Comments on the National Trade Policy Framework
The Ceylon Chamber of Commerce (CCC) welcomes the initiative taken by the Ministry of Development Strategies and International Trade (MODSIT) and the Agency for International Trade (AfIT) to prepare a National Trade Policy. The CCC was given a document titled ‘National Trade Policy of Sri Lanka – Draft 1’ in September 2016 by MODSIT and was requested to make our comments. The Chamber’s Economic Intelligence Unit, with overall inputs from the CCC’s Steering Committee on Trade Liberalisation, prepared the following comments and submitted to MODSIT by November 2016.
1. A National Trade Policy is useful in getting all stakeholders – especially across government – onto a common mission of improving Sri Lanka’s trade performance. In our view, a National Trade Policy should:
2. Once the National Trade Policy is formulated, the focus should swiftly move to developing a Trade Development Strategy or a Trade Promotion Strategy. This is what the private sector would be most keen on – implementation of key policy measures in order to have real economic and business impact.
3. The CCC observes that the document shared with us is more a framework guiding the development of a National Trade Policy or a background ‘research and recommendations document’, rather than a Draft of the National Trade Policy itself. The writing style, depth of information, historic and background analysis, and the nature of the recommendations, all lend themselves to such a background document, rather than a policy document. This document can now be used to formulate a focussed and meaningful national policy document.
4. The CCC stands ready to continually provide inputs to MODSIT and the Agency for International Trade as the final Policy document is formulated and fine-tuned.
A. Overall Focus
1. The paper starts with a correct identification of the purpose of re-focussing on international trade – the need to shift growth models (from public infrastructure and consumption, to exports and private sector investment) as well as the job creation agenda.
2. The paper (particularly in page 24) provides a clear elucidation of the current challenges in Sri Lanka’s international trade and a concise framing of why Sri Lanka need to fix these. It is one of the strongest articulations of these that is contained in a government policy document to date.
3. The document rightly identifies the need to move away from mercantilism – looking not just at exports but also at imports. This is a critical shift from the policy approaches of the last decade where export promotion was attempted alongside vilification of imports. The document recognises that imports are a crucial component of a trade-led growth strategy. As has been advocated by the CCC in an earlier article, exports and imports are ‘two sides of the same coin’1.
4. The Chamber welcomes the three pillars identified in this paper – i) domestic competitiveness; ii) trade facilitation; and iii) market access – as the key elements required for improving Sri Lanka’s trade performance.
B. Trade Facilitation, Standards, Testing
1. Page 45 argues for an important shift away from ‘control’ towards ‘facilitation’. This has been a call of the private sector for time now, as it is the most important factor when considering a modernized trading regime.
2. With regard to standards and testing, the paper talks about the issues of institutional and process fragmentation, but does not address the issues of quality, and modernity of these institutions. Often it is these issues that hold back their relevance to tradeoriented businesses.
3. The section on Mutual Recognition Agreements (MRAs) and standards seems to be heavily influenced by the issues around these faced in Indo-Lanka trade. The paper needs to take closer account of similar issues in trading with Europe, US, rest of Asia, in order to ensure that the paper takes a more holistic view, sans bias towards any one bilateral trading relationship. In some of these cases, MRAs may not be the answer, while in others (like ISFTA) MRAs would be essential.
4. National Single Window (page 84) - The paper focuses heavily on customs automation and digitization. However, modern trade facilitation (including establishing a National Single Window) requires a much wider focus, beyond just customs automation. This must be recognised in the paper. Moreover, the author may wish to consider starting with an ‘E-Hub’ first – which is an online document exchange, processing and clearance house – which is a key first step in a fully fledged national single window. The CCC’s recommendations on establishing such an E-Hub are annexed to this document (Annexure 1).
5. The paper refers to an ‘Immediate Deliverable’ (page 20) of establishing a ‘National Trade Facilitation Council’. This in fact has already taken place, as Sri Lanka’s accession to the WTO Trade Facilitation Agreement, and a National Trade Facilitation Committee is now functional.
C. Supportive Policies
1. The paper has correctly identified that policy incoherence has been a perennial challenge in Sri Lanka’s international trade. Yet, given the crucial importance of this issue, and the need to properly align tax, labour, environmental, investment, industrial, innovation, energy, and other policies, this area needs to be dealt with in greater detail. Currently, the section is just three lines, and merits more
2. The section on ‘Supporting private sector’ seem to be a catchall section that encompasses everything from ease of doing business to PPPs – these need to be carefully unpacked beyond the buzz words. As it stands now, this section is not instructive or useful. It needs to contain some key measures that will be taken to facilitate trade-oriented businesses and provide useful guidance to government agencies on what needs to be done.
3. Export policy (page 72) stands as a separate section, and it is not clear if this would be part of the broader national trade policy or whether it will become a standalone policy as the title suggests. The Export policy needs to be more contemporary – for instance, there is only passing mention of the need to focus on innovation as part of export competitiveness. Innovation needs to be highlighted more
4. The paper argues that “the legal framework and regulatory structure related to trade and investment in Sri Lanka suffer from fundamental gaps which needs to be addressed preferably prior to liberalization or markets or through a parallel process”. It states furthermore that, “the regulatory reforms could be undertaken in parallel to the envisaged expansion of bilateral agreements”. These are rather non-committal statements, and a policy document should have a firm stance on the approach the government would take in addressing the gaps in legal and regulatory mechanisms related to trade.
D. Institutional Reforms
1. The view taken in the document that the Department of Commerce (DoC) must be brought under the Ministry of Development Strategies and International Trade is a very valid one. As the international trade agenda is now firmly under the remit of MODSIT; the Agency for International Trade is set up in MODSIT; the Export Development Board is gazette under MODSIT; and the policy leadership for new Preferential Trade Agreements (PTAs) has been given by MODSIT, it is important to have this key trade institution – DOC – under MODSIT as well. The private sector is experiencing coordination and communication gaps with regard to the ongoing PTAs due to DOC being anchored to a different ministry.
2. Page 62-63 sets out the sequencing of FTA negotiations, and suggests a very systematic and structured approach. Such an approach is ideal and is desired. The private sector too would be in favour of such a well thought out approach. However, the question arises as to whether it is feasible, given the domestic political economy context and foreign relations dynamics at play in most bilateral PTAs. The paper makes a passing remark about allowing for flexibility on account of “ground realities”, but by and large sticks by this sequenced approach. It must be made very clear if the policy document calls for a sequenced approach, where PTAs will only be entered into once each of the steps are carried out, bearing in mind the inevitable short cuts that may be taken by a government in order to forge a PTA early. If, for instance, a national policy document suggests that PTAs would only be entered into “after conducting a proper cost-benefit analysis” (page 69), the government would need to honour this in all future PTAs, otherwise there will be a loss of confidence and credibility in the document.
3. The proposed administrative mechanism (on page 66) does not recognise the role of chambers of commerce and business associations. They ought to be included this, as they are vital stakeholders in any international trade regime and trade is essentially carried out by businesses.
4. Institutional structure proposed by the paper (page 90) is suitable to flatten the current institutional overlaps. Coordination failure is the key problem that the private sector currently faces with regard to government agencies dealing with trade. Yet, as long as the Agency for Development comes under a single ministry (i.e., MODSIT) it would b every difficult to have an Inter-Ministerial Committee report to it, as envisaged in this paper. This proposal may need to be reconsidered, bearing in mind practical realities of government institutional setup.
5. Under the immediate deliverables section, the paper advocates for setting up an EXIM Bank. A national trade policy document may not need to make such specific recommendations, especially with very little published analysis/evidence on the need for an EXIM Bank in Sri Lanka. The Chamber has been reliably informed by banking sector experts that Sri Lanka does not suffer from not having an EXIM Bank and it may not be an immediate priority.
1. Trade liberalization: This paper does not explicitly tackle how the illiberal tariff and para-tariff structure that has hurt trade competitiveness over a decade will be reformed. As this is the most important issue facing Sri Lanka’s international trade regime, the trade policy must clearly articulate the government’s position on this. It must also articulate the trade liberalization process that needs to be undertaken.
2. Overemphasis on PTAs, Conflating GVCs and GPNs: The paper seems to contain too much emphasis on the role of PTAs, and too little on the role of Global Production Networks. Moreover, the paper conflates Global Value Chains with Global Production Networks, and use each interchangeably. This is misleading, and not making the distinction can lead to poorly designed trade policies. GVCs and GPNs require different policy interventions, and the latter is a more contemporary and focussed way of approaching trade policy. As a result of the heavy focus on PTAs, there is insufficient elucidation of Sri Lanka’s stance with regard to multilateral trading arrangements, for example the WTO; and interactions with existing as well as emerging regional and mega-regional trading arrangements.
3. Revenue considerations: Balancing revenue with tariff and para-tariff reductions would be a crucial issue. The section on rationalising border taxes contains an insufficient focus on the contentious issues of tax revenue and what needs to be done to bolster revenue in the short-run after liberalization. While rationalising the import tax structure has been identified correctly as a critical reform area, this must necessarily be considered alongside government fiscal operations. Often in Sri Lanka, border taxes are used to make up for revenue losses or expenditure leakages in the Budget; are subject to ad hoc and frequent changes; and import tax structures have become complex and convoluted over time. This has a negative impact on the ease of doing business and also affects the country’s attractiveness as a trade-led economy.
4. Innovation focus: Overall the paper placed insufficient focus on innovation and technology upgrading. For example, in the section on policies to support domestic supply capacity and competitiveness, there needs to be more on this, as a key pillar in strengthening Sri Lanka’s trade performance. Under the list of ‘Major Pillars’ and ‘Major Elements’ (Figure 3, page 38), innovation or technology upgrading needs to be listed under the ‘Major Elements’ of ‘Pillar 1: Competitiveness’.
5. Institutional reforms: The paper does not address the reform of existing trade related institutions like Department of Commerce, Export Development Board, Import Control Department, etc., to ensure they are fit for purpose and cater to a modern international trading regime.
6. Regulatory gaps: More focus is needed on dealing with domestic industry ‘doing business’ issues, particularly fixing regulatory gaps that cause an uneven playing field between domestic products and imports (e.g., lack of regulatory oversight over imported cosmetics and beauty products). This can also be brought in as part of the reforms to trade facilitation.
7. Trade adjustment: The paper can benefit from a clearer exposition of how the government can support businesses that are likely to lose out from trade liberalization in the short term and also support firms to take full advantage of the gains from liberalization (e.g., technology transfer, loans for industry restructuring, etc.). The CCC has made these recommendations to the government, on invitation of MODSIT. It also links well with the Prime Minister’s economic policy statement that mentioned a ‘Trade Adjustment Package’.
8. Digital trade/E-commerce: The paper requires a dedicated section on digital trade – particularly e-commerce - given its growing importance in international trade and its ability to foster trade-oriented SMEs, i.e., inclusive trade. An article published by the CCC on the importance of e-commerce for international trade elaborates this further2.
9. Rise of protectionism: While the papers identifies many important risk factors in the global trade arena, a key omission amongst these is the rise of protectionism across the world, particularly in the industrialized as well as G-20 countries. This is a key risk for Sri Lanka, and merit mention in the national trade policy, including an indication of how the government plans to deal with this. A further rise of protectionism could be expected if global growth slows further and countries use protectionism to shore up their own industrial sectors.
10. Future of existing agreements: While the paper provides an extensive discussion of Sri Lanka’s existing bilateral and regional PTAs (except the SATIS, which needs to be included), there is no mention of what the next steps should be with regard to Sri Lanka’s engagement with these. The policy document should clearly articulate the country’s stance vis-à-vis these existing PTAs; retaining them, expanding them; or revising them.
1 "Why do Imports Matter for a Trade Oriented Economy?" Economic Intelligence Unit, The Ceylon Chamber of Commerce Colombo
2 "E-Commerce: The Great Equalizer in International Trade" Vol 10, TIPS Series, Economic Intelligence Unit, The Ceylon Chamber of Commerce Colombo