Impact of FTA on Bilateral Trade

Impact of FTA on Bilateral Trade

The India-Sri Lanka Free Trade Agreement (ISFTA) has led to significant upturn in overall bilateral trade. In 2011, the overall trade turnover was US$ 4919 million while it was US$ 3020 million in 2010. This is almost an eight-fold increase from US$ 658 million in 2000, when FTA came into effect. According to Sri Lankan Customs trade data the bilateral trade amounted to US$ 4.01 billion in 2012. Sri Lanka?s imports from India amounted US$ 3,483.74 million and exports to India amounted US$ 518.71 million registering a decline of 19.51% and 1.91% respectively as compared to corresponding period of 2011. India had a share of 19.52% and 5.69% respectively in the global imports and exports of Sri Lanka during 2012.

The decline in exports from India to Sri Lanka in 2012 is largely due to steep increase in the excise duty imposed on the import of vehicles on two occasions during the year 2012 that has seriously affected the competitive advantage enjoyed by Indian auto companies and overall volume of vehicles imported from India has declined by 50-60%. This had major adverse impact on the overall bilateral trade. While Sri Lankan exports to India have increased substantially during past 12 years since 2000 when ISFTA came into force, they have lagged behind the high growth in India´s exports to Sri Lanka, resulting in a widening of the balance of trade. This is largely because of the lack of export capacity from Sri Lanka to service Indian requirement and also due to increase in imports from India because of competiveness of our exports. Interestingly, over 50% of our exports to Sri Lanka are outside the list of products covered by the FTA, thereby indicating their overall competitiveness in the Sri Lankan market

Bilateral Trade Figures (US$ Million)

Year Imports from India Exports to India Total Trade Trade Deficit for Sri Lanka EXIM Ratio
SL Imports:
SL Exports

All figures in US $ million, (FTA implemented in March 2000)

1999

512

49

561

-463

10.4:1

2000

600

58

658

-542

10.3:1

2001

602

72

674

-530

8.4:1

2002

835

171

1006

-664

4.9:1

2003

1076

241

1317

-835

4.5:1

2004

1358

385

1743

-973

3.5:1

2005

1399

559

1959

-840

2.5:1

2006

1805

489

2295

-1316

3.7:1

2007

2784

516

3300

-2268

5.4:1

2008

3007

418

3425

-2589

7.2:1

2009

1710

325

2035

-1385

5.3:1

2010

2546

474

3020

-2073

5.4:1

2011

4397

522

4919

-3875

8.4:1

2012

3484

519

4003

-2965

6.7:1

India has emerged as the largest source of imports and third largest export destination for Sri Lanka (rising from 16th rank in 2000). India is also now the largest trade partner of Sri Lanka while Sri Lanka is India´s largest trade partner in South Asia. Another indicator of improving trends, in accordance with the policy of asymmetric obligations, has been a nearly ten-fold increase in Sri Lankan exports which at its peak amounted to US$ 559 million in 2005. In contrast, India´s exports have grown relatively slowly increasing by about 7 times.

Percentage of Total Sri Lanka Trade with India

Year Exports (%) Imports (%)

2002

3.57

13.81

2003

4.79

16.49

2004

6.84

17.25

2005

9.08

16.84

2006

7.25

18.51

2007

6.82

24.44

2008

5.10

21.99

2009

4.56

18.13

2010

5.77

21.03

2011

5.07

22.42

2012

5.69

19.52


EXIM Ratio:

The export-import ratio that fell from 10.4:1 in 1999 to 2.5:1 in 2005 had again risen to 8.4:1 in 2011 and had fallen to 6.7:1 in 2012.

Some of the illustrative impacts of FTA:

  1. The overall trade turnover has grown eight times since the entry into force of the FTA in the year 2000 and reached USD 4.9 billion in 2011.

  1. India has emerged as the largest trade partner of Sri Lanka. Sri Lanka has also emerged as India´s largest trade partner in South Asia, displacing Bangladesh from that position a few years ago.

  2. India is also Sri Lanka´s most balanced trade partner. It is the only country among the top ten Sri Lankan trade partners where both exports and imports are substantial. Thus, India ranks first as exporter to Sri Lanka and third as importer from Sri Lanka. All other leading partners of Sri Lanka, viz., USA, UK, China, Singapore etc are either predominantly exporters to or importers from Sri Lanka.

  1. India was the second largest exporter to Sri Lanka before the FTA and is now the largest exporter to Sri Lanka. But, more important, India became the third largest export destination for Sri Lankan products (rising from 16th rank) as a result of FTA.

  1. Overall Sri Lankan exports to India have grown 10 times since 2000 while Indian exports, mostly on the non-FTA route, has grown 5 times.

  1. Sri Lankan exports to India have largely been of new products where Sri Lanka did not traditionally have capacities. Therefore, FTA has created new export capacities in Sri Lanka that hitherto did not exist. It has brought precious foreign exchange to the country by helping create this potential.

  1. While the trade gap has expanded, the FTA has helped by creating export opportunities for Sri Lanka at a much faster rate helping in bringing down the export-import ratio from 10.4:1 in 1999 to 8.4:1 in 2011.

  1. A better way to look at benefits of the FTA is to compare the trade between India and Sri Lanka using the FTA concessions, as this is trade generated by FTA for either country and conversely at non-FTA trade where trade is carried out without any concessions. Trade under FTA between India and Sri Lanka shows that Sri Lankan exports are at about USD 450-500 million and Indian exports at USD 600-700 million, which is fairly balanced.

  1. Non-FTA exports from Sri Lanka to India are negligible at about US$ 50 million, the same as it was in 2000, when FTA came into force. Non-FTA exports from India to Sri Lanka are substantial standing at about US$ 2 billion, up from about US$ 500 million in 2000. This would imply that without the FTA, Sri Lankan exports to India would have remained stagnant while Indian exports, which are largely on the non-FTA route, would have grown four times from the 2000 level. Clearly, therefore, FTA has benefited Sri Lanka by creating 90% of its current export potential. In contrast, FTA accounts for only 30% of India´s export to Sri Lanka.

FTA has benefited Sri Lanka by creating 90% of its current export potential. In contrast, FTA accounts for only 30% of India´s export to Sri Lanka. The import-export ratio which has come down from 10.3:1 in 2000 to 6.7:1 in 2012 would have been 40:1 if the FTA was not there.

This has not happened by accident but was designed into the structure of the FTA. This was done in keeping with the relative asymmetry in the size of the two economies and in keeping with the objective that the FTA must create greater export potential in Sri Lanka than vice versa. India, therefore, opened up its tariff lines in larger numbers and at a much faster rate. As a result since March 2003, India has only 429 items left in its negative lists. Sri Lanka on the other hand opened fewer items and at a slower rate. Sri Lanka, therefore, has 1108 items in the negative list and was allowed to have an extended tariff liberalization programme for 2744 more items. These items were to become duty free for exports from India in March 2008, action on which is still awaited. Also, we must not forget that there is another asymmetry in concessions granted - every opening by India opens up a much larger market for Sri Lankan exports than vice versa.

To summarize, the results of the FTA:

  1. India has offered larger and deeper openings both in terms of tariff lines and market size;

  2. Sri Lanka has developed capability to export products, potential for which did not exist earlier;

  3. Sri Lankan exports have grown at a much faster rate than India´s; and

  4. Sri Lanka has been able to export more entirely due to the concessions granted under the FTA by India. Without FTA, its exports would have stagnated while Indian exports would still have grown four times the 2000 level.

Following are excerpts from a study done by the Institute of Policy Studies of Sri Lanka and released in September 2012 by UN-ESCAP entitled “Regional Economic Cooperation and Connectivity in South and South-West Asia: Potential and Challenges”:

An FTA in the region that has experienced significant benefits of trade creation for both parties involved is the FTA between India and Sri Lanka, which was an early experiment towards regional economic integration in South Asia. Box 2.1 below summarizes the experiences resulting from this agreement, which provides useful lessons for other South Asian economies in terms of the progress in strengthening trade and economic linkages.

The India-Sri Lanka FTA (ISFTA), which was signed in December 1998 and came into force in March 2000, was a result not only of the slow progress made through South Asian Regional Initiatives, but also a mark of renewed political confidence between the two countries. India\'s interests in advancing trade relations were apparent given its broader industrial base and ability to meet Sri Lanka\'s import needs, while the main factors prompting Sri Lanka\'s interests were the prospect of "early-mover" access to a large market that would help the country to diversify its manufacturing base and the potential to raise its attraction as a destination for FDI on the basis of preferential access to the Indian market.

The ISFTA was formulated based on a “negative list” approach, with each country extending preferences to all commodities except those indicated in its negative list. However, an important feature of the ISFTA was the adoption of "less than full reciprocity." Given the asymmetry of the two countries, Sri Lanka was given special and differential treatment, which extended to negotiations on the negative list, rules of origin and the agreed period of implementation of the tariff liberalization schedule. The outcomes of the FTA have been impressive for both parties. Between the year 2000 when the FTA became effective and 2005-06, India\'s exports to Sri Lanka recorded an average annual growth of 34.5 per cent, while those of Sri Lanka to India grew at an average rate of 132 per cent.

In the period 1995-2000 immediately preceding the agreement, average annual exports from Sri Lanka to India were US$ 39 million. By 2005, Sri Lanka´s exports to India reached a peak of US$ 566.4, a tenfold increase compared to 2000, and stood at US$ 519 million in 2011.

While the peak in 2005 was due to a large concentration of exports in 2 products - vanaspathi and copper - owing to tariff arbitration by Indian exporters, since then there has been a rise in high value-added exports to India. The number of Sri Lankan export items has increased from 505 in 1999 to 1050 in 2009 and 2100 in 2011, with a visible shift from low value-added agricultural products to high value added manufacturing goods including insulated wires and cables, intimate garments, value-added tea, furniture, tableware, machinery, rubber gloves and refined copper products. India, which ranked 14th in terms of export destinations in 1999 has climbed up to the 5th position by 2011.Over 70 per cent of Sri Lanka\'s exports have been undertaken within the framework of FTA preferences, compared to around 30 per cent of India\'s exports. On the other hand, only around 14 per cent of Sri Lanka\'s imports from India have been under the FTA.

Therefore, the FTA has assisted in narrowing the trade gap between the two countries in favour of Sri Lanka and has contributed towards more equitable and balanced growth of bilateral trade. Although the FTA covers only liberalization of goods, it has indirectly led to a significant amount of Indian investments in Sri Lanka, which has in turn strengthened Sri Lanka\'s supply capacities. Cumulative Indian realized investment which was a mere US$ 2.5 million in 1998 increased to US$ 146.8 million in 2011, recording the second highest FDI inflows into Sri Lanka.

Indian investments in Sri Lanka have emerged across diverse sectors - from oil exploration by Cairn
India, telecom services by Bharti Airtel and Tata Communications, petroleum distribution by Indian Oil Corporation (IOC), manufactures by Piramal Glass, Ultra Cement, Ceat-Kelani Tyres, L&T Cement, and Asian Paints, leisure services by Taj (Vivanta) Hotels, transport by Ashok Leyland, and banking and financial services by the State Bank of India, Indian Overseas Bank, Indian Bank and ICICI. While Sri Lankan investments in India have been limited compared to Indian investment in Sri Lanka, certain Sri Lankan companies such as Ceylon Biscuits, Carsons, Damro (furniture), Hayleys, Brandix and John Keells Holdings have made inroads into India. Further, the Colombo Port´s largest volumes of shipments are transshipment volumes to and from India.

The ISFTA has not been without its problems. Sri Lankan exporters have complained of nontariff barriers in entering the Indian market such as state taxes, quality requirements and administrative procedures, which have at times nullified the benefits of the FTA. Delays at customs and bureaucratic red tape have also been cited by Sri Lankan exporters as constraints in trading with India. However, such issues are being gradually addressed with India agreeing to remove taxes and para-tariffs. Encouraged by the performance of the FTA, the two countries are seeking to expand the scope of the FTA to cover trade in services and investments under a Comprehensive Economic Partnership Agreement (CEPA). The CEPA also proposes measures to remove impediments encountered in the ISFTA by addressing issues on rules of origin and implementing dispute settlement and mutual recognition agreements and a close cooperation mechanism between Customs Authorities.”

During the 8th session of India-Sri Lanka Joint Commission held in January 2013 at New Delhi, both countries have agreed to hold intensive consultations towards forging a special economic partnership for comprehensive and sustained economic cooperation.