Background

The present trend in the globalization process is of grave concern to Sri Lanka with bilateral trade agreements superimposing multilateral liberalization. Due to increasing interdependence and complication of rules, world trade and services today have become exceptionally complex. Sri Lanka has now adopted the GATT valuation system, and is trying to implement the WTO Anti-dumping Agreement while also introducing Intellectual Property Right laws under the aegis of the WTO. In view of these significant developments, the International Economics Unit hopes to provide rigorous research-based analysis to the Government of Sri Lanka in the preparatory and implementation process of these legislations, and also assist in Sri Lanka's preparation for future rounds of WTO negotiations and in preparing and implementing bilateral and regional agreements in trade in goods and services. Once the research is completed, the unit recognizes the importance of briefing senior officials in the public sector and the other relevant institutions of the findings, and also creating a policy debate on the recommendations.

Research Programme

The following areas have been identified as core-research of the Unit:

Trade Facilitation in Sri Lanka - Meeting the Challenge

Rationale

Trade facilitation, known as"plumbing" of international trade, is involved in reducing all transactions costs associated with the enforcement, regulation, and administration of trade policies. According to a World Bank Report it has been estimated that costs stemming from customs and related import formalities can be 2 - 5 per cent of the value of merchandise trade. Therefore, trade facilitation is a very cost effective way of reducing costs of trading: as the price of consumables become lower, it will especially help the poor directly. Also, for example Sri Lanka's apparel industry has been adversely affected by undue delays and inefficiencies in import/export procedures and documentation. Streamlining the import/export procedures will help in reducing lead times and costs of logistics and distribution.

Objectives

The study will use several trade facilitation indicators to measure different categories of the trade facilitation effort. It will also evaluate the impact of implementing the following in Sri Lanka: WTO Agreements relating to trade facilitation such as the Agreement on Import Licensing Procedures, the Agreement on TBT, the Agreement on Rules of origin, Customs Valuation Agreement, the Agreement on SPS, etc. Finally, the study aims to make recommendations that will facilitate trade in Sri Lanka.

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Recent Policy Prescriptions and Future Challenges in Trade and Tariff Policy in Alleviating Poverty in Sri Lanka

Rationale

The course of economic liberalization that Sri Lanka has pursued for almost a quarter of a century has resulted in much progress, despite serious civil difficulties during the last two decades. A gradual approach in reforming policies has maintained an environment where gains have been realized while social and economic dislocation have been minimized. The private sector is now the dominant force in most industrial markets, which are reasonably free of regulatory constraints, and the foundation has been laid for the growth and diversification of manufactured exports. Despite this progress, however, a large part of the domestic industrial sector (i.e., firms that sell mainly to local markets) and certain parts of the agriculture sector continue to operate with high protection, remaining largely isolated from the competitive export sector.

There is a preponderance of cross-country evidence that trade liberalization and openness to trade leads to an increase in the growth rate of income and output. A country's trade policy is the key link in the transmission of price signals from the world market to the national economy. Growth in incomes of the poor is strongly related to overall growth in the economy, although the relationship differs substantially from country to country. The link of overall growth to poverty alleviation has been demonstrated both in cross-country analyses (Dollar and Kraay, 2000), and for individual countries. Trade liberalization can, therefore, be expected to help the poor overall, given the positive association between openness and growth.

Objectives

The study will analyse recent policy direction in the area of trade for Sri Lanka while studying the impact of those trade policies on the poor. The impact will be determined by looking at how dispersed the average tariff is, whether there is discrimination against agriculture, how well the critical service markets function, etc.

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Garment Sector Beyond 2005 and the Social Implications for Sri Lanka

Rationale

The growth in the garment industry in Sri Lanka, especially garment exports from South Asia, has been phenomenal. During the last two decades in particular, the garment industry expanded rapidly due to the availability of quota for export to USA and EU markets, lower wages, and a favourable investment climate. In 2001, the apparel manufacturing industry, as the lead export industry, contributed 46.4 per cent to Sri Lanka's export revenue, accounting for 5.6 per cent of GDP while generating employment to 338,704 persons. During the 1999 - 2000 period, 52 per cent of the total exports were garments, of which 62 per cent were quota based. In addition to a geographical skew, the industry is also skewed by gender. The labour participation rate of women has increased from 32.3 per cent in 1980 to 46.1 per cent in 2000. This is mainly due to increased employment opportunities resulting from economic growth and, in particular, due to an export-oriented apparel industry. About 87 per cent of the total employment in garment industry is female. While the level of wages in South Asia were lower than in many other garment exporting countries, Sri Lanka experiences the highest wage rate among the South Asian countries.

The Agreement on Textiles and Clothing (ATC), which came into force on 1 January 1995 under the auspices of the Uruguay Round of Multilateral trade Negotiations, calls for complete integration of the textiles and clothing sector into the GATT discipline and the elimination of all MFA restrictions in the sector by the year 2005. Dismantling the quota regime represents both an opportunity for developing countries to expand exports as well as a threat as quotas will no longer guarantee markets while leading to even the domestic market being open for competition. According to some surveys, 50 per cent of the industry would be forced to close down with the abolition of the quota system in 2005. This will have a significant bearing at the macroeconomic level through reduction in incomes. As a result, most of the workers who are female would also lose their employment and income.

Objectives

The main objective of this research is to do a comprehensive study in regards to the present situation of the apparel industry in Sri Lanka and to look at the social implications resulting from the abolition of the MFA.

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Regionalism and bilateralism - Has it undermined the Policy Prescriptions in Sri Lanka?

Rationale

In recent years, many developing countries have embarked on programmes of external economic liberalization. In 1960, 15.6 per cent of the countries in the world--- representing 19 per cent of the population---- were "open"; by 2000, a total of 73 per cent of the countries in the world were open to international trade. Following the argument that greater openness to trade and greater integration to the world trading system is a desirable goal for the Sri Lankan Economy, it should be decided by which means this goal can be best achieved. In practice, liberalization can take several forms: unilateral, regional or multilateral. The political feasibility of each of these differs, and the likely gains from trade from various types of liberalization also differ. Unilateral liberalization, which attempts to bring down the average policy-induced trade barriers in line with most other developing countries, is confronted with a host of domestic political impediments, especially in Asia. In the case of Sri Lanka, a significant number of positive unilateral liberalization efforts were undertaken since post 1977, but this liberalization process has come to a halt since 2000. On the other hand, Sri Lanka could also participate more actively in regional trading arrangements and liberalize its economy together with the member countries of the region. In recent times, Sri Lanka's liberalization stand was a combination of regional and multilateral liberalization policies.

Objectives

This proposed study attempts to examine Sri Lanka's trade policy in the globalized world. Whether the multilateral world trading system undermined Sri Lanka's domestic policy orientation and implementation, thereby reducing Sri Lanka's competitiveness will be studied in detail. It will also examine the interactions between Sri Lanka's trade policy and other domestic policies, to ensure that trade liberalization will not be viewed in isolation from domestic reforms.

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Implications and Issues in Implementing GATS in Sri Lanka

Rationale

The share of services in world trade and investment has been increasing. In developed countries, this share typically lies between 60 and 70 per cent, while in Sri Lanka it accounts for about 53 per cent of GDP. The largest sub sector is the wholesale and retail trade. Tourism, transport, communication, and financial services are some of the other major sub sectors.

The difference between trade in services and trade in goods is due to two major reasons. Since many services require proximity between the supplier and the consumer, factor mobility is necessary for international transactions. And the limitations in "border" restrictions imply that domestic regulations have a much stronger influence on trade in services.

Objectives

The WTO General Agreement on Trade in Services (GATS)---- perhaps the most important single development in the multilateral trading since the evolution in GATT---- has so far not produced significant liberalization. While there is a dearth of research on services trade due to both conceptual and empirical difficulties, this study will analyze the effects of liberalization on Sri Lanka under two modes, vis-à-vis, commercial presence and the movement of natural persons.

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