By Avishka Jayaweera
A key aspect of a country’s trade policy is its trade agreements. Trade agreements may be bilateral, regional, or multilateral. This is one area where Sri Lanka has lagged behind its competitors, such as Vietnam. In recent times, there have been initiatives focused on bringing life to Sri Lanka’s trade negotiations and agreements, concentrating on bilateral free trade agreements or rather preferential trade agreements (for convenience, these will be referred to as FTAs) with Thailand, China, and India, among others. Unfortunately, there has not been any interest in pursuing entry into two prominent Regional Trade Agreements (RTAs), the Regional Comprehensive Economic Partnership Agreement (RECP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This blog article will assess why Sri Lanka should shift its focus from FTA to RTAs.
One possible reason Sri Lanka is not considering RTAs could be due to the country’s focus on bilateral trade deficits. At the two ends of the spectrum, the ongoing debate lies between arguing that “we have a bilateral trade deficit with X country, so we should enter an FTA with them to gain access to their market” or“we should not have an FTA because it will allow foreigners to enter our market.” This latter narrative is what gave rise to the opposition of the Singapore FTA. In this respect, this same narrative can be used to understand Vietnam’s rapid growth. For instance, a key tool Vietnam utilised to facilitate exports was FTAs, entitling industries to market access and, thereby, attracting Foreign Direct Investments (FDIs). In relation to the former camp, a trade deficit with one country is not in itself an issue. Often imported goods are used as inputs for exports to another country where we have a trade surplus. The whole debate around trade deficits is beyond the scope of the present article, but for now, hold the thought that looking at bilateral trade deficits is too narrow a view when we approach trade policy and trade agreements.
While certain FTAs might be beneficial, they should not be regarded as the standard trade-in goods agreements of the 20th century. Any FTA we enter into must be with strategic markets (ex: EU, US) and be comprehensive modern FTAs, with chapters on, inter alia, trade in services, FDIs, dispute settlement, and economic integration. Therefore, excluding such FTAs, Sri Lanka’s trade negotiations should focus on gaining access to RTAs, namely, RCEP and CPTPP, for three reasons. The first reason is a practical one: Sri Lanka does not have the capacity or resources to engage in trade negotiations with all parties. We have not engaged in extensive trade negotiations in decades (except for the Singapore FTA). Hence, the country should recognise and prioritise trade negotiations based on what is mostly beneficial. The second reason is linked to the first: RTAs allow us to kill multiple birds with one stone. While China, Thailand, South Korea, and a few other countries are parties to the RCEP, Canada, Mexico, Chile, and others are parties to the CPTPP, with the UK being the most recent country to enter the latter. Countries such as Australia, Japan, Singapore, and Vietnam are members of both agreements.
Figure 1: Countries in the CPTPP and RCEP
Source: Peterson Institute for International Economics
The RCEP covers around 30% of global trade and GDP, while the CPTPP covers about 13% of global GDP. This demonstrates that the market access potential is vast. Further, with the future of the WTO and multilateralism in question, regionalism seems to be the current trend or focus, an opportunity that Sri Lanka should not miss. With the centre of the world’s economy moving eastward towards the Asian region, gaining access to this regional economy through the RCEP and CPTPP is thus, vital.
The third reason is political. While unilateral liberalisation is the best trade policy, Sri Lanka’s history of political backsliding creates uncertainties about whether these changes will last. According to Anushka Wijesinha (Co-Founder, Centre for a Smart Future), reforms need to be anchored through legislation. Hence, accession to such RTAs with modern practises on government procurement, competition, FDI, and trade in services, among other things, can act as a vehicle for reform. While modern FTAs can be used to bring about legislative change, RTAs such as the CPTPP are much broader and deeper in scope and substance, therefore requiring Sri Lanka to undergo comprehensive reforms. Accession to such an RTA can expedite the required legislative change and can act as a safeguard for reforms that could be subject to political backsliding.
However, for all this, Sri Lanka must first overcome its biggest challenge: ‘Itself’. Protected interests are sure to oppose liberalisation, with calls relating to sovereignty, foreign conspiracy, and other emotion-invoking claims being made. We must not make the mistake of the past decade of adopting protectionist policies so that certain special interest groups can maintain their protected status and profit at the expense of national economic growth.