The Hindu Business Line : BIMST-EC meet in Bangkok: Making free trade agreements work

Leaders from six nations of the South Asian region, forming the BIMST-EC group, meet in Bangkok this week to discuss how they can enlarge trade and economic cooperation. Prime among their objectives is the signing of Free Trade Agreements that would spell low or even zero import duties on goods that are traded within the region. FTAs are not new, but they can surely do with tuning up as the working of India's agreement with Sri Lanka has shown, says K. Venugopal.

THE Prime Minister, Dr Manmohan Singh, will confer with leaders from six other nations in the region in Bangkok this week on how they can enlarge trade and economic cooperation among themselves.

Prime among the objectives of BIMST-EC, the group that comprises India, Bangladesh, Myanmar, Sri Lanka, Nepal, Bhutan and Thailand, is the signing of free trade agreements that would spell low or even zero import duties on goods that are traded within the region.

Free Trade Agreements are not new to the group. India has had one with Sri Lanka for four years, and will launch one with Thailand on September 1 this year.

If the Sri Lankan case is anything to go by, the arrangement does energise trading activity. The effects of the agreement, which came into effect in March 2000, and the results were evident pretty soon thereafter.

Sri Lanka's exporters have particularly gained from the better access they won to the large Indian market. Exports grew from a mere $70 million in 2001 to about $250 million in 2003 as India became the third largest buyer of Sri Lankan products. Not only that. The wide disparity in export performance — in 1988 India was exporting 15 times as much to Sri Lanka as it was importing from the island-nation — has now been bridged. The ratio is now just one is to four.

Yet, Sri Lanka's businessmen are convinced there is much more room for improvement as the current level of exports from the island represents less than 0.5 per cent of India's imports. It is not that they do not have the goods to send across the Palk Straits.

The lowering of tariffs to practically nil under the free trade agreement has made their products that much more competitive in the Indian market. Yet, they are tripping over new hurdles that have been set up on their track. Among these are the recently-imposed quality checks on consignments of biscuits that are imported through Chennai. "It is understandable that the first consignment from a particular manufacturer is tested for quality," said an official of the Sri Lanka Export Development Board in an informal chat with Business Line in Colombo last week. "But they (the authorities in Chennai) insist on doing it for every consignment."

It is not just biscuits that have hit the hurdles. Every consignment of tea has to be certified by the Tea Board. Textiles have to be checked and certified as free from any hazardous dyes. Says an official in Chennai, "The test for each colour is Rs 2,500. If a consignment has five colours, the importer would have to pay Rs 12,500." That is only the official charge, he adds, hinting at other hidden costs.

Such inspections that could take several days or even weeks pose not only logistical issues for Sri Lankan exporters but also significant financial losses in terms of demurrage and inventory holding costs.

"We are sending to India the same products that we export to markets in Europe and the US, and we do not face such a problem there," she said.

For some Lankan businessmen, these have been too much to stomach; they have virtually opted out of the Indian market. Early this year, the Sri Lankan Trade Development Board opened a trade centre in an upmarket shopping mall in Chennai in a bid to showcase the best of Sri Lanka's products, the brands that are popular in Europe and the US.

However, many of the companies that were slated to open their stalls have not done so because they have faced vexatious procedures in getting their products certified by authorities as fit for sale in the Indian market.

The scale of these irritants seems to be in proportion to the threat the imported products pose to the local produce. Tea is a classic case. It is Sri Lanka's best trade bet with the world, and the prospect of its unbridled entry into store shelves in India has not been viewed kindly by the Indian tea industry. Flavoured teas, that are a speciality, have met with particularly difficult non-tariff barriers.

Pepper too is meeting resistance from planters in south India, who have demanded of the Government of India that imports from the island, now around 6,000 tonnes a year be restricted to just 3,000 tonnes. The Sri Lankans claim the Indians are over-reacting saying that the Sri Lankan pepper meets just 10 per cent of India's demand.

The bald truth is that pepper from the island is considerably cheaper than India's and its increased flow into the market has lowered prices, and as a consequence, dented the earnings for Indian planters.

The tariffs may have come down as a result of the free trade agreement; yet no attempt is being spared to raise new barriers that could provide just as much protection to domestic producers.