Investment

International Trade

 1.  What are the current trends in global trading environment?

The global trading environment is changing rapidly with global production networks and global value chains. These developments are a result of product fragmentation, cross border dispersion of component production/assembly. Each country specializes in a particular stage of the production sequence and trades the value added components which ultimately result in the final product. Product fragmentation was first seen in apparel and electronic industry and now it has spread to automobiles, electrical machinery, telecommunications and electronic equipments. The factors that have led to product fragmentation are rapid advancement in production technology, technology innovation in communications, transportations and liberalization policy reforms in investment and services in both home and host countries.

Consequently, trade in goods is getting closely linked to investment flows and trade in services. The trade – investment nexus is becoming important to enhance trade flows as the volumes do matter when fragmentation of production becomes the norm. After all, it is investment that creates additional volumes or supplies for trade; thus investment led trade will be in a better position to utilize preferential market access and make maximum use of a Free Trade Agreement (FTA)..

Similarly, services account for a key component of value addition in manufacturing. The latest Asia – Pacific Investment Report 2015 published by the ESCAP shows that on average 29.4 % of value addition in industrial exports is accounted for services in the Asia – Pacific region. This new phenomenon is known as the “Service fication” of industrialized products. In fact, the “Service ification” of the industrial sector in EU averages at 55 percent and Asia Pacific trade is moving in this direction of increasing the services component in industrial products. With such trends in global industrial exports, “trade in services” liberalization is certainly going to assist the enhancement of the competitiveness of such exports. These are the key reasons why there is an urgency to convert FTAs to deeper economic partnerships. By such transition, member countries of an FTA could better utilize the preferential access offered by the FTA.

2. What is a Free Trade Agreement?

A Free Trade Agreement is an agreement between two or more countries with the aim of liberalizing the trade of goods and services and access to investment between those countries.

By increasing trade and investment, it is intended that the economies will grow to the benefit of the countries involved.An FTA does this by removing barriers to trade, such as eliminating most of tariffs and removing quotas on goods that can be exported or imported. Many FTAs also address other barriers to trade, including:

  • Customs procedures
  • Intellectual property protection
  • Restrictions on foreign service providers
  • Sanitary & Phyto Sanitary measures & Technical Barriers to Trade (SPS & TBT)

Each FTA is negotiated separately and while there are common elements, each reflects particular issues for the countries involved.

3.Why Sign FTAs Economic Partnerships and what are the benefits

The world around us is increasingly moving forward with regional and bilateral FTAs as the multilateral trade liberalization process led by the WTO has come into a standstill. There are 419 regional trade agreements in operation (www.wto.org) and bulk of them have come into operation after the WTO was born in 1995. In addition, 133 of them have now been converted into an Economic Partnership Agreements (EPA) or Comprehensive Economic Partnership Agreement or other forms of deeper economic agreements. EPAs, CEPAs and other such agreements deepen and broaden the FTA with selective reduction of the negative list and incorporating the investment and services liberalization. According to WTO estimates, nearly 50 percent of global trade takes place through regional and bilateral FTAs at present.

Major benefits of the FTA include;

  • FTAs foster freer trade flows by eliminating tariffs and some non-tariff barriers. So that FTA partners get easier market access into one another's markets and create stronger ties with our trading partners
  • FTAs increase productivity and contribute to higher GDP growth by allowing domestic businesses access to cheaper inputs, introducing new technologies, and fostering competition and innovation
  • Possibility of increased foreign investment from outside the FTA.
  • FTAs promote regional economic integration and build shared approaches to trade and investment, through broader acceptance of product standards and the adoption of common Rules of Origin.

4. What are the applicable International Laws for RTAs & FTAs?

When a WTO member enters into a regional integration arrangement through which it grants more favourable conditions to its trade with other parties through that arrangement than to other WTO members’ trade, it departs from the guiding principle of non-discrimination defined in Article I of GATT, Article II of GATS, and elsewhere.

However, WTO Members are permitted to enter into such arrangements under specific conditions which are spelt out in three sets of rules:

  • Paragraphs 4 to 10 of Article XXIV of GATT (as clarified in the Understanding on the Interpretation of Article XXIV of the GATT 1994) provide for the formation and operation of customs unions and free-trade areas covering trade in goods
  • The Enabling Clause (i.e., the 1979 Decision on Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries) refers to preferential trade arrangements in trade in goods between developing country Members
  • Article V of GATS governs the conclusion of Trade Agreements in the area of trade in services, for both developed and developing countries.

Other non-generalized preferential schemes, for example non-reciprocal preferential agreements involving developing and developed countries, require Members to seek a waiver from WTO rules. Such waivers require the approval of three quarters of WTO Members. Examples of such agreements which are currently in force include the US — Caribbean Basin Economic Recovery Act (CBERA), the CARIBCAN agreement whereby Canada offers duty-free non-reciprocal access to most Caribbean countries, Turkey-Preferential treatment for Bosnia-Herzegovina and the EC-ACP Partnership Agreement.

5. How is broader Economic Co –operation Agreement (such as CECA, EIA etc.) is different from FTA?

Broader Economic Co – operation Agreements are more comprehensive and ambitious that an FTA in terms of coverage of areas and the type of commitments. While a traditional FTA focuses mainly on goods; a broader Economic Co – operation Agreement is more ambitious in terms of a holistic coverage of many areas like services, investment, technology, competition, disputes etc.

6. Are there provisions to review the implementation of FTAs?

Yes, the FTAs have provisions for review the implementation at specified intervals through specified institutional mechanism. Moreover, each FTA incorporates a formal dispute settlement mechanism, which uses to resolve disputes that arise regarding the provisions of the FTA.

7. Can any FTA terminate once being a signatory?

Yes, such provisions are available in all agreements. With a prior notice by an agreed period of time any signatory can withdraw from the FTA.

8. What are the major FTAs & PTAs of Sri Lanka?

Agreement Coverage Year Signatories

Asia Pacific Trade Agreement (APTA)

Goods 1976 Bangladesh; China; India; Republic of Korea; Laos; Sri Lanka
Global System of Trade Preferences among Developing Countries (GSTP) Goods 1989 Algeria; Argentina; Bangladesh; Benin; Bolivia, Brazil; Cameroon; Chile; Colombia; Cuba; Ecuador; Egypt; Ghana; Guinea; Guyana; India; Indonesia; Iran; Iraq; Democratic People's Republic of Korea,; Republic of; Korea, Libya; Malaysia; Mexico; Morocco; Mozambique; Myanmar; Nicaragua; Nigeria; Pakistan; Peru; Philippines; Singapore; Sri Lanka; Sudan; Tanzania; Thailand; Trinidad andTobago; Tunisia; Venezuela, Viet Nam; Zimbabwe
South Asian Preferential Trade Arrangement (SAPTA) Goods 1995 Bangladesh; Bhutan; India; Maldives; Nepal; Pakistan; Sri Lanka
India – Sri Lanka Free Trade Agreement (ISFTA) Goods 2001 India, Sri Lanka
Pakistan – Sri Lanka Free Trade Agreement (PSFTA) Goods 2005 Pakistan, Sri Lanka
South Asian Free Trade Agreement(SAFTA) Goods 2006 Afghanistan; Bangladesh; Bhutan; India; Maldives; Nepal; Pakistan; SriLanka
SAARC Agreement on Trade in Services (SATIS) Services 2012 Afghanistan; Bangladesh; Bhutan; India; Maldives; Nepal; Pakistan; Sri Lanka

9. Why Sri Lanka needs more FTAs?

When looking at countries in SAARC, Sri Lanka is far behind others in working out duty free or preferential market access to other countries. In SAARC, five countries, viz. Bangladesh, Nepal, Bhutan, Maldives, and Afghanistan, by virtue of them being LDCs qualify for duty free access to the EU and Indian markets through the EBA (Everything but Arms) and the 2008 Indian package, respectively. In fact, nearly 84% of SAARC LDC exports have duty free access to the world at large. India has preferential market access to ASEAN, Japan, South Korea, by various FTAs and CEPAs 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 APTA & GSTP members China and Korea to which Bangladesh and India also qualify). Clearly, Sri Lanka lags behind even its South Asian neighbours in having preferential market access to its trading partners.

Similarly, Sri Lanka is currently at a juncture where it could no longer depend on debt – financed development. Debt repayment has become a huge burden on government finance and debt has become costlier with the increase in global interest rates. Thus a viable development strategy that will bring in more foreign exchange to the country is needed via promoting exports and attracting FDI. For export promotion, FDI will support to enhance the supply capacity to export and make best use of the wider market access gained via FTAs. Making this transition from debt financed public investment and import substitution to a private sector – led exports and FDI – based development strategy remains a challenge and it is the only option available for Sri Lanka at this juncture.

Therefore, it is the high time for Sri Lanka to move ambitiously to embark upon deeper economic agreements for its growth and development. The rest of the world is not going to wait for us. Time is not on our side and we need to move fast.

10.What are the FTAs, currently are being negotiated?

  • India – Sri Lanka Economic and Technology Cooperation Agreement(ETCA)
  • China – Sri Lanka Free Trade Agreement(CSFTA)
  • Singapore – Sri Lanka Free Trade Agreement(SSLFTA)

11. How the current negotiations are taken place?

Negotiations are done by the cabinet approved National Negotiating Team which comprises experts from both public and private sector including academia, senior officials of ministries/departments and other government agencies.

The Negotiating Team is headed by Chief negotiator. Under the supervision of National Negotiating Team, there are sector specific sub – committees which are responsible for drafting the specific chapters of the FTA. These sub – committees are headed by the member of National Negotiating Team and constitutes sector experts from both public and private sector. Names of the sub – committees are as follows;

  • Sub Committee on Trade in Goods
  • Sub Committee on Trade in Services
  • Sub Committee on Investment
  • Sub Committee on Economic & Technology Cooperation
  • Sub Committee on Legal Affairs
  • Sub Committee on SPS &TBT
  • Sub Committee on Customs Procedures & Trade Facilitation
  • Sub Committee on Trade Remedies
  • Sub Committee on Rules of Origin

Technical inputs are provided by the Officials of Department of Commerce and continuous stakeholder consultation process and coordination are being carried out by the Ministry of Development Strategies and International Trade.

12. What are Rules of Origin (ROO)?

Rules of origin (ROO) are the criteria needed to determine the country of origin of a product for purposes of international trade. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports. Rules of origin are mainly used:

  • to determine whether imported products shall receive any preferential treatment
  • for the purpose of trade statistics
  • to implement measures and instruments of commercial policy such as anti-dumping duties and safeguard measures
  • for the application of labelling and marking requirements

13. How are Rules of Origin enforced in an FTA?

The rules of origin are enforced through a certificate of origin that is issued by authorized agencies of the trading partner. An exporter cannot have the preferential treatments of the FTA without submitting this certificate of origin from the authorized agency.

14. Who is the authorized agency in Sri Lanka for issuing the certificate of origin?

The Department of Commerce is the responsible agency for issuing Certificates of Origin (COOs) under all GSP Schemes, Free Trade Agreements (FTAs) and Preferential Trading Agreements (PTAs) of which Sri Lanka is either a beneficiary or Party.

15. How is Rules of Origin determined?

The way of determining the Rules of Origin is sets out in the individual FTA provisions.

16. What are the non-tariff measures (NTMs) that are typically dealt in FTAs?

Following NTMs are typically figure in FTA chapters:

  • SPS and TBT measures
  • Customs Procedures
  • Import licensing procedures
  • Trade documentation
  • Pre-shipment inspections

17. What are SPS and TBT measures?

SPS is an acronym for “Sanitary and Phyto-sanitary” measures and broadly includes measures for the protection of plant, animal and human health. The WTO’s SPS Agreement describes these measures in detail.

TBT is an acronym for “technical barriers to trade” and broadly includes standards, technical regulations and conformity assessment procedures as defined in WTO’s TBT Agreement.

18.What is an Early Harvest Scheme/Programme (EHS)?

Early harvest scheme is a mini fast track prelude to the FTA under negotiation. Under the EHS, the trading countries are agreeing to accept and implement the results of a portion of the negotiations before the rest of the negotiations are completed. It is primarily a confidence building measure.

19. What are the four modes of supply under trade in services?

Depending on the territorial presence of the supplier and the consumer at the time of the transaction, the definition of services trade under the GATS is as follows;

  • from the territory of one Member into the territory of any other Member
    (Mode 1 — Cross border trade);
  • in the territory of one Member to the service consumer of any other Member (Mode 2 — Consumption abroad);
  • by a service supplier of one Member, through commercial presence, in the territory of any other Member (Mode 3 — Commercial presence)
  • by a service supplier of one Member, through the presence of natural persons of a Member in the territory of any other Member
    (Mode 4 — Presence of natural persons)

Examples: (from the perspective of an “importing” country A)

Mode 1: Cross-border

A user in country A receives services from abroad through its telecommunications or postal infrastructure. Such supplies may include consultancy or market research reports, tele-medical advice, distance training, or architectural drawings.

Mode 2: Consumption abroad

Nationals of country A have moved abroad as tourists, students, or patients to consume the respective services.

Mode 3: Commercial presence

The service is provided within A by a locally-established affiliate, subsidiary, or representative office of a foreign-owned and — controlled company (bank, hotel group, Construction Company, etc.).

Mode 4: Movement of natural persons

A foreign national provides a service within A as an independent supplier (e.g., consultant, health worker) or employee of a service supplier (e.g. consultancy firm, hospital, Construction Company).

20. What are the different categories of Natural persons and how are they defined?

  • Contractual service suppliers

A service supplier of country “A” without a commercial presence in country “B”, sends one of its employees to country “B” to supply a service, pursuant to a service contract it has concluded with a consumer there;

Eg: Hiring foreign Cricket Coach by Sri Lanka Cricket Board for 2 year contract period.

  • Intra-corporate transferees

A service supplier of “A” transfers one of its employees to the commercial presence it has established in “B”;

Eg: Indian Chef work in Taj Samudra Hotel which is a leading Indian investment in Tourism Industry

  • Business visitors

A service supplier of country “A” sends one of its employees to country “B” for the purpose of either setting up a commercial presence or negotiating the sale of a service on its behalf. Business visitors are not directly engaged in the delivery of the service, but are just facilitating future trade, which may take place though a variety of modes of supply.

eg: Businessman’s come for Trade Fairs & Conferences

  • Independent Professionals

A service supplier of country “A” goes to country “B” to supply a service in his individual capacity. The supplier would hence not represent or be an employee of any business entity that has the service contract.

eg: Professionals in the EU can move across borders in European Economic Area and practice their occupation.

21. Will trade in Services Liberalization lead to an invasion of the Sri Lankan Labour Market by Professionals?

Sri Lanka will expedite FTAs with India, China, Sri Lanka etc. in order to obtain greater market access to support its export – led development strategy. The new FTAs that the government has advocated go beyond trade in goods and covers investments and services.

Service liberalization process under WTO General Agreement in Services (GATS) is characterized by a high degree of discretion and flexibility. Members make Market Access and National Treatment commitments in each of the four modes of supply, totaling eight commitments for each activity. These commitments are sectoral, made in sectors which members are willing to table for negotiations.

Sri Lanka opened up many of its services – finance and banking, insurance, tourism, telecommunications etc. – unilaterally when it liberalized its economy in 1977. Thereafter, a gradual opening of these sectors took place as the liberal economy got more opened to foreign competition until about mid-2000s. Sri Lanka’s multilateral liberalization efforts in in services commenced in 2000 after GATS came into operation under the WTO. Sri Lanka made its commitments under the WTO GATS in telecommunication, financial services and banking, and tourism. Sri Lanka made lower commitments in in GATS compared to the extent of unilateral liberalization that has been undertaken. This allowed a greater deal of policy space for the government to shift within the committed level of liberalization and the unilaterally provided level.

Sri Lanka made a concerted decision to expose its services sector for more international trading in 2002. For this purpose, the option that was selected was GATS Article V, where countries could engage in service in services liberalization under a GATS – Plus framework in bilateral or regional agreements.

In 2010, Sri Lanka engaged in trade in services liberalization under GATS V under SAARC umbrella, known as SATIS. SATIS liberalization is an ongoing process which is progressing slowly. Services liberalization was discussed in the proposed FTA with China initiated in 2013. Trade in services liberalization in built into the FTA and negotiations on possible sectors for liberalization has commenced in 1st and 2nd round of negotiations of CSFTA in 2014 and discussion revived in 2016. Similarly, “Trade in Services” among bilateral partners are being discussed in the Singapore – Sri Lanka FTA negotiations and India Sri Lanka ETCA negotiations.

A bone contention of all agreements that include trade in services liberalization is the possible opening up of Mode 4. Sri Lanka has kept Mode 4 liberalization unbound in both its multilateral liberalization under WTO and regional liberalization under SATIS so far. Moreover, based on various discussions with industry sectors, the Hon. Minister in charge of International Trade took a decision to keep Mode 4 unbound in all services sub – sectors that are selected for liberalization with India. This means that professional labour liberalization on a stand – alone basis will not take place under the ETCA. Also it should be noted if Sri Lanka engages in Mode 4 liberalization. Where skill deficit exist, Mode 4 liberalization would operates under (a) a well – defined regulations/quotas and Mutual Recognition Agreements (MRAs) and (b) it is the private sector that would have been engaged in hiring professional labour according to their needs and affordability.

22. What is a Mutual Recognition Agreement?

A mutual recognition agreement (MRA) is an international agreement by which two or more countries agree to recognize one another's conformity assessments. MRAs can be in both areas of goodsand services for recognition of various quality standards and professional qualifications.

23. What is SATIS?

SATIS is the acronym for SAARC Agreement on Trade in Services, in which Sri Lanka is a party. This was signed at the Sixteenth SAARC Summit held in Thimphu in April 2010. The Agreement entered into force on 29 November 2012 after ratification by all SAARC Member States with the issuance of a Notification by the Secretary General of SAARC.

Since the signing of the Agreement, the Expert Group on the SAARC Agreement on Trade in Services has been engaged in negotiating Schedules of Specific Commitments. The SAARC Commerce Ministers have been monitoring the progress in this regard and giving requisite directives aimed at time-bound actions for finalization of Schedules of Specific Commitments. However, the Schedules of Specific Commitments are yet to be finalized.

24. What is ETCA?

A trade agreement that is being negotiated between Sri Lanka and India with a view to promoting investments, technical cooperation and trade in services and goods between two countries. The objective of the ETCA is to stimulate Indian investors to engage in more investment in Sri Lanka and create more career opportunities for Sri Lankans.

25. What is the current situation of ETCA negotiations?

The Second Round of Negotiations of Economic & Technology Framework Agreement (ETCA) was completed during 29-30 September 2016 in India and the Indian side has agreed to discuss in parallel the implementation issues of ISLFTA. India has given their comments /counter texts on several Chapters. Sri Lanka side has reiterated the need of continuing the services sector negotiations giving due consideration to the asymmetry between the two countries. Both sides have agreed to consult their respective stakeholders for finalizing outstanding issues. The next round of negotiations will be held.

26. What is meant by having “services” chapter in ETCA?

During the discussions it was recognized that services cover broad areas encompassing telecommunication services, financial services (Insurance, Banking) and Business Services under which professional services comes under. Although services area covers various sectors, Sri Lanka clarified its position with regard to movement of natural person or Mode 4.

Accordingly, Sri Lanka will not open Independent professionals moving to provide services. Furthermore, Commercial presence where an investor will establish an entity in Sri Lanka with minimum investment threshold and such an investor after establishment will be allowed to engage high managerial persons, as currently done under BOI law.

27. What is intended to gain from Early Harvest Mechanism of ETCA

  • Removal of Quota restrictions of ISLFTA

As discussed during the first round of negotiations, removal of quotas on apparel, pepper etc. was emphasized by Sri Lanka and a note on rationale for removal was tabled during the Second round of negotiations. In the case of apparel, inadequacy of quota was pointed out and Sri Lanka mentioned that it imports over US $ 500 million worth of yarn, fabric and garments from India. Therefore, quota on apparel should be removed to rectify this sectoral imbalance. India agreed to further to examine and request and provide a response early.

  • Structured Mechanism to address day to day operational issues

During the ETCA negotiations, Sri Lanka reiterated necessity of addressing current implementation relating issues of the ISFTA. To address existing issues and issues that would arise in future a structured grievance redressal mechanism with clear functions and authority has been proposed to establish in Delhi/Chennai.

Furthermore, this mechanism would act as a trade facilitation point and promptly address the issues brought before it by exporters. Sri Lanka

Furthermore, it was agreed to address TBT & SPS related issues faced by exporters of process foods and fruits and vegetables and manufactured products to commence negotiations on Mutual Recognition Agreement which will provide lasting solutions to problems faced by exporters. For this purpose a broad framework agreement would be negotiated under which Sri Lanka Standards Institution and Food Safety Authority and other relevant agencies will enter into agreements with their counterparts in India.

It is important to mention that during the first round and second round of negotiations Sri Lanka stated that this Early Harvest Mechanism should be implemented the day ETCA Agreement is signed.

28. What is the current situation of China – Sri Lanka FTA negotiations?

The idea was initiated during the 5th joint commission which held on 24th April 2013. Accordingly, first two rounds were held in April and November 2014.

With the new scope, The 3rd Round of Negotiations of China-Sri Lanka FTA (CSLFTA) was completed in August 2016 in Colombo and the 4th round was held in November 2016 in China. During these rounds, the text in the Chapters was discussed and there have been matters related to Trade in Goods, Services and Investment in particular which both parties are required to resolve internally and come to consensus in forthcoming negotiation rounds. In Sri Lanka, wider stakeholder consultations were conducted domestically in relation to Trade in Goods, Trade in Services, Investment, Customs Procedure & Trade facilitation, SPS & TBT, Economic & Technology cooperation etc.

29. What is the current situation of Singapore – Sri Lanka FTA negotiations?

The focus of the proposed Singapore Sri Lanka FTA (SLSFTA) is very much on the Trade in Services and Investment. Moreover, Sri Lanka expects have mutual cooperation in several emerging areas such as e-commerce and intellectual property rights. The 1st Round of Negotiations was taken place on 16th Aug 2016 where the scope of the agreement was discussed. Singapore side expressed its willingness to identify gaps and jointly develop solutions for mutual cooperation. The 2nd round of negotiations was held on 21st Oct 2016 in Colombo and further discussed the country positions with regards to all areas of the agreement. Similarly, 3rd round of SLSFTA is scheduled to be held in mid-December, 2016.

Sources:

www.wto.org

News articles published by the Ministry of Development Strategies and International Trade