The development policy of the government aims primarily at maximizing the economic benefits through integration into the global economy, attracting foreign direct investments (FDIs) in strategic sectors and improving export competitiveness. It is widely understood from the beginning that this requires policy, legal and institutional reforms in line with today’s global trends. One of the pillars of this strategy is establishing effective partnerships with strategically selected economies.
Lack of a clear vision and coherent trade policy that provides benchmarks to govern and guide the administration and conduct of international trade has resulted in the development of ad hoc and often conflicting rules, regulations and practices that affected adversely on the expansion of trade.
Therefore, the government adopted a new trade policy bringing different elements of trade policy into one platform essentially with reforms connected to increase competitiveness, expand market access and trade facilitation, create macroeconomic balance, bring policy and institutional coherence and adjustment of firms and people.
The cabinet approval was granted to the new trade policy on the basis that it gives precedence to unilateral reforms, makes trade agreements consistent, gives emphasis to reduce protection rates and reduce their variance and given the challenge of increasing exports rapidly, assures the existing barriers to private sector’s adjustment and access to needed inputs are assured and trade policymaking institutions are strengthened with competent and sufficient staff.
Accordingly, the government started the negotiations with three key economies namely Singapore, China and India. Sri Lanka expects to foster freer trade flows and create stronger ties with these trading partners, eliminate para tariffs, promote regional integration, enhance the competitiveness and deliver enhanced trading opportunities.
Process
The negotiations of the Sri Lanka-Singapore Free Trade Agreement (SLSFTA) commenced in August 2016 after the signing of the joint statement of Singapore and Sri Lanka, during the official visit of Prime Minister Ranil Wickremesinghe to Singapore from July 18 to 19, 2016. Eight rounds of negotiations have been completed and as a result, the agreement has come to the final stage in January 2018.
The ministry has taken every effort to ensure the process of negotiations to be transparent, inclusive and incorporates the interest of all stakeholders as well as to secure the national interests.
The negotiations were done through a trade negotiations team approved by the cabinet and it was supported by subcommittees appointed, covering all the areas under the SLSFTA and they provided technical level inputs during the negotiation process. The sub committees were comprised of all relevant government agencies responsible for each subject. Further, steps have been taken to have an observer representing private sector to participate in trade negotiations.
In addition, the ministry obtained views of various stakeholders such as professional associations, chambers from private sector through consultations and with reference to policy, technical and regulatory aspects, the respective government agencies were consulted.
More than 15 consultative meetings with private sector representatives have been conducted since August 2016 and a wide range of subjects coming under each area and specifically on the adjusting domestic regulatory framework to secure national interests has been discussed.
Although there was a policy decision taken by the government not to take any commitments or any opening in relation to free movement of natural persons, yet there were concerns expressed by stakeholders that lack of regulatory mechanism domestically would create possible negative effects on domestic labour market.
The United Professional Movement (UPM) assisted the process by submitting a comprehensive proposal on National Policy Framework and National Registration Process identifying the major legal shortcomings in the Sri Lankan legal systems in terms of liberalization. It included a large number of amendments to acts and enactments of new acts in a wider range of areas/subjects.
However, considering the mandate and the institutional capacity of the Development Strategies and International Trade Ministry, the consensus was reached to prioritize the amendments to address the concerns in a phased out manner through short and long-term measures.
The initial study on the domestic regulatory mechanism revealed lacuna in the existing regime and identified that addressing the immigration and emigration laws as a requisite in order to have a streamlined transparent process with respect to foreigners coming into Sri Lanka. A special team of senior officials from the Attorney General’s Department was appointed for this purpose and consultations were held with the professional associations and chambers, covering a wide sphere of sectors on the present regulatory mechanisms in Sri Lanka. As a short-term measure, from trade remedies side for the protection of industries’ perspective it was focused on submitting a Safeguard Bill to prevent the companies from the sudden surge in imports due to fluctuation in the world market and the Antidumping and Countervailing Bill to protect local industries from possible unfair trade practices due to dumping (selling at artificially low price) and subsidies given by
other countries.
These two bills will be hopefully tabled at parliament for approval in the next few days. In terms of professional services, the final clearance is awaited for the new immigration regulations drafted to address the current procedure which was claimed to be ad hoc and not transparent.
Through the new regulations, it is expected to create a transparent and balanced immigration procedure for foreign workers. However, in the longer term, a complete overhaul of the Immigration Act is to be done hopefully by early next year.
The National Human Resources Development Council Sri Lanka (NHRDCSL), which is the central entity endowed with the National Human Resources Development Council (NHRDC), too would play a major role in relation to foreign employees. The above team is in the process of finalizing the necessary amendments to the Act of NHRDC and handed over the drafted amendments to the NHRDC for further comments.
These enactments would provide the required legal background to streamline the processes in labour market, foreign employees in Sri Lanka in particular, which in turn facilitate the operationalisation of free trade agreements, once these are in force.
Scope
The SLSFTA includes several provisions aiming at reforming of Sri Lanka’s trade and trade-related policies or systems that will help in showcasing the trade-friendly framework of the government internationally. These will provide for modernization of different systems, anchoring of external investment in the country and better and more predictable policy environment.
Therefore, the SLSFTA is a way to demonstrate Sri Lanka’s openness to investments internationally and domestically. This will also help to encourage the growth, development and nimbleness of Sri Lanka’s private sector.
The Sri Lanka-Singapore FTA is a landmark agreement as it is the first trade agreement that Sri Lanka is signing in over 10 years and it is the first comprehensive agreement for Sri Lanka beyond Trade in Goods.
The SLSFTA basically covers the areas of services, investment, sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT), trade remedies and dispute settlement, customs cooperation and trade facilitation, economic and technological cooperation, government procurement, e-commerce and intellectual property rights as well.
Opening up the services market, absorbing the international best practices in the area of trade and facilitating the process of attracting investments are the major drives for negotiating a free trade agreement with Singapore, which is unilaterally a 99 percent liberalized goods market.
In 2016, bilateral trade volume (goods) stood as high as US $ 1.15 billion and there is a great potential for further expansion benefitting both countries. In the area of trade in goods, Singapore has already applied zero rate of duty to 99 percent of its tariff lines.
The Singapore-Sri Lanka FTA is part of a broader strategy of looking east to renew our trade relationships in the process of diversifying our markets towards Asia and focus on plugging into Asian supply chains. This FTA is our first agreement with a Southeast Asian country and we envisage this as a first step towards closer integration with the Association of Southeast Asian Nations (ASEAN) and potentially be part of the Regional Comprehensive Economic Partnership (RCEP) in the future.
Singapore is Sri Lanka’s 20th export destination and eighth trading partner. In terms of trade in goods, Singapore is not a significant export market of Sri Lanka. But, being an important member of the ASEAN with a high trade to gross domestic product ratio (168.5 percent world’s highest whereas Sri Lanka ratio is 24.7 percent), the FTA with Singapore will provide Sri Lanka a gateway to larger ASEAN market as Singapore has so far signed 21 free trade agreements with 32 trading partners.
Currently Sri Lanka’s exports to Singapore are limited to electrical and electronic products, parts and machinery, petroleum products, apparel, food, feed, beverages and tobacco. There is a greater potential for Sri Lanka to export certain products such as T-shirts, men’s and women’s suits, jerseys, new pneumatic tyres of rubber, men’s suits, pepper, light-vessels, fire-float, articles of vulcanized rubber and precious stones and semi-precious stones. Both countries will mutually benefit with greater investment from Singapore in these sectors.
Singapore is at present the seventh largest investor of Sri Lanka having invested (FDI) around US $ 658 million during 2005-2017 third quarter through over 119 Singaporean companies operating in Sri Lanka. The sectors that attracted investments include IT, real estate, manufacturing, construction, renewable energy and pharmaceuticals.
It is expected that the protection to be given under the SLSFTA to investors and to their investments will result in substantial increase in FDI from Singapore by Sri Lanka offering good potential for Singapore companies looking to tap opportunities in new markets. It would result in the opportunities in Sri Lanka to Singapore companies and international companies based in Singapore. Sri Lankan companies which have invested more than US $ 120 million in Singapore will also benefit.
Entering into an FTA with Singapore, being the most liberalized economy in the region, will give a positive note on Sri Lanka as it demonstrates that both countries are open for business and encourage investments. Partnering with such an economy, which is rule based, globally dynamic and with advanced managerial/institutional competencies will obviously trigger and contribute healthy reforms which in turn will move the country to the next level of economic development.
Notes on new Sri Lanka-Singapore Free Trade Agreement
Key messages
This is a landmark agreement for Sri Lanka – the first free FTA in over a decade and the first comprehensive FTA in our history. It signals to the world that the country is moving to a new era in international trade and investment.
This is the first bilateral trade agreement that Sri Lanka has forged in over 10 years. It is also the first comprehensive agreement for Sri Lanka; it means it’s the first agreement that goes beyond goods and includes services, investment, economic cooperation, etc.
To have done our first comprehensive agreement with Singapore – a country regarded as being one of the most open and liberalized economies and having high-quality institutions, is a especially important milestone for Sri Lanka.
It signals the commitment of the government to usher in an era of openness for Sri Lanka and become a formidable economic hub in the Indian Ocean.
This agreement is an important part of the new ‘national trade policy’ launched last year and is a linchpin in the ongoing trade policy reforms. To complement this, Sri Lanka is undertaking domestic reforms and initiatives to make Sri Lanka internationally competitive (e.g. Enterprise Sri Lanka, National Export Strategy, Innovation and Entrepreneurship Strategy, Doing Business and trade facilitation reforms, etc.).
Together, these reforms will boost the creation of more good-quality jobs especially for young people and new trade and business partnership opportunities.
Broader strategy
This FTA is part of a broader strategy towards greater engagement with dynamic Asian economies, with eyes on the Regional Comprehensive Economic Partnership (RCEP).
The Singapore-Sri Lanka FTA is part of a broader strategy of looking east to renew our trade relationships. While we focus on growing and sustaining in our traditional markets of the US and Europe, we have begun to diversify our markets towards Asia and focus on plugging into Asian supply chains.
This FTA is our first agreement with a Southeast Asian country and we envisage this as a first step towards closer integration with the ASEAN and potentially be part of the RCEP in the future. The key benefit of this FTA is leveraging the trade-investment nexus and plugging into Asian supply chains.
There is already interest among Singaporean investors to invest in services and manufacturing and this FTA can catalyse more. Much potential for diversification of exports through the trade-investment nexus that this agreement encourages, as well as new joint venture opportunities for Sri Lankan companies.
The agreement provides a binding commitment and framework on bilateral investment, which we didn’t have earlier and this will encourage investment.
Important to understand that not every FTA is meant to ‘balance trade between the two countries’ or ‘bridge the bilateral trade deficit’. Sri Lanka has trade surpluses with some countries and deficits with other countries. Sri Lanka would need to sign a suite of FTAs for different purposes – some aimed at boosting exports (new/preferential market access) as well as give domestic producers access to lower cost inputs, while some to leverage on the trade-investment nexus rather than narrowly looking only at goods.
Scope of agreement
Scope is very progressive; it is wider than the proposed China and India agreement – goes beyond to cover telecommunications, financial services, ecommerce and government procurement. Singapore has recognized that the e-commerce chapter in this FTA is quite a progressive one.
Sri Lanka is not a member of the Government Procurement (GP) WTO agreement but as a step towards reform, for the first time Sri Lanka has included a GP chapter in this agreement. It covers international competitive bidding (excluding national bidding). It also embodies procedural fairness and transparency in procurement. The chapter ensures alignment with national procurement guidelines and does not deviate.
Goods - On goods (and the tariff liberalisation programme (TLP), Singapore is already has 99 percent of tariff lines zero-rated. But the agreement recognises that Sri Lanka has to go step by step. So, Sri Lanka has agreed to liberalise 80 percent of tariff lines – 50 percent of lines immediately to zero (around 3600 lines), 15 percent over the first to sixth year in equal instalments and 15 percent over the sixth to 12th year.
Items that remain in Sri Lanka’s negative list are those that are sensitive on revenue and other domestic grounds: petroleum and related products, tobacco and related products, alcohol and spirits. Important to note that out of the current approximately US $ 1,000 imports from Singapore, 50-60 percent are petroleum products.
Rules of origin (ROO) – no ASEAN cumulation is allowed under this FTA. Standard ROO agreed is 35 percent value addition and change of tariff heading (CTH). Additionally there are product-specific rules on 2000 tariff lines and product chemical rules, which are exceptions to the ROO.
The real focus of this FTA is on investment from Singapore in services and manufacturing – potential for diversification of exports through the trade investment nexus and new joint venture opportunities for Sri Lankan companies.
Investment – The investment chapter will give a strong signal to prospective Singaporean investors – it gives protection to investors, predictability and transparency. Protection, national treatment – Many provisions to attract investors. The agreement provides a binding commitment and framework which we didn’t have earlier.
Services – Both countries did not commit to independent movement of professionals (under Mode 4) in this FTA, so only Modes 1 to 3. Sri Lanka has undertaken liberalisation in some important areas for business – testing labs (this will help Sri Lankan firms that now have to send samples, etc. to Singapore), sports and recreation, maritime, environmental services (pollution, waste water, energy efficiency, noise abatement, etc). In services, only Singaporean nationals are recognised.
Meanwhile, Singapore has gone well beyond Sri Lanka in services sectors – GATS plus. Just as Sri Lanka has not done, Singapore has not offered Mode 4 independent professionals movement either but Sri Lankans can benefit from the services liberalisation by Singapore as Mode 4 business visitors and intra corporate transferees.
