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Module 3: Policy Options for Competitiveness and Case Studies
Enhance Domestic Capacity to Monitor and Upgrade Quality and Standards of Exports The underutilization of trade preferences and existing market access opportunities indicates that much of export competitiveness is blunted by poor domestic capacity. Foreign markets have legitimate concerns about the safety and the SPS status of goods entering their borders. To avoid rejections, exporting countries need to meet the required minimum of such standards in a costeffective manner. Countries need effective legal and regulatory frameworks to comply with SPS standards set by international agencies like the Food and Agricultural Organization and the World Health Organization. Although the WTO permits countries to set their own SPS standards, they must instill confidence in importing countries by focusing, among others, on biosecurity, storage, and disinfection of pests and diseases. Especially for agricultural exports, this requires public-private partnerships to establish mechanisms for information sharing and support to organized exporting groups, including the establishment of laboratories and microbiology testing facilities for residues of drugs and pesticides. Box 3.1 gives an example of the role of bilateral trade agreements in facilitating market access for exporters.
Trade and Investment Policy In an increasingly integrated world, an open trade policy can improve countries’ export competitiveness mainly by reducing the cost of imports and increasing the variety of imports. Policies that restrict access to foreign sources of intermediate goods and services can deny firms access to the goods and services they need to compete internationally, and these policies are more likely to produce firm closures and job losses. Experience has shown that policies that protect domestic production from foreign competition with the goal of protecting jobs and avoiding trade-related structural adjustment are often counterproductive, temporarily saving jobs in vulnerable sectors often at the expense of higher paying jobs in competitive sectors of the economy. Delaying inevitable adjustment almost invariably translates into greater long-term hardship than would be the case if policies of market openness were pursued. Although an open trade policy is an essential component of sustainable economic growth, complementary policies also are needed to realize full benefits. Other policy choices that matter include adequate institutions and rule of law, which are crucial for property rights and for lowering transaction costs; sound regulatory framework and appropriate labor market, macroeconomic and investment
Module 3
Box 3.1. Case Example of Good Policy Practice—Securing Market Access through a South-South Bilateral Trade Agreement Frustrated with the slow progress in securing market access through the regional South Asian Free Trade Agreement (SAFTA), Sri Lanka and India signed a BTA, which became operational in March 2000. India committed to give duty-free access, within three years, to all Sri Lankan exports, except tea, textiles, and other items listed in the negative list. Given India’s much larger size, it agreed to include in its negative list only 419 tariff lines at the HS six-digit level. Sri Lanka maintained a larger negative list of 1,180 tariff lines primarily to shield its agricultural sector from Indian competition. The BTA spurred trade flows between the countries in the early years. Indian exports to Sri Lanka increased from US$539 million in 1998 to more than US$1 billion in 2003. The share of Sri Lankan imports from India reached 25 percent in 2008 from about 8 percent in 2000. The share of Sri Lankan exports to India also picked up from about 1 percent in 2000 to 9 percent in 2005. It has since declined to less than 5 percent in 2009. Although India’s exports were diversified, Sri Lanka’s were concentrated in a few commodities such as copper and vegetable oil, which also attracted Indian investors to route developing country imports via Sri Lanka to take advantage of the tariff preference. Generally considered a successful BTA, experiences with implementing the India–Sri Lanka Bilateral Trade Agreement highlight specific issues that are relevant to other pairs of developing countries seeking similar trade agreements. First, the rules of origin need to be negotiated carefully and then implemented well. Because the main export surge from Sri Lanka to India was in products for which the rules of origin were not enforced, the resulting trade disputes led to the introduction of TRQs, with India limiting preferences to imports up to a certain quantity only. This led to a decline in Sri Lankan exports during 2006–09. Second, mutual recognition of standards is crucial to reduce NTBs. Exporters suffer when SPS standards are not mutually recognized and shipments are subject to random harassment and lengthy approvals from the partner country. One of Sri Lanka’s major export interests, tea, not only was subject to a TRQ but also could enter India only through two designated ports, leading to low utilization of preferences. Third, the trade agreement should be comprehensive and set milestones. Both India and Sri Lanka saw their FDI inflows increase into each other’s territories. This increase was not only to take advantage of tariff preferences but also a response to signals issued by the signing of a legal agreement that increased business confidence. This success has led the two countries to negotiate an expansion of the current goods-only agreement to cover trade in services and cross-border investment under a Comprehensive Economic Partnership Agreement. This agreement will require the management of domestic opposition and the political economy, as well as a higher threshold of regulatory preparation and changes. Sources: Jayasekera 2004; Weerakoon 2010.