Following is the address by Ambassador of the European Union to Sri Lanka and the Maldives Tung-Lai Margue at the National Chamber of Exporters Sri Lanka Awards, Shangri-La Ballroom, 20 September. NCE Chairperson Ramya Weerakoon and BOI Chairman Mangala Yapa were among officials present.
I am glad to see that you all came here today to celebrate excellence among exporters. I feel very privileged to have been given the honour to talk to you as a Chief Guest.
When I was asked by Ms. Weerakoon to come to speak to you she was kind enough to let me choose the focus of my intervention. As my three-year posting as Ambassador here in Sri Lanka will soon end, I feel it is a good opportunity for me to talk about the tremendous changes that we have experienced during this period in our trade relations, both worldwide and in the bilateral relation between the European Union and Sri Lanka. I would then wish to look at the future of our trade relation.
Who could have imagined three years ago that there would be nowadays so many trade tensions and protectionist behaviours across the globe, if not trade wars? Although the present escalation in tariff retaliations between the US and China was foreseeable in the context of the raising competition between the two main world economic powers, nobody really expected the deterioration of relations between long-standing and trusted trade partners as presently experienced between the US and the EU or, more recently, between Japan and South Korea.
Who would have imagined the strong criticisms against the WTO rules and who would have imagined that the Brexit referendum could imply a departure of the UK, possibly without any orderly agreement, both on the divorce modalities and on the future relations with the EU?
The recent attacks against Saudi Arabian oil installations and against oil cargos are likely to result in an increase of the oil prices that will affect all our economies, both in the European Union and in Sri Lanka. And these are just a few examples.
In these growing uncertain times where suspicion and distrust seem to prevail, the European Union is seen by many countries as a reliable partner, supporting rules-based international order and concluding trade agreements that focus also on fair and ethical trade as well as inclusive and sustainable development objectives.
In its ‘Trade for All’ strategy, the EU also defends human rights, including women’s economic empowerment. In addition, all its new Free Trade Agreements include high labour and environmental standards and guarantee responsible management of supply chains.
The EU has sometimes been criticised in the past for being secretive and negotiating behind closed doors. This is why we have been working on many improvements that have become a reality. In response we became the most transparent trade negotiators in the world, also closely involving our European Parliament in the decision process. The EU is still very much in favour of a negotiated departure and comprehensive future arrangements.
The European Union, even without the UK, remains a very attractive and strong partner. We have struck an innovative Free Trade Agreement with Canada which is in force for more than a year and have another one with Japan. We are finalising our Agreement with Mexico and have struck Agreements with Singapore and Vietnam. In addition, we are negotiating with Australia, New Zealand, Chile, Indonesia and Tunisia, just to give you a few examples. We also hope to conclude rapidly important FTAs with Mercosur and India.
EU uses trade as an incentive. Our generalised system of preferences (better known as GSP) as well as our Everything But Arms initiative do this. The beneficiary third countries can develop, grow and take advantage of these schemes, while not putting their sensitive sectors and industries at risk. But these benefits do not come without responsibilities.
In exchange for this tariff-free access to the European market, countries must meet international standards in labour rights and human rights. As you well know, after two years of hard work, with the active support of the EU Delegation and my full personal input, Sri Lanka was able to regain the benefits of GSP+ in May 2017.
This allows me to make a transition and to provide you now with an overview of EU-SL trade links.
EU-SL trade links
The EU and SL have strong and long-lasting economic, trade and investment relations. The EU was Sri Lanka’s largest trading partner with 16% of total trade in 2018, before India (4.2 billion euro) and China (3.9 billion euro). This is very likely to remain true for 2019.
More significantly, the EU is by far Sri Lanka’s biggest export destination with nearly 30% of the total exports going to Europe, a value of 2.8 billion euro, ahead of the US with 2.4 billion euro.
More specifically, what are the benefits for Sri Lanka of GSP+?
GSP+ grants duty free access to the EU market for Sri Lankan products on 66% of the EU tariff lines representing something like 6,000 products. These are unilateral concessions from our side.
In exchange, Sri Lanka has committed itself to implement 27 International conventions in the area of Human rights, labour rights and the environment. These are conventions that had been ratified by Sri Lanka anyway, so we are actually not asking for anything Sri Lanka would not have had to do on its own. The EU has sent beginning of September a GSP+ Monitoring Mission to Sri Lanka and the assessment of the progress was generally positive.
The promise of GSP+ is of course, in return for working with us on implementing these shared international commitments, that Sri Lanka exports to Europe will benefit and increase.
There has been impressive export growth in Sri Lanka in the months following the re-gaining of GSP+ in 2017 and in total, since its reinstatement, Sri Lanka’s exports to the EU have increased by more than 20%. Fisheries exports have literally doubled since the removal of the fish ban and regaining GSP+. Other notable growth sectors include clothing, tea, tyres, gems as well as motor vehicle parts and footwear.
I am, however, fully aware, that the new status of Sri Lanka becoming this year an upper middle income country will mean that your country will lose sooner or later, probably in three years’ time, the benefits of GSP+. It is therefore crucial for the exporters to do two things: take all the advantages until that time, but also prepare for the future.
At the same time I realise that the economic situation in Sri Lanka, and you know this better than I do, has been strongly affected by the Easter bombings. The impact was mainly on your tourism industry, but also on a number of other areas, including the slowing down of certain exports and related services. Foreign Direct Investment has also suffered as a result of the security uncertainty in the country. It is therefore obvious that the exports companies that you are representing will have a key role in the full recovery of your country’s economy and its future growth. I am aware that Sri Lanka is facing a number of difficulties to cope with very competitive countries in Asia. It has already shown a remarkable resilience after the terrorist attacks, in particular in recovering rapidly in the tourism industry and in its exports of apparel goods.
South Asia is expected to grow by 6-7% in the years to come, and Sri Lanka, as a new middle income country, has no choice, but to be part of the regional growth agenda. This will require your country to develop and implement a long-term strategic vision, making the best use of its geographical situation as a maritime hub as well as concretising its ambitions as an important IT hub.
Coming back to GSP+, as illustrated by the figures that I mentioned, I thus believe that this preferential scheme has worked well for Sri Lanka. However, GSP+ still offers great future potential for Sri Lankan companies. GSP utilisation rate is currently still relatively low. I hope that this can rapidly improve.
So, let’s look at the future. How could we further improve our trade and investment relations? How can Sri Lankan exports to the EU fully benefit from the opportunities GSP+ is offering? How can EU enterprises receive greater incentives to invest and to make business in Sri Lanka? What will be the likely consequence of Brexit for our trade relations and how can we mitigate the risks?
Let me just outline a few areas that come to my mind:
Look for quality
First: Look for quality. There are opportunities in producing higher quality goods for Sri Lanka to stay competitive in the global arena. To put it simple, many neighbouring countries can produce cheaper, but price is not the only way to stay competitive. Quality is another one.
Second: Compared to many countries in the region, Sri Lanka has a high compliance with international labour and environmental standards. Make this a competitive advantage! Sri Lanka could move further towards sustainable production concepts such as organic produce, green production and Fair Trade practices.
Such practices are highly valued by consumers around the world, and in particular in the EU. And many of them are ready to pay a premium on such products. And we know that some of your exporters are already doing that. In particular high end brands in garment will not buy from producers who cannot assure them of minimum standards met.
I noted that NCE took the lead by providing certificates of conformity that are much appreciated both by buyers and consumers. I also noted with great interest that your theme this year is covering the areas of governance and sustainability and that this will be reflected in the selection of your award winners tonight.
Third: Diversify! Statistics show us that Sri Lankan exports are still very much focused on traditional sectors. Just one example: Clothing accounts for 60% of Sri Lanka exports to the EU. To help Sri Lanka taking full advantage of GSP+ opportunities, the EU has made available over eight million euro and launched in 2017 a trade assistance project, implemented by our partners UNIDO and ITC.
One of the key objectives is to support the development and implementation of your national export strategy and open up new export sectors. The project also supports trade policy development and regulatory reforms, enhancement of Sri Lanka’s WTO trade negotiations capacity, support Sri Lanka’s regional integration process and helps Sri Lanka to maximise the use of the EU GSP+ scheme.
Currently only 56 % of the exports you are sending to us and that would be eligible to GSP + are actually using it. I am sure that you can do better.
And we will also in the future continue to support and promote Sri Lankan exports. We reserved a total 10 million Euro for a project that will start in 2020 and aim to increase food safety and quality compliance. This is a key issue for entering the European Market.
The EU will support good agriculture and hygienic practices by food producers and processors and an updated risk-based and well-coordinated food control system. We will also use this project to Increase the share of the organic market in exports through better standards, higher investments and increased consumer demand.
As mentioned, this upcoming EUR 10 million project is expected to start in 2020 and will be implemented by UNIDO/FAO and GIZ.
Look at links
Fourth: Beyond export promotion, look at the links with investments and the overall business environment. Investors can bring not only capital, increase production but also bring know-how. We have been working closely with the Sri Lankan Government over the past year to remove obstacles that our EU investors encounter.
One example: in collaboration with the EU Delegation and the European Chamber of Commerce, we have a regular EU-Sri Lanka Investor Dialogue. This Dialogue, which has met on a quarterly basis since January 2017, provides a platform to discuss impediments to trade and investments faced by EU companies – in their presence and in the presence of competent ministries – so that the Government can find quick solutions.
In more general terms, there are still many opportunities to improve the overall environment for business and investors in this country. Some of the current obstacles include:
Lack of transparency in tendering procedures, cumbersome administrative handling, need for policy cohesion among various ministries and agencies, more fiscal incentives, easier business visa, tangible results in the fights against corruption and a prohibitive tariff regimes and sometime difficulties in navigating the customs regime. But let me also highlight here that progress has clearly been made, and Sri Lanka moved up again this year in the World Banks Ease of doing business index.
Stay open to business
Fifth: Stay open to business and integrate yourself in global value chains! Putting tariffs up to protect this or that sectors is just not an adequate course of action if you want to stay competitive as a country. It often seems the politically easiest response to simply raise tariffs or use other measures to protect a sector under stress. This never works in the long run.
Without feeling market pressure, productivity goes down. Lanka has a great opportunity to further develop its position as a regional trading hub and major trans-shipment centre. Closing your borders to imports and competition will not help. Instead search for value chains where Sri Lanka fits in and provide added value;
We already see that major trading nations in the world started moving towards protectionist measures. But trade wars are in nobody’s interest – and we all lose. As EU firmly support – and will defend – the multilateral trading system, with the WTO at its core.
Knowledge- and innovation-based economy
Sixth: Sri Lanka has potential to do more and better in terms of shifting its economy to a knowledge- and innovation-based economy. Some things are already happening in this area in particular in IT.
We have a program called Horizon 2020 that promotes science and technology based cooperation with the EU and next month we will promote this program in Colombo, Kandy and Jaffna. I am also pleased to inform you that we are about to launch a program that will help Sri Lanka to promote innovation, business incubation and startups and strengthen linkages with the EU and elsewhere in this respect.
Vocational training system
Seventh: Finally, in the EU countries we have a vocational training system that is a strength of our economy. Sri Lanka’s economy and population would also benefit from a Technical and Vocational Education and Training system that is forward looking, puts emphasis on the needs and involvement of the private sector and is not seen as an avenue for failure but instead a reservoir of competent labour.
Last, but not least, a few words about the Brexit saga. I would like to start by saying that the EU has achieved all its preparations in case of a Brexit without any agreement so as to lower its impact, in particular on our companies. Of course, nobody knows at this stage if there will be finally a deal or not between the UK and the EU. The prospect of finding a credible alternative to the famous Irish backstop issue, however, seems more and more remote.
If the UK Government comes up with a last-minute workable proposal, then a further extension beyond 31 October 2019 by the 27 Heads of State and Government could be granted. The existence or non-existence of a Brexit agreement will also have an impact on your GSP+ scheme.
If an agreement is found, this would mean two more years of transition, where the UK would still be part of the EU GSP+ scheme and therefore Sri Lankan exporters would still be able, during these two years, to export to the UK under the same conditions as now.
If no deal is found and no extension of the deadline is granted, the UK would obviously no longer be part of the EU GSP+ scheme, but would have to prepare and introduce its own preferential scheme for third countries, such as Sri Lanka.
My advice is therefore the same as the one I provided since the Brexit referendum to the Sri Lankan export companies: diversify your European destination countries, as there are 27 markets with plenty of new opportunities.
Ladies and gentlemen, I hope I was not too long, although I most probably was. Let me again thank the National Chamber of Exporters for giving me this very timely opportunity to speak to you. I have noted that in this pre-electoral period a lot of attention and events are focusing on what economic measures should be taken to stimulate the Sri Lankan economy.
Political parties and their candidates will hopefully provide their views on how to make your country more attractive for foreign investors and to help companies to export. But there could also be the temptation to make easy promises for short-sighted protectionist measures.
In this context and whatever the outcome of your upcoming elections may be, I wish to underline that the European Union intends to remain a reliable and trusted partner of Sri Lanka. We will, however, always stick to our core values.
Thank you for your attention and for inviting me. I am looking forward to enjoying the rest of this evening with all of you and to celebrate the award winners.