China-Sri Lanka FTA: Industrialists caution of adverse impacts on domestic industry

The proposed Free Trade Agreement (FTA) between Sri Lanka and China has become a point for discussion in various circles in the industrial sector today.  
The main reason is that the government has recently disclosed their requirement of reducing the Sri Lanka negative list to 10 percent and to phase out the import cess to zero within five years after implementation of the proposed FTA.
At a recent meeting held among several Chambers and Trade Associations related to Commerce and Industry, it was highlighted that the Government has earlier requested recommendations of the Chambers to reduce the said negative list to 30 percent which had initially been at 40.21 percent of the total tariff lines.  They said that the Chambers, during their meetings have come to a consensus finally, to accommodate and meet the 30 percent level accordingly.   
However, the latest scenario is to reduce the Sri Lankan Negative list to 10 percent and to remove the cess which has been imposed to safeguard the Sri Lankan industries within 5 years upon implementing the proposed FTA.
This is a situation which needs serious attention of the industrial sector.  Sri Lanka being a developing country should safeguard its industries against free entry of foreign goods. At a time where the world’s most developed country is considering to impose tariff/tax for imports from China, it is imprudent for our country to relax safeguards for our industries.
World Trade Organization (WTO) recognizes the need for adopting safeguarding measures for protection of domestic industries as para tariffs imposed to achieve this objective. Phasing out the para tariffs, such as cess, will be a death knell, leading to the closure of our local industries.
Large economies enjoy the benefits of economies of scale whilst local industries are burdened with high energy, high labor, inflated raw material costs, facing an un-levelled playing field, causing non-competitiveness.

SME dominance
Sri Lankan industrial sector is dominated by SMEs which accounts for 90 percent of the total industrial establishments. During the nearly three decades of terrorism, this sector has been the back-bone of the nation and sustained the economy, despite all the adversities, surmounting all local and global challenges.
These SMEs are dependent on Large industries for backward/forward integration for supply sourcing of raw materials, marketing and other services. Removal of tariff protection, will adversely affect these SMEs, both directly and indirectly which will lead to their non-competitiveness and closing down, creating unemployment and adversely affecting the economy.
The majority of the local industrialists have funded their investments, in their respective industries, with borrowed funds, from banks and financial institutions, using their personal assets as security.  Further, their indebtedness on loans and overdrafts run into Millions, depending on the size of the company. If they are not safeguarded sufficiently, it will lead to disastrous economic situations. 
Sri Lanka is lacking in strong economic fundamentals to develop and safeguard the local industries; such areas are high bank interest rates, non- competitive parity rate for our rupee, effective labour laws focused on improving productivity, problems  relating to conflicting investment policies, etc.  

For selected industries
It was the consensus amongst all present that they were not in agreement to this FTA at all.  No local industrialist seems to be in need of an FTA between Sri Lanka and China other than a very few in certain selected industries.    It was the view of the business community, that opening and relaxing para tariffs to the 30 percent level of the tariff lines, for the negative list,  is deemed an acceptable para tariff limit.  In this instance, it is also pertinent to mention that Sri Lanka has to safeguard its local industries.  Removing para tariffs in place, will be disastrous for most local industries and will lead to their closure, resulting in the bankrupcy of thousands of local entrepreneurs, besides the loss of jobs, for millions of Sri Lankans.
It was also the view of those present at the meeting that the criteria for entering into such FTAs, should be the sustenance, growth and development of the Sri Lankan economy. However, if needed, the environment for the implementation of same, should be through a policy and strategy framework, which will give sufficient time to enable our industries to face the challenges arising.  At least there should be a scheme to compensate such industries, who are forced to close-down, to diversify and sustain, or at least to pay off the debts and secure their invested capital. 

Safeguarding local industries
The importance of safeguarding local industries can be very evidently seen today; even in USA which is considered to be the largest economy in the world.  Therefore, WTO or any other international body could not challenge a small country like Sri Lanka, for the interest taken for safeguarding its local industries.
The business community of Sri Lanka,  has rejected these proposals completely and requests the government to extend BOI facilities, for investments in  manufacturing facilities in Sri Lanka, that are of strategic importance and add-value, contributing to economic development and prosperity of the nation and it’s people.
Therefore, they earnestly request the government not to reduce the negative list to 10 percent from the present level which has already been agreed as 30 percent and not to phase out cess within a period of 5 years, which is the only measure available to safeguard the local industries.