Sri Lanka should make better use of existing trade deals: experts

Lanka Business Online | 09 September 2007

Sri Lanka should make better use of existing trade deals: experts

Sept 09, 2007 (LBO) - Trade analysts say that Sri Lanka should make the most of existing trade deals like the Bay of Bengal Initiative before negotiating more bilateral and multilateral agreements.

Sri Lanka became a member of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation or BIMSTEC in 1997.

Bangladesh, Bhutan, India, Nepal, Thailand and Myanmar are also part of BIMSTEC, though trade under the agreement has not really taken off as expected, eclipsed by other trade deals member countries have signed.

“The BIMSTEC free trade area has still not come into practical operation although a dialogue is taking place among member countries with regard to tariff preferences,” Saman Kelegama, Director of think tank the Institute of Policy Studies (IPS) said at a seminar in Colombo.

“The start of deep economic corporation has been a bit slow with comparison to other regional groupings.”

Sri Lanka is also member of the Bangkok Agreement, the South Asia Free Trade Agreement (SAFTA) and also has free trade agreements with India and Pakistan.

Another Indo-Lanka Comprehensive Economic Partnership Agreement (CEPA) to open up service sectors between the two countries is to also to be signed.

“We have market access to most of the BIMSTEC countries through these agreements, except for Myanmar and Thailand. Therefore the importance of BIMSTEC to Sri Lanka should be considered with more care,” Jagath Dissanayake, Research Assistant at IPS said.

Some eight percent of Sri Lanka’s total exports are to BIMSTEC countries, largely India. A small amount of vegetables and other foods are exported to other countries of BIMSTEC.

More than one fifth of our imports are from the region, with India accounting for 89 percent of imports from BIMSEC countries, Thailand 10 percent and others negligible, Dissanayake said.

There is also little investment in the services sector from other member countries like Thailand and Bangladesh.

Members are hoping a new Comprehensive Economic Partnership Agreement with Japan will infuse fresh life into BIMSTEC.

“A 2006 gravity model to look at the scenario that would result in a free trade agreement between BIMSTEC and Japan, found that there would be increased trade as a result and that Japanese exports would grow a lot faster that imports from the region and would result in all the BIMSTEC countries having a trade deficit with Japan,” Deshal De Mel, Research Officer at IPS said.

“Now this is not necessarily a bad thing because even if there is a trade deficit there is always potential for dynamic benefits and welfare gains,” De Mel said.

Over the past seven years, Sri Lanka’s exports to Japan have been declining rapidly. In 2000, Japan was the third export largest destination for Sri Lankan goods. But currently it is in ninth place. Just 2.4 percent of Sri Lanka’s total exports are to Japan.

Sri Lanka mainly exports tea, rubber, fish and precious stones to Japan.

For imports as well, Dissanayake says, Japan was Sri Lanka’s largest import source in 2000, but this has gone down now to sixth place.

Analysts say however, Japan joining BIMSTEC may not have as many benefits for Sri Lanka except for certain areas as the country already has a high level of access to Japan with tariffs at just 6.5 percent.

“We see that in Japan the average MFN tariff is relatively low at 6.5 percent and therefore an FTA is not going to create a large gain in terms of reducing this. “If tariffs were higher then there would be more benefits for a country having a agreement with Japan,” De Mel said.

“If you look at Sri Lankan exports to Japan, 39 percent tariff lines that go into Japan receive MFN duty free and a further 33 percent get preferential access. Altogether that is 72 percent. So Sri Lanka already has a high level of access to the Japan market.”

Japan has played a big role in enhancing Sri Lanka’s infrastructure and is a major investment partner in the services sector.

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source: LBO