Preliminary thoughts on the Sri Lanka – Thailand Free Trade Agreement

By Avishka Jayaweera

On February 3rd, 2024, Sri Lanka signed the Sri Lanka-Thailand Free Trade Agreement (SLTFTA). As expected, this was in the model of a modern Free Trade Agreement (FTA)^[1], with chapters on service liberalisation, investment, intellectual property, economic cooperation, etc. The SLTFTA is at the very least a sign that Sri Lanka aims to engage with the global economy and has a more favourable outlook on trade than previously conveyed. While the agreement requires more in-depth analysis, this article aims to comment on a few aspects that crossed the author’s mind when reviewing the Agreement.^[2]

The WTO lives on

Following the Appellate Body (AB) crisis and its continuation even after the change in US presidency, there was talk that the World Trade Organization (WTO) is dead, or at the very least its death is imminent and that the relevance of the WTO would fade away. However, while the AB of the WTO is still non-operational (if elected again, a Trump term will do no favours to improve this situation), the WTO Agreements, as well as the jurisprudence of the AB and panels continue to have relevance and influence in international trade today. This is evident in the SLTFTA, where there is a heavy reliance on the WTO system to support the FTA as well as complement it.^[3]

The table below summarizes some of these linkages.^[4]

Table 1: Chapters of the SLTFTA that reference WTO Agreements

SLTFTA Chapter/Provision	Role/reference to WTO Agreements
Chapter on Trade in Goods	In the context of National Treatment (NT) there is a direct reference to the standard of NT in Article III of the General Agreement on Tariffs and Trade 1994 (GATT).Custom valuation of goods is to be done according to Article VII of the GATT and the Customs Valuation Agreement.The provisions on administrative fees and formalities make references to Article VIII of the GATT; fees and charges are to be imposed according to Article 6 of the Trade Facilitation Agreement (TFA).Article XI of the GATT (including its Notes and Supplementary Provisions) are incorporated into and made part of the FTA.The Article on Import licensing procedures incorporate several aspects of the Import Licensing Agreement. The Article on State Trading Enterprises incorporates Article XVII of the GATT, subject to an exception with regard to food imported or purchased for non-commercial humanitarian purposes.Measures taken for Balance of Payment (BoP) purposes have to be in accordance with Article XII of the GATT, Section B of Article XVIII of the GATT and the Understanding on the BoP Provisions, all of which are incorporated into the Agreement.
Chapter on Trade in Services	Unless otherwise defined, terms will have the same meaning as in the General Agreement on Trade in Services (GATS).The GATS Annexes, Annex on Movement of the Natural Persons Supplying Services under the Agreement, Annex on Air Transport Services, Annex on Financial Services, and Annex on Telecommunications, apply.
Chapter on Sanitary and Phytosanitary Products (SPS) Measures	Adopts the definitions in Annex A of the SPS Agreement as well as draws upon various aspects of the SPS Agreement.Provides for the Parties to take into account relevant decisions of the WTO SPS Committee in certain aspects.The Parties have also affirmed their rights and obligations under the SPS Agreement.
Chapter on Technical Barriers to Trade	Adopts the definitions in the TBT Agreement.Adopts the requirements for a standard to be an International Standards therein.The Parties have also affirmed their rights and obligations under the TBT Agreement.
Chapter on Trade Remedies	The Anti-Dumping Agreement (ADA) and the Agreement on Subsidies and Countervailing Measures (ASCM) apply to the extent not specifically provided for in the FTA.A similar approach is adopted in the Section titled Global Safeguard Measures, in relation to Article XIX GATT and the Safeguards Agreement.
Chapter on Investment	Performance requirements that the WTO Agreement on Trade-related Investment Measures (TRIMS) which are not specifically mentioned or modified by the FTA apply.
Chapter on Intellectual Property (only 2 pages)	Refers to both the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) affirming the rights and obligations of both parties and references the Doha Declaration on the TRIPS and Public Health.
Chapter on Dispute Settlement	Envisages a role of the WTO, as Article 13.7(2)(e) provides that where a party fails to nominate a panelist or they fail to agree on the chair, any Party may request the Director-General of the WTO to appoint the same.Panelists under the convened tribunal are required to comply with the ‘Rules of Conduct for the Understanding on Rules and Procedures Governing the Settlement of Dispute’ under the DSU.
Provisions on General Exceptions	Article XX of the GATT is incorporated as part of the Agreement in the Chapters on Trade in Goods, Rules of Origin, Customs Procedures and Trade Facilitation, SPS and TBT.Article XIV of GATS is incorporated into the Chapter on Services.

Source: Text of the SLTFTA

Dispute Resolution

The Chapter on Dispute Settlement is a significant improvement to the previous Dispute Settlement Mechanism in the previous FTAs, such as the Sri Lanka-India FTA. The Chapter is quite comprehensive and structured similar to the Sri Lanka-Singapore FTA (SLSFTA), providing for consultations, good offices, conciliation or mediation, and an arbitral tribunal. Interestingly, several chapters are excluded from dispute settlement. Article 5.1 excludes the SPS chapter. The sections on Anti-Dumping, Countervailing duties and Global Safeguards, from the Trade Remedies chapter are also excluded from dispute settlement. Additionally, the chapter on Economic Cooperation is excluded.

A warning against arbitrary use of import restrictions for BoP ?

Since 2020, Sri Lanka utilised a range of Quantitative Restrictions (QRs), such as temporary suspensions (i.e., import bans) and licensing requirements, which were arguably inconsistent with the procedure envisaged by the GATT. The EU has raised concerns on this issue in the past.^[5] Assuming the QRs are for BoP reasons, there is a procedure set out in the GATT for the same. Though the QRs were claimed to be for BoP/forex reasons, a study by the Institute of Policy Studies of Sri Lanka (IPS) found that “the government’s import control policy preference favoured less complex products, consumer goods, and food items. This unintentionally created an incentive structure for import substitution, even without a protectionist intent.”^[6]

Article XII of the GATT (Restrictions to Safeguard the Balance of Payments) provides an exception for BoP reasons, but to qualify for this exemption certain requirements must be met. According to the ‘Understanding on the BoP provisions’, price-based measures are preferred over bans (e.g., import surcharges). If a country opts for an import ban over price-based measures, they must provide a justification. Countries are required to notify the WTO (General Council) of the said BoP measures and enter into consultation with the BOP Committee within four months. As these measures are supposed to be temporary, the country should announce publicly the time schedules for their removal.

Turning back to the SLTFTA, Article 2.15 requires parties to “endeavor to avoid the imposition of restrictive measures for BoP purposes.” It also incorporates several WTO provisions on BoP restrictions as mentioned earlier. There is also an additional requirement to make prompt notification of such measures and such changes.^[7]

A more lenient approach is taken in the chapter on Services which states that “it is recognised that particular pressures on the balance-of-payments of a Party in the process of economic development may necessitate the use of restrictions to ensure, inter alia, the maintenance of a level of financial reserves adequate for the implementation of its programme of economic development.”

Regardless, arbitrary use of QRs is detrimental (one could argue use of QRs in itself is bad policy), and hopefully with these undertakings we move towards transparency and playing by the rules.

Bilateral Safeguards

Of course, the signing of a FTA would not be complete without claims and concerns about the negative impact on domestic industries, and such concerns are bound to arise. To that end, Section IV of Chapter 7, which deals with Bilateral Safeguard is of interest.

Article 7.7 in its provides that if as a result of the liberalisation of custom duties under the FTA, a good is being imported in such high quantities (absolute or relative to domestic production), so that these goods cause or threaten to cause a serious injury to domestic producers of similar (like or directly competitive) products, the importing country can take certain measures (to the extent necessary) to prevent or remedy this injury and to facilitate the domestic industry’s adjustment.

Possible measures include suspending the further reduction of duty rates, increasing the duty rate to a level not exceeding the Most Favoured Nation (MFN) rate at the time of the injury and the MFN rate at the time of entering the FTA. In a similar theme to BoP measures, tariff rate quotas and QRs are not accepted measures under this section. Various other procedural aspects apply, and this section appears to be quite comprehensive.

What this means in practice, however, is that there is a very specific mechanism to deal with complaints that a certain industry is being unfairly injured by imports. Whether this would lead to more lobbying by protectionists and misused is up for debate, but it makes arguments against an outright rejection of the entire FTA on such grounds unsustainable. Perhaps it would allow this FTA to avoid the fate of the SLSFTA.

Conclusion

Sri Lanka finally has a new FTA. While it appears to be a positive step to embrace a more open trade policy, an agreement is only as effective as its application and implementation.^[8] With word of more FTAs on the horizon (e.g. with China) and accession to the Regional Comprehensive Economic Partnership (RCEP), there is a reason for optimism. Sri Lankan trade law enthusiasts may finally have more local specific substance to delve into and develop their craft here. The proliferation of more FTAs would only continue to contribute to the same. It may be worth keeping in mind that (in the author’s opinion) FTAs/PTAs are a fourth-best solution, with unilateral liberalisation the first, followed by multilateral solution and then regional. However, when plan A, B, and C fail, one should not necessarily complain about Plan D succeeding.

The views and opinions expressed in articles submitted to the Comparative Advantage Blog are those of the author and do not necessarily reflect the views of The Moot Court Bench.

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^[1] Alternatively, arguably more accurately called Preferential Trade Agreements. See Bhagwati, J. (2008), Termites in the trading system: how preferential agreements undermine free trade.

^[2] At the outset the author states that the specific concessions along detailed tariff lines have not yet been analysed by the author.

^[3] It is also noted that there is a high level of similarity between the SLTFA and the SLSFTA, with regard to the wording of certain section. For more on this phenomena of ‘copied-and-pasted’ PTA?FTAs see https://www.wti.org/research/publications/998/are-the-contents-of-international-treaties-copied-and-pasted-unique-evidence-from-preferential-trade-agreements/.

^[4] Text of the agreement can be found at https://www.doc.gov.lk/index.php?option=com_content&view=article&id=305&Itemid=244&lang=si.

^[5] https://economynext.com/european-union-concerned-over-sri-lanka-import-controls-says-trade-not-one-way-street-76146/.

^[6] https://www.ips.lk/talkingeconomics/2023/06/12/has-sri-lankas-crisis-driven-import-controls-incentivised-import-substitution/

^[7] However, it is noted that the SLSFTA too had comprehensive provisions on BoP measures.

^[8] Industries that may have opportunities to benefit under the FTA, will depend on the schedule of concessions. For an ex ante study on the potential of the FTA between Sri Lanka and Thailand, see the IPS study: https://www.ips.lk/unveiling-trade-potential-an-ex-ante-analysis-of-the-sri-lanka-thailand-free-trade-agreement/.