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On 1 January, 1994 the North American Free Trade Agreement
(NAFTA) came into operation. Under its terms, existing trade
restrictions will be removed against the intra-trade of
the United States, Canada and Mexico, but will continue
to be in operation for imports from third parties. Countries
such as Sri Lanka are naturally concerned about their trade
being displaced by the NAFTA, which like all other free
trade agreements, discriminate in favour of member countries.
At present, 36 per cent of Sri Lankan exports are concentrated
in the US market and out of this amount nearly 84 per cent
are garments. Thus the apparel exports remain the major
concern for Sri Lanka in the context of NAFTA. Some argue
that NAFTA poses a serious threat to Sri Lanka’s economy
because Sri Lankan apparel exports to US will be substantially
displaced by more competitive Mexican apparel while some
others argue that the formation of NAFTA is a non-event
from the Sri Lankan perspective.
The only available literature that gives at least some
indication of NAFTA’s implications for Sri Lanka is
a study done for the World Bank by Safadi and Yeats (1993)
on NAFTA and South Asia. According to this study, the losses
for Sri Lanka due to NAFTA, in terms of 1989 statistics,
will be about 1 per cent of her exports to the US market.
But the study claims that the potential losses from the
decline in exports would be more than offset by the successful
completion of the Uruguay Round of trade negotiations. The
study however is more focussed on South Asia and the conclusions
are based on aggregate statistics. An aggregate analysis
for the South Asian region is always biased by the inclusion
of Indian statistics. Moreover, the analysis of Sri Lanka’s
case is based on the regional model which may not necessarily
be valid for a small country like Sri Lanka.
In this study we have re-examined in detail NAFTA’s
implications for Sri Lanka. In particular, we have investigated
Sri Lanka’s competitiveness vis-à-vis Mexico
in the US market. While supporting the basic conclusion
of Safadi and Yeats, we go on to show that NAFTA, and the
gradual abolition of the MFA, give new opportunities to
further expand the apparel industry of Sri Lanka. However,
we argue that this will not happen merely by the market
mechanism. Substantial work needs to be done both on the
marketing side as well as on the supply side, the latter
being weak needing more attention. In regard to the Uruguay
Round, our analysis shows that there are gains for Sri Lanka,
but the gains are not very significant as argued by Safadi
and Yeats (1993).
Table of Contents:
- Introduction
- North American Free Trade Agreement
- Sri Lanka and NAFTA
- NAFTA and the Sri Lankan Garments Sector
- Conclusion
- References
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