Sri Lanka trade policy catalyst for growth: economist

ECONOMYNEXT – Sri Lanka’s national trade policy sets out goals to reform the tariff regime and improve trade facilitation for both exports and imports in order to achieve higher economic growth, but risks losing investments to countries reforming faster, a trade economist has said.

"Sri Lanka’s national trade policy was very carefully crafted and lays out the parameters for trade growth and export diversification," said Nihal Pitigala, a trade economist who’s worked as a consultant for USAID and World Bank told the Sri Lanka Economic Summit on Friday.

"Trade is not all about exports. In order to export efficiently, you need to import efficiently.

"The trade policy sets out the needed structural transformation of the trade regime. It is the catalyst for setting the rules of the game for the domestic market," Pitigala said.

Lofty ambitions

Pitigala believes the National Trade Policy sets a lofty reforms agenda.

"It aims to structurally transform Sri Lanka into a high-end economy, but these are not lost in aspirations.

"Most countries in the world set high standards for themselves as most companies would. You’ve got to have standards and goals to strive towards," Pitigala said.

Sri Lanka also needs to reform its FDI regime and services market or risks losing trade and investments as countries increasingly negotiate their own bilateral and intra-regional trade agreements.

"Sri Lanka exports many products overseas but their sophistication hasn’t moved an inch since 1994. Our technical sophistication hasn’t budged".

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To address this challenge, Sri Lanka needs to be competitive and innovative. This requires being open.

Sri Lanka has to reform its tariff structure and eliminate para-tariffs and barriers to trade. The trade policy sets out a plan to achieve these reforms, Pitigala said.

"Sri Lanka’s tariff structure is convoluted, unpredictable and ad-hoc. Tariffs and para-tariffs sometimes disproportionately penalise small businesses."

Pitigala said the trade policy was proactive because it aims to improve trade facilitation as well with reforms to the regulatory environment around trade.

Globally, delaying cargo at ports amounts to a cost equal to a 0.8 percent duty per day. A WTO Trade Facilitation Agreement has seen trading costs decline by 14.3 percent among countries that adopted the standards and eased cross-border regulations. Sri Lanka is yet to adopt the WTO agreement.

"We lack laws relating to competition and barriers to trade. In the transactional environment, we are not doing great. Sri Lanka is not doing well in terms of ease of doing business, especially in trading.

"We pride ourselves for having an efficient port but beyond that, we are not doing that great."

A clear trade policy was also necessary to ride through global economic headwinds that occur from time to time, the latest being the China-US trade tensions.

"I would assume China and the US would eventually reach a settlement, but (Sri Lankan) policymakers should have a plan assuming the worst," Pitigala said.

Bigger markets

Sri Lanka need access to global markets and also be able to compete domestically.

"I would propose Sri Lanka needs to access more markets, but we have limited negotiating capital. We should rather enter larger markets, like our neighbour India," Pitigala said.

India is an emerging economic powerhouse and Sri Lanka’s most natural trading partner.

While building on existing trade relations with Europe and the US, Sri Lanka should also have an Eastern-looking strategy, Pitigala said, especially given the trade and technology-driven growth potential of the region.

The Transpacific Partnership (TPP) which covers 11 countries with a combined GDP of 10 trillion US dollars is addressing non-tariff barriers to improve cross-border trade and is setting up streamlined customs procedures.

The TPP will open up services and ease regulatory impediments giving businesses national treatment across the member countries.

In this context, improving trade relations with TPP partner countries is crucial for Sri Lanka, which already has a free trade agreement with Singapore.

"The TPP will open up technology-driven growth opportunities and if we engage countries with high-standards we-will be driven along with them," Pitigala said.

Opportunity cost

Failing to link-up with TPP or ASEAN’s expanded trade agreement—its 10 member countries including Australia, China, India, Japan, South Korea and New Zealand with a combined GDP of 22 trillion US dollars and 48% percent of the global population—could risk Sri Lanka losing out on foreign direct investments and preferential market access to growth economies.

"If we stay outside, there will be some diversion of trade, even in apparels, to countries within TPP because they would have considerable advantages over Sri Lanka," Pitigala warns.

"We have 13.5 percent of our exports going to TPP countries so there will be a significant impact. There could also be FDI diversion because the TPP market has become very attractive with opportunities to strengthen forwards and backwards integrations within the region".

According to Pitigala, Vietnam is expected to gain 11 billion US dollars by joining the TPP. If Vietnam stays out of the TPP, it would lose 7 billion US dollars.

"We don’t have a study like that Sri Lanka, but the impact will be significant," Pitigala said.

There are some indications that the US may decide to re-join the TPP after President Trump pulled out.

"This will be a game changer. If we don’t act now, other countries would, and this will lead to the diversion of trade and investments. This is the opportunity cost of not building trade relationships," Pitigala said. (Colombo/Sept19/2018)

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