An Analysis Of Sri Lankas Trade Policy Economics Essay

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Introduction - Viewpoints on Different Trade Barriers

With the exponential growth of Globalization post cold war, and the so called '2nd Era of Globalization' after 1989 barriers to trade has taken on a new significance. No international trade can transact without access to domestic markets between countries of the world. However, nations from early days of trade has resorted to restrictions as a tool that either protect domestic industries, as a mean of revenue, or purely for political posturing.

Such restrictions or barriers to trade are generally categorized into ;

Tariff Barriers or customs duty as cited by Van den Bossche in The Law and Policy of the World Trade Organization is a financial charge imposed at the time of exportation or importation with payment of the same is the condition which provides market access are sub-categorized into three types.

Ad Valorem Tariff, a tariff applied as a percentage of the value of goods

A Unit based tariff which usually a fixed amount based on the weight of goods

A Mixed tariff which is a combination of the above

Non Tariff Barriers, once again as cited by Van den Bossche in The Law and Policy of the World Trade Organisation are essentially barriers that restricts trade in some way other than tariff as described above. These come in many forms, and key amongst them are

Quantitative Restrictions, such as Quotas

Technical Barries Regulations, standards and conformity assessment procedures

Lack of Transparency

Unfair and Arbitrary application of trade measures

Customs formalities and procedures

Export Taxes

Export Subsidies Tax Exemptions, and concessionary export financing

Rules of Origin

Government Procurement

State subsidies, procurement, trading, state ownership

Foreign exchange controls related to imports and exports

Most nations in principle agree barriers to trade restricts development, and with this purview nations have agreed to come under the World Trade Organization (WTO) umbrella which today boasts of 153 countries in its membership. Though WTO's objectives were at a macro level centered on socio economic development as a result of enhanced trade relations amongst the signatories, it has more or less begun to focus on liberalization of trade through removal of barriers as trade barriers in tariff or non tariff form has proven to be a stumbling block in achieving its original objectives.

It should be said that though General Agreement on Tariff and Trade (GATT) has more or less achieved great success in rationalizing tariff barriers; the same has seemingly resulted in proliferation of non tariff barriers, especially with the advent of the global economic crisis.

Simplification of tariff and non tariff barriers and trade facilitation measures are inevitable today and protectionism will only contribute to industrial inefficiency, weaken the countries competitiveness, reduce its ability to expand its asset basket, negatively impact choice of sources for manufacture and to consumer. A home grown example is Sri Lanka's Apparel industry which thrived on innovation and market diversification in the face of threats arising out of the end of Multi Fiber Agreement in 2004. Internationally Singapore who imports as much as it exports but adds value prior to export is another example. The ultimate net result of barriers would be the inflationary pressure resulting in increasing the cost of countries products.

This paper will attempt to identify varying types of barriers that exist in Sri Lanka's trading environment their impact, and assess measures that could be taken to increase efficiencies.

Sri Lanka and Trade Barriers

Sri Lanka currently grants at least MFN treatment to all its trading partners, and is highly sensitized to international trading as depicted by its trade to GDP % which is taken as a measure of its openness to trade. This sensitivity has increased over the years as seen from the table below (Table 1.1), but its fluctuations are also reflective of its trading policy which seemingly is ad hoc and driven to a great extent by political expediency, as such susceptible to changes in government.

Table 1.1 - Trade as a % of GDP

Given the sensitivity to international trade and the fact that Sri Lanka is a net importer and has remained so for a considerable period of time it is imperative that barriers to trade which brings about inefficiencies and ultimately has an economic cost are minimized. As an example 23% of Sri Lanka's GDP is estimated to be in logistics (Hathiramani. Business Times, p4) as against the global benchmark of 10% as such has a direct impact in the cost-of-living . In addition trade policy and implementation is impacted by governance issues with a large number of ministries with overlapping jurisdiction which undermines coherence and cost effective implementation of policy programs. The types of barriers that prevail in Sri Lanka today are as follows.

Tariff

Sri Lanka as stated above treats all its trading partners at a minimum of MFN status as a founder member of GATT and then WTO, and has met or exceeded its commitments in tariff as well as in bound rates. With the liberalization of the economy in 1977, Sri Lanka moved to high tariff in place of controls that prevailed in the pre '77 era. However, towards achieving simplification and meeting WTO commitments Sri Lanka has simplified its tariff structure and brought down the number of tariff bands to three. However, in reaching its current state the number bands went up to as much as 6 and was brought down to 5 in 2004 which was maintained until recently and simplified further by reducing to 4 in 2010 (Table 1.2).

Table 1.2 - Changes in Number of Tariff Bands 1996 up to 2004

1996

2002

2003

2004

2010

No of Bands

3

7

6

5

4

Source : WTO Trade Policy Review 2004, Report by the Government & Lanka Business online

Tariff to a great extent remains 'ad valorem' in Sri Lanka though there are unit specific taxes that are applicable as well specially in agricultural goods which are generally used to manage seasonal changes in availability of local produce and cost of goods to local consumer.

Also to be noted is that Sri Lanka over the years has brought about ad hoc tariff waivers increasing the complexity at border for trade.

Exports generally do not carry any tariff though other restrictions prevail such as licensing which will be discussed later in this paper.

In order to bring about sanity and thereby increase in trade which is expected to increase revenue to government through volume, in mid 2010 Sri Lanka brought about sweeping changes to its tariff and other imports barriers by reducing and simplifying the tariff bands down to 4 from 5. Though there has been a multitude of opposing forces to the same citing a draw on Sri Lanka's foreign exchange reserves, the impact seemingly is minimal or to some extent positive with increase in consumer spending as well as gain in Sri Lanka's currency vis-à-vis the USD in the short term. Simplification of tariff measures reciprocal vis-à-vis growth in trade bilaterally is quite evident when one observes the trading patterns of Sri Lanka subsequent to the implementation of the Sri Lanka India Free Trade agreement. It shows the positive nature of minimal trade barriers as evidenced in Chart I below though, signifying the Comparative Advantage, the deficit in favor of India has definitely grown.

Chart I - India / Sri Lanka Trade since 2000

(Data Source :United Nations Statistical Division (UNSD) Commodity Trade (COMTRADE) Database; Nomenclature HS 1998/92)

Non Tariff Measures

Since 1995, Sri Lanka's attempts at maintaining government revenue and protection of its local industry via import taxes albeit non tariff has grown in complexion, and a myriad of taxes at the border is evident.

Port and Airport Development Levy

Value Added Tax

Excise Fees

Port handling charge that varies by container size

Surcharge of 1.5 percent assessed on the import duty for Social Responsibility Levy (to fund the National Action Plan for Children).

Surcharge of 15% on import duty.

Nation Building Tax

Cess

Imputed Profit Margin in Calculating VAT

(Source:Sri Lanka Customs Tariff Guide 2009)

Effectively, all of the above including tariff measures can increase cost of importation at a minimum to over 20% of CIF, and can go as high as over 500% in the case of vehicles. Given that Sri Lanka is a net importer of food, in totality these measures will and does have serious negative implications to the economy and in turn increase the cost of Sri Lanka's export produce and negatively impact cost of living.

In addition to all of the above mentioned non tariff taxation in place other barriers do exist.

In addition to the above on imports, certain exports also carry a cess and Tea, Coconut Products, Cashew, raw hides and skins are examples. The reasons attributed by the government for these levies are collections towards financing export promotions, protections of national security, and in the case of hides to ensure availability of raw materials for local production making it effectively a protectionist measure.

Procedures

All imports in Sri Lanka need to register with the Department of Customs. Sri Lanka has in the recent past improved its efficiencies in terms of customs processing, with implementation of the Sri Lanka Automated Cargo Clearance Systems (SLACCS), WTO/GATT valuation agreement and simplification and harmonisation of customs procedures. However, number of documents required at the border still number at 6 for imports and 8 for exports, thereby diminishing its position in the Trading Across Border category in Doing Business ranking report of the World Bank. Though, amongst its south Asian neighbors Sri Lanka ranks better in this category of rankings.

In terms of exports once again the procedures are generally streamlined and computerized, though regulated by a multitude of statutes and levies adding to the complexity resulting in the Sri Lanka's poor positioning in trading across border category.

Licensing

Sri Lanka has a licensing scheme for purposes of safeguarding National Security, Health and environment, as of March '04 Sri Lanka had licensing requirements for 474 items, and reflective of ad hoc measures prevalent licensing requirement on agricultural goods tend to be imposed and removed frequently depending on either the political climate or seasonal needs.

Standards and Technical Requirements

Sri Lanka Standards Institute (SLSI) is the accredited National Standards body and has a policy to be in line with International Standards and has established a standards code depicting the Sri Lanka Standard (SLS). For importation standards are generally required to be voluntary, but as in 2004 84 items needed to be conformed to SLS and importers were required to provide a certificate of compliance for these items.

Telecommunication Regulatory Authority provides licensing to sellers and importers and type approval process though stated to take as little as one week, this in reality can stretch for much longer periods thereby in all probability diminishing Sri Lanka's adoption rates in technology. Sri Lanka has 47 notifications as of date to the Committee on Technical Barriers to Trade (TBT) and out which only one covers labeling for consumer protection, whilst the rest are signified purely for consumer protection. This is essentially a far cry from for instance the US of A who has 1,172 notifications (WTO; TBT Information Management System).

Sanitary and Phytosanitary Measures

Importation of Livestock and Livestock based products as a mandatory measure needs to go through the quarantine process, and food imports require an export certificate from the country of origin. Importation of live animals for human consumption is prohibited.

Safeguards

Though Sri Lanka has no safeguards notified to WTO, some of the import taxation such as cess and surcharges on duty as identified above are generally used to safeguard local agriculture industry in general. As stated, these impositions and removals are seasonal based on supply, and also to some extent driven by political expediency as well.

Foreign Exchange Controls

Sri Lanka has a strict foreign exchange control regime, and a managed exchange rate policy, and both these measure are effectively used as protectionist and safeguard measures. For instance, all imports should have documents endorsed by the bank and payment effected via the bank dependent on terms of payment and during the financial crisis of '08 / '09 export product pricing and inflation were managed through Central Bank of Sri Lanka intervening in managing the exchange rates. The Central Bank intervention to manage the currency rates were to such an extent that forex reserves of Sri Lanka reached and all time low requiring the government to seek IMF intervention and support.

Another evidence of this is of late, with GSP + being withdrawn by the EU, the Euro was given to free fall vis-à-vis the Sri Lanka rupee thus ensuring that products stayed competitive despite the removal of tariff free facility enjoyed by Sri Lanka's products in to the EU.

Subsidies

Sri Lanka employs a range of subsidies in terms of export facilitation through Board of Investment starting from tax holidays to tariff free importation of goods for production as well as infrastructure. In addition there are subsidy measures that prevail through the export development board such as rewards for achievements in export volume etc. Local SME's also receive subsidies via reduced interest rates in borrowings and agriculture is heavily subsidized via a program to provide cheaper fertilizer, though expansion of state subsidies for exports is on the wane as evidenced by comments made by Secretary to the Treasury in April this year (Jayasundara,Lanka Business Online).

On the reverse Sri Lanka faces subsidy and other barriers applied to its exports as well, examples that can be cited are the case of Vanaspati exports to India, and Russian curtailments towards added value Tea products.

Conclusion

All in all Sri Lanka's trade policy has remained a mix of protectionism and openness to free trade, thereby signifying the dichotomy faced by almost all developing nations in managing short term aspirations of its people whilst trying to achieve long term growth which is expected to bring about benefits to the same people.

In the current global bench mark on openness to trade the Logistics Performance Index and Doing Business Report by the World Bank, Sri Lanka's positioning is poor and has moved down from its previous ranking, though there seems to be a disparity in the analysis and positioning as is evident from a comparison of the LPI positioning and Trading Across Borders category of the Doing Business Report as shown in Table 1.3.

Table 1.3 - Positioning Comparison South Asian Nations LPI vs Trading Across Border of Doing Business Reports World Bank

Source : Doing Business Sri Lanka 2010, & Connecting to Compete 2010, Trade Logistics in the Global Economy

Sri Lanka's performance in terms of FDI over the years has been positive despite ranking issues depicted by the above mentioned barometers, and is reflected in table 1.4 below, though it should be noted that there had been a significant drop in '09 which could be reflective of the global financial crisis that prevailed during that period.

Table 1.4 - FDI Inflow Sri Lanka 1996 to 2009

Source: UNCTAD, World Investment Report 2010

Measures in simplification and reductions of tariff and non tariff barriers are already taking place in Sri Lanka as is evident from the removal of non tariff taxation mid this year, and change in government policy towards driving out subsidy expansion.

As indicated above, being a net importer Sri Lanka has continued to manage a mixed trade policy which partially protects but to a great degree has openness and met its obligations to WTO and its co members, though benchmark indicators seemingly positions Sri Lanka as a country positioned far below its own expectations.

Towards, overcoming such issues going forward Sri Lanka should take a cue from some of the success stories in improving its LPI positioning such as Columbia, however it should be noted that most successes in this regard has been the result of private sector participation in policy making and implementation towards which Sri Lanka today lacks the desired framework and political will.

Recently, protests from the private sector on the India Sri Lanka Comprehensive Economic Partnership Agreement (CEPA), where information covering the proposed agreement was minimal has resulted in and measures to publicize the document is taking place (Sirimanna. August 1, 2010. Business Times).

These are as in most cases ad hoc and reactive steps, the need of the hour is the establishment of an apex body which includes private sector participation in establishing trade policy with a long term vision to address the plethora of needs in managing trade facilitation. This in effect should also remove the complexities associated with overlapping jurisdiction associated with the multitude of ministries that prevail today.

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