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Changing partners in commerce

Daily News, Sri Lanka

Changing partners in commerce

By Sher Azad

29 March 2012

The calls to boycott American goods and services in the wake of the recent resolution at the United Nations Commission on Human Rights (UNCHR) have highlighted the fact that Sri Lanka’s export trade is heavily dependent on a narrow slew of countries.

An embargo on Sri Lankan goods called by the European Union (EU) or the USA and the rest of the North American Free Trade Area (NAFTA) could have disastrous consequences on our economy. The enormity of this threat is revealed by the fact that, if the European Union is considered as a block, the countries voting against Sri Lanka on the resolution buy about 64 percent of the country’s exports. Imports from these countries are only about 35 percent of our total imports.

The EU is the destination for 35 percent of our exports, NAFTA for 23 percent. The country’s imports from both NAFTA and the EU total less than 15 percent of all imports, so we are heavily dependent on these countries for trade income.

On the other hand, the South Asian Association for Regional Cooperation/South Asia Free Trade area (SAARC/SAFTA) accounts for only 7.2 percent of exports.

US market

Certain countries have a strategic hold on sectors of our economy which far outweigh the actual quantum of what we export to them; the garment sector is disproportionately dependent on the US market while Mexico (a constituent of NAFTA), which accounts for only 0.7 percent of our exports, imports most of our cinnamon.

With regard to the other regions, much of our trade is with the countries which voted against us, rather than with our natural allies. For example, in Latin America we do almost no commerce with Cuba, one of our oldest friends; while Brazil, one of the fast-growing BRICS (Brazil Russia India China and South Africa) countries, takes just 0.3 percent of our exports and sends us 0.4 percent of our imports. Conversely Chile, with its tiny, stagnant economy, which voted against us, takes 0.3 percent of our exports - the same as giant Brazil - and is our main source of our tinned fish.

What is often disguised in the trade figures is how much of our trade actually goes through the metropolitan centres of the West, such as London, Amsterdam, New York and Hamburg. For example, Hamburg serves as an entrepot for Ceylon Tea, which is mixed with inferior teas and sold to third countries.

Free Trade Agreement

It is thus fairly obvious that we need to diversify our trade patterns, expanding into non-EU and non-NAFTA markets, especially with SAARC/SAFTA countries. Even within SAARC/SAFTA, we need to shift our emphasis from India, which dominates our trade - absorbing 5.6 percent of our exports and accounting for 19 percent of our imports. The remainder of SAARC/SAFTA is responsible for a mere 1.6 percent of our exports and 2.3 percent of our imports. There are economic limits to the speed at which this diversification can be carried out. Some of our exports are not suitable for certain countries, for example South America as a whole is a coffee exporter and the population does not drink tea. Then again, countries like Bangladesh and Pakistan are exporters of garments and clothing is very cheap in those countries.

One success story from which we could learn much is that of our trade with Pakistan, which doubled within five years of the introduction of the Free Trade Agreement. We sell them rubber products, coconut products, herbal products, furniture and wood products, electric goods, ceramic ware, plastic goods, betel, spices, fruit and dried fish. We buy from them, textiles, rice, cement, steel pipes, potatoes, medicaments, machinery, fruit and dried fish.

Institutional barriers

We need to come to bilateral ‘most favoured nation’ agreements with our Third World allies, allowing exports and imports at lower tariffs. Increased trade would also tend to reduce freight rates, decrease transhipment costs and so on.

There are also institutional barriers to our diversification of trade. For example, our trade with Cuba and Brazil could be reciprocal, based on us importing directly Cuban or Brazilian sugar, which would be cheaper than current imports.

However, all our sugar comes through a cartel known as the Sugar Association of London, and the prices are highly inflated above the cost at the source. These road blocks need to be overturned - elimination of the exploitative middleman generally reduces costs.

There may be other similar barriers limiting our trade with Third World partners. Why, for example, have Sri Lankan garments not made serious inroads into the Brazilian clothing market? Brazil is considered the most attractive growth market for apparel, with consumers spending six times more on clothes than Chinese consumers. The authorities and the garment sector need to study this problem in concert and come to a strategy to increase our penetration into this market.
Export sector

We also need to study our own products and see where we have gone wrong. A classic case of us losing our way is the collapse of the tea machinery industry. Sri Lanka had a healthy machinery and equipment export sector based on tea and rubber machinery. We went from being on the cutting edge of tea manufacturing technology to being an importer of tea machinery within a decade.

As our labour costs increase with our rising standard of living, we need to shift more emphasis to technology. This does not mean more computers, but a concentration on research and development.

The Industrial Technology Institute (ITI) has been quietly showing the way, providing a technological input to local manufacturing. Recently Munchee began producing Kothala Himbutu (Salacia reticulata) biscuits using techniques developed together with the Institute. The ITI has also developed ways of increasing the sap yield of Kithul (Caryota urens), meantime also means of substituting Kithul jaggery for sugar.

The model of ITI/manufacturer co-operation should be extended to include the Export Development Board and exporters, working within specific markets. The authorities also need to study the specific needs of the markets of our allies in order to uncover the product mix which will expand fastest in each and develop technologies accordingly.