SL appears to be wary about going for an FTA with China

Sri Lanka’s Foreign Minister Ali Sabry shakes hands with his Chinese counterpart Wang Yi, last Friday on the sidelines of the 71st UNGA session in New York

Fear of Chinese goods flooding the Lankan market and the challenges of penetrating the Chinese market hold back efforts to conclude an FTA despite consistent Chinese pressure  

Reporting on the meeting between the Sri Lankan Foreign Minister Ali Sabry and his Chinese counterpart, Wang Yi, last Friday on the sidelines of the 71st UN General Assembly session in New York, the Chinese embassy in Colombo said that the two sides had “agreed to speed up the negotiation process and strive for an early conclusion of a Free Trade Agreement (FTA), thereby boosting the confidence in and stabilizing the expectations for their economic and trade cooperation.”

Significantly, from the Sri Lankan side, there was no press release on the Sabry-Wang meeting. Minister Sabry had tweeted, but his tweet made no mention of an FTA. Sabry said: “Had a productive discussion with Foreign Minister Wang Yi of China. We discussed bilateral ties and cooperation between multilateral agencies. Yi assured that China will offer steadfast support to the Sri Lankan economic recovery.” 

While Sri Lanka has been prevaricating and dragging its feet on the FTA since talks on it began way back in 2015, China has been very keen on it, frequently reiterating it, and even making it a condition for continued financial investments in Sri Lanka. Chinese Premier Li Keqiang told his Sri Lankan counterpart Mahinda Rajapaksa on April 22, 2022, that while China had empathy for Sri Lanka’s economic plight and was keen on helping it, there ought to be an early start of the negotiations and signing of the FTA, “so as to enhance mutually beneficial cooperation.” Li was warning that further dilly-dallying on the FTA would affect the flow of Chinese economic aid. 

Mahinda Rajapaksa, being sensitive to China, caught on to this and said that “Sri Lanka is ready to strengthen cooperation with China in finance, economy, trade and tourism and advance the negotiation of the bilateral free trade agreement.” By saying so, MR, had made an important commitment to China, knowing only too well that it would not be easy to fulfill it, given the stiff resistance to the FTA in the Sri Lankan Establishment and the larger business community. In fact, in response to a query on the FTA, the then President, Gotabaya Rajapaksa, had said that the Chinese were “asking for too much”.

Qi Zhenhong, the Chinese Ambassador to Sri Lanka, had also discussed the FTA with the then Lankan Foreign Minister GL Peiris. The Sri Lankan statement on the meeting said that Ambassador Qi, while stating that China had signed over 26 FTAs, an FTA with Sri Lanka would immensely benefit the Sri Lankan local market and products. On his part, Peiris promised to start the 7th round of talks. However, the economic crisis which intensified put paid to that. 

China’s lukewarm response to Sri Lanka’s cries for help to face an unprecedented forex crisis, forced Sri Lanka to turn to the IMF and India. India quickly came up with a US$ 4 billion aid package and strengthened its relations with Sri Lanka, to China’s dismay. China did announce a loan and buyer’s credit totaling US$ 2.5 billion, but that was not implemented. 

However, eventually, China did announce emergency aid of around US$ 31 million, including 5,000 tonnes of rice, pharmaceuticals, production materials and other essentials.  A further consignment of medicines worth 12.5 million RMB (LKR 650 million) from China under its 500 million RMB emergency humanitarian, arrived last Friday.
While all this showed China’s desire to help Sri Lanka (to the extent possible as it keeps saying), the issue of FTA could be a stumbling block to the betterment of economic relations if that is made a condition for extending any substantial help to Sri Lanka. The FTA casts a heavy burden on Sri Lanka given the general fear of being flooded by Chinese goods with very little prospect of Sri Lankan goods finding a market in China.

In 2020, China exported US$ 4.01 billion worth of goods to Sri Lanka. The main products were light rubberized knitted fabric (US$ 241 million), broadcasting equipment (US$ 225 million), and refined petroleum (US$127 million). In the same year, Sri Lanka exported only US$ 266 million worth of goods to China. The main products were tea (US$ 60.4 million), coconut and other vegetable fibers (US$ 24.2 million) and knit T-shirts (US$ 18.5 million). There is this a yawning trade deficit. Could Sri Lanka narrow it by signing an FTA?

When talks on the FTA broke down in 2017, the stumbling block apparently was Beijing’s rejection of Colombo’s demand for a review of the FTA after 10 years. But according to EconomyNext, the real issue was opposition from the entrenched Lankan monopolists. China also wanted zero tariffs on 90% of the goods sold to each other as soon as the FTA was signed, while Sri Lanka wanted it to start with zero tariffs on only half of the products concerned and expand gradually over 20 years. Sri Lanka’s demands were reasonable from the point of view of a smaller and less-developed economy.

However, if the Lankan government abandons or toes down its protectionist policy, and if the business community and the entrepreneurial class also stop clamoring for protection, an FTA with China could work to Sri Lanka’s advantage as indeed FTAs with other countries would also do.   

A 2015 study of a possible FTA between China and Sri Lanka by the Colombo-based Institute of Policy Studies (IPS) found that Lanka would have a comparative advantage in 243 items. In addition, there were an additional 299 products with trading potential vis-à-vis China. For example, Sri Lanka can push for a place in the Chinese market for its vegetable products, rubber and plastics, the study said.

But the IPS also says that, being a smaller and weaker economy, Sri Lanka would have to negotiate for softer Rules of Origin (ROO). And also that it would be better to go for product-wise ROO than a comprehensive ROO applying across-the-board.  Also, since developed countries get over the disabilities emanating from FTAs by putting up Non-Tariff Barriers (NTB), Sri Lanka should get a firm commitment that such barriers will not be put up by China. 

Since the Chinese, in general, go for agreements based on reciprocity, Sri Lanka should deftly negotiate for an asymmetric deal given the asymmetry between the two economies, the IPS suggests.
To make the FTA work at the ground level, Sri Lankan businessmen should be given practical and up-to-date information on trade opportunities in China by a government institution. Presently, businessmen are largely on their own. Cultural differences and institutional practices often lead to misunderstandings and miscalculations, the IPS study points out.  

But all this is for the future. At the present time, Sri Lanka is too deeply involved in managing the on-going economic crisis, and is unlikely to have the time or inclination to start discussing a complex and controversial issue like an FTA with China. Sri Lanka’ silence on the discussion in New York between Ali Sabry and Wang Yi, indicates this.