Features
Don’t bank on FTAs with countries like Thailand to boost Sri Lanka’s exports
by Gomi Senadhira
“In Sri Lanka’s pursuit of transforming into a high-income country by 2048, involving trade negotiations with countries like Thailand, the Sri Lanka Thailand Free Trade Agreement (SLTFTA), was signed ….” (media release by the Presidential Secretariat, 03 February)
Five long years after starting negotiations, the trade ministers of Sri Lanka and Thailand signed what they claimed to be a very ambitious Free Trade Agreement. The negotiations on the FTA, which commenced in July 2018 during the official visit of General Prayut Chan-o-cha, then Prime Minister of Thailand, to Sri Lanka, continued through nine rounds before the agreement was finalised. At this stage, it is difficult to comment comprehensively on this agreement as the text of the agreement is still not available to the public. But it is appropriate and timely to share a preliminary analysis based on available information to initiate an informed discussion on this important agreement.
Given the lacklustre performance in the export sector over the recent years and the government’s inability to take any meaningful steps to reverse the trend, many Sri Lankans may view signing an FTA to boost exports as something to be welcomed. Particularly because of the very grand objectives Sri Lanka hopes to achieve through this FTA (as per information available through media releases), namely,
1. boosting exports from Sri Lanka to Thailand by threefold via the FTA,
2. enhancing access for Sri Lanka’s exports to markets in other ASEAN countries through Thailand’s gateway.
But can we achieve these objectives through this FTA? Or, are those just pipe dreams?
1. The objective to boost exports from the country to Thailand by three folds
In February 2023, after the third round of negotiations between Sri Lankan officials and the Thai delegation, headed by Thailand Trade Negotiations Department’s Director-General Auramon Supthaweethum at a post-Cabinet media briefing Minister Banduala Gunawardena, while justifying the plans to sign a trade agreement (FTA) with Thailand, stated,“Sri Lanka lacks FTAs with countries and that is one of the key reasons why we have not been able to boost our exports over time … and “The objective of the Government is to boost exports from the current $ 550 million to $ 1.5 billion via Sri Lanka and Thailand FTA,”. That was when Sri Lanka was facing its worst currency crisis in history. So, the claim was widely welcomed and given extensive publicity in the newspapers and news websites. However, those who are familiar with Sri Lanka’s exports would have noticed these numbers were far from accurate. Interestingly, before the commencement of the third round of the negotiations, a press release from the Presidential Media Division (PMD) had clearly stated, “… The start of the negotiations will take place against the backdrop of a significant trade imbalance in Thailand’s favour. In 2021, Sri Lanka imported goods from Thailand worth USD 355 million, but only sent USD 59 million to Thailand”. So, the officials at the Presidential Secretariat knew the correct numbers and should have issued a clarification/correction after the news was published. It should have been done promptly because these kinds of announcements send wrong signals, not only to the people of this country but also to our negotiating partners, particularly about professionalism of Sri Lanka’s Trade Negotiators.
Unfortunately, no corrections came from the government and then in May, Minister Gunawardena reiterated, “… the objective of the Government is to boost exports from the current $ 550 million to $ 1.5 billion via Sri Lanka and Thailand FTA.” That was after President Ranil Wickremesinghe had briefed the Cabinet on the progress of the discussions between the two countries.
Why is it that the Cabinet spokesman repeatedly stated “The objective of the Government is to boost exports from the current $ 550 million to $ 1.5 billion via Sri Lanka and Thailand FTA!”, at the post-Cabinet media conferences? We cannot expect the minister to have the trade statistics at his fingertips. So, where did the Cabinet and its spokesman get their numbers from? Was it from a Cabinet memo? Was he (and the Cabinet) misled by some officials in the Presidential Secretariat who wanted an FTA with Thailand at any cost? If the real numbers were presented, some ministers may have questioned the need for an FTA with Thailand, the 37th exporting destination of Sri Lanka. On the other hand, Thailand is the 10th largest exporter in to Sri Lanka. So, some may even ask will such an agreement exacerbate the foreign exchange crisis by increasing the imports from Thailand? However, none of the ministers would object to a trade agreement that would increase exports by one billion US dollars.
Anyway, now that the agreement has been finalised, I hope that the government will explain how Sri Lanka hopes to reach the highly ambitious objective set by our negotiators to boost exports by three times the current exports via the FTA. Not from $ 550 million as the government has finally corrected the numbers. Now, the new (revised) objective is, according to the PMD media release, of 3rd February, “…. tripling the existing bilateral trade value (USD 550 Mn) to USD 1.5 Billion within four years. One of the main objectives of entering into a Free Trade Agreement (FTA) with Thailand is to enhance market opportunities for Sri Lanka with possible expansion.”
That means the revised objective is triple the existing bilateral trade and not Sri Lanka’s exports within four years. Is it an achievable target within four years? Out of this USD 1,5 billion what would be the Sri Lanka’s share? Or, will it be heavily in favour of Thailand? A study undertaken by the Institute of Policy Studies (IPS) last year projected, “Assuming an immediate phasing-out of the existing tariffs, an FTA would increase bilateral trade to USD 619.6 million by 29.1 %. This increase falls short of the ambitious goal of a threefold increase in bilateral trade, at least in the short run.” The report also pointed out that if the existing tariff was immediately phased out Sri Lanka’s exports would increase by $27.6 million and Thailand’s exports would increase by $141.8 million. However, in real negotiations, it doesn’t happen like that. Countries negotiate and sign Free Trade agreements to help open markets and expand opportunities for their exporters in a balanced and mutually beneficial manner.
In 2022, out of Sri Lanka’s total exports to Thailand valued at $57.7 million, precious or semi-precious stones accounted for $33.4 million. Almost all these (precious stones) have duty-free market access in Thailand. Hence, the FTA will not add any additional enhanced market access. So, any export growth has to come from the rest of the basket and any new products that may get duty-free access to Thailand. What are the products our economic operators can export to Thailand under this FTA? What are those products that can add 100 million in additional exports within four years? Who are the exporters undertaken that challenge?
Recently in Bangkok, Ms Supthaweethum announced more realistic but substantial gains for Thailand from the FTA. She projected the Thai economy to expand by 0.02% equivalent to US$ 80 million through expansion of investment and value of Thai exports to Sri Lanka. Thai manufacturing industries and products that would benefits from the agreement would be automotive, fashion, gems, metal, electronics, rubber, pet food and corn. Although details on these projected gains are not available, I believe, most of the gains would come through duty reductions for these products by Sri Lanka. In addition to that Thai finance, insurance, tourism and R&D industries also are expected to benefit from the agreement. However, if Thailand’s economy is to expand by US$ 80 million that would require substantial (a threefold?) increase in Thai exports to Sri Lanka. But at this stage it is difficult to comment on this as we do not have the full text of the agreement.
2. Access markets in other ASEAN countries
The media release by the PMD in January, last year, identified one other objective of the Sri Lankan negotiators, that is,” … from the perspective of Sri Lanka, the negotiations will be aimed at enhancing access to our exports not only in the Thai market but also in markets in other ASEAN countries through Thailand’s gateway.” I cannot understand how this can be achieved through a bilateral FTA between two countries exchanging reciprocal concessions. Does this mean that Sri Lanka also has to open up the market to other ASEAN countries through Thailand’s gateway? How will the Rules of Origin impact such trade? It will be interesting to find out how our negotiators have achieved this objective.
Third time lucky! Or, Finally unlucky?
This is not the first time Sri Lanka and Thailand tried to negotiate an agreement to enhance trade. The attempts were made twice before. The first was to negotiate a preferential trade agreement (PTA). It was initiated when the Thai Prime Minister Thaksin Shinawatra visited Sri Lanka in 2003 on the invitation of Prime Minister Ranil Wickremesinghe. I understand those negotiations were abandoned after few rounds as Thailand refused to include products of export interest to Sri Lanka in their concession list in a meaningful manner.
After that a very comprehensive FTA was negotiated with Thailand under the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). Although it was an agreement between the BIMSTEC members, as the South Asian countries already had preferential trade agreements and India had an FTA with Thailand, the negotiations essentially were between other South Asian members and Thailand. The negotiations which commenced in September 2004, in Bangkok, was largely driven by Thailand. After 20 rounds of negotiations, a comprehensive trade agreement was almost finalised before 2010. During the negotiations, Thailand aggressively pushed for enhanced market access for their products. Unfortunately, Sri Lankan negotiators conceded substantial amount of concessions to Thailand without receiving any significant concessions in return. Thailand kept the limited number of products Sri Lanka was interested on its negative list. As a result, the final draft was heavily in favour of Thailand. Consequently, before moving forward with negotiation any further, during the 2010 – 2011 period, the Department of Commerce carried out an extensive consultation process with local stakeholders.
During those consultations, local manufacturers clearly explained that the impact of the FTA would be highly disadvantageous to the local industries and lobbied strongly against the FTA. Even the export associations did not consider an FTA with Thailand a necessity. They considered the Thai market a difficult market to enter even with tariff concessions. Only the importers (and some officials) lobbied heavily in favour of the agreement. Based on those consultations the Department of Commerce advised the ministry and all other line agencies against signing of the agreement as the objective of signing a trade agreement was to boost Sri Lanka exports in a mutually beneficial manner. At the same time the department managed to renegotiate the agreement to expand the negative list to protect local industries. This was done because there was a possibility of a decision by the government to sign the agreement for “political or religious reasons”. Fortunately, 12 years later that agreement is still at the negotiation table.
$80 million boost for Thailand. How much for Sri Lanka?
After failing twice to get a trade agreement with Sri Lanka, the Thai negotiators have finally managed to overcome the hurdle in their third attempt. What have they achieved? And where does this US$ 80 million come from? And the time-frame? What gains will Sri Lanka secure from the FTA? It is extremely unlikely that total trade also will increase to US$ 1.5 billion in four years. Even if that happens then that increase will be heavily in favour of Thailand. What will be the share of Sri Lanka? But it is difficult to comment as government is yet to share the agreement with the people of this country. Meanwhile, we can consider the IPS prediction of US$ 27.6 million as a more realistic short-term objective. But that type of expansion does not need an FTA. A good customs cooperation arrangement to tackle misinvoicing can increase our (recorded) exports by that amount.
(The writer, a former Director General of Commerce, can be contacted via senadhiragomi@gmail.com.)