Tuesday, 11th November 2014
Sri Lanka now outperforms other South Asian and some Southeast Asian countries in trade facilitation, especially in the involvement of the trade community, appeal procedures and harmonization of documents Comparative statistics of Sri
Lanka and other countries in the region reveal that Sri Lanka lags far behind its neighbouring countries in terms of all identified areas
The inaugural Gamani Corea Memorial Lecture, titled ‘Recent Trends in International Trade: Implications for Sri Lanka,’ was delivered this week by Institute of Policy Studies Executive Director Dr. Saman Kelegama.
RECENT TRENDS
According t o Dr. Kelegama, since the dramatic shift in global development policy in early 1970s from i mport substitution-led industrialization, the world has embraced exports, following the examples of Japan, South Korea, and China.
“Import substitution industrialization went well back in the day. This couldn’t be pursued by developing countries which had a lower industrial base. After East Asians went for export orientation, earning an extra dollar was seen as more feasible than saving a dollar,” he said.
This switch to exports has resulted in the development of global value chains (GVC), emphasis on trade facilitation, proliferation of regional trade agreements (RTAs) and free trade agreements (FTAs), expansion of trade in services and growth of foreign direct investments (FDIs).
GLOBAL VALUE CHAINS
“Global value chains are a reflection of the fragmentation of the international production process from raw materials to finished products, and it has become a new feature in global trade,” he said.
GVCs are most visible in the apparel, electronics, transportation and telecommunication sectors as well as wholesale and retail trade.
Dr. Kelagama noted that the increased focus on movements in value added, rather than commodity trade flows has led to the formation of GVCs, which have resulted in Multi National Enterprises (MNEs) delivering goods ‘made in the world;’ with components being traded several times across borders for value addition before the final product reaches the consumer.
“MNE organized GVCs account for 80 per cent of global trade. About 60 per cent of global trade consists of trade in intermediate goods and services while import content in exports has increased from 20 per cent in the 1990s to a current level of 40 per cent, which the WTO projects to reach 60 per cent by 2030,” Kelegama said.
He asked not to complain about import content as well as t he increased taxes and tariffs from multiple border crossings of the components, because the turnover following value addition more than makes up for the cost.
He highlighted some specific policies for participating in GVCs recommended by the United Nations Conference on Trade and Development ( UNCTAD) for developing countries.
The need to embed GVCs in industrial development policies, a conducive environment for trade and investment through developing infrastructural prerequisites, building productive capacities in firms and skill levels of the labour force, and multilateral cooperation can contribute considerably in ensuring a trade and investment policy setting favourable to sustainable GVC growth.
Dr. Kelegama said that regional value chains in areas such as Latin America, Sub Saharan Africa and South Asia need to be developed.
“Unlike ASEAN, South Asia is not integrated. So there aren’t many regional value chains, leading to less GVCs,” he noted.
He noted that other than the apparel sector, Sri Lanka’s experience in linking with GVCs has been far from satisfactory.
The favourable Multi Fibre Arrangement which set apparel export quotas for each country had helped Sri Lanka develop the industry instead of falling prey to low cost suppliers like China and Bangladesh, and yet following its abolition in 2005, the country’s apparel sector continued to flourish in the niche markets of intimate apparel and upmarket casual.
With worker wages and conditions far above competing countries, the participation in GVCs heavily influenced by the foreign customers, value addition and an enabling domestic environment; including a highly skilled domestic workforce, an entrepreneurial class, proactive industry associations, and most importantly the policy reforms in 1977 contributed to this success.
Dr. Kelegama said that these lessons from the apparel industry should be applied to all other sectors in Sri Lanka, and especially the rubber industry which has not seen any industrial upgrading recently.
However i n his opinion, t he upcoming Sri Lanka-China FTA is ripe for Sri Lanka to tap into GVCs and t he country should develop sector-specific policies to take maximum advantage of these opportunities.
TRADE FACILITATION
“Successful participation i n GVCs depends crucially on effective trade facilitation. Since goods cross borders multiple times, first as inputs, and then as final products, fast and effective customs procedures ensure t he smooth operation of the value chain,” Dr. Kelegama noted.
He said that locations become far more attractive if MNEs which outsource stages can import and export in short time frames at low costs.
“Research has shown that in some countries, trade procedures, documentation and related costs can be as high as 16 per cent of the cost of production. So many economists have argued that implementing trade facilitation measures is equally important as tariff reduction to promote trade flows,” Dr. Kelegama said.
Such measures were not in the World Trade Organization agenda until 2004, and despite a Singapore Ministerial Conference arguing in favour of them in 1996, WTO viewed trade facilitation as an issue only concerning Singapore.
“Its i mportance has been recognized by the WTO to such an extent t hat when t he WTO Ministerial took place in Bali last year, trade facilitation was a part of the Bali deal package,” Dr. Kelegama said.
He also noted that the Organization for Economic Co-Operation and Development (OECD) has devised a set of indicators for measuring trade facilitation covering the full range of border procedures from advance rulings to transit guarantees, to identify areas for action.
According t o OECD reports, lower middle income countries such as Sri Lanka can reduce the production costs by 2.7 per cent by harmonizing or simplifying documentation, 2.2 per cent by improving procedures, 2.1 per cent by introducing automation and 1.4 per cent by making available trade related information.
“Sri Lanka i n 1980 had t he National Trade Facilitation Committee, which was upgraded in 1996 to the Steering Committee on Trade Facilitation, but both of these bodies have died a natural death,” he spoke of the history in Sri Lanka.
However he noted that private sector initiatives such has the Joint Apparel Association Forum have developed trade facilitation i n recent years, including the issuance of electronic certificates of origin to easily identify genuine local producers.
Further, the adoption of Automated System of Custom Data software and the newly implemented online facilities for export and import procedures with the ‘one-stop shop’ at the Customs Department has also improved Sri Lanka’s trade facilitation.
Dr. Kelegama said that the development of physical infrastructure, such as the development of the road network, seaports and airports have also contributed to this end, while the expansion of the Colombo Port, which handles over 95 per cent of inbound cargo to the country plays a key role in facilitating trade and providing hub services in the South Asia region.
Due to such initiatives, the number of documents needed for export and import has fallen from 21 in 2007 to 12 in 2013, while the number of days required for trading has gone from 52 to 39 within the same period.
He said that according to many data sources, Sri Lanka now outperforms other South Asian and some Southeast Asian countries in trade facilitation, especially in the involvement of the trade community, appeal procedures and harmonization of documents, while lack of information, automation and internal border agency co-operation was below par.
Sri Lanka was also found to be far behind countries such as Thailand, Malaysia and Singapore.
The OECD had found that further streamlining procedures and better governance and impartiality would yield better results, while Dr. Kelegama said that engaging private investment in infrastructure by strengthening the country’s institutional and regulatory environment and implementing a more strategic trade policy geared to enhance regional integration would also help.
FTAs AND RTAs
“Since the WTO under the Doha development agenda is at a standstill, tariffs are not coming down under the WTO multilateral framework. So countries are shortcircuiting the WTO and working out RTAs and FTAs in order to get tariff reductions and promote trade,”
According to the WTO, 5 8 5 RTA s and FTAs have been negotiated globally, of which 379 are i n operation today and 37 per cent of global exports and 46 per cent of global imports flow through these.
One hundred and fifty FTAs and RTAs are in effect in Asia with over 21 signed and not in effect, with every country except Mongolia and TimorLeste being a part of at least one FTA. Most of these are bilateral, and if counting FTAs under negotiation, the number goes up to 203.
“China, Singapore, Korea, Malaysia and India are involved in many FTAs; in average about 10-12 FTAs and RTAs. In South Asia we have FTAs, but they’re all shallow agreements, in that they have coverage of goods. But FTAs in Southeast Asia and East Asia are deep and broader in that they cover investment and services,” Dr. Kelegama expressed.
He said that Sri Lanka has made certain progress towards fostering regional connectivity not just for increasing markets for goods, but also for attracting FDIs, with strong links being made with China, Malaysia and Singapore and yet, the aggressive development of infrastructure isn’t reflected to the same extent in regional trading.
However, currently the relationships are limited to import flows, except for India, with which there are considerable two way trade and investment.
“It is unfortunate that the signing of the Comprehensive Economic Partnership Agreement (CEPA) with India did not take place following forceful lobbying by certain Sri Lankan industrialists,” Dr. Kelegama spoke of the inability to take the FTA further to include services.
TRADE IN SERVICES
“Many countries are now incorporating services liberalization under RTAs and FTAs,” Dr. Kelegama said.
Despite the setting up of the General Agreement on Trade in Services in 2000, and over half of Gross Domestic Product in almost all economies being contributed by services, its liberalization has entered these RTAs and FTAs due to the stasis of WTO negotiations and they have been given various names such as Economic Partnership Agreement (EPA), CEPA, Comprehensive Economic Cooperation Agreements (CECA), etc.
Dr. Kelegama said that, according to UNCTAD data, while gross exports globally amount for just 20 per cent, half of t he value added exports is from services, as each stage of manufacturing requires them, while information communication technology (ICT) has made it easier to trade almost all types of services.
The fastest growing service sectors since 2008 have been ICT, personal, cultural and recreational services, and other business and professional services, with developing countries showing a 13 per cent annual growth for ICT services.
In Sri Lanka, 58 percent of the Gross Domestic Product is composed of services, while 20 per cent of the country’s exports are also comprised of it. Seventy five per cent of these services exports were made up of travel and transport in 2013, growing from 69 per cent in 2000, with ‘Rising Asia’ being justified by nearly 50 per cent of Sri Lanka’s inbound tourists coming from the region so far this year.
ICT exports have meanwhile, grown from 3 per cent to 13 per cent financial services from less than 1 per cent to 5 per cent in the same period.
Sri Lanka’s interest in services liberalization was seen i n t he attempted negotiations of the CEPA with India and a technical-level CEPA negotiations with Pakistan in 2008, both albeit unsuccessfully, as well as the signing of negotiations for a SAARC Agreement on Trade in Services in 2010.
Dr. Kelegama said that trade liberalization in services would be of paramount importance for the government’s plan to implement the 5 hubs strategy; shipping, aviation, commerce, energy and knowledge, as countries such as China, Singapore, Hong Kong, South Korea and Malaysia already boast similar hubs.
“Comparative statistics of Sri Lanka and other countries in the region reveal that Sri Lanka lags far behind its neighbouring countries in terms of all identified areas,” he said.
While Colombo Port ranks 29th among 125 ports in the world, 19 Asian ports handle larger volumes than it, and despite infrastructural development in airports, carrier departures have been low. The country’s tertiary education has been stagnant, while even India has emerged as a global education hub.
Dr. Kelegama said that Sri Lanka should look towards services oriented FTAs and FDIs.
“If not, the only option would be for unilateral liberalization of trade in services,” he said.
FDIs
According to UNCTAD data, over 60 per cent of global FDIs are now being allocated to services, and the main driver of this change has been MNE driven GVCs.
FDI i nflows from advanced economies to emerging and developing economies have grown in rapidly, from 15 per cent in 2000 to over 52 per cent in 2012, while Rising Asia’s global FDI outflows increased from less than 1 per cent to 10 per cent for the same period.
However, Dr. Kelegama expressed disappointment over Sri Lanka’s inability to attract FDIs.
“Five years from the end of the war, FDI has been the most conspicuous under-performer in an otherwise bullish economy... in terms of quantity and quality,” he said.
Last year, t he country only attracted US$ 916 million in FDIs, far short of the government target of US$ 2 billion, while in comparison, Vietnam in 2011 attracted US$ 12 billion, Pakistan US$ 6 billion and Bangladesh over US$ 1.5 billion.
He also said FDIs have been in mostly property development projects which may stimulate construction and related sectors in the short term, does not help in the development of services, technology and job creation in longer runs.
However, he mentioned the change of Sri Lanka’s main FDI sources to India, China, Malaysia, Hong Kong and Singapore in a positive light, helps to facilitate South-South relations and promote the Rising Asia phenomenon.
Dr. Kelegama urged the government to follow the Asian neighbours in forming favourable political, economical and international relations policies to entice more FDIs, as in addition to technology spillovers, they are the most stable form of capital; capable of stabilizing economies during financial crises due to FDIs being motivated by a positive long-term outlook of the country.
“FDIs are here to stick. Sri Lanka should promote them. It will help the country link to GVCs,” he said.
LONG WAY TO GO
Dr. Kelegama said that Sri Lanka thus has been affected by global developments, and as a small open economy which depends on external demand for sustainable growth, has to actively participate in GVCs, implement trade facilitations and further improve its trade with Asia through RTAs.
He said there is a long way for Sri Lanka to go in comparison to East Asia and South East Asia, and that FDIs and exports should be the main focus of the government instead of debt and portfolio driven growth.
“Urgent policy action is required to boost export and FDI performance so that the country can fully reap the benefits offered by these opportunities whilst also achieving l ong-term sustained growth in its post war economy,” he further added.
Dr. Gamani Corea was a leading economist and diplomat who was appointed Sri Lanka’s Ambassador to the European Economic Community, Belgium and Luxemburg in 1973. He was the Secretary-General of UNCTAD from 1974 to 1984, and a major proponent of South-South trade relations in Asia.
His policy standings i n t he 1960s were a major i nfluence in forming the 1977 economic reforms. He founded and chaired the IPS as well as the Sri Lanka Economic Association, and acted in a mentoring capacity to Dr. Kelegama.
In addition to his many contributions to the field of economics, he also earned high honours and awards both locally and internationally. He passed away on November 3, 2013.
From : http://epaper.dailymirror.lk/epaper/viewer.aspx
