Utilization of Trade Agreements in Sri Lanka: Perceptions of Exporters vs. Statistical Measurements (AWP No. 96)

Utilization of Trade Agreements in Sri Lanka: Perceptions of Exporters vs. Statistical Measurements (AWP No. 96)

 
Date: 
Tuesday, March 1, 2011
Abstract

By Deshal De Mel, Suwendrani Jayaratne and Dharshani Premaratne
Sri Lanka’s economy which followed an inward-looking policy regime in the 1960s and the 1970’s witnessed a marked shift towards the liberalization of the economy since 1977. This was followed by structural transformations, with the economy changing its course from being primarily an agricultural economy to one driven by the services and industrial sectors. Furthermore, with the liberalization of the economy, Sri Lanka became increasingly dependent on trade, with the trade to GDP ratio being 41 per cent as of 2008. In the early stages of trade reform the country’s strategy to improve outward orientation was through unilateral tariff reforms, and Sri Lanka was slow in pursuing reciprocal preferential trade initiatives1. Nevertheless, from the mid-1990s preferential trade policy initiatives were pursued, especially to strengthen bilateral trade and investment linkages with the selected partners in the region. As a result, Sri Lanka is now party to two bilateral agreements, Indo-Lanka Free Trade Agreement (ISFTA) and the Pakistan-Sri Lanka Free Trade Agreement (PSFTA) and two regional agreements, Asia Pacific Trade Agreement (APTA) and South Asia Free Trade Agreement (SAFTA).
These trade agreements have been driven by both political and economic imperatives. Many traders see the proliferation of FTAs as unavoidable. But some see such deals as harmful, raising costs and diverting trade rather than increasing it, primarily owing to the low level of tariff preferences and lack of information pertaining to many such agreements like SAPTA. Yet, in the absence of a multilateral deal through Doha, FTAs are a second-best tool of trade liberalization. The effective utilization of trade agreements becomes a pressing issue in such a background.
A common concern of trade agreement proliferation is the possibility of overlapping rules and preferences amongst different agreements – what Bhagwati referred to as the Spaghetti Bowl effect, and became known as a Noodle bowl in Asian context. For example, Sri Lanka can export to India through ILFTA, APTA or SAFTA and soon under Bay of Bengal Initiative for Multi - Sectoral Technical and Economic Cooperation (BIMSTEC) – each agreement with its own preferential tariffs, negative lists and technical requirements such as value additions. This causes the exporter to incur a search cost in identifying the most suitable agreement and/or often has to alter source of supply of inputs in order to qualify for preferences. This process is made all the more challenging given the complexity of many of these rules. Such changes in production methods are both economically inefficient and may raise trade - related business costs of industries. The Rules of Origin (RoO) are the most complicated components in regional and bilateral trade agreements. The RoO are included to stipulate prevention of trade deflection and to ensure that the product receiving preferences originated in the exporting country that is party to the agreement, and not simply a re-export of a third party free riding on the said agreement. Whilst RoO might be problematic for traders, they are necessary for ensuring the viability of a bilateral or regional trading agreement due to the free rider problem. Adopting the less restrictive RoO could result in significant trade deflection and redundancy of a trade agreement, while adopting the most restrictive RoO may result in no increased trade under the agreement.3 So far there has not been any standard framework that could be used as areference-point by policymakers in devising rules of origin criteria for a regional grouping. There has been very limited analytical or empirical research carried out on assessing the economic effects of RoO systems in Sri Lanka, despite the fact that such an assessment should form the very basis of the RoO system.
In this background, this study will explore several areas, (i) the extent and the degree to which the Sri Lankan exporters use the preferences negotiated in various trade agreements, (ii) the benefits and costs of using trade agreements (iii) impact of multiple RoO on industries, and (iv) measures that can be taken to increase utilization of trade agreements will be observed. The study will focus on market access issues of FTAs to assess the noodle bowl effect on goods related to Sri Lanka. Section 2 of the paper reviews the existing literature while Section 3 provides an overview of the preferences and RoO requirements under each agreement. Section 4 analyses the usage of trade agreements in Sri Lanka and Section 4.1 focuses on the methodology. Section 4.2 examines the utilization of trade agreements followed by Section 4.3 that presents the analyses of the perception survey results. Conclusion and the way forward is presented in the final section that stem from the findings of the study.

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