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Singapore-Sri Lanka FTA: Myths and reality

2018-08-28 00:01:53
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The world around us is increasingly moving forward with regional and bilateral free trade agreements (FTAs) as the multilateral trade liberalization process led by the World Trade Organisation has come to a standstill. There are now 419 regional trade agreements in the world. 


Is it necessary to enter into FTAs?
If we look at the South Asian countries in the South Asian Association for Regional Cooperation (SAARC), Sri Lanka is far behind others in working out duty free or preferential market access with other countries. In SAARC, five countries, viz. Bangladesh, Nepal, Bhutan, the Maldives and Afghanistan, by virtue of them being the least developed countries (LDCs), qualify for duty free access to the European Union (EU) and Indian markets.


In fact, nearly 84 percent of SAARC LDC exports have duty free access to the world at large. India has preferential market access to Association of Southeast Asian Nations (ASEAN), Japan, South Korea, by various FTAs and comprehensive economic partnership agreements it has signed during the last decade. 


Pakistan has FTAs with China, Malaysia and Sri Lanka and benefit from GSP Plus in the EU market. In contrast, Sri Lanka has preferential market access only to India and Pakistan (and some preferential access to Asia Pacific Trade Agreement members China and Korea, to which Bangladesh and India also qualify). Clearly, Sri Lanka lags behind even with its South Asian neighbours in having preferential market access to its trading partners. 


What Sri Lanka needs to do is to ensure growth and sustaining the traditional two major markets, namely the US and EU and negotiate FTAs with the emerging South Asia and Far East Asian countries, with the most dynamic potential trading partners in the Southeast Asian region, thus linking to the global production and value chains. Accordingly, Sri Lanka has embarked upon negotiations on FTAs with India, China, Singapore and Thailand.


Does government have a national policy on trade?
Yes.


Is new trade policy a fake document?
The ministry observed that the trade-related policy decisions are taken at different institutions under jurisdictions and following different directions. They were mostly ad hoc and fragmented. Those decisions did not follow a clear direction. 


The absence of a national trade policy led to chaotic decision-making and non-effective directions resulting poor performance in terms of trade. Recognizing this, the government decided to adopt a national trade policy, which can bring together various policy directions demonstrated by different agencies into one platform, where there is a clear vision.


The trade policy was formulated through an inclusive process and it took almost one year from May 2016 to May 2017 for the preparation. As it gives a fresh outlook and a broader governing framework for the country’s trade regime and brings the unclear trade policies prevailed so far into one platform for the first time in Sri Lanka’s history, the document was named as the New Trade Policy (NTP). 
The NTP took into account the development objectives of the government, Sri Lanka’s comparative advantage in trade, past trade performance, recent global trade developments and trade policy formulation experiences of other countries.


The policy was prepared by two committees, a representative committee with the participation of several representatives of government agencies and later brought it to a focused paper by a group of experts headed by Economic Advisor to President Dr. Sarath Rajapathirana and made it publicly available for comments.


The Cabinet approval was granted to the NTP at the meeting held on August 1, 2017. The Cabinet has directed the Development Strategies and International Trade Ministry and all relevant line ministries to take action to implement the policy measures contained in the NTP, pertaining to the matters under their purview. 

 


Has Sri Lanka-Singapore agreement been done secretly? 
The Sri Lanka-Singapore FTA (SLSFTA) negotiations were started on July 7, 2016 and since then, eight rounds of negotiations were held between the respective negotiation teams in about 18 months. The final negotiation was held during November 13-14, 2017. The negotiations were conducted by the Cabinet-approved National Trade Negotiation Committee and 12 of its subcommittees, chaired by including all relevant public sector institutions. 


Over a period of 18 months, more than 20 consultations were held with a wide range of stakeholders including chambers, industry associations, professional associations, etc. There were common consultations regarding all ongoing FTAs but different subcommittees had sectoral consultations on specific areas under each FTA with the relevant associations and chambers.


The Cabinet has kept informed on the status and the stances taken during the negotiation process.  Finally, the first draft of the SLSFTA was submitted to the Cabinet of Ministers on December 22, 2017 and was tabled at Cabinet meetings held on January 2, 2018 and January 9, 2018, along with the observations submitted by the president and 14 other Cabinet of Ministers.


The clearance of the Attorney General by his letter dated January 15, 2018 was obtained. The approval of the Cabinet for entering into this was given at the meeting held on January 16, 2018 and accordingly, the agreement was entered into on January 23, 2018. However, the agreement came into force on May 1, 2018, after the enactment of the bill on anti-dumping, countervailing and safeguards.

 


Does tariff become zero for all goods immediately after this agreement?
There are 7438 total tariff lines in the goods schedule of the SLSFTA.
It is important to note that Sri Lanka’s 50 percent tariff lines (3719 items) are already duty free, except for a few, not only to Singapore but also for any other country. The Tariff Liberalization Programme (TLP) of the SLSFTA was done in consultation and with the agreement of the Finance and Mass Media Ministry because it has to be carefully designed to have the least impact on the domestic industry and revenue collection. 


Under the SLSFTA, Sri Lanka undertook (TLP) to liberalize up to 80 percent of its tariff lines over a period of 12 years to 15 years. As said in the beginning, Sri Lanka’s 50 percent of tariff lines will be immediately liberalized when the agreement comes into force as those 3719 tariff lines, except for a few, are already duty free. 


Consequently, it will not have any impact either on the revenue or domestic industries. The rest of the tariff reduction and elimination will be a gradual process i.e. 15 percent of tariff lines (1116 items) from the first to sixth year in equal instalments, next 14.3 percent of tariff lines (1064 items) from the seventh to 12th year in equal instalments and 0.7 percent (51 items) from the 11th to 15th year. Therefore, all tariff lines of all goods will not become ‘zero’ immediately on entering into force of the agreement.

 


Are domestic industries at threat because of this agreement?
Almost all FTAs signed by Singapore with its other trading partners, the level of liberalization, are kept close to 90 percent or more of the tariff lines. Sri Lanka, in comparison, has been able to negotiate to limit it to 80 percent, thereby keeping 20 percent of tariff lines i.e. 1487 items in the negative list to protect the domestic industries and revenue concerns.


Items like footwear, confectionery and many other sensitive items, which have a high MFN tariff, have been kept in the negative list, due to the domestic sensitivities, though one can argue that keeping them in the negative list does not benefit a larger segment of consumers.


Furthermore, the bilateral safeguard section under the trade remedies chapter of the agreement has provision to increase tariff to the MFN level, if import surges take place on a particular product, due to the implementation of the trade liberalization programme and if such imports cause injury or threaten to cause injury to the domestic industry. Therefore, there are provisions in the agreement to protect the domestic industries. 


In addition, mere reduction of tariff will not enable products to be imported, since the products to be imported from Singapore should meet the rules of origin criteria. Furthermore, the products imported will also be subject to import licence requirement, if applicable and also to regulations for protection of human, animal and plant life.  

 


Can the products of other country (like India, Malaysia, Indonesia, etc.) origin come to Sri Lanka under SLSFTA?
The SLSFTA stipulates that there should be a minimum of 35 percent value addition or change of tariff headings at four-digit level to ensure that a substantial value addition or processing is taken place within Singapore. Sri Lanka has not accepted the ASEAN cumulation proposed by Singapore. Therefore, the inputs originating in the member countries of ASEAN will not qualify for tariff concessions unless 35 percent value addition or change of tariff heading at four-digit level has taken place in Singapore. 


Furthermore, under the Rules of Origin criteria, the products imported from Singapore will not qualify for tariff concessions unless 35 percent value addition or change of tariff heading take place at four-digit level in Singapore. The Rules of Origin in the agreement will therefore not allow goods simply to be exported through Singapore or entrepot trade, since the minimum value addition or processing has to necessarily take place in Singapore. 

 


Is there any major impact on government revenue?
There will be little or no impact from the immediate list since 50 percent tariff lines (3719 items) are already duty free.


Import data on products imported from Singapore will show that out of total imports of US $ 1293 million in 2017, US $ 750 million were petroleum and related products (in fact amounting to 60 percent of imports from Singapore) and US $ 228 million were gold. Although gold is under the duty free list, imposition of excise duty will protect revenue. 


Since tariffs on petroleum products, tobacco, spirits and alcohol are an important revenue source to the government, these items have been retained in the negative list (products that will not be subject to liberalization), thereby protecting revenue. It should be noted that as liberalization of tariff will take place over 12 to 15-year period, revenue loss, if any, should be calculated on a yearly basis and not as if tariff on all items are reduced immediately. 


According to the Finance Ministry, the total customs revenue collection from imports from Singapore in 2017 was Rs.35 billion and the revenue loss consequent to tariff liberalization under the Singapore agreement over the entire period of 15 years is Rs.733 million. Therefore, the average annual revenue loss is Rs.49 million. Furthermore, the Finance Ministry analysis shows that 97.79 percent revenue is protected.   

 


Will domestic producers be badly affected through flooding of cheap products?
Such a situation is prevented through the new legislation on trade remedies that Parliament approved recently. In addition, the agreement also contains a chapter on trade remedies, which covers anti-dumping, countervailing and subsidies, global safeguards and bilateral safeguard measures. 


Since Sri Lanka has enacted legislation on trade remedies in March 2018, Sri Lanka is now in a position to take legal action, if dumping takes place or subsidies are granted by Singapore to counter them. In addition, bilateral safeguards can be applied during the implementation period of the TLP if increased imports from Singapore due to tariff reduction causing injury to domestic industry. These provisions will enable Sri Lanka to apply such measures, if need arises, when the SLSFTA is implemented. 

 


Is it allowed to import harmful products such as garbage, clinical waste, nuclear waste, chemical waste, etc. through SLSFTA?
Some argue that since waste products are included in the TLP, such items can be dumped into the country under the agreement. It needs to be emphasized that reduction or elimination of tariff automatically does not grant automatic entry of a product into the country. For all products imported into the country, domestic regulations and mechanisms and applicable import licensing requirement, applicable standards, regulations applicable to protect plant, human and animal life will apply. 
This agreement does not take away Sri Lanka’s rights under the International Environmental Protection Treaties to which Sri Lanka is a signatory. Therefore, the current environmental laws and regulations will apply to such products and therefore, this agreement has no exemption for those to enter to the country. 


Under the Article 20 on ‘General Exceptions’ of GATT 1994, Sri Lanka has the right to take measures to protect human, animal and plant life or health. This provision has been incorporated into article 17.7 of the agreement, which ensures this right. Therefore, if there is a need, such measures can be introduced in the future.  

 


Will the agreement affect biodiversity of Sri Lanka?
It is alleged that this agreement will affect the fauna and flora of the country as endangered species such as elephant, reptiles, etc. could be exported to Singapore and such animals could also be imported from Singapore. It should be mentioned that Sri Lanka is a signatory to the Convention on International Trade in Endangered Species of Wild Fauna and Flora and Convention on Biological Diversity and the agreement does not take away our rights under these two conventions or under any other relevant conventions. 


Such imports and exports will be subject to domestic regulations and mechanisms implemented under such conventions, which include licensing requirement and recommendation and approval of the relevant designated government agency.  

 


Why are such harmful products included in duty free list?
In any international FTA, it is necessary to include all tariff lines, that is 7438 in the goods schedule that is either in the negative list, immediate liberalization list or phasing out list and a tariff line cannot be excluded. Therefore, such products should be in any one of the lists. 


Sri Lanka chose, inclusion of these items in the TLP of 80 percent, as it gave flexibility for Sri Lanka to include domestically-sensitive more items in the negative list because such harmful items cannot be imported anyway without obliging the local laws. 


This is not the first time that these items are brought under the duty free list. Most of these items have been included in the duty free list in the Indo-Sri Lanka Agreement and Pakistan-Sri Lanka Agreements and there is no evidence to suggest that these products are coming into the country in any harmful manner.


However, such items cannot enter the country because the environmental laws and regulations, import licensing requirements will apply to them. Therefore, it is not something that has been granted to Singapore only.

 


Why is importation of paddy kept duty free after 12 years in the agreement, resulting our food security at a threat?
In the case of items like paddy, grains and wheat, the applicable Rules of Origin is the criteria of ‘wholly obtained’. The wholly-obtained product should be obtained from the soil of the country that is in Singapore. If such agricultural items like wheat, paddy and other grain, if not ‘wholly obtained’ within Singapore, such products would not qualify for duty free entry, even such products are in the free list. 

And there are no paddy fields in Singapore to obtain such product from Singapore soil. It is alleged that rice from Pakistan, Thailand and Vietnam could be channelled through Singapore. In the first place, rice is in the negative list and therefore, the question does not arise, rice being imported through Singapore. 

 


Does the agreement make any commitment to liberalize services?
Both Sri Lanka and Singapore decided that the SLSFTA should be limited only to business visitors and intra-corporate transferees. Therefore, the agreement completely excludes any independent movement of natural persons (i.e. excludes contractual service suppliers and independent professionals). Accordingly, Sri Lanka’s commitments in trade in services are limited to within the existing level of openness in Sri Lanka’s current legal and regulatory framework.


As per the prevailing exchange control laws, mode 1 (cross boarder supply) and mode 2 (consumption abroad) are by and large open for market access. Accordingly, as per Sri Lanka’s commitments in scheduled sectors, Sri Lanka places no restrictions in market access for mode 1 and mode 2. Thus, staying in line with the prevailing level of liberalization and the SLSFTA offers no new market access in this regard.


In mode 3 (commercial presence or investment)  as well, Sri Lanka’s commitments under the SLSFTA do not in any case go beyond the prevailing level of openness offered through the Foreign Exchange Management Act of 2017. In fact, in some cases such as construction services, the existing regulations allow 100 percent foreign equity ownership but the SLSFTA makes a commitment only up to 40 percent foreign equity ownership. 


Therefore, with regard to the services provided through investment as well, the SLSFTA provides no new liberalization but stays within the existing level of openness allowed through the prevailing legislation and regulations. 


In mode 4 (movement of natural persons), Sri Lanka has made limited commitments only in business visitors and intra-corporate transferees in a few sectors and movement of independent professionals is not liberalized or allowed. Here again, the key priority is in supporting measures to attract investment to Sri Lanka. 


Any company that makes a significant investment overseas would like to have its senior management to accompany that investment to ensure that the investment provides the desired results. Accordingly, in selected sectors, Sri Lanka has made commitments for intra-corporate transferees of senior management. 


These senior management categories are defined as managers, executives, and specialists. Each category has a clear definition in the agreement. For example, an executive is an employee who is either a director of the company or receives only limited supervision from the general body of shareholders. 


Therefore, intra-corporate transferees of defined senior management linked to investment are allowed in the following sectors (IT, financial services, subsectors of maritime services (repair and rental services), construction industry (where a Sri Lankan company would have a majority ownership), hotels and restaurants, travel agency (where a Sri Lankan company would have a majority ownership), advertising, technical testing services and sports events organisation. 


Such senior management intra-corporate transferees are subject to all immigrations laws and regulations. They must also have at least 5 years of experience in the relevant industry or professional field. The initial period of work will be up to two years, which can be extended up to a maximum period of five years subject to the approval by the controller of immigration. 


Furthermore, the corporate transferees appointed to senior management positions should work in the same company to which they are transferred and cannot move to work in another company. As per the current laws and regulations, the Board of Investment-approved companies can bring in project personnel allowing two-year visas for directors and private companies can bring in foreign employees where skill shortages exist with line ministry approval. 


Given the stringent definitions of senior management categories within intra-corporate transferees, it is likely that the Singaporean companies will only transfer the most required and important categories of employees to a Sri Lankan branch/subsidiary. Considering the significant wage gaps between Sri Lanka and Singapore – it is highly unlikely that these employees will come to Sri Lanka and undercut Sri Lankan wages and take Sri Lankan jobs. 

 


Does Singapore FTA open up professional services? 
The short answer is no. Sri Lanka’s commitments in professional services are limited to mode 1 and mode 2. That too in the sub-sectors of selected professional services, which were requested to support the Singaporean investments into Sri Lanka. Mode 4 and mode 3 are not liberalized to any extent in these professional services – thus, there is no provision for Singaporean professionals to come and work in Sri Lanka under the SLSFTA. 


Accordingly, Sri Lanka made commitments in mode 1 and mode 2 in legal advisory services, excluding Sri Lankan law, provided cross-border – therefore this excludes the practice of Sri Lankan law. Mode 3 and mode 4 are ‘Unbound’, meaning no liberalization or commitments by Sri Lanka. 
In engineering services Sri Lanka made commitments in mode 1 and mode 2 in the advisory and consultative services sub-sector – this again does not include the practice of engineering but is only advisory and consultative services provided cross-border. Mode 3 and mode 4 are ‘Unbound’, meaning no liberalization or commitments by Sri Lanka. 


In architectural services Sri Lanka made commitments in mode 1 and mode 2 in the pre-design advisory and consultative services sub-sector – this again does not include practice of architecture but is only for advisory services provided cross-border. Mode 3 and mode 4 are ‘Unbound’, meaning no liberalization or commitments by Sri Lanka. 

 


Does Singapore FTA allow non-nationals of Singapore to take advantage of FTA and enter Sri Lanka? 
In the SLSFTA, Singapore defines a ‘national’ as a citizen of Singapore or a permanent resident (PR) of Singapore. Singapore has a population of 5.6 million people and the number of permanent residents is 0.53 million as of 2017. Obtaining PR in Singapore is a long and stringent process, subject to more challenging requirements in recent years. 


It is only this cohort of Singapore nationals that can benefit from the FTA and all other nationalities are excluded from the FTA. It is highly unlikely that someone who has with difficulty obtained the Singapore PR and earning Singaporean wages would try to sneak into Sri Lanka and take Sri Lankan jobs using the FTA as a conduit. 


Even if a Singapore national is allowed to arrive as a corporate transferee, will be subject to limitations of five years of relevant industry or professional experience, period of visa initially for two years, which can be extended to maximum period of five years and cannot move to work in another company and could work only in the company to which he/she was transferred.

 


Does Singapore FTA enable manpower and recruitment services companies to bring down all manner of workers from anywhere in the world? 
Sri Lanka’s offer in ‘Placement and Supply of Personnel’ is limited to modes 1, 2 and 3. This means a Singaporean recruitment services company could set up a company in Sri Lanka. This is already possible under the prevailing laws and regulations. 


Sri Lanka’s commitment in this sector does not include mode 4 in any capacity – it is completely unbound. Unlike in other mode 4 commitments, there is no reference even for senior management personnel for such recruitment companies. 


Therefore, a Singaporean recruitment company can set up an office in Sri Lanka, as is already allowed in the current legal structure but it cannot recruit personnel from abroad since mode 4 is unbound. Any such recruitment company that wishes to hire work from overseas has to go through the regular processes of immigration, line ministry approvals – the current laws and regulations prevail and the FTA creates no new liberalisation in this regard.


In fact, Singapore has also made a commitment in ‘Placement and Supply of Personnel’ covering mode 1, 2, 3 and in mode 4 for business visitors and intra-corporate transferees. Singapore’s commitment has gone beyond Sri Lanka’s commitment in that it makes some commitment in mode 4 whereas Sri Lanka leaves mode 4 completely unbound. Singapore’s commitment in this sector does not mean that a Sri Lankan company can recruit workers from anywhere in the world to freely work in Singapore.
(This article was released by the Development Strategies and International Trade Ministry)


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