The people of Sri Lanka have become enthused to hear about discussions on signing a Free Trade Agreement (FTA ) with China. This was revealed at discussions Industry and Commerce Minister Rishard Bathiudeen had with Deputy International Trade Representative of the Ministry of Commerce of China, Yu Jianhua last October.
If it becomes a reality, it will be the most significant milestone of Sri Lank-China trade relations since the Sri Lanka-China Rubber Rice Pact signed in 1952.
With mass development of global trade especially after the1970s, the world trend in trade moved towards liberalisation of trade or simply trading without tariff and non tariff barriers.
While multilateral agreements under the GATT and WTO have been leading to greater trade liberalisation in the world economy, regional trade agreements such as NAFTA, SAFTA became significant free trade agreements.
The development of regional cooperation among countries has given a boost to a free trade environment. The evolution of the EU from the mid 50s shows how regional cooperation develops. Free Trade Agreements (FTAs) were initiated to develop trade without barriers among countries through bi-lateral or regional discussions.
A Free Trade Agreement is a treaty between two or more countries that do not impose tariffs for trade across their borders.
The main purpose is to provide a conducive environment for business to compete globally.
The relations between Sri Lanka and China have continued for a long period. President Mahinda Rajapaksa has been developing high profile diplomatic relations with China and highlighting the importance of the Chinese market for Sri Lankan products.
China has made significant investments in Sri Lanka and does much of the large-scale construction work in the country. On the other hand China has become a leading economic power in the world, achieving its target, 25 years after the implementation of reforms.
The Chinese economy is developing at an unprecedented rate. China, the second largest economy in the world has reached the target of US $ 9 trillion GDP in 2013 maintaining an average growth rate of 9%. China is also the biggest market in the world with a population of 1.4 billion.
Increase in exports
China has given priority to strengthen its powers in the Indian Ocean and the strategic location of Sri Lanka is an important factor for any power which strives to expand in the Indian Ocean.
One of the targets of the Export Development Board's National Plan for Exports (Strategic Plan 2010-2015) is to increase exports to markets other than the EU and the USA by over 50% by 2015.
To achieve this massive increase it is necessary to export more to India, China, Japan, Korea and the Middle East Markets.
There is positive environment to develop a Free trade Agreement with China for trade development between two counties.
Highlights from a number of chronicles and archaeological findings are acceptable evidence that trade between Sri Lanka and China goes far beyond the Christian era. The Silk Route passed through the region and the abundance of resources in Sri Lanka encouraged the setting up of strong trade relations with Sri Lanka.
The trade relations of both countries strengthened with the Rubber-Rice Pact signed in 1952. It was this agreement that developed the export market for rubber and till 1976 China was the number one export market for Sri Lanka.
With the opening of the economy, Western countries overtook the Chinese position and today she has become 18th export market for Sri Lanka. In imports, China has grabbed the number one rank equalling India. The social, political and economic systems of China changed with the Chinese Revolution in 1949.
The revolution created a socialist nation in terms of development its economy, improving live standard of the people and equal distribution of income. To achieve socialism, China followed the Central Planning Economic system like other Communist countries.
This is a system where the whole economy and its all sectors is controlled by the State. Due to this closed economic system and approach, the bulk of Chinese foreign trade was with the former Soviet Union and its allies.
With the changes in the global economy, China was forced to change its policy and system to adopt to new developments. In 1990, China introduced 'Socialist Market Economy' and opened the market to foreign investors to expand production targeting the massive global market.
Some professionals called this system - dual system. It means political and administrative activities continue without any changes while opening the economy to the world.
After 1990 with the development of China's new trade policy foreign trade diverted from the former Soviet Union to Western countries EU, ASEAN, Japan, Korea, Brazil, USA, Australia are a few of the leading trading partners of China.
China also moved to sign Free Trade Agreements (FTAs). China considers Free Trade Agreements (FTAs) as a new platform to further open international trade relations and accelerate domestic reforms which is an effective approach to integrate into the global economy and strengthen economic cooperation with other economies and an important supplement to the multilateral trading system.
China implemented her first Free Trade Agreement in 2003 with its Government Special Administration Regions, Hong Kong and Macao. These agreements were wide-ranging including service sectors as these regions were part of China.
In 2007 China signed an FTA with ASEAN and, thereafter, six bi-lateral FTAs were signed with countries such as Chile in 2006, Pakistan in 2007, New Zealand in 2008, Singapore in 2008, Peru in 2009 and Costa Rica in 2011.
Ministry of Commerce and Industry officials should discuss with top Chinese authorities on whether the FTA will be definitely implemented in 2014. The official information on Chinese FTAs is given in the China FTA Network.
But according to this network there is no indication of an FTA with Sri Lanka even under consideration. At present, China is having final negotiations with the Gulf Cooperation Council (GCC) and the Southern African Customs Union (SACU) to implement FTAs.
In addition, FTAs with Australia, Iceland and Norway are on line. There are a few FTAs in the consideration list, such as the China-India Regional Trade Arrangement Study, China Korea FTA Joint Feasibility Study, China-Japan-Korea Joint Study.
China gives priority to China-India Regional Trade Arrangement Study and the China-Japan- Korea Joint Study as the trade among these four countries covers nearly US$ 1,000 billion. The officials of these countries have been having discussions from 2012 to make FTAs work.
However, negotiations are moving slowly at times due to territorial disputes. The negotiations for an FTA with Iceland started in 2006 and are yet continuing. The last FTA China signed was with Costa Rica in 2011 and during the past three years China has not signed an FTA with any country.
Not an easy task
This shows that the implementation of an FTA is only after long discussions and studies. It is not an easy task to reach finality on an FTA. Therefore, the Sri Lankan authorities should continue their dialogue with China on the proposed FTA in positive manner.
It is also important to look back at the Sri Lankan experience on FTAs.
Sri Lanka's first FTA was with India which was the first bi-lateral FTA of India. Since then, the implementation of the Sri Lanka-Pakistan FTA became effective from 2005. As a member of SAARC, Sri Lanka became a member of the South Asian Free Trade Area (SAFTA) which came into force in 2006.
Sri Lanka had discussions and negotiations with Bangladesh and Egypt for FTAs in early 2000 but did not continue discussions. The next positive FTA may be with The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC).
BIMSTEC clearly had positive discussions to create a free trade area among members.
Today Japan had shown interest in joining BIMSTEC. If Japan joins BIMSTEC it will be more beneficial for Sri Lanka after the implementation of the FTA of BIMSTEC.
It is difficult to see any benefit in the Sri Lanka-Pakistan FTA as trade between the two countries is less than 1%. The best experience Sri Lanka has on FTAs is the Sri Lanka-India FTA. Sri Lanka's exports to India were worth of US$ 570 and US$ 544 in 2012 and 2013 maintaining fifth rank of Sri Lanka's exports and US$ 3 billion worth of imports to Sri Lanka as number one importer equal to imports from China.
Even though Indian exports fluctuated, some say that the products under zero duty benefits continued to increase. On the other hand even though Indian investments had increased to obtain the indirect benefits of SLIFTA, the increase in employment opportunities and transfer of technology were not as expected.
It is more important to carry a thorough study to determine if Sri Lanka benefited under the SAFTA and other two FTAs already active. Sri Lanka as a small country should consider the advantages and disadvantages of signing an FTA with a world giant such as China. China also maintains a favourable trade balance in their total trade. China's total value of exports is over US$ 2 trillion and imports only a little over US$ 1 trillion. Sri Lanka's trade compared to China's trade is minuscule.
As far as Sri Lanka exports are concerned, China is the 18th largest export market for Sri Lanka with exports of US$ 121 million in 2013 just 1% of total exports of Sri Lanka and the import of US$ 3 billion worth of goods to Sri Lanka equals the value of goods imported from India. This shows that there is huge unfavourable trade balance between the two countries. The positive list of products may include large number of products in the proposed FTA, but the issue is whether Sri Lanka could supply all the products.
China could supply any volume of its products. Of the 30 products exported to China, five products, apparel (US$ 22 million), tea (US$ 20 million) fibre (US$ 22mn) tobacco (US$ 7 million) and rubber (US$ 6 million) cover nearly 75% of exports to China.
Mineral sands, activated carbon, footwear, frozen fish, diamond, spices, woven fabrics are listed as other key exports, but the export value of each product is less than US$ 3 million.
Over 300 products are imported from China. China's largest exports to Sri Lanka in 2013 were woven fabric (US$ 596 million), electrical items (US$ 435 million), telephone video equipment (US$ 250 million) base metal products (US$200 million) fertiliser (US$ 97 million) automatic data processing machines (US$ 97 million), boat building ( US$ 81 million).
Nearly 180 products imported from China were over US $ 1 million in value. This shows the huge trade gap and our limited exports to China.
The most viable advantage to have a FTA with China is that it provides a huge opportunity to enter the world's largest market in a competitive manner.
China also gets more opportunities to enter the Sri Lankan market. But Sri Lanka has to do a lot of homework to turn the proposed FTA in its favour by applying correct promotional strategies, innovative productivity to promote Sri Lankan products and introduce new products to the Chinese market.
Sri Lanka should invite more investors to invest in export-oriented projects to get the real benefits of agreements of this nature. On the other hand Sri Lanka should be vigilant and get all the benefits of investment specially employment opportunities and new technology.
Sri Lanka should avail itself of opportunities to initiate an FTA with China due to the close relations between the two countries. The political leadership of both countries has developed cordial relations during meetings they had during the past few years.
China displays a willingness to support not only social and economic development but also protect Sri Lanka's interests in the global political arena. It is significant to note how Sri Lanka benefited under the China-Sri Lanka Rubber-Rice Agreement.
China provided rice to Sri Lanka at an attractive price of 1/3 of the world market price during the difficult period of rice production in Asia due to the Second World War. Sri Lanka recovered the lost market share for natural rubber after the Korean War as she was offered a highly competitive price 40% above the price offered by Western countries under this agreement.
The proposed FTA should benefit both parties not only trade-wise but also further strengthen relations for another century.
The writer is a former Head of Corporate Affairs and Communications at the Sri Lanka Export Development Board and ex-Director, Sri Lanka Trade Centre in the Maldives. He can be reached at email@example.com