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Sri Lanka’s free trade agreement with Pakistan

Daily News, Colombo

23 January 2005

Sri Lanka’s Free Trade Agreement with Pakistan

BY SAMAN Kelegama

The Pakistan-Sri Lanka Bilateral FTA (PSLFTA) was signed in July 2002 and came into operation on June 12, 2005. As in the case of the India-Sri Lanka Bilateral FTA (ISLBFTA), the PSLFTA accommodates the asymmetry between the two nations.

Hence, Special and Differential treatment in favour of Sri Lanka is in-built to the FTA - Pakistan offered 206 items duty free immediately after the FTA came into operation compared to 102 items by Sri Lanka, Sri Lanka has been given a 5-year period to phase out tariffs compared to the 3 years given to Pakistan, and 697 items are included in the Sri Lankan negative list compared to 540 items in Pakistan’s negative list.

Until 1984, Sri Lanka maintained a trade surplus with Pakistan; since then it has been operating at a trade deficit. Currently, Pakistan receives 0.6 per cent of Sri Lankan exports and 0.7 per cent of Pakistani exports is destined to Sri Lanka.

Despite Sri Lanka and Pakistan not being major trading partners, for specific products, their respective export markets are crucial.

For example, Pakistan is an important export market for tea, followed by copra, rubber, betel leaves and tamarind; similarly, for Pakistan, Sri Lanka is an important market for textiles, pharmaceuticals, machinery and agricultural items.

Major Sri Lankan exports have been granted preferences by the FTA. It allows duty free entry for 10,000 tons of tea per year. Pakistan is the third largest tea importing nation in the world.

In 1975, 67 per cent of Pakistani tea imports came from Sri Lanka. By 2003 this had declined to 2.6 per cent due to Kenyan tea gradually capturing up to 64 per cent of the Pakistani tea market.

The increase in demand for Kenyan tea was a result of an aggressive marketing campaign conducted by a multinational company to change the preferences of Pakistani consumers from bulk teas to CTC teas, of which Kenya is a major producer.

In order to recapture the lost market, Sri Lanka must engage in a prominent marketing campaign to change the preference of the Pakistani consumer to bulk tea. If not, Sri Lanka may not satisfy their full quota regardless of the duty free allowance.

The FTA allows 1200 tons of betel leaves per annum. The duty for betel leaves in Pakistan is approximately Rs. 150 per Kg. A preferential margin of 35 per cent has been granted to Sri Lanka.

This is a major concession for a high demand product with many other betel producers including Bangladesh competing to capture a larger share of the Pakistani market.

Besides tea and betel, for a defined 21 categories of apparel products, 200,000 pieces are granted 35 per cent duty preference without rules of origin on fabric usage.

This will enable the Sri Lankan apparel exports to capture a notable proportion of the Pakistani market. 20 per cent duty preference on some ceramics export items has been granted, however, porcelain tableware - the primary Sri Lankan ceramic export item - has been excluded from duty concessions.

A duty free status for copra and raw rubber exports from Sri Lanka is in operation. Approximately 10 per cent of Sri Lankan coconut products (copra, coconut oil, brooms and ekels) are currently exported to Pakistan and this sector can gain from the FTA.

Presently there is an international rubber cartel operating in Pakistan pushing up prices. This creates an opportunity for Sri Lankan raw rubber exporters to capture a larger share of the Pakistani market.

In regard to Sri Lankan imports from Pakistan, the following offers by Sri Lanka are noteworthy: (a) 6000 metric tons of Basmati rice per annum on duty free basis, (b) apples and mandarins are allowed duty free entry without quota restrictions, and (c) 1000 metric tons of Pakistani potato per year is permitted duty free entry during the local off-season period so that it does not adversely impact domestic production.

Basmati rice does not compete with local rice such as samba because it is a more expensive category of rice, hence will not impact adversely on domestic rice production.

Apples and mandarins are not produced in great quantity in Sri Lanka, instead Pakistani imports will apply competitive pressure on fruits imported from India and Australia, lowering the overall price in the domestic market.

Industrial products, including PVC, carbon, machinery and transport items not manufactured in Sri Lanka have also been granted preferential duty under the FTA. They will compete with similar goods arriving from India.

Textiles & pharmaceuticals are under the zero tariff band, thus the FTA will not affect these Pakistani exports into Sri Lanka.

Agricultural items, including fish, sugar, non-Basmati rice and milk products are in the Sri Lanka negative list. This will protect the domestic production base of these goods.

By having preferential access to the two major markets in South Asia - India and Pakistan - Sri Lanka can now position itself as the conduit for Indo-Pakistan trade that has diminished due to political problems centred around the Most Favoured Nation treatment.

Currently, trade between India and Pakistan takes place mostly via Singapore or Dubai. If Sri Lanka can promote Indo-Pakistan trade by encouraging Pakistani investors to open operations in Sri Lanka in order to trade with India using the ISLBFTA and vice versa, then Sri Lanka can gradually acquire the hub status in South Asia.

All tariff preferences in the PSLFTA are at the 6 digit HS code level. Initial response to the PSLFTA appears positive. The Department of Commerce has already issued over 400 Certificates of Origin for Sri Lankan exporters for Pakistan.

A number of Pakistani betel traders have arrived in Sri Lanka to identify reliable betel suppliers and Indian investors have made inquiries about investing in Sri Lanka to export items to Pakistan using the PSLFTA.

Despite political instability in Sri Lanka, the government and private sector should maximize the use of these inquiries and benefit from the increased trade and investment opportunities arising from the PSLBFTA.

 source: Daily News