Free trade agreements (FTAs) are expected to reduce trade barriers and facilitate the expansion of trade between the partner countries. Sri Lanka and India entered into an FTA in 1998 and it came into operation in 2000. The India Sri Lanka FTA (ISFTA) eliminated the barriers of import tariffs for a large number of products traded between the two countries. Processed food products are among the products Sri Lanka can export duty-free to India.
However, despite duty-free access, food exports from Sri Lanka to India have not expanded as expected. This Insight suggests that in the case of processed food exports to India, reducing tariff barriers alone is not sufficient and removing non-tariff barriers (NTBs) is equally or more important to facilitate trade.
Why food exports to India were expected to succeed
The processed food export sector has high potential to expand to the Indian market under the ISFTA. This is due to the high taxes on processed food products imported into the country. The average tariff on food imports to India is around 30 percent and tariffs can go up to 150 percent. The ISFTA first reduced and then eliminated tariffs for almost all processed food exported from Sri Lanka. Because no other country had these duty-free terms at the time, Sri Lanka had a significant competitive advantage in exporting processed food to the Indian market.
The experience of Sri Lankan exporters who ventured into the Indian market, in terms of demand for their products, remains very positive. Both Indian and Sri Lankan exporters of food products confirm that the consumer demand for Sri Lankan products in the Indian market is high. However, despite the duty-free access and high consumer demand for the products, exporting to India has proved challenging.
In recent years, India has signed a number of new FTAs with other trading partners. However, in these agreements most processed food products are either in the phase-out list (which means the tariff will be reduced over a longer period of time) or the negative list (which means the products are excluded from the agreement). Hence, Sri Lanka still has a competitive edge over imports from India’s new FTA partner countries in terms of tariffs.
Exhibit 1 shows the performance of Sri Lanka’s processed food exports to the world and to India. The processed food exports to the rest of the world have been posting a high rate of growth of 38 percent per annum (2011-13 being an exception). This is despite not enjoying all the same advantages provided by the ISFTA when exporting to the Indian market. Therefore, it is reasonable to have expected high growth in processed food exports to the Indian market. In contrast, exports to India have failed to sustain the initial surge in growth.
NTBs explain export puzzle to India
Given that demand and competitive conditions are met, what then explains the discrepancy in the lack of export success for processed food exports from Sri Lanka to India when compared to the rest of the world? Research suggests and exporters confirm that the explanation lies in the existence of non-tariff barriers (NTBs).
NTBs are all other types of barriers to trade other than tariff barriers, such as quota restrictions, cumbersome and inefficient border procedures, inconsistent application of rules and regulations and the lack of transparency and accountability. These barriers increase the cost of trading and make imported products uncompetitive vis-à-vis domestic products.
Some of the NTBs encountered by processed food exporters when exporting to India are import permit requirements, cumbersome and inconsistent import procedures, lack of clarity on labelling requirements and undue delays and additional costs incurred at the point of import to prove compliance with Indian standards and regulations.
Thus, despite having duty-free access, delays and additional costs make Sri Lankan products uncompetitive in the Indian market. Furthermore, exporters find it difficult to find and retain buyers because of the unpredictability in timing and costing that result from the NTBs.
The case of processed food exports to India clearly demonstrates how duty-free benefits alone cannot facilitate trade. It is an important but not a sufficient condition to promote exports. The existence of NTBs continues to hamper trade
and negate the benefits of duty concessions extended by the ISFTA.
The lack of provisions within the ISFTA to address the NTBs and the weakness of initiatives by the two governments to address the problem has made Sri Lankan exporters sceptical about the benefits of further liberalising trade and investment between India and Sri Lanka. As Sri Lanka prepares to negotiate new agreements and expand existing trade agreements, this analysis underscores the need for more reflection and better negotiations. An exclusive focus on eliminating tariff barriers can create expectations of export success that subsequently fail to materialise, unless significant NTBs are also dealt within the process.
(Verité Research is an independent think-tank based in Colombo that provides strategic analysis to high-level decision-makers in economics, law, politics and media. Comments are welcome. Email firstname.lastname@example.org)