Lanka will benefit by joining emerging multilateral trade blocs like RCEP
Posted on December 19th, 2020

By Sugeeswara Senadhira   Courtesy NewsIn.Asia

Colombo, December 18 (Daily News): Gone are the days of military blocs. The new-in is multilateral platforms for economic, trade and strategic cooperation. Sri Lanka became a founder member of the South Asian Association for Regional Cooperation (SAARC) with much hope of becoming a major economic beneficiary. Before long, these hopes started to recede due to unresolvable differences between two of SAARC’s main members, India and Pakistan.

Then Sri Lanka as well as other smaller members of SAARC started to look for alternative bodies for multilateral economic cooperation. Two such regional associations offered substantial potential for economic cooperation – the Bay of Bengal Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and the Indian Ocean Rim Association (IORA).

BIMSTEC is an association of Sri Lanka and six other nations of South Asia and Southeast Asia with a population of 1.5 billion people and having a combined Gross Domestic Product (GDP) of US$ 3.5 trillion according to 2018 data. BIMSTEC member states are Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand. Except for Myanmar and Thailand, all others are SAARC members and hence BIMSTEC is referred to as the mini-SAARC or SAARC minus Pakistan, Afghanistan and the Maldives.

Fourteen priority sectors of cooperation have been identified and several BIMSTEC centers have been established to focus on those sectors. A BIMSTEC free trade agreement is under negotiation.

IORA is a proactive inter-governmental organization with an ever-growing importance within the Indian Ocean region. Strengthening the ties that bind Member States whose shores are washed by the Indian Ocean, IORA remains committed to building, expanding and understanding mutually beneficial cooperation through a consensus-based evolutionary and non-intrusive approach in the rapidly changing environment faced by the region.

Today, IORA is a dynamic organization of 22 Member States and 10 Dialogue Partners, with an ever-growing momentum for mutually beneficial regional cooperation through a consensus-based, evolutionary and non-intrusive approach. Home to nearly 2.7 billion people, Member States are rich in cultural diversity and in languages, religions, traditions, arts and cuisines.

President Gotabaya Rajapaksa said in his policy statement ‘Vistas of Prosperity and Splendour’ that given the fact that economic power is now shifting towards Asia, our focus will be on developing strong bonds and reciprocal commercial ties and trade relationships with our Asian neighbors. We must work closely with India, other SAARC and BIMSTEC nations, China, the US, the EU, Japan, Canada, South Africa, Australia, Russia and Britain.”

To put this policy into practice, there are many options available. The most recently formed regional grouping of interest to Sri Lanka is the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement between 10 ASEAN countries and China, Japan, South Korea, Australia, and New Zealand. This pact when ratified will come to represent 30 percent of the world GDP, impacting almost half of the world population and, most significantly, a multilateral trade agreement where China is a leading party.

The agreement allows for a common set of rules of origin to qualify for tariffs reduction with other RCEP members. This means less procedures and easier movement of goods. That should encourage multinational firms to invest more in the region, including building supply chains and distribution hubs.

India formally withdrew from RCEP in 2019 due to domestic demands; however despite the November 15, 2020 agreement on the trade deal, India still has an option of joining RCEP. Indian economic analysts believe that a post-pandemic world economy gasping to revive, a new regime in America come January with a strong possibility of rejoining multilateral platforms for trade and strategic cooperation, and the vision of a new India are some of the paradigms to be kept in mind before passing any judgment on what works best in India’s favor at this juncture.

India not joining RCEP has been received with mixed responses domestically with those opposing the government’s stance stating that an isolated India in the South East Asia neighborhood and India’s sensitivity to Chinese imports may be more out of geopolitics than economic considerations.

Before India’s decision to pull out of the China-dominated RCEP process in the latter stages of an eight-year negotiating process, Sri Lanka’s own ambitions to tie up with RCEP seemed fairly straightforward. Accounting for approximately 10 percent of the country’s exports and 30 percent of its imports, RCEP – comprising the 10-member ASEAN countries, along with China, Japan, South Korea, Australia and New Zealand – qualifies on economic rationale alone.

Institute of Policy Studies (IPS) Executive Director Dr. Dushni Weerakoon is of the view that the RCEP, which is the world’s largest regional trade bloc on Sri Lanka’s doorstep, raises fresh questions about how the country will navigate its most recent Asia-centric re-positioning.

Unlike other regional trade pacts to which Sri Lanka is a signatory – such as SAFTA, BIMSTEC and APTA – the RCEP offers deeper integration, she pointed out, and added that it is much more comprehensive in its coverage of import tariff cuts, with tariff reductions on about 80 to 90 percent of current tariff lines, albeit with exceptions for politically-sensitive agricultural sectors.

As new members would be selected 18 months after the RCEP agreement comes into effect, Sri Lanka is not likely to submit an immediate application to join the grouping.

However, Liu Yang Sloan of the International Research Center for NeoChina Socialism said Sri Lanka will receive the fullest support of China when it submits an application for RCEP membership. He said that Sri Lanka could be developed into a RCEP hub to link West Asia to the grouping.

RCEP is a smarter way for Sri Lanka to attract the global companies to come to Sri Lanka and develop the business here with special focus on the socio-economic revitalization in the developing countries of South Asia, ASEAN and Africa, where almost 50 percent of the world’s total population – 3.5 billion – reside,” Sloan said.

The broad tenets of the RCEP agreement aim to achieve zero tariffs on 90 percent plus traded goods between partnering countries in a decade and half. The economic impact may be dulled by the knowledge that most of these trading partners already have bilateral free trade agreements in place. Indian economists are of the opinion that the geopolitical impact of RCEP, given a heavy Chinese presence and an ambition to create a counter block to the US-led CPTPP (Comprehensive and Progressive Trans-Pacific Partnership) should not be overlooked.

India’s imports of Chinese semi-finished goods and heavy machinery have had a positive impact on Indian industries creating jobs and increasing competitiveness. Those who support the Government’s moves of withdrawal have equally strong positions on how importing these goods from China leads to job losses for the unskilled in India. In the post-pandemic Indian economy, a huge chunk of jobs has to be created for this unskilled category.

IPS researchers stated that Sri Lanka, especially in the wake of Covid-19, is looking to India and China for economic assistance, most notably on debt relief, but also for Foreign Direct Investment (FDI) and market access for its exports. China’s share of Sri Lanka’s total outstanding foreign debt at 9.6 percent in 2019 towers over that of India (2.4 percent). But both are key sources of FDI, with China leading at 16.7 percent of total FDI stock, followed by India at 12.9 percent.

As Dr. Weerakoon pointed out, with a functioning bilateral FTA on goods with India already in place, concluding a similar FTA with China too, limited to goods only, is one option available for Sri Lanka. Such FTAs with the two biggest countries in Asia will serve Sri Lanka as useful pointers to a steady integration process, including with ASEAN economies, with an eye on RCEP membership in the longer run.

As Sri Lanka’s long-term economic interests are very much tied into closer integration with the Asian region, this would be the most practical Asia-centric road map available for Sri Lanka.

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