In the recent past, Sri Lanka has focused on negotiating FTAs as a means to revive its export sector. FTAs address external barriers that Sri Lankan exporters face in the importing country. However, trade barriers are found not only at the border of the importing country, but also at the border of the exporting country.
Using agriculture products as case studies, Verité Research identifies such domestic barriers. Findings reveal that domestic barriers to trade significantly undermine the export capacity and competitiveness of Sri Lankan exports. Hence, addressing them is important to unleash the country’s export potential.
Following is a summary of the report:
The export sector of Sri Lanka has performed poorly since the turn of the century. Exports to GDP ratio has declined from 33.3% of GDP in 2000 to 12.8% of GDP by 2015. Additionally, from 2011 onwards, exports have declined in terms of absolute value. In response, the Government of Sri Lanka has made it a priority within their economic policy agenda to revive the ailing export sector.
Reviving the export sector requires identifying and addressing trade barriers that undermine export competitiveness. Trade barriers refer to factors beyond the exporter’s direct control that adversely affect the cost, quality, quantity, or timely delivery of products. Such barriers found at home are termed domestic barriers, while those found abroad are termed external barriers.
The government’s recent focus has been on reducing external trade barriers and improving market access through FTAs. In comparison, little attention has been paid to domestic trade barriers that affect export competitiveness. To unleash the full potential of the export sector, it is important to reduce both external and domestic barriers.
This study aims to identify the prevalent domestic trade barriers found at the Sri Lankan border and analyse their impact on agricultural exports. The agricultural exports, valued at US$ 2.5 billion in 2015, accounted for 25% of total exports. Tea accounted for 50% of total agricultural exports; coconut and spices accounted for another 33%; and fruit and vegetables, cut flowers and foliage, minor crops, and fisheries products constituted the remaining 17%.
The study finds that the domestic trade barriers are a significant impediment to the growth and diversification of the agricultural exports. The negative effects of these barriers are especially pronounced in the case of perishable agricultural products. Their quality and shelf life can be irreversibly affected due to delays caused by such barriers. Removing these barriers can go a long way in boosting exports.
Interviews with exporters revealed that improving the efficiency of border procedures could cut cost of products by as much as 25 to 30%.
The study identifies trade barriers the exporters face when importing inputs (e.g. seed, fertilizer) and exporting the final output. These trade barriers are divided into three broad categories namely, (i) regulatory barriers; (ii)procedural barriers; and (iii) informational barriers. Case studies in each category provide examples of such barriers and make clear their impact on exports.
Regulatory Barriers
Commonly referred to as sanitary and phytosanitary (SPS) measures, regulations governing agricultural trade aim to safeguard the health and safety of human, plant and animal life. The challenge for any country is to ensure that these regulations maintain the safety of traded products without unnecessarily impeding trade. Ensuring that regulations are 1) developed based on research and stakeholder consultations; 2) regularly reviewed and updated; and 3) designed in a manner that leaves less room for discretionary interpretation, will help overcome this challenges to a significant extent. The study identifies several weaknesses in the regulation making process in Sri Lanka, which not only impedes trade but also compromises the safety of agricultural products traded.
1. Weak stakeholder consultation
Consulting stakeholders when making regulations enhance legitimacy and credibility of regulations, helps improve their effectiveness, and enhances voluntary compliance. The study finds that the absence of stakeholder consultation is a key reason that makes regulations a barrier to trade.
For example, the use of advisory bodies is one of the most widely utilised approaches to stakeholder consultation. The proposed National Seed Council (NSC) under Seed Act No. 22 of 2003, comprising all key public and private sector stakeholders, is expected to function as an advisory and oversight body on all matters relating to production and supply of seeds and planting material. The study identifies a number of issues pertaining to seed and plant material imports that undermine the country’s export potential, which the NSC could help to address.
However, 14 years have passed since the enactment of the Act, and the NSC has yet to be set up. Failure to establish the NSC has prolonged the problems and delayed their solutions.
Advance notification and seeking comments from stakeholders on proposed changes is another widely-used approach to stakeholder consultation. This enables accurate assessment of regulatory impact, enhances compliance and minimises implementation costs. A ban on a broad-spectrum weedicide, glyphosate, was introduced in October 2015 and the impact of the ban clearly illustrates the implications of failing to undertake such consultation. The ban severely affected exporters of cut flowers and foliage to Australia, where glyphosate is the only dipping treatment permitted. The ban, coupled with the lack of alternatives, was identified to have caused a significant drop in the yields of certain crops.
Lack of alternatives also meant that agricultural producers were forced to shift to manual weeding which increased cost of production significantly. Furthermore, reports of glyphosate being smuggled into the country raises questions about effectiveness of the ban.
2. Failure to regularly review and update regulations
Regulations on agricultural trade must be reviewed in line with changes in economic, environmental and technical conditions surrounding the products they regulate, in order to ensure their relevance and usefulness. The need for review and update applies especially to the list of prohibitions and restrictions governing the export and import of plants.
The regulation protecting the country’s flora from foreign pests and diseases has not been reviewed for the last three and half decades. This raises serious concerns of the relevance and usefulness of the protection extended through the existing list of prohibitions and restrictions. Furthermore, failure to review makes traders subject to restrictions that may no longer be relevant or useful, making such regulations unnecessary barriers to trade.
3. Poor design of regulations
Failure to assess the impact of the regulations and consult stakeholders at the design stage can result in poorly designed regulations, leading to unfavourable outcomes. A clear example is the guidelines issued by the Horticultural Crops Research and Development Institute (HORDI) of the Department of Agriculture (DOA) for the testing of imported vegetable varieties.
The guidelines in effect create monopolies for seed companies over seed varieties, and thereby restrict the choice of farmers in terms of both seed suppliers and varieties. The system creates an unfair advantage for existing seed companies and creates insurmountable entry barriers for new players entering the market.
The case demonstrates how regulatory systems can fall prey to bureaucratic prerogative and vested interests in the absence of wider stakeholder consultations and impact assessment at the design stage.
Remedial measures:
Sri Lanka can learn from the measures taken by other countries to overcome
identified barriers. For example, many countries have put in place systems to notify the public in advance and seek comments prior to implementation of regulations.
Procedural Barriers
Efficient, predictable, and transparent regulatory procedures enhance compliance and facilitate trade. Sri Lankan exporters suffer from inefficient procedures at the border. This is reflected by the country’s global ranking in efficiency of border procedures, measured by the Global Trade Enabling Index.
The ranking went down by ten places within just two years, from 87th place (2014) to 97th (2016) out of 136 countries.
The study identifies inefficiency, unpredictability, and weak inter-agency coordination to be key procedural barriers to trade.
1. Inefficient procedures
Every additional hour that perishable products spend in transit because of inefficient procedures adversely affects their quality and commercial value. Several case studies serve to illustrate the negative impact of delays caused by inefficient procedures on export competitiveness.
The physical inspection process in place for perishables that go through the Katunayake International Airport is a case in point. The cargo goes through four separate inspections conducted by four different authorities.
In most instances, the inspections are carried out by officials who are not trained to handle perishable cargo, and pilferage is a frequent occurrence. The inspections are conducted in areas without any temperature control, and in some instances in open-air areas, exposing products to heat and contamination.
The result is longer transit times and damage to cargo, which significantly undermines the competitiveness of perishable exports.
2. Weak inter-agency coordination
Poor communication between agencies results in delays to exporters, which adversely affects their export competitiveness. For example, seafood exporters report of significant delays in getting the Health Certificate required to clear cargo because of weak coordination between National Aquatic Resources Research and Development Agency (NARA) and the Department of Fisheries and Aquatic Resources (DFAR).
3. Unpredictable procedures
The ability to know with confidence if listed documents are submitted, outlined procedures are followed, and the cargo can be cleared within a given period is a key determinant of trade competitiveness. The fertilizer import procedure in Sri Lanka illustrates the impact of unpredictable procedures where the traders are unable to assess with confidence the time taken to process the documents and clear the cargo.
Fertilizer importers report of frequent delays despite following the due process outlined by the National Fertilizer Secretariat (NFS).
The process itself is lengthy and cumbersome and delays are an added burden. This does not bode well for agricultural productivity and the export competitiveness of a country that meets most of its fertilizer needs through imports.
Remedial measures: The ability to profile the risk of non-compliance of a shipment with regulations and introduce mitigatory measures proportional to the level of risk can help reduce the frequency of physical inspections. For example, in the UK, the Import Risk Assessment System assigns each consignment to a risk category. Only the consignments categorised as high risk are subject to 100% inspection. Medium risk categories are inspected on a case-by-case basis, while low risk categories are cleared without any inspection.
Additionally, improved coordination and cooperation of border agencies can help to significantly reduce compliance and enforcement related time and costs.
Countries are also increasingly adopting information and communication technology to cut down red tape.
Informational Barriers
Access to accurate and timely information on regulations and procedures in a user-friendly manner is critical for export success. Not having the right information at the right time can lead to significant delays and losses for the trader.
Further, the time and money spent on finding information can be a significant barrier to trade as well. The study finds difficulty in accessing trade related regulatory information to be a major barrier to trade.
1. Limited access to information online
Making information available through the web can help reduce the information search costs significantly and enhance transparency. It is the most non-discriminatory way of making information available to the public, since access is not restricted by time and location.
Instant and convenient access to government information through websites is especially beneficial to small and medium industries and businesses located outside Colombo, who would otherwise have to visit Colombo in person to obtain the necessary information. The research finds that in Sri Lanka, information made available through websites is often limited and outdated.
Thus, traders must often call relevant organisations, or visit their offices in person to obtain the required information.
The report analysed the online availability of basic information such as contact details, application forms, procedures, list of restrictions, fees and timelines for seven key agencies related to agricultural trade. According to the study, only 36% of the required information was available online. The remaining 64% of information had to be obtained by either physically visiting the premises of the respective agency or via phone call.
2. Failure to notify traders of changes in advance
Many traders interviewed in this study experienced ad hoc changes in procedures, often with a change in the Head of the relevant regulatory authority. As the traders are not informed of changes in a timely manner, they consequently do not have sufficient time to adjust to new procedures.
An importer of special fertilizers, for example, was not informed of the need for additional approvals from the Department of Agriculture prior to the arrival of shipments at the port. As a result, a shipment took three months, instead of the usual three days, to be released from the port, which resulted in significant demurrage costs.
3. Failure to provide information in a user-friendly manner
To enhance accessibility of information, it is important to publish the information in a user-friendly manner. In Sri Lanka, finding information online can be cumbersome. It is not unusual to find information on different aspects of a single procedure related to a single product scattered over multiple websites.
Increasingly, countries are introducing online search engines where traders can find information by entering product code or name, especially for taxes and trade data. In Sri Lanka, most agencies have yet to introduce such systems. At present, soft copies of the most updated data on trade, which is organized by HS code is not available online and must be purchased from Sri Lanka Customs.
Furthermore, the taxes applicable at the point of import by HS code are not made available online in a user-friendly manner.
Remedial measures: Many countries have introduced a Trade Information Portal as a means of facilitating trade and increasing transparency. A Trade Information Portal is expected to enable traders to access all relevant trade rules, regulations, procedures, fee schedules, and forms from all border management agencies through a single user-friendly web site.
In its 2017 Budget, the Government of Sri Lanka made a commitment to establish a National Trade Information Portal. It is important to note, however, that maintaining a website of this nature is challenging as information needs to be continuously updated to ensure that it remains relevant and useful.
Therefore, putting in place institutional arrangements to ensure a proactive supply of information from the agencies to the Trade Information Portal is critical for such a portal to be an effective solution to the current information problem.
In conclusion, there is much that can be done at home to realise the untapped potential of agricultural exports. The study revealed many of the barriers that currently exist to be symptomatic of a deeper lack of communication between the three major players in the trade-related policymaking space, that is, 1) the policy makers who formulate the regulation; 2) regulatory agencies, who are unaware of the barriers created by procedures or are unwilling to address them due to the perks and privileges the existing system offers; and 3) private sector traders, who often resort to private solutions to address the barriers. Many of the barriers described can be easily resolved, as demonstrated by the experience of other countries. However, arriving at long-term, sustainable solutions requires a willingness of the government to recognise the importance of domestic barriers and work towards eliminating them. It also requires the persistence of the private sector in holding the regulatory agencies involved in trade accountable in delivering such solutions.
Verité Research is an independent multi-disciplinary think tank providing strategic analysis and advice to decision-makers and opinion-formers in Asia.
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