India- Sri Lanka Comprehensive Economic Partnership Agreement (CEPA)



Free Trade Agreements have a long history. One of the first agreements that have been agreed internationally is identified as GATT Agreement. GATT refers to General Agreement on Trade & Tariff. Initially, after the 2nd World War in 1945, in order to boost commercial trade, 23 countries which were identified as contracting parties have got together and had a discussion in order to remove trade barriers between countries and to reduce tariff for the primary purpose of enhancing world trade.


GATT was born with two institutions side by side, i.e. World Bank and International Monetary Fund. After the initial discussion had between the parties in 1945, GATT was born in 1947. GATT conducted 8 meetings throughout the world which were identified as rounds of discussions. In each round of talks, various international issues were discussed with a view to boosting trade. The first round of discussions was identified as Kennedy Round, in which the Anti-Dumping Agreement was made. What it basically means is that it prevents one country dumping its extra production at a lower price to another country.


Thereafter the next round of discussions was held between 1973 and 1979 which is identified as Tokyo Round. As a result of publicity given and also the countries felt that if they did not participate in the discussions, they will be left out and therefore, 102 countries participated in the Tokyo Round. The idea that came forward in the Tokyo Round is to reduce trade barriers between the countries. However, the Tokyo Round did not end up successfully as most of the countries disagreed with liberalization of food products. Thereafter in the year 1993 the GATT had the Uruguay Round where 117 countries participated. Unlike the Tokyo Round, there were some agreements reached in order to reduce trade barriers and also at the same time, certain rules were agreed in respect of world trade.


After the Uruguay Round, parties agreed to sign the GATT Agreement and also it gave birth to World Trade Organization. At the WTO, there were discussions on how policy disputes are to be solved between the parties. WTO rules established were firm and permanent. Therefore, whenever a dispute arises between parties, the countries could refer their disputes to WTO which will decide on behalf of the countries, what action is to be taken in respect of violation of the international trade.


People claimed that with the introduction of WTO, there were improvements to world trade and the consumers got their products at a cheaper price and also at the same time the producers of goods were able to find new markets.


If a product is available in a country at a competitive price, whereas the same product is controlled in another country by an organization which has monopoly over such product, if border transactions are allowed on a competitive basis the consumer could be protected from buying such product at just any price. Therefore, the main purpose of the Free Trade Agreement was for a product to be available to the consumer at a competitive price. Thereby, if the participating countries are willing to abide by the GATT Agreement, they could market their products in any of the member countries which are bound by the agreement and not have any restrictions imposed over such products. The duty rate for a product has to be fixed by agreement by the participating countries, and generally for a unique product the duty rate imposed by all the stakeholders should be equal to all countries. This is identified as ‘Most Favoured Nation’ obligation (MFN status). This means that any advantage, privilege, immunity, favour etc. granted by one country to another country of a product shall be accorded unconditionally to all other contracting countries for the like product.


Apart from the positive aspects that were claimed by those who are supporting international trade, there were negative aspects of world trade as well. Due to the competition, some of the factories in some countries had to be closed down as they were unable to compete with international competitors. As a result thousands of jobs were lost and therefore unemployment rose in those countries. There were also other consequences as the manufacturers wants to reduce their prices in order to be competitive in the world markets. The salaries were brought down and some entrepreneurs introduced child labour as a way of reducing labour cost. Countries where there were no stringent environmental protection regulations were affected very badly as factories were put up with minimum environmental protection standards or otherwise discharging effluents of these factories to the environment causing permanent damage.


As far as services are concerned there are various ways of providing services and this could be broadly identified as:

  1. Cross-border trade – where neither the supplier nor the producer move physically from one place to another but rely on intermediate services such as telecommunication network or postal infrastructure. For eg. consultancy work, market research, tele-medical services etc. can be done through this process.


  1. Consumption abroad – where the consumer moves to the suppliers country in order to obtain the required services. For eg. services such as higher education, tourism etc.


  1. Commercial presence of the movement of the supplier organization to the consumer’s country which involves direct investment such as banks, hospitals, hotels, consultant companies etc.


  1. Movement of natural persons to provide individual services to the consumer’s country, such as Architects, Lawyers, Consultants, Doctors, Engineers etc.


According to the information available to the public, CEPA covers a vast range of activities such as business-communication, construction engineering, education, health, transport, tourism, recreation, culture etc.


In the trade of services, one cannot impose tariff of fiscal services at the border and therefore taxes for some of the services could be charged only by imposing domestic regulations such as the tax structure of the country, service charges etc.  This could affect the local service suppliers as they have to compete with the those who have the advantage as they have no prior commitment when they move into the country to provide such services.


As professionals, we are also very concerned about the volume of professionals that could enter into this country in the name of Engineers, Doctors, architects  etc. which may be far in excess of the numbers that Sri Lanka could accommodate.  According to the information available, the number of engineering graduates produced by Indian Universities is around 1.2 million per year which is 500 times more than the number produced by Sri Lankan Universities.


There is a saying that if you ask an opinion from two Economists in respect of the same matter you may get four answers. There is lack of consistency and also predictions made by the Economists are very vague and it will hardly materialized. A classic example is the Hedging Agreement where Petroleum Corporation entered into with several state and private banks and although the Agreement consists of a ceiling for increase in prices, they never had a capping at the bottom if prices decrease below a certain value. Therefore, we ended up with paying Billions of Rupees to some of the foreign banks.


Under these circumstances, when decisions are made by the Economists and if it has an impact on others, the general public also should be aware of what is happening in respect of these important matters.


The picture that has been shown to us by those who are lobbying in favour of CEPA is that there is going to be huge development with the introduction of CEPA. When one goes through the preambles of the CEPA Agreement, which is available on internet, where it states that “Acknowledging the positive results of FTA in terms of enhanced trade and greater investment flows between parties”. From the figures presented by the opposing CEPA you can see what the enhanced figures due to the introduction of the FTA are. They are mainly due to exporting vanaspathi, copper, scrap paper and ariconuts. The gap between inflow and outflow has been widening day by day and therefore, these preambles are prepared in order to camouflage the actual events that have been happening with respect to trade agreements.


The preamble to CEPA further state that this will optimize the use of materials, natural resources and preserve the environment. Probably I think that everybody knows the damage that copper industry has caused to the environment at some of the places where Indian businessmen themselves have established factories with obsolete technologies in order to export copper from Sri Lanka to India in order to obtain duty concessions. When we act on an environmental issue, the factories have already closed and the people have also disappeared. Therefore, the damage caused to the environment is irreparable and at the same time the parties who have done the damage also have left our shores and we are left with no possibility to take action.


One of the great ideas that this International Trade Agreement promotes is that it is better for the consumer that he will get the best product at the cheapest price since there will be open competition. The monopoly that has been established cannot be sustained  as there will be inflow of goods and material at competitive prices from all over the world. What will happen to our market and consumers initially if the goods are sold at a cheaper price in order to eliminate other local competitors? Thereafter the prices will be increased as they wish, since these companies who are interested in trading under bi-lateral agreements could be 100 times more powerful monetarily and politically than our local companies. Once our local companies disappear from the competition, the entire economy will be taken by a few international companies which we cannot even imagine their sizes.


Therefore, even under FTA there is a great danger of eliminating our small industries. From the trade figures presented by lobbing groups, it is extremely clear that our growth of export to India although it may have increased by many folds, but in actual figures, it is a very small amount. In order to carry out business by the Indian company in Sri Lanka, there are no trade barriers.  The entire idea behind this FTA and CEPA is to politically control small countries by big countries.


Dr. Manmohan Singh has said once that “We can choose our friends but we cannot choose our neighbour”s. This is extremely important to Sri Lanka more than to India and therefore, we have to be very cautious when dealing with international agreements as it could affect the freedom and sovereignty of Sri Lanka.


I would like to discuss a few aspects of Chapter 10 of this proposed CEPA Agreement. I hope some of you can remember that about 30 – 40 years back, we had foreign oil companies selling petroleum products in Sri Lanka and it was nationalized and thereafter the Petroleum Corporation was established. If the parties affected by nationalization desires to obtain compensation they have to file action in local courts and the trials will be conducted according to Sri Lankan law.


What will happen if the nationalization is done under FTA or CEPA? The affected parties can go to international arbitration and it states in Paragraph 4 that Arbitral Tribunal shall interpret the provision of this Agreement in accordance with Customary Rules of Interpretation of Public International Law. This shows that whether it was right or wrong, this will be decided by international Arbitrators according to international law and therefore the investors do not have to bother about the local Court system and the Sri Lankan law. Compensation will be awarded in Billions of Rupees in arbitration.


Internationally before 1996, there had been 38 cases of international arbitration in respect of disputes arising out of Free Trade Agreements. In the year 2011, it had gone up to 450 cases and presently, there are 3,900 cases pending in respect of disputes that arose out of Free Trade Agreements. I have taken this information from the internet and presently there is a case filed by an American Tobacco Company name Phillip Morison against Uruguay Government claiming US Dollars Two Billion as the Uruguay Government has decided to enforce printing health warnings on cigarette packets.


Therefore, with this FTA the private companies will get right to sue governments in order to recover their losses. This is not only closure of businesses. One could even claim anticipated profit. According to the information available, a Swedish company has filed an arbitration action claiming Euro 3.7 Billion from Germany as the German Government has decided to phase out nuclear power plants in that country after the Fukushima disaster. Similarly, there is another case where a Canadian mining company has claimed from Québec US$ 250.0 Million as the State of Québec has decided to close the mining in order to protect the environment. Therefore, it is very clear that all these trade agreements are being driven by multi-national companies in order to establish their rights and whenever they feel that their existence is going to be threatened, they do not have to worry about the local courts and they can go to international arbitration and claim billions of US Dollars from governments and the liberty of the State will be eroding gradually and our laws in this country will be completely ignored and they will only play a second fiddle in the dispute resolution process.


It is important to note that bilateral treaties are signed between parties not as independent agreements. They are embedded into the GATT Agreement. Therefore all the legal provisions applicable to GATT Agreement have been strengthened by bilateral treaties. The multinational companies do not have to resort to the legal system of the country if there is a dispute between the company and the country. They can take the country to international arbitration where Arbitrators are appointed by WTO. Some of these Arbitrators may be Advisors to these multinational companies. However, that is how this system works. The affected party could take a government for expropriation and ask for compensation. The expropriation means harassment or introducing new legislation and even introduction of a tax is considered as expropriation. Who is going to decide whether implementation of a tax is right or wrong? It will be decided by the Arbitrators.


Bilateral investment treaties require host governments to behave in a manner consistent with legitimate expectations of foreign investors to maintain stability of legal and business environment in place at the time of an investment when conditions of foreign investment would have been relied upon when making investment decisions.


Therefore Sri Lanka being a country having a very small economy in comparison to India, there is a strong possibility that we will subjugate ourselves economically and politically if CEPA is signed between Sri Lanka and India. Therefore, if politicians intend to sign this agreement, only from advice taken from an isolated group, they will be ignoring a vast majority of this country and what will be done cannot be reversed easily if we enter into these type of agreements and therefore, it is better to have an open discussion with all professionals and businessmen before entering into CEPA agreement.