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Asian Tribune is published by E-LANKA MEDIA(PVT)Ltd. Vol. 20 No. 104

Sri Lanka China trade relationship

By T.K.Premadasa, Deputy Director/ Marketing, Sri Lanka Export Development Board

February 2007 will glow writ large in letters of gold in history as Sri Lanka & China both celebrated 50th Anniversary of its establishment of diplomatic relations between the two countries. The visit of President Mahinda Rajapakse to China at this historic occasion is valued highly significant as eight bilateral agreements were successfully signed. The other point of great importance is that the Year 2007 has been declared Sri Lanka China Friendship Year.

It is rationally appropriate to commend the trade relations between the two countries for its historical relationship and accelerated development monumentally achieved by China who will indisputably become the giant in trade & industry during this century

It is reasonably appropriate to commend the trade relationship between the two countries considering the fact its historical relationship and the monumental development in China who will indisputably become the giant in trade & industry during this century.

Since the change of government in Sri Lanka in the year 1956 significant changes were introduced in Sri Lankan foreign policy. The newly elected government was much concerned initiating dialogue with Communist countries placing in par with other revolutionary changes taken effect in Asia. In its inaugural throne speech or government policy speech in 1956, Sri Lankan government declared that she would adopt a non-aligned foreign policy pledging to review the British Air Force Bases at Katunayake & Trincomalee ameliorating better mutual cooperation with other countries and also exchanging diplomatic representation with those not being represented as yet.

This new foreign policy of non-alignment magnanimously favored negotiations on the possibility of opening diplomatic relations with socialist countries as well. Discussions were initiated in September 1956 on the establishment of diplomatic representation. The historic visit of the then Prime Minister of China Mr Choue en Lai to Sri Lanka in early 1957 facilitated to finalize a favorable decision on diplomatic representation between each other. In consequence with this prudent decision, Mr Wilmot A.Perera the first ever Sri Lankan Ambassador to the People’s Republic of China was appointed in February 1957.

Highlights from a number of Chronicles and Archaeological findings are acceptable proof of evidence that trade between Sri Lanka & China goes far beyond Christian era. Sri Lanka was the central harbor in the ancient Indian Ocean trade. Prof Senerath Paranavithane and Dr. N. Artigalla in Ceylon History ( Part One ) have proclaimed that ancient Sri Lanka was being utilized as the center for export of goods from Far East to West and South to East in particular and advanced to become the main port of entrance from East to West on sea route over the Indian Ocean. The direct link of the Silk Road with Sri Lankan ports was advantageous to Sri Lanka as the sea trade reached close bilateral contacts with China in the field of trade, commerce, culture and politics. Ancient Sino-Sri Lanka relationship has been explicitly expounded in the great works of Sri Lankan history, namely: Sihalavattuppakarana -(5AD), Sahassavattuppakarana (9AD), Buthsarana & Jataka Atuwa Getapadaya (12AD), and Pujawaliya (13AD).

The fundamental achievement on the relationship on trade negotiations in the recent past is the famous Rice Rubber Pact with China. In 1952 Sri Lanka and China entered into a bilateral trade agreement known as Sri Lanka China Trade Agreement with the firm objective of enhancing trade and mutual relations between them. In terms of the conditions of this agreement China consented to supply 80,000 tons of rice to Sri Lanka within a short period in exchange of Sri Lankan products mainly natural rubber. Primarily it was considered to be a short- term basis but on negotiations it was later consensually extended to a long- term trade agreement. Sri Lanka assured to import 270,000 metric tons of rice each year for a period of five years and China guaranteed to purchase 50,000 tons of rubber each year for five years over the same period. One of the conditions in the trade agreement signed was the prices of commodities were subject to revision annually.

This Trade Pact of Rice and Rubber agreed to between Sri Lanka and China was mostly favorable to Sri Lanka. The price of rubber offered by China was 40% higher than the price offered by the Western countries but the price of rice offered by China was less than 1/3rd of the world market price.

From Sri Lanka point of view there are three main advantages of this agreement. i.e. Assurance of a steady supply of rice to Sri Lanka when the globe was confronted with a grave scarcity of rice and Guarantee of a fixed price for rubber and better balance of trade .

World War II and exploitation of the population expansion in Asia created an inestimable damage to impoverished countries causing an immense shortage of rice resulting a crisis successfully handled with the strength of this trade pact.

Sri Lanka imported approximately 350,000 to 400,000 metric tons of rice to meet the requirements in early 1950s to avert a shortage of rice in the country. This agreement enlivened Sri Lanka to meet the crisis in the world market to a certain extent.

Sri Lanka enjoyed the opportunity in offering a high price for export of rubber to the world market during the Korean War, but eventually by the end of the war the price of rubber swooped down unexpectedly. This was mainly due to two reasons i.e. Decrease in price of rubber with the war ending and Demand for rubber by Western countries was very meager and Production of systematic rubber by USA.

Despite Sri Lanka rubber industry being adversely affected by this world crisis, Sri Lanka was able to recover the lost market share and offer its natural rubber at a highly competitive rate under this trade agreement. China commenced import of rubber from Sri Lanka in 1951 even before this agreement became effective. China extended a remarkable sense of generosity to the people of Sri Lanka in becoming the principal importer of rubber from Sri Lanka.

Sri Lanka and China at the time of signing this historic trade agreement was not mutually close to each other on diplomatic relations and political concerns since the two countries maintained different foreign policies. In spite of the differences in external affairs between the two countries China‘s cooperation in signing the trade pact is highly commendable.

A number of criticisms emanated against this agreement on the omission of a condition for the development of rubber manufacturing industry in Sri Lanka. Neither diversification of rubber products nor improvement of manufacturing industry was being implemented by Sri Lanka at this time. Nevertheless, this trade pact signed in 1952 had benefited favorable advantages to Sri Lanka.

This agreement was being renewed every five years till 1982 and protocol was signed annually for effective implementation of the conditions in the barter of rice & rubber under the purview of this agreement. In expediting the best transaction of bartering commodities, two sets of clearing accounts were maintained through the respective Central Banks.

Numerous changes were effected on the Sri Lanka China Trade Agreement during the period from 1977 to 1982. Protocols for 1980/ 1981 restricted payments on settling of accounts involved with rubber & rice only and transactions on other commodities were made in free currency. In addition protocol for 1982 directed payments in convertible currency on all trade transactions.

Improvement of relations between the two countries recognized compromising a General Trade Pact in September 1982. In consequence to this agreement most favored nation treatment was offered and bilaterally decided to establish a Joint Committee for reviewing the implementation of the agreement.

An Agreement on Economic & Trade Cooperation was signed in 1984 between the two countries. Later in 1991 a decision was arrived at the amalgamation of the two Joint Committees formed under the General Trade Pact of 1982 and Agreement on Economic & Trade Cooperation of 1984. The first session of the amalgamated Sri Lanka China Joint Commission was held in 1992 and second and third sessions were held in 1996 and 2000 respectively.

The objectives of the Joint Commission were to expand trade and other economic affairs between Sri Lanka & China. Both counties were able to exchange information, organize trade missions and delegations on conciliatory negotiations conducted by these joint commissions. In addition, China offered loan facilities and assistance on various development projects in Sri Lanka under this Commission.. This Commission builds a forum for discussions on cultural exchange and attraction of tourism.

In advancing further discussions over the progress of economic cooperation between the two countries in early 60s, China & Sri Lanka amiably entered into a maritime agreement in July 1963. In terms of this agreement all commercial vessels engaged in cargo and passenger services between the two countries or a third country were treated on the basis of most favored nations treatment.

Sri Lanka China Business Council was instituted in 1994 by the Sri Lanka business community under the auspices of the Chamber of Commerce with the sublime objective of improving trade & investment. Most members of this Council are leading business representatives from the private sector.

In early part of year 2000 Sri Lanka exchanged bilateral negotiations with China extending glowing support in favor of Chinese bid to join the World Trade Organization. Sri Lanka signed a special agreement with China in 1997 in support of Chinese admission to Asia Pacific Trade Agreement also known as Bangkok Agreement founded in 1975 recognized as one of the oldest regional preferential trade pacts in ESCAP (Economic & Small Countries of Asia & Pacific). Benefit of tariff concessions has been granted to different sectors of products under this agreement.

In spite of Sri Lanka China cordial relations on trade supported by Rice & Rubber Trade Pact being engineered to remain for a long period, bilateral trade transactions dramatically changed as caused by the economic policy changes of the two governments during the recent past. Introduction of the new economic policy in the latter part of 1970, diversification of products and markets and the relevant changes enacted in the trade agreement after 1977, made effects on Sri Lanka Trade Relations. China was the leading export market for Sri Lanka in 1975 due to the effects of Sri Lanka- China trade agreement and subsequently is ranked 26th export market for Sri Lanka as illustrated in statistical table given below.

Source- Custom Statistics

The trade between the two countries varies every year over the drop & increase of export items of products. However, it is noticeable that the trade balance has continuously been in favor of China

Source- Custom Statistics

There has been a fluctuation of Sri Lanka exports to China periodically in the recent past. Sri Lanka has exported mainly ready-made garments, natural rubber, tea, sea foods, precious and semi-precious gems during the years 1989, 1992, 1994 and 1999-2000.An enormous drop in textile export especially ready-made garments, precious and semi-precious gems has been recognized in the latter part of 1990. Sri Lanka’s export of ready-made garments to China valued at Rs.288.2 million in 1998 was distinctively dropped to Rs.8.7million in 1999 further decreasing the annual average export of garments to Rs.5 million during the last 15 years. Export of precious and semi-precious gems at the value of Rs.384 million in 1996 has descended to Rs.4 million since 1997.

However, there has been a significant increase of Sri Lanka exports to China since 2000, mainly due to the bulky export of mineral sands as Zicronium ores and rutiles, coir fiber and electrical components such as rectifiers etc. The export of mineral sands from Rs.10 million in 2000 inspiringly propelled up to Rs.146 million in 2005. Coir products worth of Rs.6 million in 2000 ascended to Rs 115 million in 2005. Apart from the above increase in exports, an intrinsic ascendancy in tea and natural rubber sector was recognized.

China accounted 0 .45% of total exports from Sri Lanka to the world. But on the current trend it is optimistic that China will increase the potential items of exports from Sri Lanka exports such as rubber products, tea, spices, confectioneries and seafood. etc.

In view of the available statistics of foreign trade in 2005 Sri Lanka has imported 7.6% of the total imports of Sri Lanka from China. Imports from China have been increasing dramatically creating huge trade balance unfavorable to Sri Lanka. In 2005 China became the fourth largest exporter to Sri Lanka next to India, Singapore and Hong Kong. Sri Lanka mainly imports fabrics, tractors, vehicle spare parts, machinery and chemicals etc. Sri Lanka will in future import a considerable number of cars, other small vehicles, automobile spare parts and electronic equipment causing formidable challenge to other leading exporting countries to Sri Lanka.

In comparison with the other leading investors in Sri Lanka, Chinese investments are not as high as others. Nevertheless, 15 projects operated by China under the BOI laws are engaged in the manufacture of garments and bicycle spare parts etc. In addition 39 Non-BOI SME projects are being operated in the field of trading houses and manufacture of Soya products.

In view of the current scenario of global economy it is of pivotal importance for the developing countries to strengthen their trade relations with China. China being the largest market in the world in market size and maintains cordial relations with Sri Lanka, it would be expedient to be seriously thoughtful of her illustrious prominence in accelerating indefinable progressive amelioration prognosticating her potential for the world leadership.

Resplendent China at the zenith of their glorious achievement in world trade is the ideal model to be studied in optimism by the developing countries as Sri Lanka for the incredible opportunities being anticipated on their outstanding excellence. Since 1979 Government of China has been enthusiastic in their Economic Reform Policy moving from Central Plan Economy to Market Oriented Economy. But Communist Part of China with its supreme power of the proletariat successfully ruling the country of the world’s largest population by a system of dual or mixed economy has accomplished in alleviating the poverty of trillions of their populace.

Chinese economy is the world’s fourth largest as appraised by the nominal GDP. She has sagaciously maintained an average growth rate of 7% during the last few decades targeting a long-term development. China with a massive power of labor force, affluence of raw materials, voluminous energy, quantitatively enriched in resources together with three busiest ports of their own among the world’s five busiest ports, will potentially become the major economic power of the planet not only in production but also in service sector. Currently China ranks 9th position in service output in world trade. High power and telecom density ensure the sector to remain on a long-term high growth trajectory.

China’s global trade surpassed by $ one trillion in 2004 doubling more than the gains in 2001. By the end of 2004 China surmounted as the third largest trading nation of the globe behind USA and Germany. The superlative example of China’s accomplishment as the major supplier is their remarkable efficacy of indefatigable efforts to shine as the seventh largest export partner to Wall Mart just ahead of UK.

Sri Lanka has overwhelming opportunities on the perceptive development in China particularly in joint ventures. Reminiscing the cordial relationship maintained between Sri Lanka & China during the past, mutual dialogue may possibly be rejuvenated to further strengthen the cordiality of understanding to stimulate trade agreements in future.

- Asian Tribune -

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