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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 2307

Sri Lanka-China Free Trade Agreement by end of 2014?

By T.K.Premadasa

The people of Sri Lanka have become highly enthused to hear the discussions on possibilities to sign a Free Trade Agreement (FTA ) with China. This was revealed at the discussions Rishad Bathiudeen, Minister of Industry and Commerce had with Yu Jianhua , Deputy International Trade Representative of the Ministry of Commerce, China in last October. If it becomes reality, it will be the most significant milestone of Sri Lank- China trade relationship since Sri Lanka- China Rubber Rice Pact signed in 1952.

With mass development of global trade especially after 1970’s world trend in trade moved towards liberalization of trade or simply trading without tariff and non tariff barriers. While multilateral agreements under the GATT and WTO have been leading towards greater trade liberalization in the world economy, regional trade agreements like, NAFTA, SAFTA became significant free trade agreements. The development of regional cooperation among the countries has given boost to free trading environment. The evolution of EU from mid 50’s shows how regional cooperation develops for free trade union. Free Trade Agreements (FTAs) were initiated in order to develop trade without barriers among countries through bi-lateral or regional discussions.

Free Trade Agreement is a treaty between two counties or more countries that do not impose tariffs for trade conduct across their borders. The main purpose is to provide conducive environment for business to compete globally.

The potential to have a FTA between China and Sri Lanka displays in the present local scenario of Sri Lanka and Chinese role in global economy.

The relationship between Sri Lanka and China has continued from long time. This relationship further strengthens with the visit of leaders of two countries. President Mahinda Rajapshe has been developing very high profile diplomatic relationship with China and highlighting the importance of Chinese market for Sri Lankan products. . The Investment of China in Sri Lanka is significant and carries a lot of construction work in Sri Lanka.

On the other hand China economically has become a leading economic power in the world, achieving its expected target with greatest potential, 25 years after the implementation of reforms. Chinese economy is developed at unprecedented rate displaying its steady stand for 21st century. China, the second largest economy in the world has reached a target of US $ 9 trillion GDP in 2013 maintaining an average growth rate of 9 %. Also China is the biggest market in the world with 1.4 billion populations.

China has given priority to strengthen its powers in Indian Ocean and strategically the location of Sri Lanka is important factor of any power who strives to expand it powers in Indian Ocean. China also as a global giant has displayed its interest expanding its powers in Indian Ocean.

The Strategic Plan 2010 – 2015 of Sri Lanka Export Development Board, the National Plan for Export Development indicate that one of the targets under the plan is to increase exports to markets other than EU and USA by over 50% by 2015. In order to achieve massive increase it is needed to have a lucrative background with more exports to India, China, Japan, Korea and the Middle East Markets.

In view of the above, it is apparently possible that there is positive environment to develop a Free trade Agreement with China for trade development between two counties.

Planning Economic system like other Communist countries. This is a system that total economy and its all sectors controlled by the State. Due to this closed economic system and approach, the bulk of Chinese foreign trade was with former Soviet Union and its allied nations.

With the changes in global economy, China was forced to change its policy and system to adopt new development. In 1990 China introduced ‘”Socialist Market Economy” to open market for foreign investors to expand its production targeting massive global market and to do trading in massive net work covering East to West of the world. Some professionals called this system as duel system. It means political and administrative activities continue without any changes while opening the economy to the world.

After 1990 it clearly shows that foreign trade of China divert from former Soviet Union to Western countries with the new development of China trade policy. Presently EU, ASEAN, Japan, Korea, Brazil, USA, Australia are few leading trading partners of China.

With new tendencies, China also moved to sign Free Trade Agreements (FTAs). China considers Free Trade Agreements (FTAs) as a new platform to further open international trade relationship and accelerate domestic reforms which is an effective approach to integrate into global economy and strengthen economic cooperation with other economies as well as an important supplement to the multilateral trading system.

China implemented her first Free Trade Agreements in 2003 with its Government of Special Administration Regions Hong Kong and Macao. These agreements wider one including service sectors as these regions are part of China.

In 2007 China signed a FTA with ASEAN and subsequently six bi-lateral FTAs were signed with countries like Chile in 2006, Pakistan in 2007, New Zealand in 2008, Singapore in 2008 , Peru in 2009 and Costa Rica in 2011.

The Ministry of Commerce and Industry of Sri Lanka should highly concentrate and discuss with top Chinese authorities whether FTA will be definitely implemented in 2014. The all official information on Chinese FTAs is giving in the China FTA Network. But according to this specific net work there is no indication on FTA with Sri Lanka even under consideration list. Presently, China is having final negations with Gulf Cooperation Council (GCC) and Southern African Customs Union (SACU) to implement FTAs. In addition, FTAs with Australia, Iceland and Norway are on line. There are few FTAs under consideration list. China – India Regional Trade Arrangement Study, China Korea FTA Joint Feasibility Study, China - Japan- Korea Joint Study are the FTAs in progress under consideration list. China gives it priorities to China – India Regional Trade Arrangement Study and China - Japan- Korea Joint Study as the total trade among these four countries covers nearly US$ 1000 billion. The officials of those countries are having continues discussions from 2012 to make successful FTAs. However, the negotiations are in a slow position some time due to territorial disputes. The negotiations for FTA with Iceland started in 2006 and still being negotiated negotiations, having over major 10 sessions of discussions. The last FTA of China is with Costa Rica in 2011 and during last three years China never signed any FTA.

This shows the implementation of FTA takes long discussions and studies. It is not an easy task to reach conclusion on FTA. Therefore the Sri Lankan authorities should continue dialogue with China in positive manner on proposed FTA.

It is also important to look back the Sri Lankan experience on FTAs. Sri Lanka's first FTA signed with India which was the first bi -lateral FTA of India. Since then, the implementation of Sri Lanka Pakistan FTA became effective from 2005. As a member of SAARC, Sri Lanka became member of The South Asian Free Trade Area (SAFTA) which came into force in 2006.Sri Lanka had discussions and negotiations with Bangladesh and Egypt for FTAs in early 2000 but did not continue discussions. The next positive FTA may be with The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). BIMSTEC clearly had positive discussions to create free trade area among the members. Today Japan had shown their interest to join BIMSTEC. If Japan joins BIMSTEC it will be a more benefited FTA for Sri Lanka after implementation of FTA of BIMSTEC.

It is difficult to see any benefit of Sri Lanka Pakistan FTA as the trade between two countries is less than 1%. The best FTA to look into Sri Lanka's experience on FTA is Sri Lanka -India FTA. Sri Lanka exports to India were worth of US$ 570 and US$544 in 2012 and 2013 respectively maintaining 5th rank of Sri Lanka's exports and US$ 3 billion imports to Sri Lanka as no 1 importer equal to imports from China. Even though the export of India in fluctuation, some opine that the products under the duty zero benefits managed to have continued increase. On the other hand even Indian investment has increased to obtain the indirect result of SLIFTA, the increase of employment opportunities, transferring technology were not successful as expected. It is more important to carry a thorough study to determine if Sri Lanka benefited the SAFTA and other two FTAs already in active.

Sri Lanka as a small country should consider the advantages and disadvantages of signing an FTA with world giant like China . China also maintains very favorable trade balance in their total trade. Chinese total value of Exports is over US$ 2 trillion and Imports only over US$ 1 trillion. Sri Lanka trade compared to Chinese total trade is miniscule.

As far as Sri Lanka exports are concerned China is the 18th largest export market for Sri Lanka with exports of US$ 121 million in 2013 just 1% of total exports of Sri Lanka and with US$ three billion Chinese imports to Sri Lanka equals number one importer India. This shows that there is huge unfavorable trade balance between two countries. The favorable positive list of products may include the large number of products in the proposed FTA, but the issue is whether Sri Lanka has the capability to supply all the products. As a matter of fact, China has capability to supply any volume of products. Even the product list of present exports to China nearly 30 products, only apparel (US$ 22 mn) , tea ( US$ 20 mn) fiber ( US$ 22mn) Tobacco ( US$ 7 mn) and Rubber (US$ 6mn) as the five major products covers nearly 75% of total exports to China. Mineral sands, activated carbon, footwear, frozen fish, diamond, spices woven fabrics are listed as other key exports , but the each product export value is less than US$ 3 million.

The list of imported products from China covers over 300 products. China's largest imports to Sri Lanka in 2013 were woven fabric (US$ 596 mn) , electrical items (US$ 435mn), telephone video equipments (US$ 250mn) base metal products ( US$200 mn) fertilizer (US$97Mn) automatic data processing machines (US$ 97 mn), boat building ( US$ 81 mn). Nearly key 180 products imported from China were over one million value imports of each product. This displays the huge trade gap and our exports are limited to China.

The most viable advantage to have FTA with China is that it provides huge opportunity to entre the world largest market in very competitive manner. China also gets more opportunities to enter Sri Lankan Market. But Sri Lanka has to do a lot of home work to turn the proposed FTA in favor Sri Lanka by applying correct promotional strategies, innovative productivity to promote existing Sri Lankan products and introduce new products to Chinese market.

Sri Lanka should invite more investors to invest export oriented projects in Sri Lanka to get the real benefits from this nature of agreements. On the other hand Sri Lanka should be vigilant if Sri Lanka gets all benefits of investment specially employment opportunities and absorbing new technology.

Sri Lanka avails of more opportunities to initiate a FTA with China due to close relationship being maintained currently. The political leadership of both countries develops cordial relationship during meetings they had during the past few years. China displays their willingness to support not only social and economic development but also protect Sri Lanka's interests in global political arena. It is worthy to note here that how Sri Lanka benefited under the China Sri Lanka Rubber Rice Agreement. China provided rice to Sri Lanka offering very attractive price 1/3 of the world market price at a difficult period of rice production in Asia due to Second World War. Sri Lanka was able to recover the lost market share of natural rubber after Korean War as she was offered at a highly competitive price 40% higher than the price offered by the Western countries under this agreement. Finally, the proposed FTA should be benefited in the interest of both parties not only trade wise but also further strengthening relationship for another century.

T.K. Premadasa is a retired former Head of Corporate Affairs and Communications- Sri Lanka Export Development Board and Ex-Director of Sri Lanka Trade Centre in Maldives .

- Asian Tribune -

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