In May 2017, Sri Lanka regained the privileges of the European Union`s (EU) Generalised System of Preferences (GSP+) for Sri Lankan exports. GSP+ trade preferences consist of the complete elimination of tariffs on 66% of tariff headings covering a wide range of goods, including textiles and fisheries. The GSP+ programme is subordinated to Sri Lanka`s promotion of human and labour rights and the achievement of sustainable development. The free trade agreements with India and Pakistan cover only trade in goods. The agreements provide for duty-free imports and tariff preferences for industrial and agricultural products. A national value added of 35% is required in order to benefit from the concessions granted under the agreements. This is Sri Lanka`s first free trade agreement since 2005 and the most comprehensive of them. It includes goods, services, investment, trade facilitation, intellectual property rights and government procurement. To strengthen their economic relations, Sri Lanka and Singapore signed a bilateral free trade agreement on 23 January 2018. Despite decades of cordial diplomatic relations between the two islands, Singapore accounted for only 1.1% of Sri Lanka`s exports and 5.3% of imports in 2016. With an important geostrategic location in the Indian Ocean, international trade is a natural goal for Sri Lanka. The country has signed various bilateral and multilateral free trade agreements (FTAs) over the years, the most recent being the Sri Lanka-Singapore FTA (ALLEAC) in January 2018. However, in early 2019, the DCFTA encountered a number of challenges that highlighted the pros and cons of such agreements.
Singapore, which will chair ASEAN in 2018, is expected to support Sri Lanka`s possible participation in the Regional Comprehensive Economic Partnership (RCEP). RCEP promises to become the largest free trade agreement in the world: the 16 participating countries account for 31% of global GDP, including the ten ASEAN countries of China, India and Japan. RCEP membership offers Sri Lanka the price of simultaneous access to a huge regional market and dynamic Asian FDI. Participation in RCEP is also arguably easier and less burdensome for Sri Lanka`s limited negotiating capacity than the separate negotiation of 16 bilateral free trade agreements. Increasing Singapore`s foreign direct investment in Sri Lanka is also a priority: only 5.3% of foreign direct investment in Sri Lanka in 2014-2017 came from Singapore. The investment climate has improved for Singaporean companies: the free trade agreement rightly contains safeguards against expropriation and discrimination against Singaporean investments. Singaporean companies can apply for large public procurement projects in Sri Lanka, and the Sri Lanka Investment Board targets Singaporean FDI in infrastructure, IT services, tourism and education. Sri Lanka should also seize this opportunity to close its large trade gap with Singapore.
Sri Lanka`s exports to Singapore are concentrated in precious stones, refined petroleum, textiles and ships; Agriculture, fisheries and services exports are lagging behind. Sri Lanka`s economy fears that the free trade agreement could lead to a “round trip” of state-subsidized imports from ASEAN and China via Singapore. They hope that the agreement`s rules of origin, which require at least 35% of value creation to take place in Singapore, will suffice. To address these and other concerns, Sri Lanka plans to strengthen temporary trade measures such as WTO-consistent safeguard measures and anti-dumping measures. But instead of advocating for protection, Sri Lankan companies should improve their knowledge of standards and quality so that they can export to Singapore`s high-income market. Meanwhile, Sri Lanka will remove tariffs on 80% of its goods over a 15-year period under the agreement, which represents a relatively long adjustment period. The free trade agreement is expected to benefit Sri Lanka through cheaper consumer goods and inputs, foreign direct investment (FDI) and competition. But the two countries are expected to tackle a number of crucial areas in order to maximize the benefits for Sri Lanka. However, since the signing of the agreement, many local businesses and politicians have criticized the FTACL.
Singapore`s membership in the increasingly duty-free bloc of the Association of Southeast Asian Nations (ASEAN) means that Sri Lankan products would have better access to ASEAN markets. However, there were also concerns that relaxing the rules of origin would mean that such traffic would work both ways, giving ASEAN countries such as Vietnam, Thailand and Indonesia, which are more direct competitors of Sri Lanka than Singapore, better access to Sri Lanka. .