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 TIPS Research Brief by the Economic Intelligence Unit (EIU) of the Ceylon Chamber of Commerce
"Trade Intelligence for the Private Sector"

 

 

 

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Introduction 

Sri Lanka signed the Sri Lanka – Singapore Free Trade Agreement (SLSFTA) on 23 January 2018 and the Agreement was brought into operation with effect from 1 May 2018.

In view of the impact of the contents of this Agreement on our members, and the potential that Government states it offers to boost domestic trade, this Chamber decided to set out its perspectives on the significant features of the Agreement.

In finalising this brief a consultative process was adopted with adequate opportunities given to members of the Chamber to submit views.

As a first step, the Economic Intelligence Unit (EIU) of the Chamber studied three (03) of the seventeen (17) key Chapters in the SLSFTA i.e. those titled - (1) Trade in Goods (with an in-depth look at the Rules of Origin), (2) Trade in Services and (3) Investment. Other Chapters with links to these Chapters were also analysed.

Following this analysis, the findings were presented to the Chamber Steering Committees on Trade Liberalisation and on Economic Policy, as well as the Chamber Committee and the Chamber Board. After incorporating observations from these meetings, the findings were presented at a specially convened forum for members of the Chamber.

This research brief is structured to provide the key summary findings in Part 1 while the remaining sections (Part 2 to Part 4) delve into the facts and analysis of the three key Chapters referred to above. Insights from the recently concluded Sri Lanka Economic Summit 2018 have been included in Box 1 of the full TIP.

 

Seven Key Insights on SLSFTA  

The SLSFTA is an important step towards driving Sri Lanka’s growth in Trade, Services and Investment:

The Chamber sees the Agreement positively in the context of enhancing Sri Lanka’s trade initiatives and deepening its current relations with the economies in the Association of Southeast Asian Nations (ASEAN). ASEAN is a growing trading region with links to global production networks that Sri Lanka could have the potential to integrate with to diversify its exports basket and attract Foreign Direct Investment.  

Considering that the Agreement is comprehensive in its coverage, there exists opportunities for Sri Lankan businesses to derive benefits from this Agreement by leveraging on the synergies it is expected to bring between trade, investment and services. It is worthy to note that consequent to the signing of the Agreement, there have been numerous delegations that have visited the country from Singapore to explore potential investment opportunities.

 

2. Greater robustness required in the Consultation process:

The Chamber was an active stakeholder participant whenever consultations and meetings were convened by the Ministry of Development Strategies and International Trade (MoDSIT) and with the negotiating team of SLSFTA. The Chamber also assisted in the consultation process by making timely submissions and convening sector specific consultations on trade-in-service for its members, in maritime, construction, tourism and IT sectors, in 2017. 

However, the Ministry of Development Strategies and International Trade should have engaged in a much more robust process with consistent two-way communication with all stakeholders impacted by the SLSFTA. A more structured approach would have given the stakeholders more confidence with regard to the process. We are encouraged by the Cabinet decision of 31 July 2018 to institutionalise the Trade Negotiation Committee for future trade negotiations. Regular updates pre and post negotiation rounds similar to the status update post the 9th round of ECTA negotiations[i] should be a high priority of the Negotiating Committee.  These updates should be timely, as delayed releases detract from its value.

 

3. Cabinet Approval granted for SLSFTA: 

We have examined the matter of obtaining approval of the Cabinet, and observe that the Minister of Development Strategies and International Trade has sought and obtained approval of the Cabinet. From a statement made by the Minister in Parliament during the debate on the SLSFTA in Parliament, it is observed that –

a) The draft Agreement was submitted to Cabinet by the Ministry of Development Strategies and International Trade by Cabinet Memorandum dated 21 December 2017.

b) Positive observations were made by His Excellency the President and 14 other Cabinet Ministers on the 9 January 2018.

c) These observations were incorporated in a revised Agreement which was submitted to the Cabinet on 12 January 2018 for approval.

d) At the Cabinet Meeting held on the 16 January 2018, the Agreement was approved by Cabinet and approval was granted to MoDSIT for the signing of the same during the visit of the Singapore Prime Minister on the 23 January 2018.

e) The Agreement came into force on the 1 May 2018 after the Anti-Dumping and Countervailing Duties Bill and the Safeguard Measure Bill were passed in Parliament.

It is also observed that the Agreement was “laid before” Parliament and debated on 17 July 2018 i.e. after the Agreement came into force.

 

4. Tools to counter Dumping of Goods and Import Surges:

Two important laws were passed by Parliament in 2018. These are –

a) the Anti-Dumping and Countervailing Duties Act No. 2 of 2018 which provides for the investigation and imposition of anti-dumping duties and countervailing duties in respect of products that are dumped in Sri Lanka thereby causing injury to Sri Lankan industry; and

b) the Safeguard Measures Act No. 3 of 2018 which provides for the conduct of investigations and the application of safeguard measures on products imported into Sri Lanka.

These Acts were certified by the Speaker on 19 March 2018. Section 1 of each of the Acts states that the Act shall “…. come into operation on such date as the Minister may appoint, by Order published in the Gazette.” The “Minister” is defined to mean “the Minister in charge of the subject of Trade.” Accordingly, we await confirmation of the date with effect from which they are in operation. In addition, the SLSFTA has a Chapter on “Trade Remedies” which is based on the principles of the above laws.

The collective impact of the above provisions is to provide protection to the domestic industries from illegal dumping, and to also provide for the application of safeguard measures where there are import surges that could cause serious injury to the domestic industry and where it is determined that the application of such measures is necessary in the public interest. The principle recognized here is that public interest is accorded due recognition and safeguard measures will be applied only in the public interest.

 

5. Goods from the ASEAN region cannot flood in through the SLSFTA while Sri Lanka gains from predictability in the tariff regime:

The SLSFTA is one of the least stringent in terms of the Rules of Origin (ROO) criteria when compared to Sri Lanka’s existing FTAs, but it prohibits measures such as ASEAN cumulation that permits goods from the ASEAN region to access Sri Lanka through Singapore indirectly. Goods sought to be brought in to Sri Lanka are required to qualify under the ROO criteria which requires substantial value addition.

Sri Lanka does not gain from market access advantage to Singapore, as 99.9% of tariff lines were open free of duty even prior to the SLSFTA. However, according to the WTO[iii] Singapore’s tariff regime currently levies taxes only on six tariff lines (beer and some other spirits), but at a multilateral level (WTO commitments) around 30% of Singapore’s tariff lines are not subject to an upper tariff rate (unbound). The tariffs on goods that are subject to an upper ceiling (i.e. bound) range from zero to 10%.  As such, at a future date, Singapore has the flexibility to increase the rates to the rest of the world[iv] on these tariff lines.  However, with the commitment of 99.9% of tariff lines to Sri Lanka under the SLSFTA, these ceilings will not be applicable to Sri Lanka. Hence, it is seen that the SLSFTA has brought more predictability for Sri Lankan exporters with the confirmation of the zero tariff in respect of these goods.

 

6. Guidelines set for the Movement of Persons with links to Investment in the SLSFTA:

In International Trade, Services can take place through four distinct categories referred to as Mode 1, 2, 3 and 4. Mode 4 refers to the movement of people and this Mode has been further subdivided into 4 categories. A brief explanation on the categorisation of modes is found in Annexure 01.  

In the SLSFTA, Mode 4 has been opened to only two of the four sub-categories, namely to Business Visitors and Intra Corporate Transferees (ICTs), with the latter requiring Singapore Nationals working as ICTs to work in a company that has made an investment in Sri Lanka and is incorporated (as specified in horizontal commitments under Mode 3 linked to commercial presence[v] through investment).

The SLSFTA does not permit entry for Singaporean Nationals to work in Sri Lanka under the other two sub-categories of Mode 4 i.e. Contractual Suppliers and Independent Professionals.

Furthermore, Sri Lanka has put in place guidelines for the two sub-categories of Mode 4 that are open (i.e. ICTs and Business Visitors).  Entry of Business Visitors are restricted to 30 days. In terms of ICTs, they have to be (1) be a National of Singapore ( not a Permanent Resident holder), (2) be employed in the Singapore Company for no less than 12 months and (3) have a minimum of five years of relevant industry or professional experience, prior to the date of application.

In addition to the above guidelines, ICTs are further restricted to the following positions: (1) Manager, (2) Executives and (3) Specialists which are clearly defined in the Agreement. The definitions of these positions can be understood to be stricter than what we would typically classify in Sri Lanka. For example, an “Executive” and a “Manager” is defined as an individual with wide decision-making power and one who is:

a) a member of the board of directors; or

b) receives only general supervision; or

c) receives direction from higher level executives; or

d) receives direction from general body of shareholders.

The guidelines are more stringent in terms of Professional Services. Sri Lanka has listed only three (03) Professional Services for Singapore. For these Services Mode 3 and 4 are closed for Singaporean Nationals. The resultant position is that Singaporean firms cannot incorporate companies to provide these Professional Services in Sri Lanka and bring down any Singaporean Nationals to work as ICTs.

 

7. The previous Bilateral Investment Treaty has been repealed by the new Investment Chapter in the SLSFTA, providing more investment protection for both sides:

The Investment Chapter of the SLSFTA replaces the previous Bilateral Investment Treaty (BIT) between Sri Lanka and Singapore signed in 1980. This Chapter will now govern the entire investment regime between the two countries. The SLSFTA provides that previous investments will continue to be governed under the BIT for a period of ten years from the date of operation of the SLSFTA. After ten years these investments will be subjected to the provisions of the Investment Chapter of the SLSFTA. The scope of an investment is limited to 3 qualifying characteristics: (1) commitment of capital/other resources, (2) certain duration and (3) expectation of gain/profit or assumption of risk.

The SLSFTA provides that, in the event that the SLSFTA is terminated, the provisions of the Investment Chapter will continue to apply for a period of ten (10) years from the date of termination to investments in existence at the date of termination of the Agreement.  This savings clause provides protection to investments made under this Agreement, for ten years.                                                      

A comparison of the provisions relating to “Expropriation” in the SLSFTA and the BIT Agreement indicates that the provisions in the SLSFTA provides more investment protection than the BIT Agreement.  

In the case of inconsistency related to the Investment Chapter, other Chapters of the SLSFTA will prevail over the Investment Chapter to the extent of the inconsistency.

 

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