By Rohan Samarajiva
When the first bilateral agreement setting a legal framework for services trade, the Canada-US Free Trade Agreement, went through, it became the main issue in a general election that saw Prime Minister Brian Mulroney, its principal proponent, win. When the India-Sri Lanka Free Trade Agreement went through in 1998 there was barely any public discussion. Both were not optimal in public-policy terms.
Bilateral agreements, especially involving non-tariff barriers (NTBs), are important and deserve public debate. Unfortunately, the opponents of the Comprehensive Economic Partnership Agreement (CEPA) with India have ceased to debate on facts. They have descended to personal attack and half-truths. But to remain silent is to yield the public arena to the demagogues.
FTA to CEPA
Sri Lanka was the first country to have a working bilateral trade agreement covering goods with India.
We would have been the second to have a working agreement with India that covered services and investment in addition to goods, if not for the government’s retreat in 2008. The main opponent inside the government was the late Highways Minister Jeyaraj Fernandopulle. He was uninformed when he opposed the CEPA, as were the few but vociferous opponents who advised him. There was little public debate on the subject.
Some of the misconceptions propagated by the opponents were:
Stopping the CEPA would help resolve the problems experienced with Free Trade Agreement (FTA) with India, operational since 2000;
Increased deficits in the past few years under the FTA are bad;
Sri Lanka’s failure to increase exports to India, especially with regards to our main goods exports, tea and apparel, were entirely the fault of India; and liberalisation of services trade with India was harmful to Sri Lanka.
There were problems with the FTA in its first decade. Nature’s Secret succeeded in Bangladesh and not in India (I understand that they still sell in India). Munchee is an extremely successful company, but was frustrated by court cases in Tamil Nadu. The vanaspati episode was the nadir of the FTA’s first decade. Here, legal-on-paper actions by certain Indian investors to exploit the low duties offered by the FTA by setting up factories in Sri Lanka to export into India were blocked by the Indian authorities.
There also have been great successes. Colombo Dockyard has succeeded in winning multiple government tenders, difficult to do if the Indians were intent on harming Sri Lankan exports. The “Amante” brand of lingerie marketed by MAS saw a 150 percent growth in 2009. A Nielson survey rated it as the Indian “Product of the Year” for 2009.
This is no evidence of a uniform pattern of big brotherly bad behaviour. What the facts suggest is the value of working together to resolve problems especially when both sides are new to trade liberalisation, including through the formal dispute settlement provisions that were not included in the FTA, but are included in the CEPA draft.
The least informed of the criticisms was the claim that rising imports from India were bad for Sri Lanka and evidence of the failure of the FTA. One of the reasons why Indian exports increased was the import of petroleum products by Lanka IOC. Another was the substitution of cheap Indian two-wheelers for the Japanese imports of yesteryear. It is silly to claim that obtaining cheaper products from one market instead of another is bad. What is sad is that those who should know better, including economists, make this absurd argument.
It is true that there were caps on tea and apparel exports into India from Sri Lanka, both being items that both countries exported. In an ideal world, there would not be. But the CEPA and preceding negotiations relaxed the conditions of the cap placed by India. But the most recent evidence points to an earlier lack of interest by Sri Lankan apparel exporters as a contributory factor. There was a 40 percent increase in apparel exports in 2009 over 2008 despite overall Sri Lankan exports to India declining by more than 28 percent in that recessionary year.
As GSP Plus came under threat, our exporters began to see the merit of the enormous market right next door. Unlike GSP Plus, trade with India is not conditional on human rights and other extraneous matters. The certainty afforded by real trade agreements, multilateral or bilateral, is the main reason why not signing the CEPA is inimical to the interests of Sri Lanka. There is no opposition to the chapter of the CEPA that deals with goods (which is simply the current FTA with some refinements).
What is being opposed is the services chapter. It is being opposed on the basis of fear mongering about the country being inundated by Indians. This will not happen because trade agreements do not abrogate immigration laws. This will not happen because we did not get inundated even after we started giving visa on arrival. In fact, the Indian tourists who got those visas on arrival kept our hotels afloat and their employees from losing their jobs in the past few years.
Movement of Indian professionals under the services chapter will be limited to those directly attached to Indian firms that invest here (under Mode 3 services trade), except in one or two industries where there are shortages and no industry opposition (http://www.island.lk/2008/07/14/business4.html). Those who raise the bogeyman of Indian professionals coming to Sri Lanka neglect to talk about the 3000 Sri Lankans currently working in India on work authorizations, who will in the future be able to get their visas a lot easier; or of the larger number of sectors opened up by the Indian side.
What the opponents highlight are imagined dangers. A balanced approach would look at the dangers as well as the opportunities. Sri Lankan professionals have done well in all the countries they have gone to temporarily or as migrants. There is no reason that they will not succeed in India if given the opportunity. Signing CEPA will result in those opportunities being opened up in one of the most attractive, high-growth markets in the world.
CEPA and the hub strategy
Without the CEPA, the government is unlikely to succeed with the five-hub strategy that is the centerpiece of the Mahinda Chinthana Idiri Dekma. Currently, Colombo has regional shipping and aviation hubs, though much potential remains unrealised. Indeed, much has to be done quickly if the present hub status is to be retained in the face of rapid developments in the region.
The CEPA negotiations saw the Indian bureaucracy formally recognising Colombo as a regional transportation hub for the southern sub-continental region. This was a major advance from the earlier Indian policy positions that sought to substitute Indian ports for Colombo. CEPA is a necessary condition for locking in the changed attitudes. It is essential to consolidating the container port in Colombo, one of the greatest assets of the Sri Lankan economy. Not locking in the Indian commitment to Colombo as a regional shipping hub is inimical to the interests of Sri Lanka. Analysis of the viability of Sri Lanka, a decidedly energy-deficit country, becoming an energy hub shows that the prospects for Sri Lanka becoming an energy hub and Hambantota becoming a ship refuelling station are intertwined. Unless there is a refinery in Hambantota it is unlikely that it can attract even a small portion of the expected 10,000 ships a year (this is more than double the number attracted to all Sri Lanka ports now).
A refinery just for bunkering will not make sense in the same way that the Sapugaskanda refinery has not. What will make sense is a very large refinery that can exploit the economies of scale of current technologies. The market for such a refinery will have to be the entire southern sub-continental region. Not having framework agreement will make necessary investments that much harder to attract. Not signing CEPA is therefore inimical to the hub strategy. It is inimical to the interests of Sri Lanka.
The success of the transportation and energy hub plans, at least, rests on good relations with India. This could, arguably, be achieved through good personal relations exemplified by the family friendships that the Bandaranaikes used to claim with the Nehru-Gandhi family. But, at least in international affairs, there is value to legal agreements, especially now that ruling family relationships have declined in importance. That is why not signing CEPA is inimical to the interests of Sri Lanka.