Highlights of Sri Lanka-Singapore FTA which makes watershed in Sri Lankan economy

On 23 January, Sri Lanka marked a significant watershed in the development of its economy when it signed a Free Trade Agreement (FTA) with Singapore after 18 months of negotiations between the trade negotiation teams of both countries.

It was a ‘giant leap’ in terms of implementation and laying down of a marker that the government of Sri Lanka is moving into a new era of international trade. Three Singaporean companies also sealed deals with Sri Lankan partners at a business forum held the day after the signing of the FTA. There were four agreements signed for new projects across food, aquaculture, hospitality and infrastructure. Singapore SME Food Studio plans to set up and operate premium food courts in some Sri Lankan malls, while aquaculture business Ark Holdings plans to build and operate a crab farm.

Although the main thrust of FTAs is to reduce or eliminate trade barriers and increase trade, the recently signed Sri Lanka Singapore Free Trade Agreement (SLSFTA) has a larger message as it signals to the world that Sri Lanka is open for business, including investments. The two island nations are also the ideal hubs – Sri Lanka for South Asia and Singapore for South East Asia.

A key factor in the success of negotiating Trade Agreements is an understanding of the underlying needs and constraints of the other side and working to develop mechanisms to meet those needs. The complexity of trade procedures and market access rules do not necessarily have to be a hindrance but can instead be viewed as opportunities for innovative solutions.

The agreement shall enter into force on the 1st day of the 2nd month, following the date which parties exchange written notification certifying that they have completed their respective applicable legal requirements and procedures for the entry into force of this agreement. The domestic process will be completed within about 4 weeks’ time.

Key features of SLSFTA Wider Scope

The SLSFTA is comprehensive in scope in that it covers Goods, Services, Investments, SPS/TBT, Rules of Origin, Intellectual Property rights, Customs Procedure and Trade Facilitation, Government Procurement, Competition, Trade Remedies, Economic and Technical Cooperation, Transparency Provisions, Dispute Settlement, and General and Final Provisions while it includes chapters on Telecommunications, E-commerce and Financial Services annex.

Tariff liberalisation with relatively long adjustment period

Sri Lanka agreed to eliminate customs duty of 80% out of 7,042 tariffs lines keeping 20% in the negative list which will not be subjected to reduction or elimination. In terms of tariffs reduction modality, Sri Lanka will remove customs duty on 50% of tariffs lines ‘currently duty free’ on entry into force, 15% from 1-6 year and another 15% from 7-12 year. Furthermore, revenue sensitive items such as petroleum products, cigarettes, alcohol beverages and spirits will be in the negative list.  While Sri Lanka will include many agricultural products and domestic industry sensitive items in the negative list, 50 lines which includes steel products, paint products, spare parts, plastic products, electronics products, printed books and cosmetic items will be phased out  only from 11 to the 15 year. The ‘CESS and PAL’ will be eliminated over a period of five years starting from fifth to the tenth year. 

Determine products of Singapore origin

All goods under the agreement have to fulfil general rules of origin of 35% domestic value addition (DVA) or a change of tariff headings (CTH at 4 digit HS level). For some export products, specific process rules will apply. The Rules of Origin (ROO) is pivotal to prevent market access provided through and the tariffs liberalisation program is not misused and only goods originating in Singapore with sufficient value addition or processing will qualify for duty concession.

Limited service liberalisation

Trade in services is negotiated on a positive list basis, where Sri Lanka specifies the extent of liberalisation, the level of restrictions and any other conditions for the supply of Singaporean services in the sectors Sri Lanka chooses to make commitments in. In the case of Sri Lanka’s offers to Singapore in the Services chapter, there is no new liberalisation beyond what is already available through the prevailing unilateral regime as defined in the exchange control regulations, investment regulations, immigration regulations, etc. The primary objective of the chapter is to provide commitment, transparency and certainty to the level of liberalisation in the listed sectors.

Sri Lanka has made no commitments in the independent Movement of Natural Persons or Mode 4. However, business visitors are allowed entry for a period of up to 30 days, subject to immigration requirements. This would facilitate business visits to develop trade and investment linkages between the two countries. Entry is also permitted for intra-corporate transferees – where a Singaporean company with an investment in a committed service sector in Sri Lanka will be allowed to send senior management and specialised skilled workers to support that investment on a temporary basis. These categories will be limited to managers, executives and specialists, who have advanced knowledge and expertise in the said subject area. The initial period of temporary entry shall be up to 2 years, which can be extended up to a maximum stay of 5 years in total. 

Wider coverage of Singapore’s offer

Considering Singapore’s offers to Sri Lanka in Trade in Services, Singapore has made commitments in a number of service sectors which are of export interest to Sri Lanka including Professional services – Accounting and Audit, Architectural services, Engineering services, Medical services (Modes 2 and 3), Legal Advisory services (Modes 2 and 3), Computer and related services, Tourism services - Hotels and Restaurants, Travel Agency, Tour Guiding, Maritime services – Freight Transportation, Shipping Agency, Maritime Auxiliary services – Ship Brokering services, Construction and related services. Singapore’s commitments cover a wider range of service sectors than the sectors offered by Sri Lanka and Singapore’s offer to Sri Lanka in Trade in Services has significantly more depth and coverage than Sri Lanka’s offer to Singapore.

A clear process to settle disputes

The Investment chapter provides sufficient protection to Singaporean investors and to their investments and thereby to attract investments to Sri Lanka. These include Minimum Standard of Treatment, National Treatment, MFN, Compensation for Losses, Performance Requirements, Senior Management and Board of Directors, Treatment of Information, Expropriation, Transfers and Subrogation. The chapter also provides the necessary flexibility for the state to regulate investments with a view to achieve national objectives such as subsidies and grants given to domestic investors/investments which will not be available to Singapore and taxation measures that are excluded unless it amounts to indirect expropriation. Investor-State dispute settlement process under the FTA contains some deviations which were incorporated into the legal text when compared to our existing Bilateral Investment Agreements, with a view to minimise the cost of arbitration and to protect against any undue favouritism towards capital exporters.

Ensuring that public procurement markets are transparent and open to international competition

The Government Procurement chapter in the SLSFTA is in line with the National Procurement Guidelines and covers mostly the provisions on transparency and procedural fairness. The chapter;

• is limited only to International Competitive Bidding (ICB) and excludes National Competitive Bidding (NCB) and excludes procurement made under grants, development assistance and PPP. Further, procurements made for commercial sale are also excluded.
• is limited to a few selected central government entities, and  few SoEs while excluding sub central level entities
• includes provisions for Sri Lanka to continue to grant price preference to domestic suppliers for a period of 10 years.
• Threshold levels have been identified and provisions of this chapter be applicable only to procurements over those thresholds

Trade facilitation tools

Recognising the importance of customs and trade facilitation matters in the evolving global trading environment, chapters include provisions to facilitate reduced business costs in cross-border trading and red tape around customs processing, competition law and technical and quarantine standards. Also for companies to have better effective access to each other’s markets, it requires a basic set of common rules to provide for a level playing field and prevent abuses. Given the importance of adequate protection and enforcement of intellectual property rights, a chapter on intellectual property rights is included. 

Trade remedies

With the provisions on Anti-dumping subsidies and Countervailing Measures and Global Safeguards to reaffirm both parties’ rights and obligations under the WTO Agreement, the Bilateral Safeguard Measures provide provisions to increase customs duties, during the tariffs liberalisation program, if increased imports from Singapore cause or threaten to cause serious injury.

Insofar as the agreement is concerned, provision has also been made for the protection of local producers/entrepreneurs by incorporating a chapter on Trade Remedies and a commitment to ensure observance of principles of transparency and competition. These will be supplemented internally with laws on anti-dumping, countervailing duties and a regime to prevent anti-competitive practices.

Review implementation

Also under the Institutional, General and Final provisions chapter, provision has been made for instituting a joint committee to further enhance trade relations between the Parties and in terms of Article on Amendments, it provides for any amendments to be done subject to the prescribed procedure.  The first meeting of the Joint Committee shall be held within one year after the entry into force of this Agreement. Thereafter, the Joint Committee shall meet every two years which can consider ways for review, if any.