By TON Sri Lanka

During the ongoing economic crisis in Sri Lanka, China refused to rearrange the repayment of its loans to Sri Lanka by saying that it has no system of doing such a thing. Instead, the Chinese Foreign Minister advised the Sri Lankan President that he should promote Sri Lankan industries and exports and sign the long-pending Free Trade Agreement (FTA) with China to finish the foreign exchange shortage.

However, when the economic situation in Sri Lanka degraded, China offered a loan of US$ 1.5 billion to aid pay off old loans and an additional US$ 1 billion as a credit to secure essential goods from China. After Sri Lanka approached the IMF, China offered help Sri Lanka swing a good deal with the IMF.

However, China’s old demand that Sri Lanka should speedily negotiate and conclude an FTA still remains. China is certain to pursue this goal to firm up its economic relations with Sri Lanka which cannot be run only on the Belt and Road Initiative (BRI), which is mainly a package of erection infrastructural facilities.

China desire to build its relations with Sri Lanka on a strong footing of trade and investment. The FTA is a tool that can open boost the trade and investment.   

Reasonably, the Sino-Lankan trade has been deeply one-sided. In 2020, China exported US$ 4.01 billion to Sri Lanka. The main products were light rubberized knitted fabric (US$241 million), communications equipment (US$ 225 million), and advanced petrol (US$127 million).

During a similar year, Sri Lanka exported US$ 266 million value of goods to China. The core products were tea (US$ 60.4 million), coconut and other herbal threads (US$ 24.2 million), and knit T-shirts (US$ 18.5 million).

Sri Lanka is wary about entering into an FTA with China, as it has experience with other regional countries. Although, the Indo-Lankan FTA has given an increase to Lankan exports to India, still, Sri Lankans keep viewing the India- Sri Lanka FTA (ISLFTA) as unfavorable. They allege the Non-Tariff Barriers (NTB) raised by India are against the interests of Sri Lanka.

Similar worries are there when they conversed an FTA with China. China’s trade with Sri Lanka has increased swiftly.

It is a reality that Sri Lanka’s imports from China increased despite an overall reduction in the island nation’s international trade and the rise of protectionism in its policies. Sri Lanka’s imports-to-GDP ratio was 36% in 2005; during the same year, imports from China to GDP ratio was only 2.6%.  2017, the imports to GDP ratio had dropped down to 23.8% while imports from China to GDP ratio had increased to 4.8 %.

This momentous upsurge in imports from China came even without China having a Free Trade Agreement (FTA) with Sri Lanka. That means Chinese imports are subjected to normal tariffs, which might be eliminated under an FTA. This is a perturbing factor for Sri Lanka.

It was in 2014, the regime of the China-friendly Lankan President discussed FTA with China. Since then, the two sides have had six conversation sessions. However, the discussions became unsuccessful in 2017 due to differences over the level of trade terms and conditions under the FTA. China wanted 90% of goods to be tariff-free. Obviously, it is not a good trade situation for Sri Lanka.

According to the website Silk Road Briefing, China gives priority to trade in goods and then moves on to trade in services and investments in its FTAs with other countries. China has signed FTAs with 26 countries so far. China is pursuing a policy to remove duties on over 95% of tariff lines on its exports. This shows an alarming situation.

Although, the opportunities for Sri Lankan financiers are profuse because Sri Lanka had a relatively global trade advantage in 566 products, of which, 243 items were or could be exported to China. There were an additional 299 products with trading potential with China. These included vegetable products, rubber, and plastics.

The Silk Road Briefing website points out that there are regional examples that Sri Lankan businesses and entrepreneurs could follow: “The China-ASEAN Free Trade Agreement, which impacted small countries such as Cambodia and Laos, as well as larger economies such as Indonesia, Malaysia, Thailand, and Vietnam, came into effect in 2009.

At that time their businesses struggled on their own and were able to adapt by either reinvesting in their own businesses by joining together with Chinese partners or by looking more closely at the China market.

The experience of these South East Asian countries has an example for Sri Lanka which had increased its exports in billions of dollars like Cambodia’s exports rose from US$ 0.841 billion to US$ 1.46 billion; Indonesia’s from US$ 11.63 billion to US$ 32.6 billion.

The same is the case with Laos from US$ 0.47 bn to US$ 1.68 bn; Malaysia from US$ 19.01 billion to US$ 38.7 billion; Thailand, from US$ 15.9 billion to US$ 30.2 billion and Vietnam from US$ 4.8 billion to US$ 49.4 billion. Sri Lankan entrepreneurs will have to come out of their suspicions and should take advantage of opportunities to enter the huge markets in China-related to FTA.