The proposed economic agreement with India: Lessons from the recent past

There is today considerable public interest in the Economic and T e c h n o l o g i c a l C o - o p e r a t i o n Agreement (ETCA), which the government is proposing to enter into with the Indian government. Talks at official level have already been held and a Framework Agreement is under discussion. The content of the proposed agreement can be expected to form an important component of the discussions to be held shortly at the Joint Commission between Sri Lanka and India. These preparations are intended to pave the way for the signing of the agreement, in its final form, about the middle of this year.

Relevance of contemporary experience

My purpose in this article is to highlight some relevant considerations, in light of our country’s experience in the recent past, with a view to ensuring that these issues receive fully the attention they deserve, so that Sri Lanka’s national interests in the trade and economic field are protected to the maximum extent.

From FTA to ETCA

The free trade agreement (FTA), which was signed between the two countries in 1998 and come into force in 2000, dealt with goods and commodities. What is now contemplated is an extension into the field of services. This was the objective of the Comprehensive Economic Partnership Agreement (CEPA), which has been under discussion between Sri Lanka and India for many years, but could not be concluded because of strong opposition from significant sections of the business community in our country. The current initiative is an Economic and Technological Co-operation Agreement (ETCA), the principal purposes of which are broadly comparable with those of the aborted Comprehensive Economic Partnership Agreement (CEPA).

FTA: Operational issues

The grievances many leading members of the business community articulated over the years related to a series of problems of a practical nature which arose in the implementation of the FTA. The gist of these recurring complaints was this: The FTA defined the quantities of different commodities, which could be exported from one country to the other in accordance with the terms of the FTA. Thus, there was bilateral agreement that X tons of tea, pepper, cinnamon, apparel goods and so on could be exported out of Sri Lanka into India, enjoying all the concessions available under the terms of the FTA. However, the complaint was that, when it came actually to sending out these commodities into India, a host of administrative problems arose, and the cumulative effect of these problems was to deprive our exporters, in large part, of the benefits to which they were entitled, in principle, under the FTA. The constraints, of which Sri Lanka’s business community incessantly complained, pertained to what were known as non-tariff barriers (NTBs). In simple terms, what this meant was that the theoretical entitlement to export designated quantities of particular products, was stultified, in appreciable measure, in practice by bureaucratic restraints which were imposed in a variety of forms.

Problem of “canalization”

The process, described as “canalization”, was the main cause of frustration on the part of entrepreneurs. A few examples will suffice.

(a) The import licensing procedure

Although the permissible quantity of each commodity to be exported was specified in the FTA, there were administrative restrictions imposed on the Indian importer. He was required to obtain an import licence, without which the import into India could not be made. The import licence issued at the Indian end was, therefore, an essential precondition for the Sri Lankan exporter to secure, on the ground, the benefit conferred by the FTA. The procedure for obtaining the import licence, it transpired repeatedly, was by no means smooth or easy. There were long delays, experienced as a matter of routine, and these spawned a burgeoning number of complaints. What the aggrieved Sri Lankan exporters asserted was that the entitlement of the Indian importers was within a quarterly time-frame: they were required to utilize their import entitlement within a period of four months. If this did not happen, for whatever reason, an extension had to be applied for by the Indian importer, to import the unutilized quantity during the succeeding quarter. There were, allegedly, powerful Indian commercial interests resisting the swift issue of import licences to Indian importers, because of the adverse impact on Indian manufacturing interests caused by the entry of goods from overseas. Be that as it may, the complaint at this end was that the entitlement under the FTA could not, in practice, be enjoyed by the Sri Lankan exporter, who found, at the end of the quarter, that only a fraction of what he was entitled to export could in fact be exported. The residue had then to be carried over into the next quarter, and so on, until at the end of the year there still remained a substantial deficit. This problem remained larg e l y unresolved and was a continuing source of disenchantment.

(b) The time-frame and destination for exports

There were, as well, issues arising from restrictions imposed by the Indian side with regard to the ports to which commodities --- tea, for instance --- could be shipped. Furthermore, the timing of imports into India was determined administratively, and it sometimes happened that the goods exported did not reach the Indian importer at a time which would have enabled the maximum benefit to be gained from the transaction. This benefit would depend, naturally, both on the area in which the receiving port is situated, and the time of the year (when there is a surfeit or a shortage of the commodity in question) at which the export is physically made. All the s e wer e sus c ept ibl e to administrative intervention, which was the cause of the unhappiness repeatedly expressed by the Sri Lankan business sector.

(c) Certification, customs and quarantine

Another fertile source of friction had to do with Indian procedures relating to certification, customs and quarantine. The results certified after laboratory examination in Sri Lanka were frequently not accepted, and fresh chemical testing insisted upon. This often resulted in protracted delays which brought about deterioration of the quality of the goods exported, and consequent financial loss to the Sri Lankan exporter. There was also the problem that customs and quarantine procedures across Indian states were far from uniform. Moreover, taxes imposed by Indian states, as opposed to the central government, resulted in some degree of complexity, aggravated by wide divergence in respect of the quantum of the applicable levies.

(d) The suggested solution and its adequacy

Considering these issues in terms of their overall impact, the gravamen of the complaints was that what appeared to be a clear and unimpeachable agreement at the political level was deprived of substance by bureaucratic action in a variety of contexts, amounting in the final analysis to virtual impossibility of actual enjoyment of a large part of the benefits provided for by the FTA. As the protests gathered momentum and no really satisfying solution seemed to be within reach, the matter was revisited on several occasions.

On each of these, the sustained response on the Indian side was that a viable and effective solution to all these problems --- the existence of which was not contested – could be readily evolved in the more thorough setting of a comprehensive agreement, sought to be accomplished by the ongoing negotiations. Representatives of the Sri Lankan business community vehemently objected to this approach. Their basic position was that contentious issues arising from implementation of the FTA, should be discussed and resolved within the framework of the FTA itself, and that it was both reckless and futile to acquiesce in a far-reaching expansion of the scope of bilateral agreements from goods to services, while these pressing issues remained pending.

Other considerations

I think it useful to set out here some of the other considerations which Sri Lankan entrepreneurs underlined in their representations during the last few years.

(a) Symmetry and reciprocity: Inherent strengths

Given the dramatic divergence of scale between the two countries, critical issues naturally arise in respect of symmetry and reciprocity. While Indian negotiators conceded consistently that allowance must be made for these differences, the arrangements on the ground did not always meet with satisfaction. The strong feeling on our side was that, if Sri Lanka was to benefit substantially, the commodities in respect of which free access is allowed into the markets of the Indian sub-continent need to be identified, with particular reference to Sri Lanka’s intrinsic strengths and capacity. Tea and apparel products are two of the commodities which will bring us the largest benefits in the wake of enhanced access.

While it is true that progressive increase in quantities, especially with regard to apparel products, has been agreed to by India, the view was vigorously expressed on several occasions by our exporters that an FTA, if it is really to serve Sri Lanka’s interest in the long run, should be so structured as to make provision for totally free access, for these two commodities, into Indian markets over time. This was scarcely inequitable, since the practical dynamics of the situation, in relation to scale, would ensure that the adverse effect on Indian producers would be infinitesimal. It must be remembered that the total value of Sri Lanka’s exports is approximately US $ 9 billion per year. Out of this, nearly US $ 6 billion is accounted for by the export of garments and tea. Nevertheless, provision has been made for only a negligible quantity of exports of these commodities, in terms of the FTA with India. In fact, the startling reality is that the quantity provided for by the FTA is less than 2 percent of the total quantum of these crucial commodities exported out of Sri Lanka each year. This situation is due to very specific quantity ceilings and designated entry point stipulations. The result is that, even after 15 years’ experience of the working of the FTA, Sri Lanka’s largest export commodity into India is arecanut.

(b) Balance reflected in the Negative Lists

There was, in addition, persuasively articulated concern about the need for maximal use of Negative Lists, within the limits of propriety, to achieve the required protection for Sri Lanka’s trade interests through this mechanism. Our business community was convinced that much could be learnt, of practical advantage for the future, from some aspects of our experience of the working of the FTA, and that these lessons would stand us in good stead in addressing, with the depth and perception they deserve, even more vital issues which will inevitably arise in the formulation of Negative Lists as an integral component of a wide ranging agreement in respect of services.

(c) Movement of persons an especially sensitive issue

The thrust of misgivings which influential sections of the Sri Lankan business community expressed, in discussion about a proposed CEPA, pertained to the Fourth Module, which governed the movement of natural persons.

These apprehensions were not fanciful, and needed to be allayed by well-considered responses. Repeated reference was made to the marked impressions created by the presence of large numbers of expatriate workers in many sectors including dockyards, iron foundries and especially in the mercantile, health and tourism sectors. The important point here is that trading in services, as distinguished from trading in goods, envisages not only provision of the service but the entire gamut of activities used for the generation of that service. Thus, shipping encompasses not only physical transportation but engineering, operation of shipping agencies, freight forwarding, ship operational maintenance and so on.

Likewise, information technology would include data entry operation, software designing, data processing personnel as well as technicians, engineers and skilled persons involved in such services. During the last 10 years, Sri Lanka has witnessed an upsurge in tourism, information technology, construction, shipping, aviation and private healthcare. Opening up these activities without clear demarcation of specific areas to be catered for in the Negative Lists, together with an effective regulatory framework and strong institutions responsible for enforcement, could introduce a high degree of vulnerability into these sectors, with disturbing repercussions for employment and growth in a sector which constitutes nearly 60 percent of Sri Lanka’s gross domestic product (GDP). Attention has been drawn in sustained representations to already existing problems with regard to significantly increasing numbers of foreign personnel employed in hospitals and hotels, and concern is unavoidable whether these problems would be aggravated as a consequence of the innovations contemplated in respect of services. This is especially so, in areas of work which could easily be done by Sri Lankans whose employment prospects are likely to be damaged by the entry of foreign competitors. A telling example would be an ambulance service which would involve not only drivers but various other categories in maintenance and related activity. Although infusion of technology is clearly advantageous for our economy, vulnerability arising from employment prospects for expatriates is, naturally, an issue of extreme sensitivity.

(d) Value addition: The overriding factor

A point which has been consistently stressed on the Sri Lankan side is the centrality of value addition. Trade agreements of the kind envisaged will serve us well only if they result in the use of Sri Lankan materials and services by the foreign companies that come in. Reservations have been expressed in respect of several situations that brought about competition between Sri Lankan and foreign companies, without such value addition to any significant extent taking place. This has happened, for instance, in the steel sector. This, ‘per se’, is detrimental to our interests, because of inherent inequalities in respect of competitive capability.

Conclusion

If I am asked to isolate the single most potent factor underlying the anxiety felt by large sections of the Sri Lankan business community, I would answer without hesitation that the central problem is the fear that practical considerations, as experience shows, often thwart the substance of contractual arrangements. The host of administrative and bureaucratic impediments, which stand in the way of Sri Lanka deriving the fullest benefit from the stipulations contained in the FTA, exemplify this problem. It is, therefore, vitally important to engender confidence that the total environment will be conducive to proper implementation in a fair and even-handed manner. It is this factor, more than anything else, that will make all the difference in respect of public acceptance.