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Getting on with the neighbour: Lessons from Sri Lanka

Rohan Samarajiva
IT was reported that a group of experts had recently met in Dhaka to discuss the pros and cons of a bilateral trade agreement with India.
According to the report the consensus was against an agreement. One speaker had referred to the Indo-Lanka Free Trade Agreement (ILFTA), saying it had been a failure. This is contrary to the facts.
The ILFTA has been a great success, increasing the volume and diversity of Sri Lanka's exports to India. The overall imbalance remains, but most of India's exports to Sri Lanka are items outside the scope of the FTA such as petroleum products and motor vehicles.
There is controversy on the expansion of the FTA into a Comprehensive Economic Partnership Agreement (CEPA) that would provide a legal framework for trade in services and for investment.
The opposition comes from a few industrialists who appear to be driven by atavistic fears of India more than by evidence. Those opposed to the CEPA have made it very clear they are not asking for the abrogation of the FTA, which in revised form will become a
part of the proposed CEPA. The Ceylon Chamber of Commerce supports the CEPA.
Sri Lanka was the first country to sign a free trade agreement with India, back in 1998. It had flaws, as would be expected when it was a first for both countries. There were port-of-entry constraints that have since been removed.
Sausages from Sri Lanka rotted in the Chennai port because the testing had to be done in Kanpur. Sri Lankan exporters were surprised by state-level taxes that were not covered by the FTA, a document that bound only the central government.
India hit the emergency stop on two commodities exported from Sri Lanka, pepper and vanaspati. The latter was produced in Sri Lanka by Indian investors who found an arbitrage opportunity. Now that India has rationalised its tariffs, the arbitrage opportunity no longer exists.
Sri Lanka started negotiating a CEPA in 2003, just behind Singapore. Today, Sri Lanka is at the back of the line, with India having concluded similar agreements with many countries, including Singapore, Korea, Japan and even the European Union.
During the recent visit of the Indian Minister of Commerce Anand Sharma, the fate of
the unsigned agreement was the elephant in the middle of the room that occupied everyone's attention, but was not spoken of by the Indian delegation.
Instead, Sharma talked about what India would do for Sri Lanka: export zones for auto parts and pharmaceuticals, greater support for oil exploration, a bilateral committee to help increase Sri Lanka exports, among others.
He was talking about the asymmetrical approach embodied in the FTA and CEPA, but not in so many words.
He also talked about doubling bilateral trade to $10 billion by 2015 and massive increases in Indian investments in Sri Lanka. That this would require legal frameworks in the form of investment and extended trade agreements was implied but not stated.
What's in it for them?
In conditions of imperfect information, people base their decisions on short cuts, the fancy word being heuristics.
So, when people who do not quite know how to assess a trade or investment agreement hear one party advocate it, even in implicit form, the heuristic kicks in. What's in it for them? If they are for it, it must be bad for us.
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It was clear the Indians want the CEPA signed. The Indian minister's sweeteners, committees and targets all reinforced the point. For those in the zero-sum-game mindset offers of this sort cannot have a simple explanation.
But there is. For India to realise its great, or even regional, power dreams (exemplified by the much-desired seat on the Security Council), it must have good relations with its neighbours.
Pakistan is a long shot; relations with Nepal are volatile and the other two neighbours, Bhutan and Maldives are micro states. That leaves Bangladesh, Myanmar and Sri Lanka.
Myanmar could offer some opportunities for investment, but will mostly need aid. Bangladesh and Sri Lanka are the countries India can most easily trade with and build a sound basis for mature politico-economic relations that could serve as models for the other neighbours.
And trade, as most people know, is not a zero-sum game. Both countries can gain. There are things in it for India, but there aregood things in itfor Bangladesh and Sri Lanka too. Good fences make good neighbours
But what is in it for Sri Lanka is not really the sweeteners dangled by the Indian minister. What the private sector firms (in Sri Lanka as well in India) who were listening to all this need is certainty and a
reduction in the discretion given to officials on both sides.
The CEPA is not about deals for setting up this or that export zone, or special dispensation to invest in one or another place. Trade agreements contain rules of behaviour that one can depend on; that carry with them consequences if violated. They reduce risk for investors and traders.
Perhaps the most erudite among the Sri Lankan ministers participating in the event (there were five), Dr Sarath Amunugama, senior minister of International Monetary Cooperation, explained the present order.
When there is a problem, we call our colleagues in India and work something out. Our personal relations are such that this is assured, he said.
What he did not say is that the aggrieved Sri Lankan investor or trader must also have good personal relations with the people in government who can make those calls. Minister Amunugama was describing international trade relations in a government of men, not of laws. Everything depends on who knows whom, and the quality of the relationship.
In a government of laws, international trade would also be governed by laws: international agreements well negotiated and implemented without discrimination. You would not have to know the
minister or the secretary; you would be entitled to redress, based on rights and obligations embodied in the agreement.
Taking Indo-Lanka trade to $10 billion cannot happen through one-off deals, as it was in the days when bilateral relations were said to be governed by the friendship between the Nehru and the Bandaranaike families.
At the levels now being discussed, what are needed are big, continuing transactions by major players. That cannot happen without investment and services-trade agreements. Tariffs are low; what now matters, even in trade in goods, are non-tariffbarriers.
In the case of services trade, that is all that matters. And investment is all about estimating and managing risk. Agreements such as CEPA, though imperfect, are needed to manage non-tariff barriers and risk.
Often repeated at the event was the Sri Lankan president's saying that India is more than a friend, but a relative. Sadly, the metaphor is inappropriate for modern economic relationships. Well-negotiated and executed legally-binding agreements are what enable modern trade and investment, not exchanges of favours typical of family relationships.
Rohan Samarajiva is the founding chair and CEO of LIRNEasia, an ICT policy and regulation think tank based in Colombo.