In response to a severe debt crisis, the Sri Lankan government is taking prompt action to address the situation. One of the key measures being taken is the expediting of Free Trade Agreement (FTA) negotiations with China. Alongside this, Sri Lanka has expressed a strong interest in joining the Regional Comprehensive Economic Partnership (RCEP), which is led by China. This strategic decision is driven by China’s substantial financial support to Sri Lanka, in the form of loans and grants. As a member of China’s Belt and Road Initiative, Sri Lanka aims to demonstrate its appreciation and commitment to the partnership while also seeking their initiative in restructuring the debt Sri Lanka owes to China in order to obtain the International Monetary Fund bailout package.
While China has benefited from significant import revenue by importing a considerable quantity of goods from Sri Lanka, the exports from Sri Lanka to China have remained relatively low. Will this trade imbalance could be address through the FTA and RCEP membership is unclear as of now.
In 2021, the value of China’s exports to Sri Lanka reached around USD 4.7 billion, while Sri Lanka’s exports to China amounted to USD 274 million. Despite the absence of a Free Trade Agreement (FTA) between the two countries so far, Sri Lanka, as an island nation, faces significant challenges in competing with China’s robust export capabilities. Moreover, the influx of Chinese imports has flooded the Sri Lankan market already. This situation raises concerns regarding the potential limitations on domestic market growth if an FTA is signed, as it could lead to further increases in Chinese goods entering Sri Lanka.
India withdrew from the Regional Comprehensive Economic Partnership (RCEP) for similar reasons as they were concerned about the potential negative impact on their domestic market. Foreign Minister of India, Dr. S. Jaishankar, officially stated the withdrawal on November 4, 2019, emphasizing the need to safeguard India’s national interests. India’s primary concern was that RCEP participation would expose their producers and manufacturers to a surge of inexpensive imports, particularly from China, which could have posed a significant threat to local businesses, industries, and jobs. Sectors such as textiles, agriculture, and dairy, employing millions of workers, were seen as particularly vulnerable to imports from RCEP signatories. Furthermore, India would have been required to gradually reduce tariff levels under the agreement. “It would’ve been death-knell of manufacturing and several other sectors in India. We would have thrown Indian industry to unfair competition from non-transparent economy like China,” noted Union Minister Piyush Goyal.
After its decision to step out of the Regional Comprehensive Economic Partnership (RCEP), India is now focusing on advancing the Free Trade Agreements (FTAs) within the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). BIMSTEC comprises Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka, and Thailand. However, progress in these FTAs has been relatively slow too.
Additionally, India has faced challenges within the South Asian Association for Regional Cooperation (SAARC), which has been largely hindered by persistent conflicts between India and Pakistan. This situation has diverted to other platforms for various international bilateral treaties, including the RCEP, as well as the revival of initiatives like the China-Pakistan Economic Corridor (CPEC) and BIMSTEC.
The RCEP officially came into force on January 1, 2022, for 10 original parties, including Australia, Brunei Darussalam, Cambodia, China, Japan, Laos, New Zealand, Singapore, Thailand, and Vietnam. Subsequently, it entered into force for the Republic of Korea on February 1, 2022, for Malaysia on March 18, 2022, for Indonesia on January 2, 2023, and for the Philippines on June 2, 2023. With its vast membership in terms of GDP, the RCEP has become the world’s largest free trade agreement. India which was an observer of the RCEP finally knew they are not going to benefit hence left the platform.
Over the past few years, China has been actively involved in the ASEAN project, despite not being there initially. In their view, ASEAN was designed to “encircle China”. However, in 1996, China became a full dialogue partner of ASEAN realizing its importance and strategized cautiously to move in. Subsequently, in 2008, China appointed its first ambassador to ASEAN, and in 2011, the establishment of the ASEAN-China Centre (ACC) held in Beijing. China further solidified its engagement with ASEAN by establishing its Permanent Mission in ASEAN in 2012 to foster dialogue and strategic partnerships, ultimately aiming to be identified as a “community of shared destiny.”
In its pursuit of regional influence, China sought to regain strength in the RCEP too, which is perceived as China outsmarting the United States and its allies on the political front. China successfully included countries like Japan and Australia within the framework of the RCEP.
In 2020, China and 14 other countries came on board for RCEP and this agreement has been seen as a potential catalyst for economic recovery in Asia following the disruptions caused by the pandemic. One year after the implementation of the RCEP, China has experienced significant growth in its export of petrochemical products. In 2022, the total petrochemical trade between China and RCEP member countries amounted to US $292.81 billion, representing a 15% increase compared to the previous year.
During this juncture, former Pakistan Prime Minister Imran Khan commended President Xi Jinping’s visionary Belt and Road Initiative (BRI) that is aimed to enhance regional and international connectivity for China. The China-Pakistan Economic Corridor (CPEC), a flagship project of the BRI, is playing a significant role in fostering cooperation and development along the BRI. Nevertheless, Pakistan is facing sever bankruptcy like Sri Lanka over heavy loans obtained from China.
Economists in Pakistan have raised concerns regarding the China-Pakistan Economic Corridor (CPEC) and its impact on the country’s economy. Drawing parallels with Sri Lanka’s experiences, where Chinese projects did not generate the anticipated revenues, they argue that CPEC has exacerbated existing structural imbalances in an economy that heavily relies on consumption and government spending for growth. This has resulted in a widening trade imbalance between imports and exports, presenting challenges for Pakistan, which is a net energy importer, as it grapples with generating sufficient revenue to meet its import obligations. Consequently, Pakistan is seeking an IMF bailout of USD 7billion to avoid default, and has approached the US assistance to it.
In light of these developments, the President of Sri Lanka has highlighted the importance of gradually liberalizing the service sector as a means to attract foreign direct investment (FDI) and has expressed the intention to pursue membership in the Regional Comprehensive Economic Partnership (RCEP).
The Sri Lankan government, led by Ambassador to Indonesia, Rtd Admiral Jayanath Colombage, conducted a successful Fact-Finding Mission in Jakarta, Indonesia from June 12 to June 14, 2023, as part of their pursuit to join the Regional Comprehensive Economic Partnership (RCEP). This delegation comprised senior government officials who showed great interest in becoming an RCEP member. They received a warm reception from representatives of ASEAN, including Secretary-General Dr. Kao Kim Hourn, Deputy Secretary-General Satvinder Singh, officials from the ASEAN Secretariat, Indonesian government officials, and various Ambassadors of RCEP.
The Fact-Finding Mission conducted by Sri Lanka is the first of its kind by any country since the RCEP entered into force on January 1, 2022, as acknowledged by the Sri Lankan government. The Sri Lankan delegation, led by Senior Advisor to the President Dr. R. H. S. Samarathunga, visited the ASEAN Secretariat, which currently serves as the depository of the RCEP. The RCEP is composed of ten ASEAN member countries and their five partner countries, namely Australia, China, Japan, New Zealand, and the Republic of Korea.
The RCEP represents a vast market of 2.3 billion people, accounting for nearly 30% of the world’s population. It also holds significant economic power, with a combined GDP of US$ 29.3 trillion, equivalent to approximately 30% of global GDP. Furthermore, the RCEP contributes to around 28% of global trade based on 2021 statistics.
On RCEP, both parties have discussed the accession procedure formalities and the way forward to reach an early agreement. These discussions explored opportunities to enhance trade, investment, and strengthen economic cooperation between Sri Lanka and ASEAN. Additionally, the Sri Lankan delegation had the opportunity to meet with several Ambassadors from ASEAN countries, including Brunei, Cambodia, China, Japan, Singapore, and Thailand. This provided a valuable platform to share Sri Lanka’s intentions and seek support in reaching a potential agreement with RCEP. The Sri Lankan delegation had fruitful discussions with Director for ASEAN Trade Negotiation from the Ministry of Trade, Dina Kurniasari, and Director General for ASEAN Cooperation of the Ministry of Foreign Affairs of Indonesia, Sidharto R. Suryodipuro the government said.
Ultimately, Sri Lanka must strive to achieve a balanced approach in its exports to China. Taking into consideration the scale of its local production and the prevailing export imbalance, the crucial question persists as to whether a mutually beneficial outcome can be reached, or if Sri Lanka will blindly accept the deal without careful evaluation.