India-Sri Lanka Free Trade Agreement: An Analysis of Merchandise Trade

1. ADB RETA 6472: STRATEGIC PARTNERSHIP FOR POLICY DEVELOPMENT AND ACTION TO FOSTER REGIONAL COOPERATION IN SOUTH ASIA India-Sri Lanka Free Trade Agreement: An Analysis of Merchandise Trade Presented at Research Information System for Developing Countries Dr. Subrata Kumar Behera & Prof. I N Mukherji 13 June 2011

2. Structure of the presentation • Objective & Methodology • Overall trade pattern • Changing structure of trade • Macro-analysis of the FTA • Revision of the ‘Negative List’ • Declining margin of preference • Finding and policy implications

3. Terms of Reference/objective TOR for this study is to investigate, over the decade 1998-99-2008-09; • The overall trend in bilateral trade between India and Sri Lanka • The changing structure of bilateral trade • The emergence of new products and decline of old ones in the composition of trade • The trade potential between the two countries given the supply-demand balances and existing trade • To work out the revealed comparative advantage of the identified potential products and further, to assess their competitiveness in respective markets • On the basis of such analysis, suggest modalities for pruning products in the respective Negative Lists of the Contracting States • To assess the role of decline in preferential margins in the operation of ILFTA.

4. Methodology • UN COMTRADE database has been used for trade data • TRAINS database has been used for tariff data • Analytical tools used: • Potential Trade • Revealed Comparative Advantage • Export Specialization Index • Trade Intensity Index

17. Major Sri Lankan products loosing competitiveness in the Indian market due to fall in India’s MFN rates • HS Code ProductDescription • 7403Refined copper and copper alloys, products7605Aluminium wire. • 72 to 73Iron or steel & its' articles • 7601Aluminium products68Marble282490Lead oxide • 740811Copper wire. • 740400Copper waste & scrap • Source: http://www.doc.gov.lk/web/indusrilanka_freetrade_introduction.php as on 12 Dec 2010.

21. Compound annual growth rate of imports of the two contracting states under different product categories (2001-2009)

22. PRUNING THE NEGATIVE LIST : PRODUCTS IN ILFTA NL NOT IN SAFTA NL • It is assumed that tariff cuts are generally deeper in bilateral arrangements compared to multilateral/regional trading systems. However, it was observed that there are number of items that are not listed under the SAFTA sensitive list is found under the Negative List of ISLFTA. • There are 97 products in the Negative List of India under ILFTA which don’t figure in the Sensitive List of India under the SAFTA. Annex 4 of the present study enlists such products. This study recommends removal these products from the Negative List. These lists include 49 products in the readymade garments (chapter 61 & 62) on which India allowed duty free import up-to a limit of 3 million pieces in the bilateral sensitive list in 2008. • Similarly, there are 201 products in the Negative List of Sri Lanka which don’t figure in the Sensitive List of Sri Lanka under the SAFTA. Annex 5 of the present study enlists such products. The present study recommends removal these products from the Negative List.

23. PRUNING NEGATIVE LIST: TRADE POTENTIAL AND COMPETITIVENESS APPROACH

24. India's Potential vs. Sri Lanka's Negative list

25. Sri Lanka's Potential vs. India's Negative list

26. India's Tariff Barrier

28. Sri Lanka's Tariff Barrier

31. Differential between India's MFN (≥50%) and preferential tariff (duty-free) vis-à-vis Sri Lanka's MFN tariff (2009)

32. Major Findings • The overall trend in bilateral trade have increased over the years in relation to world trade. • India became the most favoured import source for the Sri Lankan importers immediately after the implementation of the FTA • On the other hand, rank of Sri Lanka as an export destination of India’s products improved but remained beyond 10 (from 18th in 2000 to 13th in 2005) • The structure of bilateral trade has undergone a change since the agreement. The study highlights Sri Lanka’s export diversification to Indian market, the overall concentration in copper and vegetable oil notwithstanding.

33. Major Findings (cont..) • Trade in number of products has increased considerably in spite being in the negative list. • The study lists out the products to be removed from the negative list from either side . • The importance of bilateral margin of preference has gone down as a result of declining MFN rates, pointing to the need for more comprehensive bilateral engagement. Further, the study cautions of possible trade deflection in identified products not in the negative list and suggests preemptive measures to forestall such attempts.

34. Policy Implications • Rationalization of the negative list could be undertaken • Since external tariff differential still exist, there is need for strict administration of the Rules of Origin and to rationalize the MFN rate as far as possible • Competitiveness of goods is declining in each others market due to greater liberalization of the economies (specifically the tariff rates). Hence, it is high time to enter into the areas of mutual cooperation like trade in services and investment. • The urgency to negotiate a Comprehensive Economic Partnership Agreement (CEPA) arises not merely to widen the scope of cooperation in non-trade matters, but to further deepen cooperation in trade-related issues as well to address existing anomalies that exist. It may be recalled that a number of non-tariff barriers operating in India such as restrictions on ports of entry, restrictions on sourcing of inputs for duty-free entry to Indian market were addressed within the context of such negotiations.

35. Thank you.