CEPA: Why this excitement?
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
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
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
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
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
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
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?