Government should engage with public on FTAs: Deshal De Mel


Jan 28, 2016 (LBO) – Sri Lanka’s government needs to engage with the public when negotiating Free Trade Agreements with other countries, economist Deshal De Mel said.

De Mel on his blog stated that local manufacturing and services enterprises may have disruptive impacts through the Free Trade Agreement with China.

“It is curious that there is almost no public debate about the FTA that is being negotiated with China, which has an infinitely higher probability of having disruptive impacts on local manufacturing and services enterprises,” De Mel said.

He has also shared some facts about Trade in Services agreements that would apply to CEPA, ETCA, or any such agreement.

Full text of the blog post is reproduced below.

The Four Letter Word (CEPA)

Over the last 10 years I have disliked engaging in debates about the Indo-Lanka CEPA (now ETCA) because these are almost always characterised by non-rational, emotional, and misinformed views. The fact that successive governments have kept this agreement shrouded in secrecy is largely to blame for this. I never understood the government’s reluctance to engage the public and I do hope this changes this time around. The drama relating to CEPA is also partly due to Sri Lanka’s and Sri Lankans’ thorny relationship with India. For instance, it is curious that there is almost no public debate about the Free Trade Agreement that is being negotiated with China, which has an infinitely higher probability of having disruptive impacts on local manufacturing and services enterprises.

CEPA is (once again) in the news cycle and it is an opportune time to share some thoughts. I was involved in the negotiations and drafting of the CEPA between 2005-2008, during which time the Institute of Policy Studies, where I was employed, was assisting the Government of Sri Lanka in negotiating the Services Chapter of the agreement. These views are however my own. I have no involvement in the current incarnation of CEPA (ETCA), but what I hope to do is to share some facts about Trade in Services agreements that would apply to CEPA, ETCA, or any such agreement.

· Why deepen integration with the Indian economy? – Sri Lanka has a relatively small market of around US$ 75 billion (that’s around Apple’s annual gross profit) and population of 20 million. An economy of this nature cannot grow in a sustainable manner if it has an inward focus. By deepening integration with a market like India, we can create a stronger incentive to attract FDI hoping to tap into the broader South Asian market and also to create avenues for local companies to expand and achieve scale. The two countries at present have an agreement that covers trade in goods, but services account for 60% of Sri Lankan GDP, and it makes sense to allow the benefits of competition and liberalization to reach that part of the economy as well. In an ideal world, we would have a multilateral or at least regional trade agreement that creates more substantive liberalization, however given the failings of the WTO, the next most logical market to tap into is the large neighbouring market that is India.

· Why liberalise? – Competition can create significant benefits for economic growth and development. It creates incentives for industry to innovate and to improve productivity so as to remain competitive. Higher productivity in the long term can translate into higher real wages. Competition creates benefits for consumers in terms of better prices, gives consumers the benefit of choice, and creates incentives to improve service quality to remain competitive. Many incumbent industries are weary of competition – and would argue that there is no need for it. However, there is very little consultation of consumer interest since consumers are large dispersed groups that are usually poorly organized and fail to articulate their collective interest.

· What about regulation? – Few would argue that markets function perfectly – markets fail on several accounts such as imperfect information, negative externalities and so on. Therefore there is a clear case for smart, unobtrusive regulation that can help markets work more effectively. The good news is that agreements on trade in services allow regulations to remain. With regard to mode 4 of trade in services (movement of natural persons), any workers that enter a country using such an agreement would still have to comply with all national regulations including immigration regulations, the regulations and quality assurance processes stipulated by the relevant industry or professional body. If they fail to meet such criteria they would not be able to gain access to the market.

· Won’t Sri Lanka’s market get flooded? – Unlike agreements on trade in goods, agreements on trade in services are negotiated on a ‘positive list’ basis. For Free Trade Agreements (FTAs) involving goods a negative list approach is usually adopted where other than products specified in a ‘negative list’, every other product is liberalized. For trade in services the opposite applies. The liberalizing country can choose exactly what sector or sub-sector it wants to liberalize, and everything else remains at status quo. Therefore the extent of liberalization is entirely up to us.

· What about dislocations within the sectors that are liberalized? – When making commitments to liberalise a services sector, a country again has the flexibility to state what exactly it wishes to liberalise and what it wishes to exclude from liberalization. For instance, a country could place a numerical limit on the number of foreign employees allowed, and also stipulate a minimal level of educational/professional qualification for entry and so on. It can also limit its commitments to a narrow sub-sector of a broader sector where the economy would benefit from foreign investment, labour, or technology. Therefore a country can tailor its liberalization commitments to meet its economic priorities.

· What then are the risks? – Since we have flexibility in tailoring commitments to our needs, the risk we undergo is the risk of making a mistake due to inadequate data or other lack of information. There is also a risk of mal-regulation where the capacity of our regulatory bodies maybe inadequate to address instances of market failure. Usually such trade in services agreements leave a provision for adjusting commitments after a 3 year period (could be negotiated) to account for such learnings.

· Doesn’t trade in services already take place? – Yes, we have foreign investment in service providers (Dialog, Etisalat, HSBC, Citi Bank, AIA Insurance, KPMG, E&Y, Taj Hotels and many more), and we have foreign employees working in foreign and local service sector companies. What a Trade in Services Agreement does is it creates an institutional framework within which trade in services can occur. At present, it is a unilateral approach where at any time the rules of the game can be changed by either party. An agreement creates a rule based framework in which this trade occurs. When two countries of asymmetric size are engaged in economic exchange, it is in the interest of the smaller, relatively less powerful country to operate within a rule based framework, rather than in a (relative) legal vacuum. And in a nut-shell that is what CEPA is; it is a framework of rules to govern trade between India and Sri Lanka.