This is the 2nd article in the ‘Smart Future’ series – my new weekly column in the Daily Mirror Business.
In recent years Sri Lankan policymakers have turned their back on Europe – not only in terms of political issues, but also in terms of trade policy. The pivot of international economic policy to countries like China have come at the expense of neglecting what is still one of the largest export markets for Sri Lanka – the European Union (EU). The new Sri Lankan government appears keen to correct this. It has expressed interest in negotiating to regain the EU GSP Plus concessions that we lost in 2010 due to concerns over human rights issues, which is estimated to have cost the economy US$ 1.5 billion according to IPS Executive Director Dr. Saman Kelegama. Despite all the rhetoric about ‘diversifying to Asian markets’, we cannot ignore the fact that EU countries absorb nearly one-third of all our exports. And this has hardly changed in years.
Sri Lanka’s Peers Have Performed Far Better
While I am rarely in favour of extended periods of special concessions, which could undermine longer-term competitiveness and dynamism, right now the regaining of GSP Plus would come at a welcome time and we must take anything we can get. Why? Sri Lanka’s export performance is troubling. While Sri Lankan merchandise exports grew at less than 5%, our export competitors like Bangladesh, Cambodia and Vietnam who face similarly tough export market conditions grew their merchandise exports by 22%, 21% and 15% respectively during 2010-2013. Looking at their performance in Europe particularly, a similar picture emerges. While Sri Lanka’s exports to EU grew at an average of 5.4% between 2011-2013, Vietnam’s grew by 7.4%, Thailand’s by 13.2%, Cambodia’s by 16.6%, Laos’s by 21.2% and Myanmar’s by 61.6%. Sri Lanka’s exports, however, performed better than Bangladesh’s (1%) and Pakistan’s (1.2%). Several of these countries have a special tool in their trade kit that Sri Lanka doesn’t. They are all parties to the EU’s ‘Everything But Arms’ (EBA) agreement, which gives far greater preferential access (duty-free, quota-free) than GSP Plus does.
Consumer and Business Mindset in Europe
How can Sri Lanka create new opportunities for exports, under a rekindled favourable trade regime between Sri Lanka and Europe? At the recent National Chamber of Exports (NCE) Annual General Meeting, the Norwegian Ambassador Grete Løchen talked about a few points that are relevant for Sri Lankan exporters, which are worth recalling here. The first was that consumers in Europe are becoming much more conscious about labour and environmental standards, and their voice is more powerful than ever before. So, products from countries and companies that cater to that will do really well. She argued, “the number of special interest groups has increased substantially in recent years and it is becoming more difficult to hide under the radar, even if you are a small company”. Many Sri Lankan companies already have a good record on this front, compared to many in Asia. This can certainly become a competitive advantage to focus more on, if Sri Lanka is looking to pivot back to European markets. She also noted that now, more than ever before, European companies looking to do business with foreign partners look at their track record in terms of environmental, employee and social consciousness before forging business links. She said that in the case of Norwegian firms, “Your corporate counterpart in Norway will look at your CSR profile before entering into any contract”. Many European importers remark that they like to do business with Sri Lankan companies as they have a very good track record on delivering high quality and delivering on time. Many companies had remarked to the Norwegian Ambassador too that the fluency in the English language was a major attraction, compared to working in other Asian markets. The other key thought she shared was that, over some other markets in Asia, many Norwegian firms – and this is probable true of wider Europe – see Sri Lanka as a “an Asian market that is just right for them to handle” while India, for instance, is seen as “too much and too big for them to figure out”.
Tepid Growth in EU, but Not All the Same
Sri Lankan exporters should be under no illusions, however, about the prospects for growth in Europe. The conditions are tough. A few weeks ago, the World Bank cut its 2015 growth forecast for the region from 1.8% to 1.1%, and average unemployment is stubbornly high at around 11.5%. But these aggregate numbers might not capture the full story. “The EU” is not a homogenous group where all countries can be clubbed together as now being “weak performers”. For instance, countries like Turkey, Poland, Lithuania, Latvia, Luxembourg, and Ireland are forecast to post robust growth rates of around 3% or more in the next five years. These markets may provide new growth opportunities for Sri Lankan exporters in the coming years and we all need to take a far more nuanced and ‘unbundled’ look at European growth in European.
Rising Above the Fray
Regaining the GSP Plus – and the 6-7% duty cut it offered – can certainly get our exports’ competitive edge back. So it may well be the immediate priority in boosting our exports to Europe. But this would only be a short-term fix. Picking up on the changing attitudes and preferences of European consumers and companies, and catering to them, can help our exports rise above the fray of price concerns.
‘Smart Future’ is a column dedicated to advancing ideas on economic reforms, innovation, and competitiveness. This is the second article in the series.