Analysis of New Trade Policy – Part 2 The role of Global Value Chains

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2017-08-13

Umesh Moramudali

Among many other topics discussed in the recently approved New Trade Policy (NTP), substantial emphasis was given to the concepts of Global Product Sharing (GPS) and Global Value Chains (GVC) which seem to be the trends of globalization. NTP refers to the GPS as the division across countries of 'tasks' within the State production cycle, and notes that this has spread across many countries.

"High-tech and capital intensive industries rely heavily on GPS networks. Multi National Enterprises (MNEs) often offer more investments to low-cost locations to export back to their own countries and to third world countries. Among developing countries, especially in Asia, industries as diverse as automobiles, television and radio receivers, sewing machines, office equipment, electrical machinery, machine tools, cameras, watches, solar panels and surgical and medical devices have become established as part of the GPS networks animated by MNEs. These were among the fastest growing segments of global trade, in recent years", as stated in the NTP.

The World Trade Organization (WTO) notes that GVCs have become a dominant feature of world trade, encompassing developing, emerging and developed economies. The whole process of producing goods, from raw materials to finished products, is increasingly carried out wherever the necessary skills and materials are available at competitive cost and quality. Services also play an important role in global value chains not only by linking and co-ordinating activities of firms across countries but also as enablers of value creation and upgrading.

The growing fragmentation of production across borders highlights the need for countries to have an open, predictable and transparent trade and investment regime as tariffs, non-tariff barriers and other restrictive measures impact not only foreign suppliers, but also domestic producers. It also highlights the importance of an ambitious complementary policy agenda to leverage engagement in GVCs into more inclusive growth and employment prospects.

Product sharing and FDI
These product sharing networks often linked with FDI as such are linked to MNEs. For that very reason, it is a must to facilitate FDI through making it easier to start and function businesses. However, thus far the Government has failed to establish a conducive environment for business as reflected by the Ease of Doing Business Index in which Sri Lanka is ranked at 110.
However, the silver line is that the Government understands the issue and it was mentioned in the NTP that foreign investment and exports also tend to generate higher paying jobs. Yet, in 2013, Sri Lanka was ranked at 100th place in terms of FDI flow and 125th in terms of FDI stock. Most Asian late comers in their industrialization process have attracted larger volumes of FDI compared to Sri Lanka. Unfortunately, no major MNE has set up operations in Sri Lanka's manufacturing sector over the last decade.

The NTP goes on to state that it will create new opportunities for Sri Lanka's exporters and will also open Sri Lanka's markets to foreign firms, exposing firms in the economy to increased international competition which entails confronting some of the world's most efficient suppliers. However, just as the NTP will help exporters become more competitive, it will also enhance the competitiveness of Sri Lankan firms, in particular, SMEs in domestic markets by reducing barriers on imported inputs and getting rid of monopoly control of domestic inputs, maintaining a competitive exchange rate, reducing the cost of regulation and spurring service providers as well as producers of goods throughout the domestic production network to become more efficient.

SL's history of
facilitating MNEs
Being the very first country in the South Asian region to liberalize trade in 1977, Sri Lanka opened up many opportunities to attract FDIs through MNEs. In the aftermath of 1977, Sri Lanka had the opportunity to facilitate two big MNEs namely, Motorola and Harris Corporation. A renowned economist who had conducted extensive research on international trade, Prof. P. Athukorala noted, Motorola had incorporated a domestic subsidiary in 1980 for an assembly plant with 2,600 workers while the US-based Harris Corporation even started building a factory which would employ 1,850 people. Sadly, Sri Lanka lost both those opportunities as civil war intensified. It was not merely those two big opportunities, but many other opportunities that would have opened up, were lost due to the civil war and the political instability that ensued.

Human capital
Sri Lanka also lacks sufficient human capital to be a part of GVCs. The country requires to invest heavily on Research and Development, to facilitate investors with the required technology and skilled labour. Commenting further on this matter during a recent public lecture, Prof. Athukorala emphasized the importance of skills development in relation to expand trade and attract Foreign Direct Investment. He cites the example of Malaysia, which set up a skills development centre allowing foreign investors to place factories there. He notes that Sri Lanka too was offered such chances soon after liberalization, but lost such opportunities due to political instability and conflict.

However, Athukorala's emphasis is more on middle rank manpower than extraordinary engineers. According to his view, middle level manpower is needed to train unskilled labour which provides sufficient workers with skills for an investor to set up a factory.
It is the Government which has a huge role to play in building a skilled labour force. The Government needs to invest more on technical education as well as vocational training which would help to provide the skilled labour force required by industries. On a practical level, it can be suggested that expanding Engineering Faculties and IT Faculties would generate a large pool of skilled labour.

However, Prof. Athukorala's argument reflects only a part of the story. The rest of the story is to address the brain drain and retain these skilled labourers in the country. Every year, a large number of skilled labour leave the country after completing their higher education which reduces the chances of the country to attract investors. Hence, there has to be a mechanism to address the brain drain and keep the best local talent within the countryl.

Border efficiency
Another huge issue Sri Lanka faces in becoming a part of GVCs, is the lack of border efficiency. Recently, Senior Economist Subashini Abeysinghe noted that Sri Lanka was lagging behind in border efficiency, and enhancing efficiency in this regard is mandatory if the country wants to become a regional trade hub.

"Out of 136 countries ranked with regard to border efficiency and transparency, Sri Lanka is ranked at 97. During the last few years, the country has gone down in the ranking", noted Abeysinghe.

According to a research conducted by Verite Research regarding Non-Tariff Barriers (NTBs) faced by agricultural exports, it was identified that between 2014 and 2016 the country's global ranking in terms of efficiency and transparency in border administration measured by the Global Trade Enabling Index went down y ten places from 87 to 97.

It was also identified that Sri Lanka lags behind Thailand ranked 45, India ranked at 75 and Vietnam ranked at 87. According to the Doing Business Index 2017 of the World Bank it takes 76 hours on average to comply with export document requirements in Sri Lanka compared to 11 hours in Thailand, 38 hours in India and 50 hours in Vietnam.

The research further identified inefficiencies and unpredictability in procedure to be a significant barrier faced by Sri Lankan exporters of agricultural products. The inefficiencies resulted from several factors; lack of coordination and communication between respective agencies, continuing redundant practices, corruption and pilferage, limited dialogue between public and private sector agencies and the absence of targeted measures to minimize delays and damage to perishable export cargo.

OBOR and GVCs
The discussion on Sri Lanka tapping into GVCs is timely, particularly in the light of the opportunities that are likely to open up with the One Belt One Road (OBOR) initiative. Sri Lanka, being a part of the OBOR and with the strong connectivity of Chinese firms across the globe, Sri Lanka has a great chance to become a significant player in GVCs. However, that will only be possible if bold reforms are introduced regarding border efficiency, providing skilled labour and facilitating business. Therefore, the NTP emphasizing on GVCs and GPS is something that needs to be seen as a positive move. Yet, it requires genuine commitment towards bold reforms.

Umesh holds a B.A. (Hons) in Economics from the University of Colombo and can be contacted via [email protected]

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