FTA’s –How beneficial are they?

Free Trade Agreements (FTA’s), with neighbouring countries and other nations is making the small –scale industries in Sri Lanka jittery not because of the duty cuts and the products from larger countries freely coming into the country at penetrative pricing, but because of problems concerning inverted tariff structures, rules of origin and ambiguity in the definition of raw material and intermediate and finished goods.

Not surprisingly, under the FTA between two developing countries, there could be a number of items in which both countries are equally competitive. In the Sri Lanka –India FTA, for instance, sectors like tea will lead to a trade lock as both are equally strong in the world market. In some cases to protect domestic industry there can be lopsided trading that can affect continuity like in the case of pepper exports from Sri Lanka to India. In the Indian-Thailand FTA agreement, the likely sectors to be effected are automobiles, gems and jewellery.

Apart from lower input costs, the other aspect that will effect FTA agreements to countries like Sri Lanka is the flexible laws. In countries like Vietnam the flexible laws help an organization change to the changing consumer requirements faster. I strongly feel that it is in those areas that Sri Lanka must open its doors to the FTA as the benefits to the economy outweigh the challenges it offers. However, whilst decisions need to be taken keeping in mind the larger picture, sectors which provide considerable employment and are vulnerable should be kept out of the agreement.

A FTA must also provide for tariff structures to be inverted if the duties on finished products are brought down under the FTA agreement, whilst those on raw materials and intermediate goods that go into the production of these goods remain at high levels. If not SME’s are rendered uncompetitive, compared with those countries with low duties on raw materials or if its home grown.

When FTAs are discussed the focus is more on the finished product and low priority is given to the raw material. In some instances powerful lobbies from large raw material manufacturers, primarily large companies, the raw material is pegged at very high levels, whilst the finished product would attract zero duty on under the FTA by 2008. The only way forward is to have a uniform rate of duty for all products, with the lowest possible slab of 5% or 8%. One needs to have simple procedures and remove discretion or discrimination that can hurt the SMEs.

A bigger challenge is clearly defining what qualifies as raw material, immediate and finished products. Such ambiguities in definitions are one of the loopholes generally used by some powerful lobbies. Recently the problem of rules of origin, weighed heavily on the SMEs. Depending on the partner country, FTAs have different clauses under rules of origin with regard to the amount of value addition that qualifies a product to be of the same origin as the country with whom the FTA is being signed.

To my mind every bilateral treaty brings with it innumerable procedures surrounding rules of origin and tariff reductions. These become the biggest entry barrier to new markets. A typical small manufacturer would, therefore, have to go through hundreds of clauses and conditions to really understand the impact of FTAs or to gain international access. A typical multilateral treaty under WTO that holds for large number of countries is the ideal solution.

There are some systems being developed by countries where there is a mechanism to gauge the impact of duty change of raw materials on finished goods and vice versa. I feel this should be developed and available on line so that there is transparency and drive open trade among SMEs on a stronger platform. I also feel that an FTA should be developed on a economic interest than a political footing whilst the recent thrusts we see where there are FTA’s being eyed between Canada and Sri Lanka and also Bangladesh is because of the slow progress of WTO in forming a consensus for multilateral agreements.