Spicy trade between India and Sri Lanka
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File picture of separating the chaff from the pepper.
In December 2017, the Indian government introduced a Minimum Import Price (MIP) on imported black pepper as Indian Rs. 500 per kg. The target was the increase in Sri Lanka’s exports of “low-quality and cheap pepper” to India, which have pushed down the domestic pepper prices there.
It was reported that within that year alone the domestic pepper price has fallen by 35 per cent. Consequently, there was a growing discontent among India’s pepper growers and traders, which had become a political issue.
The MIP, however, did not crack down on the issue; Sri Lanka continued to dump “low-quality and cheap pepper” to the Indian market. This time the exporters used to split their large pepper consignments into smaller quantities and, transported many times to India through many different ports.
I take this issue today, to discuss not necessarily the pepper trade, but the difference between “free trade” and “free trade agreements”. The two essentially differ from each other, while there is no way to replace free trade with a free trade agreement.
I was also inspired by the fact that the issue has paved the way for bribery and corruption at high levels. And there are alleged links as revealed last week, even to finance terrorism through corrupted spice trade.
Distorted trade
Under the Indo-Lanka Free Trade Agreement (FTA), Sri Lanka can export 2,500 Metric tons (Mt) of black pepper to India without import duty, and any amount above that at 8 per cent import duty. India also imports pepper from Vietnam and other countries which is subject to 54 per cent import duty.
Sri Lanka is known to produce “high-quality” pepper and other spices such as cinnamon, cloves, cardamom and nutmeg. India paid US$6,000 per Mt of Sri Lankan pepper, while Vietnam pepper is about half of that price. When Vietnam pepper was re-exported to India after mixing with Sri Lankan pepper at high price and low duty, India was said to have lost $2,700 per Mt.
FTAs can promote corrupted trade practices. Pepper from Vietnam can enter the Indian market via Sri Lanka and make unwarranted profits through corrupted business practices; with such business practices, traders can avoid higher import duty through the Indo-Lanka FTA on the one hand, and claim higher market value applied to high-quality pepper under the Sri Lankan label on the other hand.
Sri Lanka’s infamous trade
Apparently the above practice seems impossible without bribery and corruption entering Sri Lanka’s trade under the FTA: First, pepper should enter Sri Lanka through the customs, and then for exporting to India it should receive the “certificate of origin” as stipulated in the FTA.
The Hindu newspaper in India in its business section – Businessline – on January 8, 2018, reported that the bribe in Sri Lanka to re-label Vietnam pepper with a fake certificate of origin is $1,000 per Mt; it makes Vietnam pepper eligible to be exported under the Indo-Lanka FTA.
That’s how Sri Lanka became infamous for exporting “low-quality cheap pepper” to India.
By the way, the government also needs to employ people to deal with all above malpractices, carried out by the people of the government itself – a source of job creation and job multiplication!
A world full of criss-cross FTAs looks like a “spaghetti bowl” resulting in costly complications, according to economist Jagdish Bhagwati. And to manage that complicated trade as well as to combat bribery and corruption associated with that trade, the government should create and multiply jobs which the nation has to pay for.
Sri Lanka’s pepper miracle
Until 2016 for most of the years, Sri Lanka’s exports of pepper to India were around 5,000 Mt, according to International Trade Centre (ITC) data. In 2017 and 2018, it more than doubled, exceeding 10,000 Mt.
India has always been the main export market for Sri Lanka to export pepper, while more than 80 per cent Sri Lankan pepper was sold to India. But for India, Sri Lanka wasn’t the main source of pepper supply until 2017; it was Vietnam.
In 2016 India imported over 40 per cent of its pepper from Vietnam, while Sri Lanka supplied 20 per cent only. By 2017 Sri Lankan pepper exports surpassed the Vietnam exports; but don’t think that Sri Lanka did a miracle by doubling pepper production within one year! It was simply the Vietnam pepper that was re-exported via Sri Lanka.
Hot products
Since the time of implementing the Indo-Lanka FTA in 2000, “free trade” in some products between the two countries became hot at both ends, and continues to be so to-date.
In the early days it was about items like “copper products” that Sri Lanka started exporting to India. I don’t think Sri Lanka had “copper mines” at all. But at that time Sri Lanka’s fastest-growing export item to India under the FTA was the copper products, until it was cracked down! Then, we heard similar stories regarding many other products such as marble, granite, florescent bulbs and plywoods.
Among minor export commodities, it was about mixing cheaper cloves and cardamom imported from Indonesia with Sri Lankan products, and re-exporting to India under the FTA. After that it was about “Vanaspati” – palm oil which Sri Lanka didn’t have a known history of producing here on a large scale.
Another export racket was the re-export of Indonesian areca nut to India through Sri Lanka; if it was directly from Indonesia, areca nut was subject to 100 per cent import duty at the Indian port.
Question that confuses us
Finally, there is an important and confusing question that we have to answer: Do all these things mean that we should impose import barriers? I am sure, at least some might take it to bring about an argument against open economy and to justify protective trade regime.
The whole issue is due to bogus business practices which were made possible by bribery and corruption at high level. It is the regulatory regimes more than the open economy that open up opportunities for bogus business practices, bribery and corruption.
Secondly, it is the lapses in law enforcement that enable bogus businesses. For example, there is “free trade” among the member countries within the European Union. But it does not mean that someone can engage in bogus business practices; there is law enforcement on the one hand, and there are technical and quality standards applicable on the other hand. If goods and services that enter into trade do not meet the required technical and quality standards, that business is highly unlikely to succeed.
Overall policy environment
Finally, the underlying economic factor is the difference between micro matters and the overall trade environment. Even if Sri Lanka adopts import controls on a couple of commodities as the government actually did in some cases, what matters most is the overall trade policy; does it create an open economy that supports trade expansion or protect the environment that impede it?
Exports of all of the spices account for only 3 per cent of the total $12 billion exports in 2018.
Sri Lanka’s overall economic progress through trade expansion would never depend on a couple of minor export crops or individual export products under FTA. It might be important for a couple of individuals, but not for the nation.
The overall economic progress would depend on the successful integration of the country with the global economy through trade in manufactures and services.
Countries, however, enter into FTAs for different reasons, while some of these reasons are not even economic. According to the World Trade Organization (WTO), there are 291 “spaghetti bowl” trade agreements in force in the world by January 2019. Nevertheless, it is not these trade agreements, but the overall trade policy reforms which have contributed to the economic success of the nations. (The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk).