Trade deal with China waiting for Sri Lankan business

Sri Lanka is looking to increase trade with China through a regional trade deal.
The Commerce Department says the Asia Pacific Trade Agreement, or the APTA, is a window into the massive Chinese market. The department is now getting ready to hold talk with local businesses, to improve on existing concessions from China.

Chinese offer
China has already expressed interest in expanding trade with Sri Lanka.

“China is a huge market. This year, we will import nearly one trillion dollars worth from the rest of the world. So there are many, many opportunities for Sri Lanka to trade with China,” Zhu Hong, from the Department of International Trade, China, speaking at a seminar on the APTA organised by the Ceylon Chamber of Commerce earlier this month.

“We give a 27 percent margin of preference, on average, for around 1700 items at 8 digit customs classification level, to Sri Lanka. This covers around 50 percent of Sri Lanka’s total exports into China,” said Hong.

With APTA trade talks, the coverage of Chinese concessions to Sri Lanka will increase to around 3,000 items soon.

Duty cuts ignored
But so far, exports into China and the use of the APTA agreement itself, have been slow. Whatever little exports heading into China from Sri Lanka, are taking the conventional route, paying full duties, instead of the APTA route with APTA duty cuts.
In 2006 exports to China from Sri Lanka came to around Rs 2.6 billion while imports from China came to Rs 81 billion.
The current export basket into China is mainly made up of items like coir fibre, rubber and rubber products and tea. The Commerce Department says some of these products are already eligible for duty cuts under the APTA but that exporters are not asking for concessions.

“When we matched the exports, we found that some are eligible for concessions but are not using the concessions,” said Dr Dayaratne Silva, Deputy Director of Commerce. The Commerce Department says exporters need to check on what items qualify for duty cuts and must then get the APTA Certificate of Origin, to qualify for duty cuts into China.

“We found that some exports go into China without the APTA certificate of origin. So they don’t get any duty reductions. Also Sri Lankan exporters have so far used less than 5 percent of preferential tariff lines granted by China,” said Silva.

Out of the closet
APTA, previously known as the Bangkok agreement, is the oldest preferential trade agreement among developing countries of the Asia-Pacific region. It was formulated under the guidance of the UNESCAP to increase trade within Asia and was signed during Sri Lanka’s closed economic regime, in 1975. Originally, the signatories were India, Sri Lanka and Bangladesh, from South Asia and Lao and the Republic of Korea, from East Asia.

The agreement gathered dust for a quarter century from 1975 to 2001, until China joined the group. This linked two of the world’s largest markets and two of the world’s fastest growing economies, China and India, inside one trade deal. Over the past decade, trade between China and India shot ahead, to hit an average annual growth rate of 34 percent. Meanwhile, South Korea transformed into an industrial nation and is now the third largest economy in Asia.

With these developments in the background, last year, APTA held its second ministerial meeting.

According to UNESCAP, the preferential trade agreement is now set on becoming a free trade agreement with plans to include services and investments under it.

The six countries have already started cutting duties. Earlier this month the APTA countries met in Colombo for another round of trade talks and agreed to expand trade concessions for each other.

“At the Colombo meeting we agreed on modalities and deadlines. We agreed on a coverage of 50 percent of tariff lines and concessions also at 50 percent. We have a May 23 deadline for request lists and by August 31, we will finish the offer lists. The fourth round of negotiations is scheduled for completion by October 2009,” said Xuan Zengpei, the Director of the Trade and Investment Division of UNESCAP.

Sri Lanka already has bilateral free trade agreements with the two largest South Asian economies, India and Pakistan. Therefore, the APTA is seen by local trade authorities, as an entry route into China and South Korea.

Sri Lanka is also classified as a vulnerable economy under the APTA agreement. This means, as in the case of the least developed countries, Sri Lanka will be able to make lower concessions than India, China and South Korea. The Commerce Department is now getting ready to compile Sri Lanka’s offer and request lists and is calling for feedback from local businesses.

Ground reality
Sri Lankan exporters however, are more down to earth about the ‘potential’ Chinese market opportunity.

“With our cost of production, we can’t compete on price against Chinese goods in the Chinese domestic market,” said Mohan Mendis, a past president of the Sri Lanka Exporters Association. Given the domestic production limitations, exporters say the trade authorities should look into the possibility of opening up service exports into China.

“There could be some niche products that we can target. But the fact is, on top of our rate of production cost increase, we are also a small manufacturer, and we don’t have China’s economies of scale. So where I see a future potential, is in the area of specialised services, like in the hospitality industry,” said Mendis. Another recommended area is tourism. “China’s middle class is growing and they are travelling. So tourism is something that we can immediately target,” said Mendis.

The Chinese authorities have already identified some areas for trade development including tourism “The Chinese embassy has identified gems and jewellery, tea, natural rubber and tourism, as potential avenues to grow trade with China. The embassy is also developing a trade promotion programme for Sri Lanka,” said Lasantha Wickremasuriya, President of the Sri Lanka-China Business Council.

Exporters say the trade authorities should also raise awareness among exporters about the APTA agreement, to increase its usage.