The South Asian region’s struggle to reconcile benefits of a progressive trade policy with the arguably detrimental effects that such a policy can have on several domestic constituencies continues. It is not only India that lives with this struggle. It remains an equally important struggle for Sri Lanka, the country with the history of adopting outward-oriented trade policies much before any other country in the region, or for that matter most other countries in the world.
Leaving behind more than two decades of bloody ethnic conflict that has set back economic take-off, today’s Sri Lanka is confident of striding a robust growth path. With a population of around 20 million, it cannot afford to have illusions about a ‘large’ domestic market driving its economic success. As a small economy, it has its task cut out and it needs to integrate deep with the global economy, particularly through cross-regional global value chains. Such integration is not possible without an aggressive external trade policy.
Given Sri Lanka’s imperatives to trade, and the efforts it made to open up its economy in as early as the 1970s, it is surprising that Sri Lanka has had limited engagement in bilateral and regional trade negotiations. Bulk of Sri Lanka’s current trade is with the US and Europe. This is largely due to the preferential access that Sri Lankan exports get in these markets through Generalized System of Preferences (GSPs). This itself should have encouraged Sri Lanka to seek greater preferential access in other markets by striking trade deals. But surprisingly, Sri Lanka’s FTA dossier is limited to only six bilateral deals—India, Pakistan, Israel, Singapore, Iran and Egypt. The scopes of these agreements are limited to preferential tariff access to a bunch of items. But these don’t include trade issues beyond tariffs, such as services and investments, making the agreements insufficient in scope and long-term benefits.
One of the reasons behind Sri Lanka’s lack of engagement in trade agreements is the unfortunate history of domestic ethnic conflict that it had for almost three decades since the 1980s. The conflict forced policy preoccupation on internal security and disabled Sri Lanka from capitalising the benefits of outward oriented policies. It is only during the last three-four years that Sri Lanka has begun looking at trade as a contributor to economic growth on the foundation provided by domestic stability. As a part of this focus, the Ministry of Development Strategies and International Trade of Sri Lanka has prepared a National Trade Policy (NTP) document.
A forward-looking and progressive document, the NTP tries to combine economic benefits of following open trade policies with cushions for minimising adverse impacts of opening up. As a policy vision this is what it should aspire to achieve. The problem, however, is whether it will be able to do so; whether the emphasis on minimising costs would restrain authorities from pushing the frontiers of open economic policies as much as they should for getting long-term economic gains. These doubts linger in the light of concerns that have come up in Sri Lanka’s recent trade negotiations.
Discussions have been going on for several years on upgrading the India-Sri Lanka goods FTA into a comprehensive agreement including services and investment.
However, concluding the agreement hasn’t been possible due to concerns in Sri Lanka over the impact of the agreement on the domestic economy. Building up on impressions that the goods FTA has provided much greater access to Indian exports in Sri Lanka as opposed to Sri Lankan exports in India, there are fears that the upgraded FTA would increase the presence of Indian professionals in Sri Lanka and give Indian businesses greater control over economic resources of the country. It is ironical that these impressions and apprehensions are identical to those that Indian industries have about several of India’s existing FTAs and the ones that India is negotiating including the RCEP.
Sri Lanka is currently expanding/negotiating trade agreements with India, China and Singapore. The concerns mentioned above are not with respect to only India, but would manifest in trade discussions with China and Singapore as well. These concerns make it particularly challenging for Sri Lankan authorities to articulate a ‘inclusive’ national trade policy that would be acceptable to domestic constituencies. Matters are complicated by the fact that India and China are major strategic partners for Sri Lanka and key investors in its economy. The government therefore cannot be oblivious to the importance of maintaining robust economic engagement with these countries, much of which is to be maintained through the FTAs being negotiated.
It is clear that being ‘small’ does not necessarily entail a favourable disposition of domestic constituencies to liberal trade policies. The global discourse criticising free trade for many of the social and economic ills that several countries are suffering from has extended to small economies like Sri Lanka too. The notion of free trade being a necessary condition for small economies to grow for overcoming the limitation of the small size of their domestic markets is no longer unconditionally acceptable. It is indeed unfortunate that even Sri Lanka—a small economy with a history of open economic policies and in urgent need of engaging in trade negotiations—has to cope with the additional challenge of justifying the virtues of trade.