LKI forum makes clear case for FTAs | Daily News


LKI forum makes clear case for FTAs

To most people who aren’t economics or maths wizards, the topic of Free Trade Agreements (FTAs) is a bit of a hazy subject. It’s logical then that all over the world, FTAs are seen as contentious, where people fear that their national interests are being compromised to other countries, without gaining a whole lot in return.

People in Sri Lanka and elsewhere worry that critical jobs are syphoned away or made obsolete by labour from foreign markets. These anxieties are common and often well-founded, but also stem from a lack of understanding – or a lack of clear explanation.

A forum discussing FTAs at the Lakshman Kadirgamar Institute (LKI) last week, titled ‘What’s in it for us?’ made a refreshingly clear case for Sri Lanka to engage in FTAs, explaining the importance of international trade cooperation in the developing global marketplace.

“Sri Lanka’s post-war economy has been dominated by the domestic economy,” said Economist and Finance Ministry Advisor Deshal De Mel.

He said that for years Sri Lanka accepted foreign loans with extremely low interest rates, between zero and two percent. But after 2017, off-shore borrowing significantly increased and simultaneously, Sri Lanka was crossing over into the category of a middle-income country.

“Suddenly, we are seeing our foreign debt repayment obligations increasing significantly, which has contributed to negative public perceptions of Sri Lanka’s foreign loans,” said De Mel, who argues that the situation is a cost of development. “Once you cross into middle-income country status, those kinds of concessional interest rates are no longer available.”

In order to alleviate the burden of debt repayment, De Mel advocated furthering trade and investments with, and from, other countries. “It is clear that Sri Lanka needs to increase its foreign earnings,” he said, listing the examples of export of goods and services, foreign direct investment, tourism, and foreign remittances.

He also said that the key to Sri Lanka’s future economic success is to bring down tariffs in the long-term, with “transparent, predictable, rules-based agreements,” and to look towards the bright horizons of a dynamic Asian market. “It’s clear that we need to realign our strategy,” he said, “particularly with regard to the ASEAN region.” Since forming, the Association of South East Asian Nations’ (ASEAN) market has managed to create economic partnerships with 2.6 billion people across 16 countries.

De Mel chose to take lessons from ASEAN, rather than the South Asian Association for Regional Cooperation (SAARC), “where political divisions are major inhibitors to trade. We are still very much a couple of decades behind in that sense,” he said.

ASEAN, on the other hand, grew with investment and genuine economic cooperation within the Asian region, “and from outward investment from Japan,” he said.

De Mel also unpacked what that kind of cooperation looks like in today’s economic context. He explained that ‘finished products’ are a vestige of the ’80s and ’90s, (building a car with all of the necessary materials in one location, for example). Today, with free trade agreements and lowered tariffs, companies contract out work to different countries that either have access to certain materials more easily, or offer labour at a lower cost. This way, companies can make a lot more money. This piece-meal production line means that many different countries are producing intermediate products that are ultimately assembled in one place to form the finished product. “Most of global trade today is driven by intermediate products,” said De Mel.

Sri Lanka, on the other hand, deals mostly in finished products, specifically apparel and tea. In fact, these two items make up 60 percent of all Sri Lankan exports (with about 45 percent comprising apparel and 15 percent comprising tea). For a long time, Sri Lanka had a competitive advantage in the apparel industry, because it had comparatively low labour costs. This model is not sustainable, argued De Mel: “Labour costs have increased in Sri Lanka and we need to find new areas where we can compete.”

That’s where FTAs come in. “For Sri Lanka’s future, if we want to go into new products,” said De Mel, “it’s essential that we go out of this domestic structure,” and into a dynamic trade-based structure.

Mangala Yapa, Managing Director of the Agency for Development of the Development Strategies and International Trade Ministry said, “You can’t think about a new Sri Lanka, a new economy, without thinking about FTAs.”

Sri Lanka is well-placed to enter into strategic FTAs that would better its economy, he said. “I don’t think in this part of the world, there is any other country with this kind of locational advantage between East Asia, South Asia, Australia and the Middle East. But, what are we doing with this advantage?” asked Yapa, in a way that suggested that Sri Lanka could be doing more.

He said that Sri Lanka is increasingly excluded from global trading patterns and that to gain a foothold in the ASEAN economy, the country must develop a network into the East Asian and South East Asian regions.

Yapa focused on how the country could seize the geographical advantages of its major ports (both airports and sea ports), in Colombo, Hambantota, Mattala, Trincomalee, and Hingurakgoda, which are seen as strategic also to China. “China and other countries are so keen. We have a huge market around us,” he said.

Creating agreements with countries like India, Bangladesh and China, says Yapa, means “creating investors in Sri Lanka.” What would make Sri Lanka attractive, he explained, is making these ports viable, and in that way, making Sri Lanka seem like not just one, but many economic markets to explore. That’s another thing that FTAs do: they create a multifaceted network of countries which looks more appealing to investors.

Executive Director (Acting) and Chair of the Global Economy Programme at the Lakshman Kadirgamar Institute, Dr. Ganeshan Wignaraja said that East Asia has used FTAs for its economic strategy, because they genuinely open up a country to foreign investment. “This is the way the world is going, and what it means for countries outside of this region is that the cost to trade and investment in these blocs is much higher without them, and that’s a big problem.” This means that if Sri Lanka were not to enter into trade agreements with other Asian countries, by default, the cost of trading with those countries would be much higher. “What we have to do and be smart, and what East Asia was able to do, is to have strategies that maximise the benefits and minimise the costs,” he said.

Another reason why FTAs are good for the economy is that by increasing competition and also raising standards they can improve productivity, said Dr. Wignaraja.

Importantly, though, East Asian countries like South Korea, Japan, and China implemented domestic social welfare programmes before they began the process of ‘opening up’. “They opened up in a very cautious manner. These countries were not passive, they did domestic reforms before. They invested in human capital,” he said.

This was very much a warning from Dr. Wignaraja, who said that “FTAs are not neutral in losses and gains.” He outlined the potential losses: downsizing, lost jobs, cheap products that flood markets, to name a few. He said that some workers will win, but some will certainly lose, and the government plays a critical role in alleviating the threats that FTAs can pose to domestic workers.

De Mel mentioned that government programmes like Enterprise Sri Lanka and other credit schemes could be used to address the domestic impacts of FTAs. He and the other speakers seemed to believe that FTAs can play an important role in catalysing governments to implement social programmes.

What made the discussion so effective was its ability to put complex economic systems into plain English, so that the audience was left with a better understanding of the problems and promises of Free Trade Agreements. While they may spell major markets and big benefits for the Sri Lankan economy, in order for the average citizen to embrace FTAs, clear and practical arguments must be made for them.

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