ECONOMYNEXT – Sri Lanka is working on a new trade arrangement with the European Union when the country graduates from the Generalised System of Preferences Plus system (GSP+) that gives duty free access to the region, a foreign ministry official said.
Sri Lanka which was earlier classified as a middle income country was downgraded to a lower middle income country in July 2020 by the World Bank after two years per capita contraction of gross domestic product, in the wake of monetary instability that triggered two currency crises in close succession.
“EU is the second largest trading partner in Sri Lanka, with exports growing 28 percent under the GSP + facility and records 2.3 billion Euros in total,” Dhammika Senasinghe, Director General for Europe, Central Asia, the EU and Commonwealth, foreign Ministry of Sri Lanka told a business forum in Colombo.
“As Sri Lanka progress to graduate to upper middle income states in the future we will be not qualify for the GSP plus benefits, which means we would need to work out on a special trading arrangement with the EU whilst highlighting our climate change related vulnerability also under the sustainable development criteria.”
The EU suspended GSP+ over human rights concerns and non-compliance with the International Covenant on Civil and Political Rights.
In May 2017, the EU had restored the GSP+ facility and a ban on fish exports were lifted by June 2016.
Senasinghe said they were important turning points in the relationship.
EU and Sri Lanka had an ongoing relationship and much better understanding of each other, she said.
“In the last 5-6 years Sri Lanka s engagement with the European Union has been proactive, dynamic and robust in a lot of ways leading to significant collective transformation,” Senasinghe said.
“In this period we have developed a greater appreciation for constructive open, transparent including sustained dialogue in difficult complex issues. Our regular interaction has enable for useful information in perception and greater understanding on complex ground realities from both parties.
“The nature of our relationship when we graduate to an upper middle income state, will change from donor beneficiary engagement to one of working partners.
“This is an ongoing engagement that is firmly institutionalized which reflects it’s threats.”
Sri Lanka’s exports to the EU which hit 3.5 billion US dollars in 2011, fell to 3.0 billion dollars in 2015.
In 2019 Sri Lanka had exported 3.5 billion US dollars of goods to the EU including UK and imported 1.58 billion US dollars of goods according to central bank data.
Sri Lanka’s key exports were garments, rubber, vegetables, machinery, tea, spices, tobacco and fish.
“With regards to the GSP plus benefit, despite the complaints with the commitments, Sri Lanka yet to harness the full potential of this key,” she said.
“Sri Lanka utilization rate of facilities is around 55- 58 percent, while Pakistan is 96 percent and Philippines is 73 percent.
“Part of the issue is the limited exports. Therefore, diversifying our products via textiles and food and raising awareness among our exporters on the benefits of GSP plus are the solutions that had been advocated.”
Sri Lanka has high import duties, which pushes up domestic costs and makes the country uncompetitive.
With inputs also under import duty (an input of one industry is a final good of another), the chances of competitive new exports emerging from small businesses are very low, analysts say.
Unless companies are set up as specialist exports with duty free imports (usually with foreign direct investment) others cannot automatically develop and grow into exporters.
Protectionism also weakens domestic firms, which get used to high profits (rents) by exploiting poor consumers through import duties and doest no face competition in the home market.
That a tax on import is a tax on exports was explained as far back as 1936 by economists Abba Lerner (Lerner Symmetry Theorem) but Mercantilists find the concept difficult to grasp and firms who makes excess profits (rents) has in their interest to mislead the public.
Other countries will also not stay idle as import tariffs are raised or trade controlled.
Meanwhile the European Union has warned Sri Lanka on a raft of new import controls and rising protectionism.
“From the EU view point, that we have a negative trade balance with Sri Lanka is not an issue as such,” Thorsten Bargfrede, Deputy Head of Mission at the delegation of the European Union in Colombo told a business forum in Colombo.
“Failure of trade for us doesn’t come through a surplus (for Sri Lanka). We stand, as a principle, for a rule based open trading system, and do not believe in protectionism.” (Colombo/Dec07/2020)