India, Sri Lanka agreement is an example to follow
Saman Kelegama
The Financial Express, 5 October 2005
There is little scope for economic cooperation in South Asia, argue some economists. Low intra-regional trade, larger scope of gains from North-South cooperation and limited complementarities in the region are some of the arguments used against a free trade agreement in South Asia.
Perhaps, the slow progress of Saarc Preferential Trading Arrangement (Sapta) with little results after four rounds of tariff reduction during 1996-2003 gives further force to these arguments.
However, pessimistic viewpoints and slow progress of Sapta have not discouraged South Asian countries from exploring various other avenues to move trade and investment in the region during the last decade. The best example is the use of bilateral free trade agreement option to stimulate trade and investment.
The successful Indo-Sri Lanka Bilateral Free Trade Agreement (ILBFTA) is a good example. Arguments like the larger country being the key beneficiary, trade diversion taking place and disruption of the production base in Sri Lanka have been negated by the successful implementation of the bilateral agreement.
After five years, the trade balance in favour of India declined from 15:1 in 1998 to 3.5: 1 in 2004. In 2004, bilateral trade amounted to US $ 1.73 billion, with Indian exports amounting to US $ 1.35 billion and Sri Lankan exports amounting to US $ 382 million.
India, which was the 21st destination for Sri Lankan exports in 1998, became the third largest destination in 2004. India was the largest source of imports to Sri Lanka before the ILBFTA. After the implementation of the agreement, Indian imports stabilised at 13-15% of overall imports of Sri Lanka.
India, which was mainly exporting agricultural items to Sri Lanka until the late 1980s, is now a major supplier of industrial goods and services. Indian investment followed trade and over 50% of the Indian investment in the Saarc region today is in Sri Lanka. India is the fourth largest investor in Sri Lanka after Singapore, the UK, and Australia.
Indian investments have played a key role in invigorating dormant complementarities in the Sri Lankan export production side. The trade-investment nexus is gradually working for Sri Lanka as well—Ceylon Biscuits and Damro are the most visible Sri Lankan investments in India.
Sri Lanka sees the imbalance in the trade account due to its limited export supply capability getting compensated by investment flows in the capital account. The enthusiasm for the ILBFTA is sustained through such positive thinking and strong political commitment from both sides.
India and Sri Lanka have now agreed to move towards a Comprehensive Economic Partnership Agreement (Cepa) by January 2006. The Cepa will include investment and services in addition to deepening commitments undertaken in the ILBFTA.
The Sri Lankan experience shows that if the regulatory framework in a bilateral FTA is correctly designed to accommodate the disparity between the countries, then a small country could in fact gain from an FTA.
In this case, the time frame of tariff phase-out, rules of origin, and negative list were designed to accommodate the smallness of Sri Lanka's export and production capacity. In other words, special and differential treatment in favour of Sri Lanka was built into the bilateral FTA.
If Safta is to make an impact, it should prove within its first two years of operation that unlike Sapta it can withstand political shocks and move forward to facilitate trade and investment in the region.
And above all, it should move fast enough to supersede the existing bilateral FTAs in the region and prove to be a potential building bloc of a future Asian economic community. This then is the challenge before the 13th Saarc Summit in Dhaka in November 2005—to give a positive spin to Safta and make it effective like the ILBFTA.
The writer is executive director, Institute of Policy Studies of Sri Lanka
