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China backs resumption of stalled FTA with Sri Lanka

Economynext | 9 January 2022

China backs resumption of stalled FTA with Sri Lanka

By Shihar Aneez

China has signaled the desire to re-start a stalled Free Trade Agreement talks with Sri Lanka to boost exports and come out of an economic crisis, during a visit of Foreign Minister Wang Yi, Beijing’s ambassador to Colombo said.

Free trade talks with between China and Sri Lanka hit a hurdle in 2018 under the last administration because Beijing disagreed with Colombo’s demand for a review of the deal after 10 years according to officials familiar with the issue.

“Already we had six rounds… I would like to ask the Sri Lankan government why the talks were halted. I don’t know why,” Qi Zhenhong, China Ambassador to Sri Lanka told select journalists at Galle Face Hotel as Chinese State Councilor and Foreign Minister Wang Yi left the island ending a two-day official visit.

“During the State Councilor’s visit this time, he himself and leaders of Sri Lanka had a very good discussion on the Free Trade Agreement (FTA) as well as a Comprehensive Economic and Technical Co-operation framework.”

China has invested billions of dollars building ports, airports, roads and power stations in the Indian Ocean island nation just off the southern toe of India as part of its Belt and Road Initiative to increase its trade and other connections across Asia and beyond.

Troubled History

Under the last administration, which tried to neutralize a pro-Chinese investment policy, concerns were raised that such investments were driving the country of 21 million people deeper into debt and undermining its sovereignty, prompting greater scrutiny of deals with China.

Sri Lanka consumers and businesses import more goods from China than it at the moment, some of which are inputs for exports to third countries.

Ministerial level discussions about an FTA agreement have not been held since March 2017 while lower-level discussions between officials have made little progress after the deadlock over a 10 year review, Colombo officials have said.

Free trade benefits the poor, but can hurt the profits and revenues of companies which previously charged higher than world prices from consumers under tariff protection.

The review clause that Sri Lanka requested in 2017 would allow it to change some of the deal terms if they were hurting the island nation’s businesses.

So-called ‘sunset clauses’ can increase uncertainty and put businesses that invest on the basis of a free trade deal at risk.

However, Ambassador Qi Zhenhong says China has a very “flexible policy” on that.

“Today when State Counselor Wang Yi had discussions with the Sri Lankan leaders, he explained that we should encourage exports and professionals to study the FTA discussions very soon,” he said.

“Wang said any questions or concerns on the FTA from the Sri Lanka side can be raised. We are open for that.”

“And if one particular item is not good enough for Sri Lanka, you can ask more and we will do the study. We have a flexible policy.”

Uncertain Impacts

Officials from the last government had said that China wanted zero tariffs on 90 percent of goods the two countries sold to each other as soon as an agreement was signed while Sri Lanka wanted it to start with zero tariffs on only half of the products concerned and expand gradually over 20 years.

China’s push for free trade pacts with the Maldives in 2017 drew criticism from opposition political groups who said it had been rushed through parliament with less than an hour of debate.
Sri Lanka in 2018 has wanted more time to negotiate the deal as it was not sure about the economic impact of a rushed deal on its economy.

“There is not a single reason that China will take advantage of Sri Lanka through FTA or through trade,” Qi Zhenhong, clad in a black suit with a pinned badge of Sri Lanka and Chinese national flags crossed on his blazer, said.

“Free trade is a global trend and Sri Lanka has a very unique strategic geopolitical position.”

“I think if we can have a Free Trade Agreement, Sri Lanka can export its products to the market of 1.4 billion populations and you can take the advantage of China”

“And Sri Lanka can become a hub or sub hub for the products and to the different regions. If you have the manufacturing industry, the financial industry will follow.”

Free Trade Resistance

Though a leader in free trade in the region at one time, Sri Lanka has seen import tariffs go up over the last 15 or so years with protectionists gaining more political clout.

India has tried to expand its existing FTA to a comprehensive economic partnership for more than a decade.

However, it has met with resistance from domestic business lobbies, trade unions and politically-motivated opposition parties.

Though exports to India under the free trade deal has grown making the country the third highest buyer of Sri Lanka goods after the US and EU, critics have pointed to the large volumes of imports – some of which are taxed heavily such as cars to criticize it.

An FTA with Singapore by the last administration was strongly resisted by the current ruling Sri Lanka Podujana Peremuna (SLPP) when it was in the opposition.

Government officials have said that some political parties resist such agreements without any knowledge but just to make sure it is not implemented under their rival government.

They also say international intervention and some perceived exploitation also had been reasons for FTAs negotiations ending in failure.

“I learnt from the history that Sri Lanka was taken advantage by some countries’ economy because of the FTA in the past,” Qi Zhenhong.

“I can assure you that all the countries, including medium and small countries, that had established free trade agreements with China, got benefits.”

China has overtaken India as the top importer since 2019, the official data showed.

Sri Lanka imported $3.5 billion worth of Chinese goods in 2020 which is 22 percent of the total imports, mostly raw materials for garments, machines and electronics, metals, transport equipment and chemicals, followed by India which accounted for 19.2 percent of the total imports in the same year.

 source: Economynext