CEPA: Why this excitement?

M. G. Siriwardane

President Mahinda Rajapaksa has made it absolutely clear that he will not sign any agreement with any country that will be detrimental to the interest of Sri Lanka.

The Indian Prime Minister, Manmohan Singh, has said sometime back that India will be willing to move at a pace Sri Lanka is comfortable with and that Sri Lanka can take its own time if at all it wants to embark on a Comprehensive Economic Partnership Agreement (CEPA).

With this scenario in place, why is there so much excitement about CEPA? CEPA has now become a football to be kicked all around. In this process, a number of sweeping statements have been made, confined not only to aggrieved businessmen but also to academics.

On sovereignty and nationalistic grounds, the need for CEPA can be questioned. That is why the final decision on CEPA has to be taken at a political level.

But at the economic level, there may be valid reasons to move towards CEPA if there is a desire at the political level to do so. Then again, the economic arguments should be based on hard facts and not on fanciful ideas. If there are economic arguments against CEPA, they too should be based on hard facts and not based on hearsay or drawing room gossip.

A recent article by Prof. A.D. V. de S. Indraratna on the subject that appeared in the Island was full of factual inaccuracies and contradictions and a few of them are highlighted here in the public interest.

The Professor states that: "there is no counterfactual analysis done to show that the increase in trade was due to the FTA."

This is not correct, counterfactual analysis is available in the existing literature and they show that the bulk of the increase in exports from Sri Lanka to India would not have materialized without the FTA.

Leaving aside these complex literature, what do the available data indicate? Using 2007 data, if a simple back-of-the-envelope comparison is made on the trade between India and Sri Lanka using the FTA concessions, which is trade generated by the FTA for either country and conversely at the level of non-FTA trade where trade is carried out without any concessions, we get the following - trade under the FTA between India and Sri Lanka shows Sri Lankan exports were at about US$ 450-500 million and Indian exports at US$ 600-700 million, which is fairly balanced.

Non-FTA exports from Sri Lanka to India were negligible at about US$ 50 million, the same as it was in 2,000, when the FTA came into force.

Non-FTA exports from India to Sri Lanka were substantial standing at about US$ 2 billion, up from about US$ 500 million in 2000. This would roughly imply that without the FTA, Sri Lankan exports to India would have remained stagnant while Indian exports, which are largely on the non-FTA route, would have grown four times from the 2,000 level.

Clearly, therefore, the FTA has benefited Sri Lanka by creating 90 percent of its current export potential. In contrast, the FTA accounted for only 30 percent of India's exports to Sri Lanka.

Therefore, the FTA has benefited Sri Lanka by facilitating 90 percent of its exports. In contrast, the FTA has accounted for only 30 percent of India's export to Sri Lanka.

The import-export ratio which came down in favour of Sri Lanka from 10:1 in 2000 to 5:1 in 2007 would have been somewhere close to 40:1 if the FTA was not there (Indian economy is about 40 times larger than Sri Lanka while the exports of India to Sri Lanka vis-...-vis exports of Sri Lanka to India are only five times larger).

The fact that Sri Lanka's current export potential is more than what it should be, given the ratio of size of economies, is partly due to the FTA. The number of products exported from Sri Lanka to India increased from 505 in 1999 to 869 in 2008 (reached a peak value of 1062 items in 2005) indicating that a more diversified product base is benefitting from the Indian market than before.

The effectiveness of the Indo-Sri Lanka FTA (ISLFTA) in driving Sri Lankan exports to the Indian market could be compared with Sri Lankan exports to China where there is no FTA governing trade.

The trade between the two countries amounted to US$ 958 million in 2007 and Sri Lankan exports to China amounted to a meagre US$ 34 million whereas Chinese imports to Sri Lanka amounted to US$ 924 million.

It was a case of one way traffic - there is enough demand in Sri Lanka for Chinese products but not vice versa.

At another point, the Professor states that :"there must be special and differential treatment so as to place a small country like Sri Lanka in a level playing field."

This provision is already built-in to the FTA, where even BA students in Economics in their final year extended essays on the subject have documented this fact: (1) longer negative list for Sri Lanka, (2) different time tables for phasing out tariffs (three years for India and eight years for Sri Lanka), (3) relaxed rules of origin for Sri Lanka, (4) high revenue earners for Sri Lanka like motor vehicles to be kept in Sri Lanka's negative list, and (5) more initial duty free tariff lines offered by India.

Not only that, in operational terms, the special and differential treatment was quite satisfactory and that is why Sri Lanka has been able to increase her exports to India and minimize Indian imports to Sri Lanka under the FTA.

At another point the Professor says that: "why don't we first try to solve the problems of ISLFTA and try to turn it in Sri Lanka's favour before we think of CEPA?" The Professor does not seem to be aware of the historical evolution of the CEPA.

Very briefly, in 2002 a decision was taken by both Governments to set up a Joint Study Group with a mandate to suggest solution to ISLFTA problems and build it to a comprehensive economic partnership agreement to cover both investment and services.

The thinking at that time was that in the globalized world, trade in goods is closely interconnected to trade in services and investment flows and that a comprehensive framework will be the best solution to facilitate trade between the two nations. The Joint Study Group Report (JSGR) had recommended the same special and differential treatment as in the ISLFTA in favour of Sri Lanka.

It was exchanged between the then two leaders of the country in October 2003, and a decision was made to have a CEPA in operation within six months. The period suggested was too short and thus it took four years (2004-2008) for the commerce officials of both countries to come into an agreement on the possible way forward.

The CEPA agreement basically addresses all the problems so far that have been identified in the FTA and broadens it to accommodate selective liberalization of services and investment in a phased manner as per the recommendations of the 2003 JSGR.

At another point the Professor says: ."..it does not make sense to expand into services... and other activities when several ISLFTA issues remain unsolved."

So it appears that it make sense to the Professor to bring services to SAFTA even though SAFTA suffers from more problems than the ISLFTA, but not integrate services with ISLFTA which is a fast track trade agreement! The SAFTA framework agreement on trade in services (SATIS) was signed by the Sri Lankan President at the 15th SAARC summit at Thimpu in April 2010 without being noticed by the Professor.

Under this agreement, which is similar to the CEPA agreement on services, both Sri Lanka and India would open their services sectors and negotiate the extent of openings in the coming months.

Given the experience of the SAFTA agreement on trade in goods, it is almost certain that Sri Lanka will have to open more sectors under this framework than in the bilateral framework of CEPA with India to satisfy other smaller and poorer member countries of SAFTA such as Bangladesh, Bhutan, Nepal and Afghanistan.

These openings by implication would extend to India as well. On the contrary, in keeping with the SAFTA agreement on trade in goods, India is likely to open a much smaller number of sectors under SAFTA as against what it offered to Sri Lanka under CEPA in a bilateral format. This would mean that at the end of SATIS India will have greater openings in Sri Lanka while Sri Lanka, not having entered into a CEPA with India, will lose the larger openings offered by India in the latter.

Who then is the loser? Is it not absurd to sleep over the SAFTA agreement on trade in services that is less beneficial to Sri Lanka? Why did the Professor not request the Sri Lankan commerce officials to rectify the anomalies of SAFTA before embarking on SATIS? Among the many factual inaccuracies and contradictions in the article, only a few can be dealt with here. This is not to say that the ISLFTA has been perfect and CEPA is the best format for the way forward, but to show how facts have been distorted. Similar distortions of facts were presented during the Presidential Election campaign in January 2010.

Sarath Fonseka's campaign was fed with ammunition stating that the corruption in the Mahinda Rajapaksa Government had retarded the growth rate by 2 percent, so much so that this claim found its way into Fonseka's Manifesto which said that the facts on corruption are based on Prof. Indraratna's scholarly analysis. Respected academics in the country cogently disputed these claims at that time. And the people of this country too rejected such assertions after careful scrutiny.

Just as then, it is essential to put the correct facts before the people so that they could decide what is right and what is wrong.

There is certainly no hurry for CEPA, in fact it can be rejected altogether, but the question remains why the Professor has got so excited about CEPA?