The politics of free trade: the Split-Executive and the Joint Opposition

Rajan Philips-September 22, 2018, 7:55 pm 

It would have been a breath of fresh air for Sri Lankans concerned by the falling rupee to hear the Central Bank Governor Indrajit Coomaraswamy address the country’s currency crisis while participating in a cyber-security forum in Colombo. Contrast that with the odourful nonsense that emanates from the country’s principal political forum. It is the Central Bank more than the cabinet or parliament that is at the wheel for the daily management of the economy. The Governor’s message was grim but honest, and it conveyed the assurance of watchful competence. That is all one can ask for in any and all professional or political decision makers. Contrast again to the time of Dr. Coomaraswamy’s two predecessors, both page boys in buttons to their presidential and prime-ministerial benefactors, and who like drunken sailors ran through the precious forex reserves to protect the rupee only to end up depleting the reserves and depreciating the rupee anyway. The takeaway from the Governor’s message is that the rupee is under attack from powerful exogenous forces, and that the path to replenishing reserves and stabilizing the rupee depends on boosting exports and FDIs.

To be charitable to the UNP half of the government, its pursuit of free trade agreements with different countries may well be intended for the purpose of boosting exports and facilitating FDIs. What is frustrating, however, is that the government has done very little to prepare the domestic economic platform for leveraging the free trade agreements that it is hurrying to forge on multiple external fronts. Even more frustrating, the government has not done the political homework to ensure that the agreements it reaches will have broad support in the country, beyond its MPs in parliament. On top of everything is the country’s split-executive – a president and a prime minister who are supposed to be working jointly but who are pre-occupied with facing off each other at the next presidential election.

All that the government’s sworn detractors have to do is to shout out loudly that the Free Trade Agreement (FTA) with Singapore is a sell-out, and it is enough to scare the President into ordering a review of the signed agreement by his own panel of experts. And it took a visiting Australian trade expert to publicly admonish the government of the risks involved in retracting from a formal trade agreement which has only recently been signed and is yet to take off. Breaking agreements is Trump’s forte and Sri Lanka is not big enough and cannot be bullying enough to emulate Trump, however much local admirers might be crazy about Trump’s crazier methods.

Multiple Fronts

Regardless, the same UNP half of the government keeps going on pursuing other trade agreements on multiple fronts. Just last week, Sri Lankan trade negotiators were in Bangkok for round two of the trade talks between Sri Lanka and Thailand. The negotiations do not seem to have got the same news coverage in Colombo as they did in Bangkok as well as in other South East Asian media outlets. The news from Bangkok is that the Thai government is quite keen about striking a trade deal with Sri Lanka as soon as possible and is aiming to expand the bilateral trade five-fold from $320 million today to $1.5 billion by 2020. The Thai expectation is to invest in Sri Lankan tourism and to use Sri Lanka as a gateway to the Indian market, as well as to benefit (it is not clear how) from China’s One Belt, One Road initiative using China’s infrastructure footholds in the island. Currently, Thailand has a trade surplus with Sri Lanka – exporting dried fish, rubber and auto-parts totalling $272 million, and importing jewellery, gold and plant products valued at $48 million.

What are the Sri Lankan government’s plans to facilitate export diversification and expansion to take advantage of the trade expansion that Thailand is targeting? Will Sri Lanka exports grow beyond gold and jewellery? More importantly, is the country’s split-executive of one mind on the trade talks with Thailand? Or will the President break loose once again and appoint another committee to review the potential trade deal after the fact? When will the busybody GMOA doctors and other self-serving professionals get in the act to do their mite as accomplished spoilers?

There are other countries besides Thailand that the Sri Lankan government is courting for making trade deals. India and Sri Lanka have been negotiating a new Economic and Technology Co-operation Agreement (ETCA) between the two countries for over two years and involving ten rounds of talks. The government is pursuing ETCA given the political anathema to reaching a Comprehensive Economic Partnership Agreement (CEPA) with the big neighbour. The Sri Lankan political misgivings are focussed on Sri Lanka’s apparently large trade deficit with India, and the irrational fear of Indian nationals flooding into Sri Lanka’s job markets. The more practical irritant is the non-trade barriers at the Indian customs to Sri Lankan exports, especially when Indian officials refuse to accept Sri Lankan quality assurance certificates for processed food exports. The Sri Lankan negotiators have been quite insistent on removing these barriers before any finalization of the ETCA.

The fear of an Indian professional and labour invasion is overblown political nonsense but one that cannot be eliminated except through the lived experience under a free trade agreement. The large trade deficit, however, can be explained by the type of traded goods between the two countries and the increasing Indian market opportunities for Sri Lankan exports. In the 15 years after the Sri Lanka-India FTA came into force in March 2000, bilateral trade has expanded seven-fold from under $700 million to $4.9 billion. Sri Lanka’s exports rose nearly twelve-fold from $55 million to $640 million and cover over 4,000 product lines; imports from India rose by a much lesser proportion from $600 million to $4.3 billion. India is the third largest single country importer of Sri Lankan goods and services after the US and the UK,and the second largest exporter to Sri Lanka after China. Also, the imports from India are primarily motor vehicles, fuels and oils, pharmaceutical products, and heavy industrial products like cement, iron and steel, all of which are presumably price-competitive compared to importing from other countries.

Sri Lanka also has had a trade agreement with Pakistan since 2005. The volume of bilateral trade is around $325 million and Sri Lankan exports to Pakistan are valued at $75 million. Sri Lanka is also pursuing free trade talks with China (which is demanding 90% tariff liberalization from Sri Lanka), and with South Korea in the form of a Memorandum of Understanding. Singapore, on the other hand, is a fully liberalized importing country and so there is no need for an FTA to remove tariffs for Sri Lankan exports. The incentive is for facilitating the flow of FDIs and services from the City-state while removing tariffs on 80% of imports from Singapore over a period of 15 years. The broader benefits could be access to the regional markets of ASEAN countries and the even wider RCEP markets – the potential Regional Comprehensive Economic Partnership involving the ten ASEAN countries and the six Asia-Pacific countries comprising: Australia, China, India, Japan, South Korea and New Zealand.

In the end trade agreements are easier signed than politically sold. Governments with strong and purposive leadership can navigate them through troubled waters. Unfortunately, the present government is not only weak on its feet, but is also split in its head. The opposition to free trade has no serious alternative to offer. Its more voluble members consider themselves to be distant cousins of Brexit supporters in England and the Trump base in the US. But Sri Lanka is neither Britain nor the US, and cannot survive without trade. What is more, there are serious second thoughts about Brexit in England, and there is deep buyers’ remorse among the Americans over the Trump presidency.

Free trade has its advantages and disadvantages. The answer is not blind patriotism or protectionism, but smart regulations that have been tried in many agreements and can be adapted to suit different situations. The onus is on the Sri Lankan government to demonstrate that its agreements have the necessary regulations to address such concerns as labour migration, working conditions, environmental protection and cultural preservation. The duty of the opposition and other stakeholders is to make sure that these regulations are, in fact, in place.