by C.A.Chandraprema 

June 16, 2018, 7:56 pm
There is mounting disquiet in the country over the free trade agreement that the government has signed with Singapore. What they have signed with Singapore is not an agreement that is restricted to trade in goods, but a more comprehensive arrangement that involves the trade in services as well. When this government tried to sign a similar agreement with India, they encountered stiff resistance from the public and have all but jettisoned the idea. But this FTA with Singapore which remained under the radar has now been signed. Last week we dealt with the possible implications of this FTA when it comes to the trade in services. This week we need to look at its implications with regard to the trade in goods. All Sri Lankan governments have been abysmally unsuccessful at negotiating proper trade agreements.

The Sri Lanka – India Free Trade Agreement has benefitted India but not Sri Lanka. Most of the goods that can be exported by Sri Lanka to India are blocked at that end but anything that can be exported from India to Sri Lanka readily finds its way here. What we have with India is not an FTA but a fiasco. The present government was trying to expand the FTA with India to include the trade in services, without doing anything to rectify the outstanding issues with regard to exports to India. Clearly, this is not a government that knows what it is doing and cannot be trusted to negotiate any trade agreements. Apart from the concerns regarding the trade in services in the SLSFTA, there are concerns with regard to the trade in goods as well.

SL foregoes tax revenue for no return

A paper written by two researchers at the Institute of Policy Studies states that “Custom duties on 50% of tariff lines will be eliminated immediately by Sri Lanka (approximately 3,600 tariff lines) and that this will be gradually increased to 80 % over a period of 12 years. Singapore already grants Sri Lanka tariff free access on 99% of goods”. When you look at this statement, one wonders what benefit there will be to Sri Lanka from the trade in goods with Singapore. If Singapore already gives Sri Lanka duty free access on virtually all product categories, what benefit will Sri Lanka gain by immediately eliminating tariffs on 50% of product categories and increasing this to 80% of product categories over the next 12 years? The nature of this transaction means that Sri Lanka has undertaken to do something for nothing in return. Furthermore, if Sri Lanka has tariffs in place for various product categories there will be good reasons for having imposed those tariffs. One can impose customs duties with the intention of raising revenue in which case, the revenue of the government will go down when such tariffs are eliminated.

With what is the government going to meet that shortfall in tax revenue? Besides since Singapore is a free port, once tariffs are removed on specified goods, even the goods in that category that were being purchased from other countries will be channeled duty free through Singapore after suitable value addition to satisfy rules of origin criteria, leading to the loss of even more revenue. Products for which value has been added at more than 35% in Singapore can be exported to Sri Lanka, which is not a difficult target to achieve. If the idea in having tariffs is to protect local production, that objective too would not be met by removing customs duties on imports from Singapore.

There are some safeguards in the rules of origin protocol in the SLSFTA which states that certain operations will not be considered sufficient to confer status of products originating in Singapore. This includes preserving operations to ensure that the products remain in good condition during transport and storage; breaking up and assembly of packages; washing, cleaning; removal of dust, oil, paint or other coverings; husking and partial or total milling of rice; polishing and glazing of cereals etc. Such provisions are included to ensure that goods are not channeled duty free to Sri Lanka after superficial value addition in Singapore.

The question about these safeguards however is that Sri Lanka will never be able to implement them due to the lack of a mechanism to monitor the value addition process in Singapore before the goods are shipped to Sri Lanka. Furthermore, given the establishment of Singaporean companies in Sri Lanka with Singaporean managerial staff to do the importing from Sri Lanka under the provisions of this FTA, it will become even more difficult to monitor whether the goods coming in adhere strictly to the rules of origin criteria.

What are they trying to import?

If one looks through the 300 plus pages of the Tariff Schedule for Sri Lanka which is a part of the SLSFTA, one notices some disturbing entries. Take for instance product category 10061000 – rice in the husk (paddy) for which the present Customs Import Duty is Rs.50/-per kg. The government has undertaken to reduce this to zero in 12 years. Currently, a 7.5% Ports and Airports Development Levy is being charged on paddy and this is to be reduced to zero in 10 years. Then there is product category 17029021 Sakkara (suger cane jaggery) for which a Customs import duty of Rs.10/= per kg is charged at present which will be reduced to zero in 12 years. The 7.5% Ports and Airports Development Levy on sakkara is to be reduced to zero in 10 years and the hefty cess of Rs. 250/= per kg is also to be phased out in 10 years.

One could argue that Singapore does not cultivate rice or sugarcane and that these two products will get knocked out on rules of origin criteria. However while husking and polishing rice is considered to be insufficient to qualify under the rules of origin criteria, parboiling and stockpiling isn’t. Sakkara can be refined into sugar and if sakkara finds its way completely duty free into this country, what is going to happen to our sugar cane cultivators? Then take product catrgory 23023000 flour – of wheat. The present 15% Customs Import Duty is to be phased out in six years and the 7.5% Ports and Airports Development Levy is to be reduced to zero in 10 years. When wheat flour comes to this country in that manner it will lead to an increase in wheat consumption and a reduction in rice consumption.

Clearly, someone needs to take a closer look at the SLSFTA. The present government has a tendency to forget that we are not a city state like Singapore and that we have a large rural hinterland and an agricultural sector that needs to be protected and fostered not just to provide employment but also for food security. It should also be remembered that millions or Sri Lankans are employed abroad because the local economy is unable to provide even the existing population with jobs. In such a situation what will happen if the country’s production base is further undermined?

Most people would have seen environmentalists criticizing the SLSFTA saying that the government has undertaken to import waste products into this country and that Sri Lanka is going to be turned into a garbage dump for Singapore. In looking at the Tariff Schedule for Sri Lanka, we see that with regard to product categories 38251000, 38252000 and 38253000 which apply to municipal waste, sewage sludge and clinical waste respectively; no Customs Import Duty or Cess is being charged at present, mainly because no one has been insane enough to import waste into this country. But strangely enough, Sri Lanka has agreed to phase out the 7.5% Ports and Airports Development Levy for these ‘products’ in 10 years.

Little wonder that the environmentalists are shouting from the rooftops that the government is going to allow Singapore to export its garbage to Sri Lanka. This seems all the more likelier with Singapore opening up companies in Sri Lanka as per the provisions of the SLSFTA. At least when it comes to waste products, there will be no rules of origin complications! Of course it has to be said that under the tariff schedule of Singapore, similar waste products can be exported from Sri Lanka into Singapore as well and completely duty free. However, garbage flows downhill, not uphill, so any flow that takes place will be from the richer to the poorer country.

One would think that for safety’s sake and to reassure the public the government should have slapped prohibitive duties on such ‘products’ and also blocked them with an X on the schedule so that they are taken out of the ambit of the SLSFTA.

Chapter 2 of the SLSFTA states that Sri Lanka and Singapore will progressively liberalize the trade in goods over a transitional period starting from the date of the entry into force of this Agreement. Each Party is to accord national treatment to the goods of the other Party in accordance with Article III of the GATT 1994. What Article III of GATT 1994 says is basically the following:

* Internal taxes and regulations affecting the internal sale, purchase, transportation, distribution or use of products, and quantitative regulations should not be applied so as to afford protection to domestic production.

* The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin.

* No contracting party shall maintain any internal quantitative regulation which requires that any specified proportion of any product must be supplied from domestic sources.

* Internal maximum price control measures can have effects prejudicial to the interests of imported products and contracting parties applying such measures shall take account of the interests of exporting contracting parties.

That would give an indication of the direction things will take. Article III of GATT allows the payment of subsidies exclusively to domestic producers, and subsidies effected through governmental purchases of domestic products. However, no one in his right senses is going to allow duty free imports and then give subsidies to locals producing the same goods. Three years after the date of the entry into force of the SLSFTA, or at the request of either Party, the Parties will mandatorily have to consult to consider accelerating the elimination of customs duties set out in the Schedules. What this provision essentially means is that Sri Lanka will not have even the time given in the original schedules to phase out the earmarked duties and charges but will have to seek ways and means of fast tracking things.

Non-tariff barriers prohibited

There is yet another provision in the Chapter on the trade in goods which has been criticized by certain parties as a case of allowing the importation of second hand goods from Singapore to Sri Lanka. What this provision says is that a party shall not apply a customs duty to a good, regardless of its origin, that re-enters its territory after that good has been temporarily exported from its territory to the territory of the other party for repair or alteration.

Upon the entry into force of this Agreement, the contracting parties shall not increase any existing customs duty or introduce any new customs duty, on the importation of a good originating in the other party. A Party shall not adopt or maintain any prohibition or restriction on the importation of any good of the other Party or on the exportation or sale for export of any good destined for the territory of the other Party, in accordance with Article XI of GATT.

Article XI of GATT prohibits the maintenance of non tariff barriers in the form of quotas, import or export licenses on imports and exports to the other contracting party. Some exceptions to this rule are allowed as when export prohibitions are temporarily applied to prevent critical shortages of foodstuffs or other essential products. Import restrictions are allowed on any agricultural or fisheries products for such purposes as to remove a temporary surplus of the like domestic product. Before taking any of these measures, the Party intending to take the measures shall supply the other party with all relevant information as far in advance as practicable, with a view to seeking a solution acceptable to both parties. If no agreement is reached within thirty (30) days of supplying such information, the Party intending to apply the measures under this Article may proceed to do so.

The contracting parties recognize that dumping, by which products of one country are introduced into the commerce of another country at less than the normal value of the products, is to be condemned if it causes or threatens an established industry in the territory of a contracting party. For the purposes of this Article, a product is to be considered as being introduced into the commerce of an importing country at less than its normal value, if the price of the product exported from one country to another is less than the price, when destined for consumption in the exporting country or is less than the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profit.

In order to offset or prevent dumping, a contracting party may levy on any dumped product an anti-dumping duty not greater in amount than the margin of dumping in respect of such product. No contracting party shall levy any anti-dumping or countervailing duty on the importation of any product of the territory of another contracting party unless it determines that the effect of the dumping or subsidization, as the case may be, is such as to threaten an established domestic industry, or is such as to retard the establishment of a domestic industry. In exceptional circumstances, where delay might cause damage which would be difficult to repair, a contracting party may levy a countervailing duty without the prior approval of the contracting parties provided that such action shall be reported immediately to the contracting parties and that the countervailing duty shall be withdrawn promptly if the contracting parties disapprove.

The signing of trade deals that will have far reaching consequences for the ordinary people of the country should be thought out carefully. The people should be kept informed about what kind of commitments the government was getting the country into. One of the main campaign issues at the last American presidential election were the trade agreements that previous American administrations had signed. In Britain, the referendum to exit the European Union saw all three British political parties, the Conservatives, Labour and Social Democrats trounced and those favoring Brexit winning. Such agreements may seem a good idea to some but in operation they produce unforeseen consequences and then there is a public backlash.

In Sri Lanka’s case, the Sri Lanka – Singapore FTA has not been debated in Parliament, or among the public. The government has not even taken steps to make Sinhala and Tamil translations of the legal text of the agreement available to the public.

To read the legal text of the Sri Lanka – Singapore Free Trade Agreement please visit: https://ie.enterprisesg.gov.sg/~/media/IE%20Singapore/Files/FTA/Existing%20FTA/Sri%20Lanka%20Singapore%20FTA/Sri-Lanka-Legal-Text-SLSFTA