Benefits of FTAs to SAARC Countries with Special Reference to Sri Lanka’s Experience Prof. Lakshman R. Watawala

Why FTA’s? Win-win for Trading Partners Efficiency from Specialization & Competition Economies of Scale: Preferential Market Access Products Diversification FDI Inflows Transfer of Technology Overall Increase in Welfare

Criteria for Free Trade Agreement Success Geographical Proximity High Pre – FTA Tariffs High Intraregional Trade Levels Tade Complementarities Low Political Tensions Streamlined Market Access Low Non-tariff Barriers (NTBs)

Regional / Bilateral Trade Agreements in Selected SAARC Countries

India’s Regional / Bilateral Trade Agreements Agreements in Operation Agreements Signed but Negotiations Ongoing Agreements in the Pipeline Possible Future Agreements India Singapore FTA India Thai FTA (EHS in operation) India Sri Lanka FTA South Asian Free Trade Agreement (SAFTA) India Nepal Trade Treaty Bangkok Agreement (APTA) India Bhutan Trade Treaty India ASEAN CEPA BIMSTEC India GCC Framework Agreement Indo Chile PTA Indo MERCOSUR A/g India Japan CEPA India Mauritius PTA India Peru FTA India Korea CECA India EU Trade Investment Agreement India US FTA in services India Russia CECA India Sri Lanka CEPA India China RTA India MERCOSUR SACU India, Brazil, S. Africa India Vietnam India Australia

Pakistan’s Regional / Bilateral Trade Agreements Agreements in Operation Agreements Signed but Negotiations Ongoing Agreements in the Pipeline Possible Future Agreements South Asian Free Trade Agreement (SAFTA) Pakistan Malaysia FTA Pakistan China FTA Pakistan Sri Lanka FTA Pakistan Malaysia Early Harvest Programme Pakistan China Early Harvest Programme Pakistan Iran PTA Pakistan USA FTA Pakistan Mexico FTA Pakistan Bangladesh FTA Pakistan Afghanistan FTA Pakistan Turkey FTA Singapore Pakistan FTA

Bangladesh Regional / Bilateral Trade Agreements FTAs Agreements in Operation Agreements Signed but Negotiations Ongoing Agreements in the Pipeline Possible Future Agreements Bangladesh USA GSP European Community Bangladesh Asia Pacific Trade Agreement South Asia Free Trade Agreement (SAFTA) Bangladesh Middle East (Trade preference system for the organization of the Islamic conference BIMSTEC

Sri Lanka’s Regional / Bilateral Trade Agreements FTAs Agreements in Operation Agreements Signed but Negotiations Ongoing Agreements in the Pipeline Possible Future Agreements Indo – Lanka FTA EU GSP+ South Asia Free Trade Agreement (SAFTA) Pakistan Sri Lanka FTA Bangkok Agreement (APTA) BIMSTECTIFA (USA & Sri Lanka) India Sri Lanka CEPA

Sri Lanka’s Experience with FTA’s ● Indo – Lanka FTA (ISFTA) ● Pakistan Sri Lanka FTA (PSFTA)

Salient Features (1) Sri Lanka’s FTA’s Coverage : Only “Goods” Negative List Approach : to Protect National Interests Phased Elimination of Tariffs ISFTAPSFTA India : 3 YearsPakistan : 3 Years Sri Lanka : 8 Years Sri Lanka : 5 Years

Salient Features (2) Sri Lanka’s FTA’s Rules of Origin Criteria –Wholly Produced/Obtained Products –Non-wholly Produced/Obtained Products Domestic Value Addition : Over 35% (Cumulative ROO : 25% + 10%) H.S. Transformation ISFTA : At 4 - digit level PSFTA : At 6 - digit level “Sufficient Process”

Tariff Structure Total No. of Items : 5,224 Pakistan’s Commitment - PSFTAIndia’s Commitment -ISFTA

Tariff Structure Total No. of Items = 5,224 (1,220 Items) (1,225 Items)(2,779 Items) Sri Lanka’s Commitment -ISFTASri Lanka’s Commitment -PSFTA

Achievements Indo – Lanka FTA

Sri Lanka Trade with India (SLRs.Mn.) YearImportsExports Import/Export Ratio Trade Gap , : 1 1, , : 1 3, ,569 1, : 1 18, ,523 2, : 1 33, ,477 4, : 1 41, ,750 6, : 1 47, ,84716, : 1 63, ,87123, : 1 80, ,00838, : 1 97, , , ,000 56,200 50,889 55, : : : 1 84, , ,000

HS Code Product DescriptionValue of Exports (Rs. mn.) Duty Preference% of Exports to India Share of SL in Indian Import Market MFNFTA 1516Vegetable Oil (Vanaspathi)8,208100%099%27% 7403Refine copper & copper alloys5,0535%097%74% 7413Stranded wire, cables of copper3,99710%0100%89% 8544Insulated wire, cable and electric conductors 3,4147.5%092%14% 7605Alluminium wire2,5755%0100%52% 1517Margarine2,394100%099%18% Pepper1,36370%082%60% 4707Waste and scrap of paper1,32010%0100%5% 0907Cloves1,18235%089%42% 7408Copper wire1,0905%0100%9% Antibiotics7517.5%0100%7% 7404Copper waste & scraps5505%095%2% Other18,992 Total50,889 Sri Lanka’s Exports to India

Sri Lanka Exports to India ProductUS $ Vanaspathi Copper & Copper based products

New Products exported to India (Under the FTA) Multiwall Paper Sacks Marble Slabs Ceramic-ware Gems & Jewellery Ice Cream Machines Furniture Rubber Products Copper Products DIMMS (Computer Parts) MDF Boards Ayurvedic Products Paints Food Items Car Batteries Fibre Products Energy Saving Lamps Bicycles Tyres Coconut Milk

Some Indian Companies Operating in Sri Lanka Taj Group CEAT Gujrat Ambuja Larsen & Turbro Apollo Cosco Polymers Numeric Technologies Polycab Cables Ruchi Soya IOC Bharath AirTel Gujrat Glass Asian Paints Ramco Group Motherson Sumi Western Refrigeration VSNL Lanka Tata Tea GTB Steel Bhuwalka Steel Life Insurance Corp. India

Investment flows from India YearNo. of Projects Realized Investment Cum. Rs Mn Realized Investment Cum. US $ Mn , , , , , , ,357265

Top 15 Investor Countries Ranked by FDI – 2007 (US$ Mn.) S/N CountryValue 01Malaysia UK Japan India Hong Kong Sweden Netherlands USA Singapore Italy UAE Belgium China Korea Rep Germany8.38

Indian Investments Indo - Lanka FTA Products Metal Products Wire/Cables Rubber Products/ Tyres Edible Oil Furniture Marbles and Granites Ceramics/ Glass Electrical/ Electronics Investments (Last 7 year period) No. of Projects (started)134 FDI USD 265 mn. Employment 6,300 Sectoral Breakdown of Indian Investments (As at end 2005)

● : Large scale projects- Domestic market oriented Cement Bagging Terminal - Gujarat Ambuja, L & T Construction Materials- Ramco - roofing sheets - Bhuwalka, GTB - steel profiles - Asian Paints - paints Investment Flows from India A Historical Perspective ● Pre - ISFTA and Post - ISFTA US$ 3.4 mn04 units US$ 94 mn25 units US$ 265 mn134 units ● – Domestic-market oriented Units/Enterprises Manufacturing:CEAT & Ashok Leyland & LMT Services:Taj Hotels, IMRB (market research) Advantages:Tariff protection in Sri Lanka Similarities in both markets Domestic demand ● 2000 onwards – Export Oriented Projects & Domestic – (Lanka IOC petroleum)

Achievements Pakistan – Sri Lanka FTA

Trade between Sri Lanka and Pakistan YearExportsImportsRatio : : : : : : : : 3.0 (USD Mn)

Major Sri Lankan Products Export to Pakistan Coconut Tea Spices Copra Betel leaves Coconut Oil Coconut Fibre Graphite Plastics Raw Rubber Fibre board Paper and Paper Boards Computers and Parts

Sri Lanka’s Exports to Pakistan HS Code Product DescriptionValue of Exports (Rs. mn.) Duty Preference% of Exports to Pakistan Share of SL in Indian Import Market MFNFTA 4001Natural Rubber2,0435%3.3%24%30% 1203Copra1,32210%0%100%99% ‘0902Tea84720%0%2%4% ‘0801Desiccated Coconut7635%0%23%64% 8908Vessels Structures32425%16.5%100%20% 4411Fibre Boards30010%6.6%60%11% Other1,782 Total7,381

Pakistan Exports to Sri Lanka Textile Fabrics – Zero tariff Pharmaceuticals – Zero tariff Machinery Agricultural Items Rice, Potato, Fruits (apples, mandarins) etc MT Basmathi rice Industrial products – PVC, Carbon etc.

Tariff Rate Quota and Margin of Preference for Sri Lanka exports to Pakistan 10,000 MT of Tea duty free Duty for Betel leaves is Rs 150 per Kg. SL granted quota of 1200 MT per annum. Currently revised to 20% MOP 200,000 pcs apparel products of 21 categories granted 20% duty preference Ceramic exports granted 20% duty preference but not for porcelain tableware

Trade with India Conduit for Indo Pakistan Trade Now take place via Singapore or Dubai Pakistan Investors could start operations in Sri Lanka to trade with India using ISFTA Sri Lanka can acquire Hub Status in South Asia

Pakistan Investments Pakistan - Sri Lanka FTA No. of Projects Investment (Rs. Mn.) 151, ,730 Before FTA (end of 2004) After FTA (2005 – 2007)

Opportunities for Investment Need for Textile Fabric Industry in Sri Lanka for Garment Industry Sri Lanka assist to improve the garment manufacturing techniques Gem and jewellery trade Tea bagging industry Super market operation in Pakistan Generous Tax Incentives

Highlights of Sri Lanka’s Trade Agreements

Special Tariff Preferences for Sri Lankan Products Indo-Lanka FTA  4,232 products (zero duty) Sri Lanka-Pakistan FTA  206 products (zero duty)  4,480 products – 34% immediate duty preference (phasing out to zero duty in 3 yrs)

Impact on FDI Indian industries which took take advantage of high duty in India will gradually lose advantage as seen in the Vanaspathi industry Environmental controls, value addition and minimum pricing formula for copper and copper products has resulted in the closure of this industry Opportunities – Coal power plant in Trincomalee Industrial and IT parks Education - Teaching of English, BPO & IT industry. Fabric Industry for Garments

Impact on FDI Sri Lankan investors have invested and looking at opportunities in the Hotel and Tourism sector Industrial Park for Garments and Fabric, Garment factories, Retail trade and supermarkets.

Lessons Learnt Need Political will Size of country does not matter Success achieved by giving Preferential treatment to smaller countries Comparative advantage activates dormant complementarities Promote air travel sectors and tourism Non Tariff Barriers could be a hindrance No advantage given for products having genuine comparative advantage due to protection Closer co-operation in Trade and Promotion of non FTA Goods

Looking Beyond FTA Comprehensive Economic Partnership Agreement (CEPA) Further liberalization of Trade Services including Professional services Investment liberalization

THANK YOU!