Protectionism can harm exporters as an increasing share of trade is in the form of intermediate products, with a declining share going to final products, says trade expert Dr. Mia Mikic.
With many businesses importing intermediate goods (and services) for further processing, any measure adding to the cost of imports discriminates against them and reduces their competitiveness, said Dr. Mikic, Chief, Trade Policy and Analysis of the Trade, Investment and Innovation Division of the United Nations Economic and Social Commission for the Asia and the Pacific (ESCAP), in an interview with Business Observer.
The new, deeper and broader trade agreements Sri Lanka is negotiating with India, China and Singapore may be a game changer for Sri Lanka, she said.
Dr. Mikic, who is based in Bangkok, was in Sri Lanka recently to conduct a training program on ‘Sri Lanka: Capacity Building on Trade Policy Analysis’ organized with the Institute of Policy Studies and to conduct a national workshop on ‘Trade led development in the multilateral trading system’ organized by ESCAP and WTO.
Excerpts of the interview:
Q: You’ve said Sri Lanka has made relatively less progress in developing its trade when compared with advancements in the construction field. As a professional visiting the country for the first time since the 1980s, how do you explain this? Why do you think we lag behind?
A: Sri Lanka was one of the early ‘liberalizers’ in Asia and the Pacific. But from what data shows, it appears that this approach was not followed very consistently.
Looking at data, openness measured in terms of exports and imports in GDP, after a rise back in late 1970s/early 1980s, these ratios plateaued and then after the 2008 crisis export/GDP ratio dropped below 20%.
Trade per capita is less than $1,000. For an economy of Sri Lanka’s size, that appears to be low. Economies with a similar GDP per capita in the region record higher openness ratios.
Export and import year-on-year changes show lots of fluctuations and no clear (upward) trend, again in contrast to those economies which were growing exports and imports at increasing rates, up to 2008 which caused a break in that trend in many export-led economies.
Understandably, the country was in a war and that affected your ability to expand international trade and investment as well. It must now push harder to compensate for lost time.
Q: Sri Lanka’s government is committed to more liberalized path. How should the country prepare its people and businesses to embrace more openness?
A: Global trade has been stalling ever since a temporary recovery in 2010/2011.
This has spilled over into the regional trade and Asia-Pacific is recording a lower performance compared to the pre-crisis period for the fifth year in a row.
In such an economic environment, protectionism - especially in G20 economies - has started to creep up. ESCAP Asia-Pacific Trade and Investment Report 2016, to be released on November 29, shows clearly the rise in use of restrictive trade measures across the board.
Therefore, Governments must make a clear effort to resist protectionist pressures. Measures to increase productivity, reduce trade costs, diversify the export base, expand the formal economy and the taxation base, and improve access to education and health protection are much more viable options to deliver a long-term growth than turning to building walls at the borders.
Q: Sri Lanka is also looking at three crucial trade agreements with India, China and Singapore? How do you look at this initiative?
A: Traditionally, developing countries could grow and expand their exports depending on having market access through either multilateral liberalization or by using GSP schemes.
Yet, with no or very patchy and slow progress in the multilateral negotiations, and limitation of access through GSP, many Governments have chosen bilateral and regional liberalization routes to protect preferences and open new markets, especially for South-South trade and investment.
Sri Lanka is not an exception in having that objective. In contrast to other countries in Asia, Sri Lanka is implementing only two bilateral free trade agreements (with India and Pakistan) and two regional trade agreements (SAFTA and APTA). These agreements do not fit into the category of ‘new generation’ agreements; they are mostly focused on traditional liberalization of trade in goods.
Thus, negotiating new, deeper and broader, agreements with India, China and Singapore may be a game changer for Sri Lanka.
It is important to negotiate these deals wisely, keeping in mind differences in development and economic size between the partners. Fortunately the international rules do allow for special and differential treatment even in bilateral and regional deals.
Q: China and India are big economies and we are quite insignificant in comparison. How could we benefit from these two economies? How do the large economies benefit from trade agreements? Why do you think India needs a further trade agreement with Sri Lanka?
A: The benefits are simple to harvest with large economies. If your companies get preferential access to these markets through the FTAs for the products in which they are competitive, they will be able to produce and sell almost limitless quantities to these large markets, allowing them to use economies of scale, reduce costs of production and possibly enter some other markets even without special concessions.
Companies may earn higher profits and expand their business, employ more people, and purchase new technology. There is no issue in benefiting in trade with a large economy, as long as that large economy or its firms do not use their size to impose terms of the deal or get control over your market.
Thus, a small country must be vigilant and support trade deals with appropriate regulatory regimes in areas such as competition policy, labour and capital markets, IPRs and similar areas.
One must keep in mind that often countries enter FTAs for non-economic benefits, and deals between large and small economies frequently reflect some of those aspects. But it is also for economic benefits that a large country needs a deal with a smaller one. For example, to supplement domestic production, smoother seasonal fluctuations, perhaps even get its hands on some technology.
Q: What are the key areas that Sri Lankan negotiators should look at when having negotiations, for instance, with India or China to gain the best out of these agreements?
A: It is difficult to say in general terms, but normally it is about rules of origin for goods, being watchful if working with negative listing in services, investor state dispute settlement, and in some cases such as State Owned Enterprises, government procurement and competition provisions may be important.
Care should be given to trade remedies, but for that the country should first develop domestic regulation so it could use this contingency protection. Countries in Asia and the Pacific are not very good at adding ‘Trade adjustment’ provisions but those would be helpful for managing short term adverse impacts.
Some more advanced economies (e.g. USA and Republic of Korea have them incorporated negotiation mandates).
Q: Why are businesses concerned about protectionism in a country such as Sri Lanka? How much should we actually protect?
A: Businesses are concerned with protectionism because they may be harmed by protectionism unless their sector is the one being protected. We must remember that an increasing share of trade is in a form of intermediate products, with a declining share going into final products.
This means that many businesses are importing intermediate goods (and services) for further processing and any measure adding to the cost of imports discriminates against them and reduces their competitiveness - and they are often exporters.
Sometimes they can get the tariffs paid back but this is not the same as not having to pay (or prepare paperwork for that) in the first place.
Every country needs protection to support its public policy objectives and development goals. Such protection should be transparent (meaning information available to all), simple in terms of instruments used (one single tariff instead of combinations of tariffs with quotas, surcharges, and other duties and non-tariff measures), and frequently time-bound (not indefinite). Special attention is needed with respect to services protection as Governments are under pressure to overextend protection to domestic services sectors.
This reduces competitiveness in both industrial and other services business for export and domestic markets. Thus protection of services - which are increasingly tradable - must be well thought through.