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Reaping the benefits of Free Trade Agreements

7 September 2015 06:30 pm - 0     - {{hitsCtrl.values.hits}}

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Verite Research Executive Director Nishan de Mel (right) with Verite Research Head of Economic Research Subhashini Abeysinghe
Pic by Pradeep Dilruckshana



By Shabiya Ali Ahlam
In the recent years a common topic we have heard our leaders, both political and business, repeatedly harp on is with regard to increasing exports to help contract the trade deficit, but it seems that their actions have failed to be louder than their words.

Given the new economic direction the country is poised to take after the recent elections, once again a key area that has been highlighted is on orienting Sri Lanka towards succeeding in exports.

It is no news that the nation’s percentage of exports to gross domestic product (GDP) has been falling over the last decade and has grown to become a critical problem for the country. It essentially means Sri Lanka is not earning based on its own production, but is earning from the production of other countries, indirectly uplifting the labourers working in other regions. By not supporting the local workforce as much as we should, it means we are an economy that is dependent on remittance. 

However, it is good to observe Sri Lanka is still striving and keen on improving this space as the new government, just as the previous, has acknowledged the need to change the policies if the exports are to increase.

As this realisation crept in, economic think-tank Verité Research conducted a study titled ‘Addressing Compliance Related Non-Tariff Barriers Through Mutual Recognition Agreements: A Case Study In Food Trade Between India And Sri Lanka’.

For this endeavour the institution partnered with the Fruits and Vegetable Association of the Ceylon Chamber of Commerce (CCC) and the National Chamber of Exporters to work on policy ideas to help local exporters succeed in the global market.

While the main focus of this research was around the difficulties in exporting to India, Verité Research Executive Director Nishan de Mel pointed out the first and foremost step that should be taken is to set up a Mutual Recognition Agreement (MRA) with India. 

As Sri Lanka has a free-trade agreement (FTA) with India, it typically takes away the tariff barriers. Due to this, exporters in the food sector are at an advantage as they are able to export goods to that country without having to pay duties, which other nations would have to pay.

Despite this competitive advantage, local exports to India have not succeeded as much as expected or as it should. Why? Even though the tariff barriers have reduced significantly, other kind of obstacles have come up, preventing the success of local exports, even under the FTA.

“A particular non-tariff barrier (NTB) that has been creating a lot of problems is the one with regard to the testing for standards and compliance and procedures that takes place at the Indian ports. There are mandatory testing to ensure quality and hygiene. This testing for standards in the India ports has caused three kinds of problems that act as barriers and difficulties for local exporters,” explained de Mel.

The first is delays. With no proper time frame set, the number of days taken to obtain laboratory reports and release goods from Indian ports is observed to be a hurdle. This is so since these tests take from a week to as much as three months, or at times even longer. This is a problem for food items as there is an expiry date and often they don’t make it to the shelf.


Additional costs 
The second is additional costs. At many instances the delay has resulted in the shipment to be discarded as they have perished before reaching the shelf. In addition to this, the cost of doing the testing contributes to this factor as in India the costs for lab testing are high due to excessive sampling. This has led to the shipment having to sit at the port for longer periods, for which exports have to pay demurrage.

Furthermore, the fact that there is no predictability as to how long it will take to do the testing and release the goods creates uncertainty. Due to that, exporters cannot give confidence to the retailors at the other end as to when the goods will be received.

“Exporters have also complained about the lack of clarity as to why the goods are held up at ports. Often it is not clear as to what has to be done to speed up the process. All that leads to the difficulty in retaining Indian buyers as it is only natural for any buyer to have predictability to around supply,” shared Mel when presenting his findings.

Unfortunately, this issue is a one-sided one as Indian exporters undergo no such hassle at Sri Lanka ports. The reason for this is that our nation has agreed to accept and accredit Indian testing agencies to test for Sri Lankan standards. However, India has not accepted the same handed friendship and the relevant authorities have failed to identify and rectify the same.

Noting that a MRA will help address the problem, Mel professed: “India should also recognize Sri Lanka for being able to test for Indian standards. This is not a proposal that is strange for India as in fact it already has MRAs with many other countries, even those that do not have FTAs with it. 

The MRA is packaged with the Comprehensive Economic Partnership Agreement (CEPA) with India but its delays have taxed local exporters. The question is do we have to wait for CEPA? It’s is not the case. There is no reason to wait for this agreement.”

Verité Research suggests that in addition to the standards, exporters experience further delay and cost in complying with the technical regulations imposed by other government agencies such as the Food Authority, Department of Animal Production and Health, National Plant Quarantine Services and others. Hence, an MRA standard alone will not be sufficient to completely overcome compliance-related NTBs. It is therefore vital that the MRA is comprehensive in scope and not limited to standards alone. 

In this light, Verité Research recommends that Sri Lanka explores the possibility of setting up a dedicated Export Inspection Scheme or Body, similar to the Export Inspection Council (EIC) of India. This scheme/body can facilitate not only the India – Sri Lanka MRA, but also similar future agreements with other trading partners.
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