian businesses contributed to the uncertainties in business circles and the reluctance of the Government. These remain. Difficulties experienced with the India Sri Lanka Free Trade Agreement (ISLFTA) added to the concerns of our business community.

The opposition to the CEPA having continued, the new government which was elected in 2015, came under the same pressures.

On December 9, 2015, the Prime Minister said in Parliament that Sri Lanka will not sign the present CEPA but will enter in to an Economic/Technical Co-operation Framework Agreement with India.

The Development Strategies and International Trade Minister, Malik Samarawickreme, said later that Sri Lanka will ink an Indo-Lanka Economic and Technical Cooperation Agreement (ETCA) by mid 2016 and a Framework Agreement in February.

Now we have on the table a draft Economic and Technical Cooperation Agreement (ETCA) and a Draft Economic and Technical Cooperation Framework Agreement (ETCFA).

Q.2. What does this mean in reality? Are such trade agreements with other countries a novelty to Sri Lanka. Some background clarification is important.

A. Sri Lanka is not new to trade in goods and services liberalisation agreements and is already party to a number of these. Eg. The SAFTA, the APTA, and the BIMSTEC. The FTAs with Pakistan and India already exist. The FTA with India, concluded in 1998, entered in to force in 2000. It covers the trade in goods.

Sri Lanka is now negotiating a FTA with China. Sympathetic attention has been drawn to the recently concluded Trans Pacific Partnership (TPP). Political and industry commentators have emphasised the importance of joining the TPP.

In addition, Sri Lanka has concluded over 25 Investment Protection Agreements, including with India. But despite the experience with all these agreements, it is the proposed arrangement with India that has given rise to concern. The concerns of the business community must be addressed.

Q.3. Sri Lanka is already a party to the SAARC Agreement on Trade in Services 2010 (SATS). But this agreement did not give rise to the same level of concern?

A. The SATS is in the nature of a framework agreement which encourages the conclusion of further agreements for progressively liberalising the trade in services in the SAARC region. Liberalisation is expected to happen on the basis of a positive list on a request and offer basis

These other agreements must be consistent with Art V of the General Agreement on Trade in Services (GATS) which entails a commitment to continue liberalizing except in the circumstances provided. E.g. security issues, balance of payments issues, etc. Sri Lanka is a party to the GATS. The GATS reflects the increasingly overwhelming importance of services in the global economy.
It is noted that services account for about 58% of the SL economy.

Thus Sri Lanka is already committed to opening up its services sector to SAARC parties in principle.

Q.4. What is the scope of the ETCA. Will it reproproduce the CEPA under a different title.

A. The goal of ETCA is to enhance economic, trade and investment cooperation.

The Draft ETCA, like the now abandoned CEPA, covers a wide range of sectors, including the trade in goods and services, the movement of natural persons, economic relations, investment and technology cooperation. (The chapters on investments and the movement of persons have been removed in the publicly available draft). The ETCA aims to reduce tariffs and restrictions to trade in goods and services.

The ISLFTA is incorporated by specific reference in Article II to the ETCA. Similarly, provisions of the GATT and the GATS are specifically incorporated to the ETCA.

Importantly, the framework agreemment ETCFA, which is expected to be signed in February, commits the parties to begin consultations on an agreement on trade in goods within six months of the Entry Into Force of the framework. These consultations will include customs procedures, phyto sanitary measures, ROOs.

The same commitment to commence negotiations on implementing agreements is incorporated with regard to services, investments, including the protection of investments, economic cooperation and technology cooperation.

Q. 5. The possibilty of closer treaty mandated relations in the services sector has given rise to particular concern. Are the Sri Lankan service providers justified in feeling threatened?

A. Services cover a wide range of business activities – Transport, warehousing, information, securities, commodities, banking, insurance, investment, accountancy, IT, education, arts, entertainment, recreation, hotels and restaurants, heath, legal, etc. Sri Lankan service providers do not possess extensive experience in competing with global giants. Their operations remain relatively small. Some Indian service providers have aggressively begun to make a mark globally.

Under the propsed ETCFA, services liberalisation will be on case by case requests. It will be on the basis of a positive list.

Many professional bodies in Sri Lanka have their own rules on accreditation and require national accreditation for an individual or firm to practice that trade. Eg. lawyers, doctors, accountants, architects, et al. These accreditation requirements have been used to exclude professionals solely with foreign qualifications.

But there may be many groups with no national accreditation requirements, eg. Engineers, builders, etc. The professionals in such professions do not have the possibility of controlling outsiders who seek to practice these professions in Sri Lanka.

Provision in the ETCFA and the ETCA on liberalising services would very likely have an impact on the existing controls on foreign qualified professionals providing services in Sri Lanka.

State Govternments of India have the ability to control professionals and professional bodies. Eg. Tamil Nadu used these powers to prevent Sri Lankan cricketers from playing there.

Q. 6. ISLFTA . Has our experience with the ISFTA since 2000 been positive. If not, cold this explain some, if nor all, the concerns of our professionals and professional bodies?

A. Our experience with the ISLFTA will be instructive in implementing a future ETCA. There are lessons to be learned, especially in drafting a future ETCA or other implementing agreements.

The FTA is based on a negative list approach. Tariff concessions/elimination were offered except for items on the negative list.

Special and Differential Treatment provisions were built in favour of Sri Lanka.

Sri Lanka enjoys a longer negative list than the Indian side, longer periods for liberalisation, and more favorable rules of origin requirements. On paper Sri Lanka should have done well under the ISLFTA.

On the face of it, the figures are impressive. The bilateral trade grew to over $ 4.5 billion in 2013-2014. India exported $ 3.98 billion worth of goods. Sri Lanka exported $ 678 million. Intetestingly, much of it in re-exports.
2100 tariff lines were exported to India in 2012. Up from 505 in 1999.
Now this figure includes value added products like furniture, tyres, insulated cables, waste paper, refrigerators, confectionary, etc.

In 2007, almost 50% of exports to India, consisted of vanaspathi and copper. Altgough this was more a case of trade diversion to take advantage of the existing Indian customs duty regime.

India has become the 3rd biggest export destination for Sri Lanka after the US and the EU.

The second biggest investor in Sri Lanka is India. Indian investments are prominent in the areas of petroleum, vehicle assembly, telecoms, banking, hotels (Taj), etc.
India is the main destination for Sri Lankan investors, such as Damro, Dankotuwa, John Keells, Brandix, etc.

But despite the special treatment provided in the ISLFTA for Sri Lanka, serious concerns have remained.
Bland statistics, by themselves, may not be helpful to determine whether the ISLFTA has been an actual success for Sri Lanka.

Q.7. Sri Lankan exporters, in general, continue to have reservations with the ISLFTA. Is the problem with the Agreement or its implementation?

A. There are some treaty related problems from the perspective of Sri Lankan exporters. But there appear to be bigger problems in the implementation.

For example, the nature of the negative lists for India, conditions of Rules of Origin and concessions that were offered on the basis of quotas, allowed only a percentage of the overall trade between the two countries to effected under the ISLFTA.

There are irritating access issues – Indian bureaucrats are sometimes unaware of the details of the ISLFTA.

Difficulties with Indian visas have been a regular disincentive to do business in India.

Apparent aministrative hostility in India has also been encountered by Sri Lankan businesses.

Concessions were provided in the ISLFTA for items that Sri Lanka can not supply while many items which Sri Lanka could supply came under the negative list. For example, Sri Lanka is strong on tea, ready made garments and textiles. These were placed under quota in the ISLFTA.
Even the quotas came under stringent ROO requirements and port restrictions.
Ready made garments were limited to 8 million pieces.

Regional restrictions – Non tariff barriers – In Tamil Nadu, the sales tax on Sri Lankan exports is 21%. On local products it is 10.5%.

Unilateral quota and port restrictions – Vanaspathi exports were unilaterally limited to 100,000 tons in 2006. Vanaspathi has disappeared as a major trading item between the two countries now as India has liberalized the import of palm oil. Similarly, copper has become an insignificant export.

A 2500 ton limit on pepper imports was imposed in 2006 and, even then, only through the port of Kochi.

Lack of institutional support. This has placed Sri Lanka at a distinct disadvantage.

Further complicating factors for Sri Lankan exporters:
– unfamiliarity of Indian bureaucrats with Sri Lanksn trade descriptions, non acceptance of Sri Lankan certification, (Sri Lanka recognizes Indian certification for 80 items. The same does not apply on the Indian side), excessive paperwork required at Indian ports of entry, the time taken to sample and test perishable items like strawberries. (Testing may be done far from the port.), difficulties in obtaining information, eg. on labeling requirements, etc., lack of border coordination, (Different ports demand different documentation.). There is also no effective help desk established under the ISLFTA.

Q.7. Sri Lankan exports to other countries of the world have expanded substantially. There is a feeling that the exports to India have not kept pace despite the ISLFTA.

A. It is true that exports to India have grown but the quantity and range of exports to the rest of the world have boomed witout the.assistance of specific treaties. The bulk of Sri Lankan imports from India are not covered by the ISLFTA. Vehicles, petroleum products, steel, etc.
Only 13% of imports fall under the ISLFTA.

At the Sri Lanka end other issues have emerged. Foreign businesses sometimes bring only a minimum of funds to Sri Lanka for investment purposes and try to raise the required amounts locally. FDI inflows would be marginal in these cases.

Interestingly, there is no trade agreement between India and China – nevertheless bilateral trade exceeds $ 80 billion. Thus raising the legitimate question of the necessity for the proposed international agreements with India.

There is value in creating a good legal framework as the basis for a successful economic partnership between two neighours. But the framework must be carefully balanced and protect the interests of both parties, especially of the smaller and weaker party.

Some of the provisions of the draft ETCA are worth reexamination, especially given the background of the difficulties faced by Sri Lankan exporters. The ECTA makes a great effort to confirm with WTO and GATS provisions to which Sri Lanka is a party. The 64 page long draft ETCA might be finalised in its present form or be broken up in to separate parts.

The ETCA clearly states that it is intended to enhance the ISLFTA.
The 64 page draft in small font could turn in to a trade lawyers’ paradise.

India has considerable experience in fighting cases at the WTO and in foreign courts. Sri Lankan experience in these areas may be much more limited.

Ch. 2, ETCA – TRADE IN GOODS

In Art II incorporates the provisions of the ISLFTA 1998. The ETCA, among other things, prohibits non tariff measures other than those permitted by the WTO agreements and the ETCA (Art vii), allows anti dumping measures consistent with the provisions of the WTO agreement and is very detailed (Art ix), maintains the Gatt Art xix Global Safeguards Measures.
Art xvi provides for preferential safeguards measures for protecting domestic industries from serious injury and they are very detailed.

Ch. 3, ETCA – TRADE IN SERVICES

Art. iv provides for. National Treatment.
Parties shall ENSURE that measures are applied in an impartial manner.
Parties MAY recognise education or experience of the other party’s nationals and are required to ensure that professional bodies negotiate and conclude agreements providing for the mutual recognition of education, experience, etc. (Art. xi).
Art xvi says that there shall be no restriction on international transfers and payments.

12. What to Do

Since these agreements are intended to benefit the trade, industrial and services sectors, the relevent trade and industry bodies should be closely consulted during negotiations.
Their concerns should be addressed in the texts.

Their buy-in is essential for the success of the agreements.

The experience of successful exporters could be shared for the benefit of all.

Trade facilitation must be included in ETCA.

A help desk with skilled officers must be established. The help desk must take a proactive approach in promoting the national interest.

The Institute of Policy Studies suggests that Sri Lanka needs to make better use of the existing ISLFTA. But for this to happen, government machinery must be proactive.

Tourist arrivals from India in excess of 170,000. This is a resource that can be exploited to our benefit.

Sri Lanka needs to move in to less traditional markets. India is a non traditional market and an increasingly lucrative one.

India’s increasing prosperity provides a ready made market for services

160 million Indians are estimated to be in the INR 20,000 – 100,000 bracket.

Sri Lankan exports have duty free access to India except for 429 products

India is the biggest source of FDI, largest source of imports, third largest destination for SL exports, bilateral trade exceeds $ 4.5 billion

But on the negative side, 56m are unemployed in India. An estimated
60,000 Indians work in Sri Lanka now. Safeguards need to be built in to the agreements.

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