Sri Lanka-Australia-New Zealand Bilateral Trade and Investment Report June Enhancing Trade and Investment Linkages

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1 Enhancing Trade and Investment Linkages 1

2 Australia (Left) Anushka Wijesinha New Zealand (Right) Obtained via New Zealand Trade and Enterprise Chris Sisarich Mlenny Kieren Scott 2

3 Sri Lanka Australia - New Zealand Bilateral Trade and Investment Report Prepared by the Economic Intelligence Unit for the Sri Lanka- Australia- New Zealand Business Council of the Ceylon Chamber of Commerce June 2017 Final Report By Anushka Wijesinha Saumya Amarasiriwardane Economic Intelligence Unit The Ceylon Chamber of Commerce eiu@chamber.lk 3

4 DISCLAIMER: All information in this report is derived from sources, which we consider reliable and a sincere effort is made to report accurate information. Details published herein are intended for information purposes only. 4

5 Table of Contents Economic Overview: Australia Economic Overview- New Zealand Bilateral Trade Performance Sri Lanka s Trade with Australia Sri Lanka s Trade with New Zealand Growing Product Areas of Exports Growing Areas of Sri Lanka s Exports to Australia Growing Areas of Sri Lanka s Exports to New Zealand Growing Areas of Sri Lanka s Imports from Australia Growing Areas of Sri Lanka s Imports from New Zealand Expanding Sri Lanka s Trade with Australia and New Zealand Potential Exports under Revealed Comparative Advantage Methodology Export Potential to Australia: RCA Insights Export Potential to New Zealand: RCA Insights Indicative Trade Potential Sri Lanka s Indicative Trade Potential with Australia Sri Lanka s Indicative Trade Potential with New Zealand Trade Intensity Sri Lanka s Trade Intensity with Australia Sri Lanka s Trade Intensity with New Zealand Trade Complementarity Sri Lanka s Trade Complementarity with Australia Sri Lanka s Trade Complementarity with New Zealand Foreign Direct Investment FDI Inflows from Australia FDI Inflows from New Zealand Trade and Investment Opportunities Strengths of Sri Lanka as a Trade and Investment Destination Strengths of Australia as a Trade and Investment Destination Strengths of New Zealand as a Trade and Investment Destination Trade and Investment Opportunities in Sri Lanka for Australia Trade and Investment Opportunities in Sri Lanka for New Zealand Trade and Investment Opportunities in Australia for Sri Lanka Trade and Investment Opportunities in New Zealand for Sri Lanka

6 Constraints in Trade and Investment Constraints Faced within the border by Sri Lankan Business People in Doing Business with Australia and New Zealand Constraints Faced by Sri Lankan Business People within the Australian Border Constraints Faced by Sri Lankan Business People within the New Zealand Border Constraints faced by Australian and New Zealand Business People in Doing Business with Sri Lanka Annexures Annex 1: Key Steps for an Investor to follow in Establishing a Company in Sri Lanka Annex 2: Key Agencies to Contact for the Industry and Government References

7 List of Tables Table 1-Top Imports by Australia from the World Table 2-Top Imports by New Zealand from the World Table 3- Sri Lanka s Current Export Categories to Australia, Table 4-Sri Lanka s Top Ten Exports to Australia, 2016 (HS 6 Digit Level) Table 5-Sri Lanka s Current Import Categories from Australia, Table 6-Sri Lanka s Top Ten Imports from Australia, 2016 (HS 6 Digit Level) Table 7-Sri Lanka s Current Export Categories to New Zealand, Table 8-Sri Lanka s Top Ten Exports to New Zealand, 2016 (HS 6 Digit Level) Table 9-Sri Lanka s Current Import Categories from New Zealand, Table 10-Sri Lanka s Top Ten Imports from New Zealand, 2016 (HS 6 Digit Level) Table 11-Top Emerging Export Products to Australia ( ) Table 12-Top Emerging Export Products to New Zealand ( ) Table 13-Top Emerging Import Products from Australia ( ) Table 14-Top Emerging Import Products from New Zealand ( ) Table 15-RCA Computations of Exports by Sri Lanka to Australia by Product Group (2015) Table 16-RCA Computations of Exports by Sri Lanka to New Zealand by Product Group (2015) Table 17-Sri Lanka's Indicative Trade Potential with Australia, Table 18-Top Ten Export Products with the highest Indicative Trade Potential with Australia (US$ 000), Table 19-Sri Lanka s Indicative Trade Potential with New Zealand, Table 20-Top Ten Export Products with the highest Indicative Trade Potential with New Zealand (US$ 000), Table 21-Top Ten Products with the highest Trade Intensity of Sri Lanka with Australia Table 22-Top Ten Products with the highest Trade Intensity of Sri Lanka with New Zealand Table 23-Sri Lanka's Trade Complementarity with Australia ( ) Table 24-Sri Lanka s Trade Complementarity with New Zealand ( )

8 List of Figures Figure 1-Sri Lanka's Bilateral Trade with Australia ( ) Figure 2-Trend of Sri Lanka s Top Ten Exports to Australia-( ) Figure 3-Trend of Sri Lanka s Top Ten Imports from Australia-( ) Figure 4-Tourist Arrivals from Australia to Sri Lanka ( ) Figure 5-Sri Lanka's Bilateral Trade with New Zealand ( ) Figure 6-Trend of Sri Lanka s Top Ten Exports to New Zealand-( ) Figure 7-Trend of Sri Lanka s Top Ten Imports from New Zealand-( ) Figure 8-Tourist Arrivals from New Zealand ( ) Figure 9-Top Emerging Exports to Australia ( ) Figure 10-Emerging Exports to New Zealand ( ) Figure 11-Emerging Imports from Australia to Sri Lanka ( ) Figure 12-Top Emerging Imports from New Zealand to Sri Lanka ( ) Figure 13-Total Potential Exports to Australia, Figure 14-Export Potential to Australia - RCA Trends in First 5 Main Products ( ) Figure 15-Export Potential to Australia - RCA Trends in Second 5 Main Products ( ) Figure 16-Top Potential Exports to New Zealand (2015) Figure 17-Export Potential to New Zealand of First 5 Main Products ( ) Figure 18-Export Potential to New Zealand of Second 5 Main Products ( ) Figure 19-Sri Lanka s Trade Intensity with Australia ( ) Figure 20-Sri Lanka s Trade Intensity with New Zealand ( ) Figure 21-Sri Lanka's Trade Complementarity with Australia ( ) Figure 22-Sri Lanka's Trade Complementarity with New Zealand ( ) Figure 23-FDI Inflows from Australia ( ) Figure 24-FDI Inflows from New Zealand ( )

9 Executive Summary Sri Lanka is on a path of economic rebalancing, away from a growth model dominated by debt-driven public infrastructure to one driven by exports and investment. In this process, diversifying the country s trading relationships becomes important. Currently, much of Sri Lanka s trade is with the economies of the EU, US, China, and India. Yet, important new opportunities for trade and investment are possible with countries where this relationship is still at a nascent stage, like Australia and New Zealand. The Sri Lanka-Australia-New Zealand Business Council of the Ceylon Chamber of Commerce is desirous of enhancing trade and investment linkages between Sri Lanka and the two countries. As a key step in this direction, an evidence-based and data-rich overview of the current bilateral trade relationship would be useful in order to identify the status-quo and map out next steps, and hence the purpose of this report. This report provides a detailed snapshot of current trade patterns; an analysis of trade potential using numerous tools including Revealed Comparative Advantage (RCA), Indicative Trade Potential, Export Complementarity and Intensity, etc.; an overview of bilateral investment; and an exploration of qualitative issues relating to enhancing bilateral trade and investment. Where the report has identified areas that need to be tackled, in terms of trade and investment constraints faced by business people in each country, these need to be addressed soon. account for 72 per cent of Sri Lanka s total exports to Australia and three product categories accounted for 83 per cent of Sri Lanka s total exports to New Zealand. Just two product categories account for 65 per cent of Sri Lanka s total imports from Australia, while a single category (dairy) account for 93 per cent of Sri Lanka s total imports from New Zealand. While currently the key export products from Sri Lanka to Australia are textiles, tea, and rubber, analysis on potential exports suggests expanding into vegetable products, food products, footwear, plastics, and mineral products. Meanwhile, currently the key export products from Sri Lanka to New Zealand are tea, textiles and rubber, analysis on potential exports suggests expanding into vegetable and food products, chemical products, plastics, and minerals, while increasing textiles even further. It is envisaged that this report informs a discussion on how to progress the bilateral economic relationship between Sri Lanka- Australia and Sri Lanka-New Zealand from here, and provide a sound reference point for both the private sector as well as policymakers of all three countries. Australia is Sri Lanka s 23 rd largest trading partner and New Zealand is Sri Lanka s 28 th largest trading partner. An important issue highlighted in this report is the need to diversify Sri Lanka s trade with Australia and New Zealand. Currently, there is high export and import concentration in a few categories. Three product categories 9

10 Exports to Australia- US$ Mn 166 Imports from Australia- US$ Mn 162 (US$) (US$) Textiles Mn Vegetables Mn Tea and Coffee Mn Dairy Products Mn Rubber Products Mn Paper and Paperboards Mn Fats and Oils (Animal/Vegetable) Mn Machinery Mn Ceramic Products Mn Cereals Mn Tea, Coffee and Vegetable Products Textiles Food Products Footwear Plastics and Rubber Products Mineral Products Australian Visitors to Sri Lanka (2016) Sri Lankan Visitors to Australia (2014/15) Around Sri Lankan Students in Australia (2016) Australian Education Providers in Sri Lanka Sri Lankans in Australia (2016) 0.48% of Australia s Population Around (Foreign Direct Investment) US$ Mn From Australia to Sri Lanka (2016) Sources: Trade: International Trade Map World Integrated Trade Solutions Education and People: Department of Foreign Affairs and Trade, Australia 10 Tourism: Tourism Development Authority of Sri Lanka Department of Foreign Affairs and Trade, Australia FDI: Board of Investment, Sri Lanka

11 Exports to New Zealand- US$ Mn 37 Import from New Zealand- US$ Mn 170 (US$) (US$) Tea and Coffee Mn Dairy Products Mn Textiles Mn Fruits and Nuts Mn Rubber Products Miscellaneous Edible Preparations Mn Mn Plastics and Articles Starches and Glues Mn Mn Paper Yarn and Woven Fabric Mn Machinery Mn Tea, Coffee and Vegetable Products Plastics and Rubber Products Mineral Products Textiles Food Products Chemical Products New Zealand Visitors to Sri Lanka (2016) Around Sri Lankan Students in New Zealand (2015) Sri Lankan Visitors to New Zealand- No published Data Available New Zealand Education Providers in Sri Lanka - No published Data Available Sri Lankans in New Zealand (2013) People in New Zealand with a Sri Lankan heritage Around (Foreign Direct Investment) US$ Mn From New Zealand to Sri Lanka (2016) Sources: Trade: International Trade Map World Integrated Trade Solutions People: Census-Statistics, New Zealand 11 Tourism: Tourism Development Authority of Sri Lanka Education: Education New Zealand FDI: Board of Investment, Sri Lanka

12 These THREE categories together accounted for Tea, Coffee and Vegetable Products 25% Rubber Products 12% Other 28% 7% 6% 5% Footwear Food Stuff Stone/Glass of Sri Lanka s total exports to Australia 35% 3% 3% 5% Transportation Miscellaneous Other Textiles These THREE categories together accounted for Textiles 29% Rubber Products 15% 6% Food Stuff 17% Other 5% Miscellaneous of Sri Lanka s total exports to New Zealand 39% Tea, Coffee and Vegetable Products 3% 3% Stone/Glass Other Source: Author s Calculations Based on Trade Map, International Trade Centre 12

13 These TWO categories together accounted for Animal and Animal Products 39% 37% Other 9% 7% 7% Wood and Wooden Products Chemical and Allied Products Machinery/ Electrical of Sri Lanka s total imports from Australia Vegetable Products 24% 4% 3% 7% Metals Miscellaneous Other This SINGLE category accounted for of Sri Lanka s total imports from New Zealand Animal and Animal Products 93% 7% Other 1% Vegetable Products 1% 1% 1% 1% 2% Machinery/ Electrical Chemical and Allied Products Plastics/ Rubbers Metals Other Source: Author s Calculations Based on Trade Map, International Trade Centre 13

14 Economic Overview: Australia The Australian economy has demonstrated remarkable economic resilience amidst challenging external conditions. With a record of steady growth and adaptability, Australia has achieved 26 years of uninterrupted economic growth year-on-year. The ingredients that have fueled this success have been Australia s strong institutions, formidable energy and natural resources sector, growing services sector, and the ability to adapt to global changes. Currently the world s 13 th largest economy, Australia is forecast to achieve an average annual GDP growth of 2.9 per cent over the next five years the highest among major advanced economies. Australia s nominal GDP is estimated at US$1.3 trillion (A$1.7 trillion) and accounts for 1.7 per cent of the global economy. In terms of per capita GDP in the country, it has increased from US$ 1,807 in 1960 to US$ 56,311 in Australia s exports and overall growth have been deeply intertwined with Asia s rise as an economic powerhouse. Australia s major exports its mineral and energy resources have been an important contributor to Asia s industrialization. It is a leading producer of gold, iron ore and uranium, and the world s second largest LNG exporter. Australia is a global top 10 producer of agriculture, and its agricultural commodities and premium food are meeting Asian consumers demand for clean, green and safe food products. On the services sector, growth areas have been in financial services (particularly wealth management), healthcare, education, tourism and professional services to Asia s growing middle class. The top growth sectors identified from 2016 onwards are healthcare services (including elderly care and ageing related services); organic farming, meat and other food processing; tourism; ICT; finance; houseware products retailing; and private education. Recent Import Trends The following section provides a snapshot of the top imports by Australia in 2016 (by value) and the percentage share of each in terms of the country s total imports 1. Table 1-Top Imports by Australia from the World-2016 Product category Value (in US$ Bn) Share of Total Imports ( per cent) Machinery including computers Vehicles Electrical machinery, equipment Mineral fuels including oil Optical, technical, medical apparatus Pharmaceuticals Gems, precious metals Plastics, plastic articles Categories listed above are at the 2-digit Harmonized Tariff System (HS) code level - 1 -

15 Furniture, bedding, lighting, signs, prefab buildings Articles of iron or steel Source: Trade Map, International Trade Centre Imported vehicles had the fastest-growing increase in value among the top 10 import categories, up 52.3 per cent for the 7-year period starting in Second was the furniture, bedding, lighting, signs and prefab buildings category, growing 51 per cent gain, followed by plastics growing at 37.2 per cent. Mineral fuels including oil showed a 15.9 per cent decline, based largely on falling purchases of imported crude oil and petroleum gas. Gems and precious metals also recorded a decrease over this period, falling 14.2 per cent, driven primarily by the cutback in gold imports. Recent Developments and Macroeconomic Outlook The mining boom benefited Australians directly employed in the resources sector, boosted government tax receipts, and increased the purchasing power of Australians overseas through a stronger Australian dollar. Australian households could afford to import more, and more of this import demand was met by China. By , almost one-third of Australia s imports of elaborately transformed manufactured a category that includes clothing, motor vehicles, machinery, and paint came from China, up from just 10 per cent in While the economy has a whole unambiguously benefited from the mining boom, some sectors, such as trade-exposed manufacturers, saw demand for their products fall because of Australia s elevated exchange rate. As dramatic as they were, these changes were part of a long-term structural adjustment in the Australian economy that was already well underway and would have substantially occurred even without the mining boom. The boost in Australia s national income from the resources boom cushioned Australia from some of the costs that come with industrial restructuring. However, Australia now faces significant policy challenges if it is to maintain its living standards while adjusting to much lower commodity prices. In particular, Australia s resource endowments and position in Asia provide limited competitive advantage to Australian business when compared to competitors in other developed markets in Europe and North America. There are concerns of the impact of China s slowdown on the Australian economy. There was some slowdown in GDP growth towards the latter part of Responding to softening demand, in August 2016 the Reserve Bank of Australia decreased its policy rates by 25 basis points to 1.50 per cent, the second reduction in 12 months. No further easing is projected. Fiscal consolidation of around 0.5 percentage points of GDP is projected, and public debt has risen but from a lower level (it is around 45 per cent of GDP). The government has noted that it has the fiscal space to respond to an unanticipated downturn in activity. There is a possibility in increasing spending, notably an acceleration in the public investment programmes underway in telecommunications, roads and public transport systems

16 Economic Overview- New Zealand New Zealand has a small open economy and has a small manufacturing and a large service sector, along with a highly efficient export oriented agricultural sector. Over the last three decades, the New Zealand economy has changed from being the one of the most regulated in the OECD to one of the least regulated, most free market-based economies. Both in 2015 and 2016, New Zealand was ranked as the world s easiest place to start a business by the World Bank s Doing Business Index. This economy is valued at US$ 174 billion (2015) and accounts for 0.23 per cent of the global economy. It is currently the world s 53 rd largest economy. The country s economic growth is 3.4 per cent (2015) and the economy is in its eighth year of continued expansion. It is expected to grow by 2.6 per cent and 2.7 per cent in 2017 and 2018, respectively. In terms of per capita GDP, it registered an upward trend since 2010 and recorded US$ 37,808 in In 2015, New Zealand exported US$ 34 billion and imported US$ 37 billion resulting in a trade deficit of US$ 3 billion. Dairy and dairy products are the top export product of New Zealand to the world and it is the world s second largest dairy exporter. Additionally, meat; wood and articles of wood; fruits and nuts; and beverages are its other major export products. The largest component of services exports is tourism. Meanwhile, vehicles, machinery, mineral fuels and plastics are the major import products by New Zealand (2015). Recent Import Trends The following section provides a snapshot of the top imports by New Zealand in 2016 (by value) and the percentage share of each in terms of the country s total imports. Table 2-Top Imports by New Zealand from the World Product category Value (in US$ Mn) Share of Total Imports ( per cent) Vehicles 5, Machinery 4, Mineral fuels including oils 3, Electric machinery, equipment 3, Plastics, plastic articles 1, Optical, technical, medical apparatus 1, Aircraft, spacecraft and parts 1, Pharmaceutical products Furniture Paper and paperboard Source: Trade Map, International Trade Centre Imports of aircraft, spacecraft and parts has the fastest growing increase among top ten imports of New Zealand from the world, accounting for 83 per cent growth in 2016 compared - 3 -

17 to 2007 followed by furniture and vehicle imports accounting for 71 per cent and 42 per cent respectively. Recent Developments and Macroeconomic Outlook The New Zealand economy has steadily recovered from the Global Financial Crisis despite subsequent disruptions such as the Canterbury earthquakes in 2011 and occasional periods of drought. The economy is substantially export driven, exports accounting for about 30 per cent of GDP. The country has a share of 0.2 per cent of world exports and is the 58 th largest export economy in the world. Although the country is mostly known for its agricultural produce, it is not too far behind on diversification with new services and manufacturing sectors growing more recently, and is now ranked 39th in the Economic Complexity Index. Last year, the country s fiscal balance position recorded a surplus for the first time since the Global Financial Crisis. Since 2000, consumer price inflation in New Zealand has averaged around 2.7 per cent and the current Policy Target Agreement of New Zealand requires the Reserve Bank of New Zealand to maintain inflation in the range of 1-3 per cent on average over the medium terms. Net debt of the government was broadly steady at 25.2 per cent of GDP in 2014/15 and the long-term debt objective is to bring back net debt to no higher than 20 per cent of GDP by 2020 and remain between per cent thereafter

18 Bilateral Trade Performance Sri Lanka s Trade with Australia Australia is Sri Lanka s 23 rd largest trading partner. Bilateral trade between Sri Lanka and Australia was recorded at US$ 362 million in 2016, lower by 15 per cent compared to Bilateral trade in 2015 at US$ 428 million, was the highest value of trade between the two countries during the last decade. Figure 1-Sri Lanka's Bilateral Trade with Australia ( ) - (US$ million) Sri Lanka's Exports to AUS Sri Lanka's Imports from AUS Total Trade between SL and AUS Source: ITC Trade Map Trade between the two countries has doubled over the 2007 to 2016 period. The balance of trade was in favour of Australia, and this steadily widened over the period. Sri Lanka s exports to Australia have almost doubled over this decade, from US$ 185 million in 2007 to US$ 362 million in Australia is ranked as Sri Lanka s 15 th largest export destination (2016), but accounts for just 1.6 per cent of Sri Lanka s total exports to the world. The importance of Australia as an export destination for Sri Lanka has been gradually increasing, with the share of exports from Sri Lanka to Australia doubling over the decade reviewed. Meanwhile, Sri Lanka is Australia s 23 rd largest import destination (2016), and purchased 1 per cent of Sri Lanka s exports over the last ten years. In terms of value, imports to Australia have grown nearly twice during last decade from US$ 105 million in 2007 to US$ 196 million in Sri Lanka s Current Export Categories to Australia In 2016, Sri Lanka exported US$ 166mn worth of goods to Australia, of which textiles and vegetable products accounted for nearly 35 per cent and 25 per cent respectively. Exports of Plastics/ Rubber accounted for 12 per cent. These three categories together accounted for 72 per cent of Sri Lanka s total exports to Australia

19 Table 3- Sri Lanka s Current Export Categories to Australia, 2016 Product Category Sri Lanka's Exports to Australia (US$ '000) Percentage of Sri Lanka's Total Exports to Australia Animal and Animal Products Vegetable Products 41, Food Stuff 10, Mineral Products Chemical and Allied industries Plastics/Rubbers 19, Raw Hides, Skins, Leather, and Furs Wood and Wood Products 2, Textiles 58, Footwear/Headgear 11, Stone/Glass 7, Metals Machinery/Electrical Transportation 4, Miscellaneous 4, Service Total 165, Source: Author s Calculations Based on Trade Map, International Trade Centre Top ten exports at HS six digit level are given at the below table. These ten export products in total accounted for around 49 per cent of Sri Lanka s total exports to Australia in Table 4-Sri Lanka s Top Ten Exports to Australia, 2016 (HS 6 Digit Level) HS Code (6 Digit Level) ' ' Product Description Sri Lanka's Exports to Australia (US$ '000) Percentage of Sri Lanka's Total Exports to Australia Black fermented tea and partly fermented tea, whether or not flavoured, in immediate packings... 19, Gloves, mittens and mitts, impregnated, coated or covered with plastics or rubber, knitted... 12, Crude coconut oil 8, ' T-shirts, singlets and other vests of textile materials, knitted or crocheted (excluding cotton) 8, ' Footwear with outer soles of rubber or plastics, with uppers other than rubber, plastics, leather... 8, ' Solid or cushion tyres, interchangeable tyre treads and tyre flaps, of rubber 8, ' Nuts and other seeds, incl. mixtures, prepared or preserved (excluding prepared or preserved... 4, ' Food preparations, n.e.s. 4, Brassieres of all types of textile materials, whether or not elasticated, incl. knitted or... 3, Gloves, mittens and mitts, of vulcanised rubber (excluding surgical gloves) 3, Source: Trade Map, International Trade Centre

20 US$ '000 US$ '000 Figure 2-Trend of Sri Lanka s Top Ten Exports to Australia-( ) 14,000 12,000 10,000 8,000 6,000 4,000 2, ' ' ' ' ' ' ' ' ' ' ,000 25,000 20,000 15,000 10,000 5,000 0 *Note: Export values of are represented by the secondary axis Source: Trade Map, International Trade Centre Sri Lanka s Current Import Categories from Australia Nearly 40 percent of Sri Lanka s imports from Australia is vegetable products and nearly 24 per cent is animal and animal products in 2016 (see table below). These two key categories together accounted for 64 per cent of Sri Lanka s total imports from Australia. Table 5-Sri Lanka s Current Import Categories from Australia, 2016 Product Category Sri Lanka's Imports from Australia (US$ '000) Percentage of Sri Lanka's Total Imports from Australia Animal and Animal Products 46, Vegetable Products 76, Food Stuff 10, Mineral Products Chemical and Allied industries 14, Plastics/Rubbers Raw Hides, Skins, Leather, and Furs Wood and Wood Products 17, Textiles 1, Footwear/Headgear Stone/Glass Metals 8, Machinery/Electrical 14,

21 US$ ' Transportation 1, Miscellaneous 4, Service Total 196, Source: Author s Calculations Based on Trade Map, International Trade Centre Table 6-Sri Lanka s Top Ten Imports from Australia, 2016 (HS 6 Digit Level) HS Code (6 Digit Level) ' Product Description Sri Lanka's Imports from Australia (US$ '000) Percentage of Sri Lanka's Total Imports from Australia Milk and cream in solid forms, of a fat content by weight of > 1,5%, unsweetened 38, ' Dried, shelled lentils, whether or not skinned or split 25, ' Wheat and meslin (excluding seed for sowing, and durum wheat) 22, ' Dried, shelled peas "Pisum sativum", whether or not skinned or split 10, ' Dried, shelled beans of species "Vigna mungo [L.] Hepper or Vigna radiata [L.] Wilczek", whether... 8, Fluting paper, uncoated, in rolls of a width > 36 cm or in square or rectangular sheets with... 5, Unwrought lead, refined 5, ' Flours, meals and pellets, of meat or offal, unfit for human consumption; greaves 3, Pigments and preparations based on titanium dioxide of a kind used for colouring any material... 3, Dried, shelled chickpeas "garbanzos", whether or not skinned or split 3, Source: Trade Map, International Trade Centre Figure 3-Trend of Sri Lanka s Top Ten Imports from Australia-( ) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, ' ' ' ' ' ' ' ' ' ' Source: Trade Map, International Trade Centre - 8 -

22 Trade in Services between Sri Lanka and Australia Export of services to Australia from Sri Lanka amounted to US$ million in 2015/16 have recorded year-on-year growth of 17.3 per cent and make up 0.2 per cent of Australia s total services imports. Import of services from Australia to Sri Lanka amounted to US$ 238 million in 2015/16 and grew by 13.1per cent year- on- year. Source: Department of Foreign Affairs and Trade, Australia Tourism Links between Australia and Sri Lanka Tourism is a major growing sector in the Sri Lankan economy. 4 per cent of total tourist arrivals to Sri Lanka are from Australia and Australian tourist arrivals in Sri Lanka have grown by more than three paces over the last decade from 20,241 to 74,496 in Figure 4-Tourist Arrivals from Australia to Sri Lanka ( ) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Source: Sri Lanka Tourism Development Authority Australia is supporting the improvement of Sri Lanka s skills of tourism industry and launched a Skills for Inclusive Growth programme with the Ministry of Skill Development and Vocational Training in January Australia is providing monetary aid and technical assistance over four years to strengthen the Sri Lankan tourism sector through training and mentoring for employees and small businesses over the full tourism value chain. Tourism to Australia from Sri Lanka is also on the increase and in 2014/15 there were 26,200 Sri Lankan visitors to the country Department of Foreign Affairs and Trade, Australia - 9 -

23 Education Links between Australia and Sri Lanka The education sector plays an important role in the bilateral relationship between Australia and Sri Lanka. Australia is the second largest and most popular tertiary education destination for international students originating from Sri Lanka with around 6,000 Sri Lankan students studying in Australia in Australia offered 107 new Australia Awards for Sri Lankan students to study in Australia in Twenty three Australian education providers are operating in Sri Lanka and several Australian universities also have articulation programmes where degrees started in Sri Lanka can be completed at an Australian university. The majority of Australian education providers in Sri Lanka offer higher education courses or university preparation courses. Sri Lanka also participates in the New Colombo Plan ; a signatory initiative of the Australian Government which aims to lift the knowledge of the Indo-Pacific in Australia by supporting Australian undergraduates to study and undertake internships in the region. 3 Department of Foreign Affairs and Trade, Australia

24 Sri Lanka s Trade with New Zealand New Zealand is Sri Lanka s 28 th largest international trading partner, with a total trade value of US$ 220 million in Considering the last decade, bilateral trade between the two countries has expanded by more than 1.5 times. In 2011, trade between the two countries recorded it s highest in a decade, after experiencing a significant drop in 2009 and 2010 due to global economic uncertainty and lower dairy production (due to a drought over 2007/08). Growth in trade since then has been modest over the decade reviewed. Figure 5-Sri Lanka's Bilateral Trade with New Zealand ( ) - (US$ million) Sri Lanka's Exports to NZ Sri Lanka's Imports from New Zealand Total Trade between Sri Lanka and NZ Source: ITC Trade Map During the last decade, only about 0.2 per cent of Sri Lanka s exports went to New Zealand and about 1 per cent of Sri Lanka s total imports were from New Zealand. New Zealand is Sri Lanka s 53 rd exporting destination and 24 th import destination. Sri Lanka s trade balance with New Zealand has been in slight deficit, but this deficit has not widened significantly over the last ten years. Sri Lanka s Current Export Categories to New Zealand Sri Lanka s key export product categories to New Zealand (2016) were vegetable products and textiles, accounting for 39 per cent and 29 per cent respectively, and plastic/rubber products accounting for 15 per cent. 83 per cent of total exports from Sri Lanka to New Zealand were covered by these three product categories

25 Table 7-Sri Lanka s Current Export Categories to New Zealand, 2016 Product Category Sri Lanka's Exports to New Zealand (US$ '000) Percentage of Sri Lanka's Total Exports to New Zealand Animal and Animal Products Vegetable Products 9, Food Stuff 1, Mineral Products Chemical and Allied industries Plastics/Rubbers 3, Raw Hides, Skins, Leather, and Furs Wood and Wood Products Textiles 6, Footwear/Headgear Stone/Glass Metals Machinery/Electrical Transportation Miscellaneous 1, Service Total 23, Source: Author s Calculations Based on Trade Map, International Trade Centre Table 8-Sri Lanka s Top Ten Exports to New Zealand, 2016 (HS 6 Digit Level) HS Code (6 Digit Level) ' ' Product Description Sri Lanka's Exports to New Zealand (US$ '000) Percentage of Sri Lanka's Total Exports to New Zealand Black fermented tea and partly fermented tea, whether or not flavoured, in immediate packings... 6, Solid or cushion tyres, interchangeable tyre treads and tyre flaps, of rubber 1, ' Plates, sheets and strip of cellular rubber 1, ' Gloves, mittens and mitts, impregnated, coated or covered with plastics or rubber, knitted... 1, ' Gloves, mittens and mitts, of vulcanised rubber (excluding surgical gloves) ' Sails for boats, sailboards or landcraft, of textile materials ' Coconut, abaca Manila hemp or Musa textilis Nee", ramie, agave and other vegetable textile T-shirts, singlets and other vests of textile materials, knitted or crocheted (excluding cotton) ' Green tea in immediate packings of <= 3 kg Sacks and bags, for the packing of goods, of polyethylene or polypropylene strip or the like Source: Trade Map, International Trade Centre

26 US$ '000 US$ '000 Figure 6-Trend of Sri Lanka s Top Ten Exports to New Zealand-( ) 2,000 1,500 1, ' ' ' ' ' ' ' ' ' ,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Note: Export values of are represented by the secondary axis Source: Trade Map, International Trade Centre Sri Lanka s Current Import Categories from New Zealand In 2016, more than 90 per cent of Sri Lanka s imports from New Zealand were animal and animal Products. The balance nearly 10 per cent was spread across categories like vegetable products, chemical and Allied products, machinery and electrical products etc. in small quantities. Table 9-Sri Lanka s Current Import Categories from New Zealand, 2016 Product Category Sri Lanka's Imports from New Zealand (US$ '000) Percentage of Sri Lanka's Total Imports from New Zealand Animal and Animal Products 183, Vegetable Products 2, Food Stuff Mineral Products Chemical and Allied industries 1, Plastics/Rubbers 1, Raw Hides, Skins, Leather, and Furs Wood and Wood Products 1, Textiles Footwear/Headgear Stone/Glass Metals 1, Machinery/Electrical 1, Transportation Miscellaneous Service Total 196, Source: Author s Calculations Based on Trade Map, International Trade Cent

27 US$ '000 US$ '000 Table 10-Sri Lanka s Top Ten Imports from New Zealand, 2016 (HS 6 Digit Level) HS Code (6 Digit Level) Product Description Sri Lanka's Imports from New Zealand (US$ '000) Percentage of Sri Lanka's Total Imports from New Zealand ' Milk and cream in solid forms, of a fat content by weight of > 1,5%, unsweetened 170, ' Milk and cream in solid forms, of a fat content by weight of <= 1,5% 5, ' Butter (excluding dehydrated butter and ghee) 2, ' Fresh apples 2, Milk and cream in solid forms, of a fat content by weight of > 1,5%, sweetened 1, ' Grated or powdered cheese, of all kinds 1, ' Casein Saturated polyesters in primary forms (excluding polycarbonates, alkyd resins, poly"ethylene Articles of titanium, n.e.s Processed cheese, not grated or powdered Source: Trade Map, International Trade Centre Figure 7-Trend of Sri Lanka s Top Ten Imports from New Zealand-( ) 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ' ' ' ' ' ' ' ' ' ' , , , , ,000 50,000 0 Note: Import values of are represented by the secondary axis Source: Trade Map, International Trade Centre

28 Trade in Services between Sri Lanka and New Zealand No data is available on trade in services between Sri Lanka and New Zealand Tourism Links between Sri Lanka and New Zealand New Zealanders are the 35 th largest tourist arrivals to Sri Lanka. New Zealand tourist arrivals to Sri Lanka have grown by more than four paces over the last decade from 2,627 in 2007 to 9,045 in Figure 8-Tourist Arrivals from New Zealand ( ) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Note: No publically available data on Sri Lankan tourist to New Zealand Education Links between Sri Lanka and New Zealand 1,003 Sri Lankan students were studying in New Zealand in 2015 and it is an 18 per cent increase compared to Considering the last six years ( ), the number of Sri Lankan students studying in New Zealand has more than doubled from 412 in Sri Lanka was the 21 st largest market in New Zealand by number of international students in per cent of Sri Lankan students in New Zealand studied in the Private Training Establishment (PTE) sector, 23 per cent at universities and 21 per cent at Institutes of Technology and Polytechnic (ITP). 4 Education New Zealand

29 US$ '000 Growing Product Areas of Exports Based on the export figures over the last decade, the report identified product areas that are showing a growing trend. Growing Areas of Sri Lanka s Exports to Australia Crude coconut oil (HS ) and footwear with outer soles of rubber or plastics (HS ) were identified as exports with a sharp growing trend while nuts and other seeds (HS ), glazed and ceramic flags and paving (HS ) brassieres (HS ) and Jerseys and pullovers (HS ) as exports with moderate growing trend. Figure 9-Top Emerging Exports to Australia ( ) 10,000 8,000 6,000 4,000 2, ' ' ' ' ' ' ' ' ' ' Source: Trade Map, International Trade Centre Table 11-Top Emerging Export Products to Australia ( ) HS Code (6 Digit Level) Product Description ' Crude coconut oil ' Footwear with outer soles of rubber or plastics, with uppers other than rubber, plastics, leather Nuts and other seeds, incl. mixtures, prepared or preserved (excluding prepared or preserved Glazed ceramic flags and paving, hearth or wall tiles; glazed ceramic mosaic cubes and the Brassieres of all types of textile materials, whether or not elasticated, incl. knitted or... ' Jerseys, pullovers, cardigans, waistcoats and similar articles, of wool, knitted or crocheted Women's or girls' trousers, bib and brace overalls, breeches and shorts of textile materials, Women's or girls' trousers, bib and brace overalls, breeches and shorts of synthetic fibres, Pneumatic tyres, new, of rubber, having a "herring-bone" or similar tread, of a kind used on... ' Cinnamon "Cinnamomum zeylanicum Blume" (excluding crushed and ground) Source: Trade Map, International Trade Centre

30 US$ '000 US$ '000 Growing Areas of Sri Lanka s Exports to New Zealand Food preparations (HS ), desiccated coconuts (HS ) and coconut oil and its fractions (HS ) were identified as exports with a sharp growing trend while sacks and bags (HS ), Cereal flours (HS ) and fresh and dried bananas (HS ) as imports with moderate growing trend. Figure 10-Emerging Exports to New Zealand ( ) ' ' ' ' ' ' Note: Export values of are represented by the secondary axis Source: Trade Map, International Trade Centre Table 12-Top Emerging Export Products to New Zealand ( ) HS Code (6 Digit Level) Product Description Desiccated coconuts ' Coconut oil and its fractions, whether or not refined, but not chemically modified ' Sacks and bags, for the packing of goods, of textile materials (excluding man-made, cotton,...) ' Fresh or dried bananas (excluding plantains) ' Cereal flours (excluding wheat, meslin and maize) Food preparations, n.e.s. Source: Trade Map, International Trade Centre

31 US$ '000 Growing Areas of Sri Lanka s Imports from Australia Fluting paper (HS ), unwrought lead (HS ), pigments and preparations based on titanium dioxide (HS ), food preparations (HS ) and Newsprint in rolls (HS ) were identified as imports with sharp growth and articles and appliances which are worn or carried or implanted in the body (HS ) and products of animal origin (HS ) as imports with moderate growth. Figure 11-Emerging Imports from Australia to Sri Lanka ( ) 6,000 5,000 4,000 3,000 2,000 1, ' ' ' ' ' ' ' Source: Trade Map, International Trade Centre Table 13-Top Emerging Import Products from Australia ( ) HS Code (6 Digit Level) Product Description Fluting paper, uncoated, in rolls of a width > 36 cm or in square or rectangular sheets with Unwrought lead, refined Pigments and preparations based on titanium dioxide of a kind used for colouring any material Food preparations, n.e.s Newsprint as specified in Note 4 to chapter 48, in rolls of a width > 36 cm or in square or... ' Articles and appliances, which are worn or carried, or implanted in the body, to compensate... ' Products of animal origin, n.e.s., dead animals, unfit for human consumption (excluding fish,... Source: Trade Map, International Trade Centre

32 US$ '000 Growing Areas of Sri Lanka s Imports from New Zealand Milk and cream of a fat content by weight of less >10% (HS ) and grated or powdered cheese (HS ) and articles of titanium (HS ) were identified as most growing areas of imports from New Zealand to Sri Lanka. Figure 12-Top Emerging Imports from New Zealand to Sri Lanka ( ) 1,600 1,400 1,200 1, Source: Trade Map, International Trade Centre ' ' ' Table 14-Top Emerging Import Products from New Zealand ( ) HS Code (6 Digit Level) Product Description Grated or powdered cheese, of all kinds ' Milk and cream of a fat content by weight of > 10%, not concentrated nor containing added sugar Articles of titanium, n.e.s. Source: Trade Map, International Trade Centre

33 Expanding Sri Lanka s Trade with Australia and New Zealand It is very important to not only have a look at the current trading patterns but also consider products which Sri Lanka has comparative advantage and high trade potential to trade. The study employed Revealed Comparative Advantage (RCA) methodology and Indicative Potential for Trade numbers to assess what sectors and product categories have potential for Sri Lanka to grow its exports to Australia and New Zealand. In addition to that, Trade Intensity Index was used to determine whether the value of trade between two countries is greater or smaller than would be expected on the basis of their importance in world trade and Trade Complementarity Index was used to assess the extent which the export specialization and import specialization of trade countries complement each other in relation to world trade. Potential Exports under Revealed Comparative Advantage Methodology For RCA computations in this study, the World Integrated Solutions Database (WITS) of the World Bank was used. Box 1: What is Revealed Comparative Advantage? Revealed Comparative Advantage (RCA) enables the comparison of a country s relative proportion of a certain product in the world market and the indication of changes in relative proportions over time to be made. RCA index allow to determine where the comparative advantage of countries lies in bilateral or multilateral trade and to examine country s international competitiveness. The RCA indicates whether a country is in the process of extending the products in which it has a trade potential, as opposed to situations in which the number of products that can be competitively exported is static. It can also provide useful information about potential trade prospects with new partners. Countries with similar RCA profiles are unlikely to have high bilateral trade intensities unless intra-industry trade is involved. The RCA index of country I for product j is often measured by the product s share in the country s exports in relation to its share in world trade: RCA ij = (x ij/x it) / (x wj/x wt) Where x ij and x wj are the values of country i s exports of product j and world exports of product j and where X it and X wt refer to the country s total exports and world total exports. A value of less than unity implies that the country has a revealed comparative disadvantage in the product. Similarly, if the index exceeds unity, the country is said to have a revealed comparative advantage in the product

34 RCA Export Potential to Australia: RCA Insights Based on RCA computations 5, 10 product categories were identified with highest comparative advantage for Sri Lanka in exporting to Australia. These are vegetables, textile and clothing, plastic and rubber, footwear, consumer goods, stone and glass, raw materials, food products, hides and skins and live animals. Considering the decade of , RCA on textile and garments, stone and glass and raw materials show an increasing trend, indicating potential for further export growth in this area. Meanwhile, RCA on vegetables, plastic and rubber and animal registered a declining trend, indicating challenges to maintaining a competitive export position in these categories with the existing product basket. Figure 13-Total Potential Exports to Australia, 2015 Vegetables Textile and Clothing Plastic or Rubber Footwear Consumer Goods Stone and Glass Raw Materials Food Products Hides and Skins Animal Source: Authors Calculations Based on WITS Database Figure 14-Export Potential to Australia - RCA Trends in First 5 Main Products ( ) Vegetables Textile and Clothing Plastic or Rubber Footwear Consumer Goods 5 Data is for 2015, based on availability in the World Integrated Trade Solutions (WITS) Database

35 RCA Source: Authors Calculations Based on WITS Database Figure 15-Export Potential to Australia - RCA Trends in Second 5 Main Products ( ) Stone and Glass Raw Materials Food Products Hides and Skins Animal Source: Authors Calculations Based on WITS Database Table 15-RCA Computations of Exports by Sri Lanka to Australia by Product Group (2015) Product Group HS Codes Export (US$ 000) Export Product Share (%) RCA 2015 Vegetables Textile and Clothing 06,07,08,09,10,11,12,13, 14,15 40, ,51,52,53,54,55,56,57, 58,59,60,61,62,63 53, Plastic or Rubber 39,40 17, Footwear 64,65,66,67 11, Consumer Goods 127, Stone and Glass 68,69,70,71 9, Raw Materials 8, Food Products 16,17,18,19,20,21,22,23, 24 9, Hides and Skins 41,42, Animal 01,02,03,04,05 1, Intermediate goods 16, Wood 44,45,46,47,48,49 1,

36 Miscellaneous Metals 90,91,92,93,94,95,96,97, , ,73,74,75,76,78,79,80, 81,82, Minerals 25, Chemicals 28,29,30,31,32,33,34,35, 36,37,38 1, Capital Goods 7, Machinery and Electrical machinery 84,85 3, Fuels Transportation 86,87,88,89 4, Source: Authors Calculations Based on WITS Database Export Potential to New Zealand: RCA Insights Based on the RCA computations, the 10 most comparatively advantageous product categories for Sri Lanka in exporting to New Zealand are vegetables, textile and clothing, plastics or rubber, consumer goods, stone and glass, hides and skins, miscellaneous products 6(b), raw materials, food products an intermediate goods. While these results cannot definitively conclude what export categories would grow in the future, they provide a reasonably strong indicator of what has been succeeding against competitors and what has not. Further granularity can be obtained with more advanced techniques, particularly those employed by the Commonwealth Secretariat and UNCTAD which is beyond the scope of this report. Figure 16-Top Potential Exports to New Zealand (2015) Vegetables Textiles and Clothing Plastic or Rubber Consumer Goods Stone and Glass Hides and Skins Miscellaneous Raw materials Food Products Intermediate Goods Miscellaneous products under HS

37 RCA RCA Source: Authors Calculations Based on WITS Database Figure 17-Export Potential to New Zealand of First 5 Main Products ( ) Hides and Skins Miscellaneous Raw materials Food Products Intermediate Goods Source: Authors Calculations Based on WITS Database Figure 18-Export Potential to New Zealand of Second 5 Main Products ( ) Vegetables Textiles and Clothing Plastic or Rubber Consumer Goods Stone and Glass Source: Authors Calculations Based on WITS Database

38 Table 16-RCA Computations of Exports by Sri Lanka to New Zealand by Product Group (2015) Product Group HS Codes Export (US$ 000 ) Export Product Share (%) RCA 2015 Vegetables Textiles and Clothing 06,07,08,09,10,11, 12,13,14,15 10, ,51,52,53,54,55, 56,57,58,59,60,61, 62,63 5, Plastic or Rubber 39,40 3, Consumer Goods 19, Stone and Glass 68,69,70,71 1, Hides and Skins 41,42, Miscellaneous 90,91,92,93,94,95, 96,97, Raw materials Food Products 16,17,18,19,20,21, 22,23,24 1, Intermediate Goods 3, Metals 72,73,74,75,76,78, 79,80,81,82, Animal 01,02,03,04, Footwear 64,65,66, Wood 44,45,46,47,48, Machinery and Electric Mach. 84, Chemicals 28,29,30,31,32,33, 34,35,36,37, Capital Goods Transportation 86,87,88, Minerals 25, Source: Authors Calculations Based on WITS Database

39 Indicative Trade Potential Indicative trade potential is defined as the lower of the value a selected country exports to the world or the value the partner country imports from the world minus the current trade between the two countries under review. Sri Lanka s Indicative Trade Potential with Australia Sri Lanka s highest indicative trade potential with Australia in 2016 was vested with animal and animal products accounting for 34 per cent of the Sri Lanka s total indicative trade potential with Australia followed by vegetable products. Table 17-Sri Lanka's Indicative Trade Potential with Australia, 2016 Product Category Indicative Trade Potential (US$ '000) Percentage of Total Indicative trade Potential Animal and Animal Products 3,484, Vegetable Products 723, Food Stuff 132, Mineral Products 15, Chemical and Allied industries 87, Plastics/Rubbers 223, Raw Hides, Skins, Leather, and Furs 5, Wood and Wood Products 45, Textiles 151, Footwear/Headgear 3, Stone/Glass 48, Metals 111, Machinery/Electrical 231, Transportation 40, Miscellaneous 151, Service Total 10,379, Source: Author s Calculations Based on Trade Map, International Trade Centre

40 Top Ten Export Products with the Highest Indicative Potential with Australia (US$ 000), 2016 Table 18-Top Ten Export Products with the Highest Indicative Trade Potential with Australia (US$ 000), 2016 Product Code (HS 6 Product Label Digit Level) ' T-shirts, singlets and other vests of textile materials, knitted or crocheted (excluding cotton) ' Men's or boys' trousers, bib and brace overalls, breeches and shorts, of cotton (excluding... ' Men's or boys' shirts of cotton (excluding knitted or crocheted, nightshirts, singlets and... ' Medium oils and preparations, of petroleum or bituminous minerals, not containing biodiesel,... ' Brassieres of all types of textile materials, whether or not elasticated, incl. knitted or... ' T-shirts, singlets and other vests of cotton, knitted or crocheted ' Food preparations, n.e.s. ' Women's or girls' trousers, bib and brace overalls, breeches and shorts of cotton (excluding... ' Babies' garments and clothing accessories of cotton, knitted or crocheted (excluding hats) ' Jerseys, pullovers, cardigans, waistcoats and similar articles, of cotton, knitted or crocheted... Source: Trade Map, International Trade Centre Sri Lanka's exports to Australia Australia's imports from world Sri Lanka's exports to world Indicative Trade Potential, (US$ 000) 8, , , , , , , , , , ,654, , ,162 3, , , ,346 2, , , ,258 4,164 1,208, , , , , , , , , , , ,506 Sri Lanka s Indicative Trade Potential with New Zealand Textiles recorded the highest indicative trade potential of Sri Lanka with New Zealand in 2016 followed by food stuff. Table 19-Sri Lanka s Indicative Trade Potential with New Zealand, 2016 Product Category Indicative Trade Potential (US$ '000) Percentage of Total Indicative Trade Potential Animal and Animal Products 29, Vegetable Products 100, Food Stuff 354, Mineral Products 166, Chemical and Allied industries 53, Plastics/Rubbers 195, Raw Hides, Skins, Leather, and Furs 10,

41 44-49 Wood and Wood Products 91, Textiles 933, Footwear/Headgear 51, Stone/Glass 111, Metals 62, Machinery/Electrical 255, Transportation 199, Miscellaneous 158, Service Total 10,521, Source: Author s Calculations Based on Trade Map, International Trade Centre Top Ten Export Products with the Highest Indicative Potential with New Zealand (US$ 000), 2016 Table 20-Top Ten Export Products with the Highest Indicative Potential with New Zealand (US$ 000), 2016 Product Code ' Product Label Medium oils and preparations, of petroleum or bituminous minerals, not containing biodiesel,... Sri Lanka's exports to New Zealand New Zealand's imports from world Sri Lanka's exports to world Indicative Trade Potential (US$ 000) 0 638, , ,162 ' Food preparations, n.e.s , , ,841 ' ' ' ' ' ' ' T-shirts, singlets and other vests of cotton, knitted or crocheted 78 68, ,678 68,863 Smoking tobacco, whether or not containing tobacco substitutes in any proportion 0 58,313 62,865 58,313 (excluding... Vessels for the transport of goods and vessels for the transport of both persons and goods ,664 53,253 53,253 T-shirts, singlets and other vests of textile materials, knitted or crocheted (excluding cotton) , ,927 51,030 Men's or boys' trousers, bib and brace overalls, breeches and shorts, of cotton (excluding , ,824 49,337 Women's or girls' trousers, bib and brace overalls, breeches and shorts of cotton (excluding , ,608 48,294 Jerseys, pullovers, cardigans, waistcoats and similar articles, of man-made fibres, knitted ,027 46,991 46,987 Preparations of a kind used in animal feeding ' (excluding dog or cat food put up for retail... Source: Trade Map, International Trade Centre 0 80,116 43,561 43,

42 Trade Intensity The Trade Intensity Index is used to determine whether the value of trade between two countries is greater or smaller than would be expected on the basis of their importance in world trade. Box 02- What is the Trade Intensity Index (T)? It is defined as the share of one country s exports going to a partner divided by the share of world exports going to the partner. It is calculated as: T ij = (x ij/x it)/(x wj/x wt) Where x ij and x wj are the values of country i s exports and of world exports to country j and where X it and X wt are country i s total exports and total world exports respectively. An index of more (less) than one indicates a bilateral trade flow that is larger (smaller) than expected, given the partner country s importance in world trade. Source: WITS Sri Lanka s Trade Intensity with Australia Sri Lanka s Trade Intensity with Australia was greater than 100 during last the three years, which implies that the export link between the two countries is significant and Sri Lanka is exporting more to Australia than might be expected from Sri Lanka s country share in world trade. Figure 19-Sri Lanka s Trade Intensity with Australia ( ) Source: WITS

43 Table 21-Top Ten Products with the Highest Trade Intensity of Sri Lanka with Australia-2016 HS Code (6 Digit Level) Product Description Soya beans, whether or not broken (excluding seed for sowing) Fresh or dried bananas (excluding plantains) Dried cod "Gadus morhua, Gadus ogac, Gadus macrocephalus", even salted, not smoked (excluding Fresh or chilled leguminous vegetables, shelled or unshelled (excluding peas "Pisum sativum" Cane or beet sugar and chemically pure sucrose, in solid form (excluding cane and beet sugar Fish, salted or in brine only (excluding fillets, offal, herring, cod, anchovies, tilapia, Steering wheels, steering columns and steering boxes, and parts thereof, for tractors, motor Fresh or dried pineapples Articles of plaster or of compositions based on plaster (excluding plaster bandages for straightening Peaches, incl. nectarines, prepared or preserved, whether or not containing added sugar or... Source: Author s Calculations Based on WITS Database Sri Lanka s Trade Intensity with New Zealand Recorded index values for Trade Intensity between Sri Lanka and New Zealand was greater than 100 during the last three years, which implies the high trade relations between the two countries where Sri Lanka is exporting more to New Zealand than might be expected from Sri Lanka s share in world trade. Figure 20-Sri Lanka s Trade Intensity with New Zealand ( ) Source: WITS

44 Table 22-Top Ten Products with the highest trade intensity of Sri Lanka with New Zealand-2016 HS Code (6 Digit Level) Product Description ' Dried cod "Gadus morhua, Gadus ogac, Gadus macrocephalus", even salted, not smoked (excluding Steering wheels, steering columns and steering boxes, and parts thereof, for tractors, motor Fresh or dried bananas (excluding plantains) Rice in the husk, "paddy" or rough Flexible intermediate bulk containers, for the packing of goods, of synthetic or man-made textile Parts of furniture, n.e.s. (excluding of seats and medical, surgical, dental or veterinary Molluscs, fit for human consumption, even in shell, smoked, frozen, dried, salted or in brine... Trunks, suitcases, vanity cases, executive-cases, briefcases, school satchels and similar containers, Textile fabrics impregnated, coated, covered or laminated with plastics other than poly"vinyl Husked or brown rice Source: Author s Calculations Based on WITS Database

45 Trade Complementarity Trade complementarity provides useful information on how well the structure of a country s imports and exports match. Box- 03: What is the Trade Complementarity Index? The trade complementarity (TC) index can be used to assess the extent to which the export specialization and import specialization of trade partners complement each other in relation to world trade. The TC between countries k and j is defined as: TCij = 100(1 sum( mik xij / 2)) Where xij is the share of good i in global exports of country j and mik is the share of good i in all imports of country k. The index is zero when no goods are exported by one country or imported by the other and 100 when the export and import shares exactly match. Sri Lanka s Trade Complementarity with Australia Table 23-Sri Lanka's Trade Complementarity with Australia ( ) Year Trade Complementarity Source: WITS Sri Lanka s Trade Complementarity with Australia has increased in 2016 compared to 2015 after experiencing a decline in 2015 compared to Considering the last four years, trade complementarity of Sri Lanka with Australia recorded a slight fluctuation. The increase in the index value in 2016 compared to 2015 implies that Sri Lanka's export structure and Australia s import structure have become more complementary in 2016 compared to Figure 21-Sri Lanka's Trade Complementarity with Australia ( ) Source: WITS

46 Sri Lanka s Trade Complementarity with New Zealand Table 24-Sri Lanka s Trade Complementarity with New Zealand ( ) Year Trade Complementarity Source: WITS Trade Complementarity of Sri Lanka with New Zealand recorded a continuous increase from 2013 to 2016 which implies that Sri Lanka s export structure and New Zealand s import structure have become more complementary. Figure 22-Sri Lanka's Trade Complementarity with New Zealand ( ) Source: WITS

47 Foreign Direct Investment This section takes a brief look at foreign direct investment (FDI) inflows from Australia and New Zealand into Sri Lanka. Due to constraints on data availability, a sectoral breakdown of FDI inflows by country has not been possible due to lack of information availability. FDI Inflows from Australia According to data made available to us from the Board of Investment (BOI) of Sri Lanka, FDI inflows from Australia have grown steadily over the last decade, reaching its peak in 2014 at US$ 37.4 million, and dipping to US$ 18.6 million the following year. In 2016 inflows picked up to US$ million. Considering Sri Lanka s total annual FDI, Australia accounted for between just 4 and 6 per cent of total inflows in recent years. Figure 23-FDI Inflows from Australia ( ) US$ mn Source: Board of Investment, Sri Lanka FDI Inflows from New Zealand FDI inflows from New Zealand have been volatile but recently on a secular upward trend. Inflows, which were negligible in the early part of the decade reviewed, grew to around US$ 0.8 million in recent years. The peak was in 2012 at US$ 1.2 million. In 2016, inflows recorded US$ 5 million which was the highest for the last decade. This sharp increase was due to an investment of US$ 4.1 million by a New Zealand dairy company 7 during the 4 th quarter of Considering Sri Lanka s total annual FDI, New Zealand accounted for less than 0.5 per cent of total inflows in recent years. 7 New Zealand Dairy Company-Fonterra

48 Figure 24-FDI Inflows from New Zealand ( ) US$ mn Source: Board of Investment Sri Lanka

49 Trade and Investment Opportunities Strengths of Sri Lanka as a Trade and Investment Destination Report extracted below indicated strengths of Sri Lanka as a trade and investment destination from the Board of Investment of Sri Lanka. 1. Location and Connectivity Sri Lanka is strategically located at the cross roads of both east and west sea routes and serves as the point of entry to South Asia and located next to the fast growing Indian subcontinent with close proximity to Southeast Asia and the Middle East. The Country has strong air connectivity with more than one hundred weekly flights to India alone. The Country is connected to the SEA-ME-WE III and IV (South East Asia-Middle East-Western Europe) fiber optic communication backbone with over 11 communication satellites orbiting above the south of the country. 2. Educated and Adaptable Labour Force Sri Lanka possesses the most literate population in South Asia and one of the highest in the developing world with a literacy rate of 92 per cent. Extensive government investment on education has produced a competent and intelligent workforce which is trainable and comfortable with high tech production and services. English is widely spoken and it is the main language used by the business community. Well educated, energetic, skilled and semi-skilled human resources are readily available at competitive wage rates in Sri Lanka. 3. Resilient Economy A Peaceful domestic environment and improved investor confidence facilitated all key sectors to perform well, which contributed towards the high economic growth. The Service sector is the largest contributor to the national economy comprising more than 50 per cent. The strong economic performance in the Sri Lanka has lifted the country s per capita income substantially, which has enabled the country to be graduated to middle-income status from the list of Poverty Reduction and Growth Trust eligible countries. 4. Access to Key Markets Sri Lanka is the only country to have Free Trade Agreements with both India and Pakistan, giving duty free access to over 1.3 billion consumers from the island. Since the agreement was signed bi-lateral trade between Sri Lanka and India has grown more than 5 times and bi-lateral trade between Sri Lanka and Pakistan has grown 3 times. In addition, by locating in Sri Lanka, a company can gain preferential trade access to two large regional blocs under the South Asian Free Trade Area (SAFTA) and the Asia-Pacific Trade Agreement (APTA). 5. Solid Infrastructure Private and public investment programmes have been implemented to improve the country s basic infrastructure facilities such as sea, air, power and telecom. Colombo South Port Expansion, Development of high mobility road network, Southern Highway, Colombo-Katunayake Highway, Outer Circular Highway, Construction of Norochcholai coal power plant, Upper Kotmale Hydro Power project, Trincomalee Coal power project

50 and Connecting to SEA-ME-WE IV project are the key recent infrastructure developments in the country 6. Social Infrastructure Sri Lanka is leads the South Asian region in human development indices with its high literacy rate and national health indicators. Life expectancy is 70.3 years for males and 77.9 years for females. Sri Lanka is a firm proponent of international laws and UN s rights of labour, children and women. 7. Investment Protection and Double Taxation Sri Lanka has signed bilateral Investment Protection Agreements (IPA) with 28 countries and has signed bilateral Double Tax Avoidance Agreements with 38 countries. Strengths of Australia as a Trade and Investment Destination Below strengths were extracted from of the Australian Trade and Investment Commission 1. Growing Economy Australia s demonstrated economic resilience, adaptability and record of steady growth provide a safe, low risk environment in which to do business. In 2016, Australia recorded its 26 th year of consecutive annual economic growth which is underpinned by strong institutions, an exceptional service sector and an ability to respond to global changes. The Australian economy is the 13 th largest economy in the world and rated AAA by all three global rating agencies. Annual real GDP growth is forecasted for 2.9 per cent over the next five years, which is the highest among major advanced economies. 2. High capability and capacity of Industries Australia has the capability and capacity to provide high quality products and services to the world. Australia s mineral and energy resources continue to power Asia s industrialization, and its agricultural commodities and premium food are meeting the region s demand for clean, green and safe products. Australia s service based economy is also well-equipped to provide wealth management, healthcare, education, tourism and professional services to Asia s growing middle classes. Australia is a world leading producer of gold, iron, ore and uranium and the world s second largest LNG exporter, one of the global top ten producers of major agricultural commodities, the world s third most popular destination for students and the 11 th largest international tourism market. 3. Talented Workforce Australia s labour force is one of the most educated, multicultural and multilingual in the world. As a result of the excellent education system, quality scientific research institutions and availability of specialized training services in Australia, the country s workforce is highly skilled. The Australian workforce is culturally diverse where almost 30 per cent of the workforce was born overseas and over 43 per cent of Australia s workforce hold a tertiary qualification

51 4. Well Positioning of the Country Australia is well positioned as a trade and investment base for international companies doing business with Asia and the country has an open trading economy. The country s trade agreements facilitate the smooth flow of goods, services and investments with major economies across Asia, Europe and North America. 5. Favorable Business Environment Political stability, transparent regulatory system and sound governance framework of Australia underpin the country s economic resilience. Australia has ranked in the global top five on the Index of Economic Freedom. Australia s effective governance provides multinationals with a safe, secure business environment. Australia ranks15 th out of 190 economies for ease of doing business and quality of life of the country is rated the 7 th highest in the world. Strengths of New Zealand as a Trade and Investment Destination Strengths stated below were extracted from the New Zealand Trade and Enterprise. 1. Stable and Secure Economy New Zealand boasts sound macroeconomic foundations and the country is among the top 20 rated sovereigns in the world. The country has maintained a low inflation environment for more than two decades; independent monetary policy and a focus on price stability; a long standing floating exchange rate and no exchange controls or restrictions on reputation of funds. 2. Centrally Positioned and Globally Connected Country The location of New Zealand gives the country a highly advantageous time zone for doing business globally. The country is connected to Europe, North America and Asian markets. New Zealand has Free Trade Agreements with major economies promoting easier trade and investment flows. New Zealand has some of the fastest internet speeds in the world and excellent transport and distribution links to all international markets. The country s air connectivity for freight and passenger services continues to improve. 3. Low cost and High Quality in Doing Business New Zealand offers significantly lower costs to do business in areas such as export compliance costs, the average wage and lower facility costs compared to neighboring Australia. 4. Food Powerhouse The country s temperate climate, high rainfall, clean waters, fertile land and low density population makes New Zealand an ideal setting for producing quality foods and beverages. New Zealand is the world s largest exporter in the world of dairy products and lamb and the country s dairy products account for one third of the global dairy trade. 5. Sustainable Environment New Zealand is a clean and pure country with progressive approach to business and a strong environmental track record. The country is wealthy in natural resources and the World Bank estimates that New Zealand ranks eighth out of 120 countries in natural capital per capita, outranked only by petroleum-exporting countries

52 Trade and Investment Opportunities in Sri Lanka for Australia. Trade and investment opportunities were identified based on the interviews conducted with industry stakeholders and the Board of Investment of Sri Lanka. 1. Education Australia is well known worldwide as an excellent study destination because of the reputation of Australian teaching institutions, the quality of teaching and assurance of student s personal safety. The Board of Investment of Sri Lanka is seeking for investments in the higher education sector of Sri Lanka to position the country as a center of excellence and regional hub for learning and innovation and there are investment opportunities in sub-sectors such as branch campuses of leading foreign universities, higher education institutes, hospitality and tourism, hotel management, design development, engineering, nursing and maritime training, Technical and Vocational Education. There are many opportunities for Australia to further strengthen its relationship with Sri Lanka through increased collaboration in the education sector. 2. Apparel The apparel sector is the highest industrial employment generator and the highest foreign exchange earner to the Sri Lankan economy and the Board of Investment of Sri Lanka identified that investors have opportunities in the areas such as Northern and Eastern provinces with the peace prevailing in these areas and enough employment availability and also due to emerging constraints in the Western Province. Investment opportunities available in sub sectors such as apparel manufacturing, textile and fabric manufacturing, garment accessories manufacturing, garment related services such as garment washing, textile testing and screen printing etc. 3. Hospitality and Tourism The Sri Lankan Government has identified the tourism sector as a key growth area and the Board of Investment is working on attracting foreign direct investment to the country as there is a good opportunity for investors of hotels, resorts, villas, higher-end restaurants, leisure, entertainment and theme parks, tourism transport (domestic and international sea and air transport), meeting incentive convention and exhibition, domestic and international air transport, water based transport, skill development for the areas of hotels and hospitality training institutes. Further to above, there are opportunities in allied and ancillary sub-sectors such as convention and exhibition centers, tourist shopping complex, water sports, golf course, race course, angling, spa and wellness centers, yacht marina, eco-lodge, camping, whale and dolphin watching, coastal ferry services and cruise line. 4. Livestock There are significant opportunities for investors in the livestock sector especially for the value added products 8. The Government is looking for specialized investment to improve productivity, level of innovation, access to international markets and improve overall value addition of the sector and there are investment opportunities available for animal husbandry. The excellence of Australia in efficient farm production methods, research and development and innovations brings them a great opportunity to invest in Sri Lankan livestock sector. 8 Board of Investment, Sri Lanka

53 5. Infrastructure The infrastructure sector of Sri Lanka has experienced a massive progress and is expected to support the country to maintain a high and sustainable growth in both the medium and long term. As per the Board of Investment in Sri Lanka there are opportunities available in housing and property development, shopping and office complex, mixed development projects, hospital services and medical services, warehousing and logistics services, exhibition centers, industrial parks and construction of highways and railways. 6. Other Sectors with Opportunities Robotics and electronics, paper, real estate, high-tech manufacturing and logistics and transport/free port are the sectors identified during stakeholder interviews which Australians have opportunities in Sri Lanka other than the key areas stated above. Trade and Investment Opportunities in Sri Lanka for New Zealand. Trade and investment opportunities were identified based on the interviews conducted with industry stakeholders and from the Board of Investment of Sri Lanka. 1. Aviation New Zealand is a pioneering global payer in air craft design, air craft manufacturing, new materials and aviation technology. They have an excellent training environment for engineers, pilots, crew, air traffic control and managers and their aviation industry has successfully implemented software for aircraft management, maintenance and scheduling which provides compelling commercial advantages for operators around the world. Further to that, New Zealand companies have developed world leading expertise in air traffic control and weather prediction, which they are now exporting to markets worldwide. The aviation industry in Sri Lanka is poised for growth as it focuses on increasing connectivity with neighboring regions as well as positioning itself as a vital hub for maintenances, repair and overhaul, logistics and aviation training. Investment opportunities available in this sector are improving aviation services to become a hub of aviation, improving airport facilities to become a good destination as well as a good transit point. With this context, New Zealanders can tap into these opportunities by leveraging their expertise in the well-developed aviation sector. 2. Health New Zealanders are experts in health information technology with solutions that work across the continuum of care from hospitals and community clinics to telemedicine and homecare. New Zealand health IT companies are exporting these solutions to healthcare providers in Asia. They are well known for their expertise in medical technologies, which are developed at the convergence of life sciences, technology and engineering disciplines. With the ageing population, Sri Lanka needs to invest more in modern healthcare practices and technologies. New Zealand s well developed and innovative healthcare system has an opportunity in Sri Lanka to provide insights in areas of digital patient record management and innovations in medical devices, diagnostics and patient healing

54 3. IT BPO New Zealand is well known as an innovative and flexible telecommunications and electronics supplier with companies leading the world in a number of market sectors including GPS and radio communications. New Zealand technology expertise in retail, mobile e-payments, loyalty analytics and cloud based solutions for businesses globally is based on New Zealand companies unique intellectual property, fresh thinking and sophisticated partnerships. IT software development, Business Process Outsourcing (BPO) industry, Knowledge Process Outsourcing (KPO) industry, IT and IT enabled services and training centres have tremendous potential to emerge as key growth sectors in Sri Lanka. With their expertise in this sector, there is an excellent growth opportunity in Sri Lanka for New Zealanders. 4. Agriculture New Zealanders are experts in farming, fishing and livestock management and it is a one of most efficient agricultural economies with a reputation for producing internationally significant research, agricultural practices and products. There are significant opportunities in Sri Lanka for investors in the agricultural sectors, both the domestic market and for value added exports 9. The government of Sri Lanka is seeking specialized investment to improve productivity, the level of technology innovation, access to international markets, use of quality seeds and planting materials and improve overall value addition. The Sri Lankan agriculture sector has growth opportunities in cultivation and processing of fruits, vegetables, herbs and spices, deep sea fishing and rearing processing fish, animal husbandry projects, horticulture and floriculture. With their knowledge on the agriculture sector, New Zealand firms can tap into these opportunities. 5. Food and Beverages New Zealand is a world leading producer of milk powder, butter, cheese, other dairy products, lamb, beef, apples, kiwifruit, honey, rock lobsters, infant formula and dairy based processed foods and exports these products to all markets around the world. Sri Lanka has a fairly developed urban retail infrastructure with leading players running modern stores across major cities. Due to the steady increase in tourism arrivals, people s awareness on health and quality foods and beverages and Sri Lankans increasing per capita income the demand for quality imported food and beverage products has gone up. There are opportunities in dairy investment, cold chain management, improving quality standards of raw milk and other food products and manufacturing of inputs such as feed. This is a growing opportunity for New Zealand companies to expand businesses with Sri Lanka. 6. Other sectors with Opportunities Export oriented manufacturing, export oriented services, infrastructure projects, higher education and skill development, establishment of knowledge cities, wood products, ecotourism and real estate and property development are the sectors with opportunities identified other than the key sectors stated above. 9 Board of Investment, Sri Lanka

55 Trade and Investment Opportunities in Australia for Sri Lanka Trade and Investment opportunities were identified based on the interviews conducted with industry stakeholders, information from the Australian Trade and Investment Commission and IBISWorld Agribusiness Australia s diverse climate, rainfall patterns and soil types sustains a wide range of agribusiness enterprises. The geographic isolation and leading quarantine and monitoring regime support Australia s for high quality production. Competitiveness in agribusiness is derived from locally-developed production methods and technologies and international research and development collaborations. Continuous innovation, research, consulting, sophisticated plant and animal breeding programs and intelligent transport solutions construct the ability of Australian agribusinesses to produce high quality commodities. Australia is keen to attract investment in innovation related to the agribusiness industry Food Processing With continuous developments in food processing, separation and packaging technologies and innovations Australia is staying at the forefront of the global food industry in the world. These strengths are combined with a reliable supply of high quality raw materials, a strong food safety regime and an environment that encourages creativity. Australia is seeking foreign investment in food production and advanced food processing. 3. Tourism With the key strengths such as proximity to the fast growing economies in Asia, unique natural wonders, the safe environment and food and wine experiences Australia s tourism industry has been identified as a growth sector. As one of the world s most transparent real estate markets and with strong growth in visitor numbers and trip spend, Australia s tourism sector is attracting strong international investment interest. 4. Residential Aged Care The ratio of over 65s to those of working age in Australia will be higher than ever as a result of lower fertility rates and longer life expectancies 12. By 2050, the number of people aged in the range of will more than double. As a result of this scenario, residential aged care, medical research and re-skilling an ageing work force are identified as growing business sectors in Australia. In addition, the physiotherapy industry is expected to grow over the next five years with the ageing population Tropical Medicine Australia provides opportunities in invest in research, development and clinical validation of new vaccines, therapeutics and diagnostics for tropical diseases. With world class research institutions, bio-technology companies and collaborative research and clinical networks, Australia is both a world leader in medical research. 10 IBISWorld is a research company in Australia provides industry-based researches 11 Australian Trade and Investment Commission 12 ARC Centre of Excellence in Population and Ageing Research (CEPAR) 13 IBISWorld is a research company in Australia provides industry-based researches

56 6. Digital Technologies Australia s need for efficiency gains is driving demand for digital technologies and creating strong opportunities across the economy including collaborative research and development, digital infrastructure and data centers, cyber security, financial services (fintech), agribusiness and food (ag-tech), resources and energy, digital health, transport and logistics, government services, education and tourism. 7. Health and Wellness Spas Demand in Australia for the health, wellness and spas industry s services has soared due to increasing focus on health and appearance 14. The industry has benefitted as spas have become popular with a wider client base, including men, corporate users, couples and families. Sri Lanka has been at the center of spiritual and physical healing for centuries and provide Ayurveda, Eastern and Western therapies such as Thai massage, hydrotherapy, herbal baths, and reflexology and beauty treatments. With this expertise in the health and wellness spa industry, Sri Lanka can tap into the opportunity in the Australian market. 8. Advanced manufacturing, services and technology Australia has advanced research and innovation capabilities in areas of advanced manufacturing and material science and technology solutions such as composite research including carbon fibres for aerospace, automotive, and industrial, light metal processing for example, additive manufacturing, bio products for medical, and industrial use like nanotechnology and electronic and photonic materials such as batteries and energy storage. Australia offers world-class research infrastructure, a strong and flexible regulatory regime, including IP protection, tax incentives and supportive business culture for undertaking research and development. 9. Other Sectors with Opportunities In addition to above the key sectors, there are a few other sectors with opportunities in trade and investment in Australia for Sri Lankan business people. They are sports management, sports medicine, art and theater and confectioneries. 14 IBISWorld

57 Trade and Investment Opportunities in New Zealand for Sri Lanka Trade and Investment opportunities were identified based on the interviews conducted with industry stakeholders and information from the New Zealand Trade and Enterprise. 1. High Value Manufacturing The New Zealand manufacturing industry is highly reputed in terms of flexibility, resilience and adaptability. Aviation, food and beverage, energy, healthcare, marine, security, industrial equipment and bio-processing technology are the key areas of strength and opportunity. The well-educated and skilled labour force and their cost-competitiveness, collaborative research and development environment, government support on science and innovations and wellmaintained infrastructure are the key strengths of New Zealand in high value manufacturing. New Zealand is keen to attract investment to this industry. 2. Forestry and logging New Zealand has a vigorous forestry and wood processing sector that offers significant investment opportunities throughout the forestry supply chain from plantation to wood processing, especially in value added wood products. The low level of local processing, increasing wood availability due to increasing harvest, makes this an attractive investment opportunity for producers of high-value wood products. 3. Food and Beverages With the projection of growing the global population to more than ten billion people by 2050, so the global agricultural production will have to increase by 70 per cent 15.The food and beverages sector of New Zealand is looking forward to support to meet this increasing demand and keen on attracting foreign investments to this sector. Investing in New Zealand s food and beverages sector provides international investors access to the largest manufacturing sub-sector in New Zealand. 4. Dairy New Zealand is the world s top dairy exporter accounting for one-third of global dairy demand. The demand for whey milk protein and other milk commodities is expected to exceed supply capabilities for the foreseeable future 16. New Zealand provides opportunities for investors in value added processing of products such as specialty cheese, flavored milks and food containing dairy ingredients such as chocolate, frozen bakery goods and infant formula. Also there is untapped potential and room for investors in the niche areas such as infant formula, nutritional shakes, shredded cheese, single serve butter and premium specialty cheese and nutraceuticals. 5. Functional Foods New Zealand has a booming health ingredient, functional foods and nutraceuticals industry. World-class science, unique raw materials, excellence in food research, biodiversity, a pristine growing environment, safety and traceability all make this a growing sector. New Zealand offers opportunities for investors in this sector especially in functional foods such as low-fat milk that is high calcium and protein, bio-medical and bio-health products. 15 New Zealand Trade and Enterprise 16 New Zealand Trade and Enterprise

58 6. Information and Communication Technology New Zealand Trade and Enterprise has identified agri-tech, software solutions, digital media, health and financial services technology as fast growing and emerging sub sectors in the Information and Communication Technology industry and the country offers investment opportunities for foreign investors in these sub-sectors. 7. Other Sectors with Opportunities In addition to these key areas, a few other sectors were identified at the stakeholder interviews. They are mineral products such as phosphate, gems, silicon; food stuffs such as tea and sugar cane; marine; Bio-processing technology sectors; and Sri Lankan made items focusing on Sri Lankan history and culture and a shared love of Cricket and Rugby etc

59 Constraints in Trade and Investment The report identified some constraints the business people face in trading and investing in Australia and New Zealand based on the stakeholder interviews conducted. These constraints were categorized based on the geographical area where the constraint is existing. Constraints Faced within the border by Sri Lankan Business People in Doing Business with Australia and New Zealand 1. High Level of Tariffs and Taxes Over the years successive governments have imposed different taxes from time to time resulting multiple taxes in operation in Sri Lanka at the moment. Imports in to Sri Lanka are subjected to a variety of import duties, which combined can result in high duty rates. Customsimport tariff, Value Added Tax (VAT), Port and Airport Development Levy, Nations Building Tax, Regional Infrastructure Development Levy and Social Responsibility Levy are the duties applicable at the border. On the development of certain commodities, Commodity Export Subsidy Scheme (CESS) and Special Commodity Levy are imposed. These taxes result in higher shelf price of products, which can have a negative impact on demand for particular products. Suggestions by stakeholders - Signing of a double tax treaty between Sri Lanka and New Zealand (Sri Lanka has a double taxation avoidance agreement with Australia) - Aim for a less complicated border tariff structure which gives reasonable protection and revenue to the Sri Lankan economy. 2. Retail Price Control In Sri Lanka maximum retail prices are applied for sixteen essential items. Considering the Australia and New Zealand context here, the retail price control on imported milk powder is vital. Currently, this applies to full cream milk powder and Non-fat milk powder. According to the Consumer Affairs Authority of Sri Lanka, these retail prices are determined with the movements in exchange, global commodity prices and requirements of dairy processors. Suggestions by stakeholders - Government to consult dairy processors in any review of price controls - Set up a transparent and predictable formula to set retail prices 3. Farm-gate milk Prices The Sri Lankan Government continues to steadily increase the farm-gate milk prices in an attempt to encourage local milk production. As a result of this, milk is becoming a less affordable to the less affluent in the country. Suggestions by stakeholders - Introduce a quality based pricing system to incentivize quality improvements

60 4. Regulatory issues 4.1. Enforcement of the Food Act It is important to have a more streamlined regulatory approval process. For example harmonize the Sri Lankan regulatory regime with international standards including Food and Agriculture Organization of United Nations (FAO), World Health Organization (WHO), and Codex International food standards. This would enable more innovation in local dairy opportunities and swifter decision making which currently undergoes a complex process involving multiple stakeholders Border testing From a stakeholder s point of view Sri Lanka has one of the most stringent border testing process in the world. The current process involves multiple agencies drawing samples for testing which is very time consuming and burdensome. For example, Quarantine certification. Suggestions by stakeholders - Should streamline the process to make the system more efficient and transparent including standardizing the testing to be implemented and coordinated by one responsible authority. Constraints Faced by Sri Lankan Business People within the Australian Border 1. Finding Business Partners. It is very difficult to find a business partner/company with a national network in Australia. 2. Availability of Chinese products in the Market Chinese products are largely available in the Australian market, which are very price competitive and it is difficult for Sri Lankan products to compete with the prices of Chinese products. 3. Poor awareness and No Promotions on Sri Lanka Business people who are engaged in tourism and tourism related services face these constraints as there is no country promotions happening in Australia on Sri Lanka as a good tourist destination. 4. Strict Quarantine Rule Due to Australia s unique native eco system and geographic isolation they are operating strict quarantine regulations for travelers and businesspeople

61 Constraints Faced by Sri Lankan Business People within the New Zealand Border It was hard to identify constraints faced by Sri Lankan business people in doing business with in the New Zealand border. As New Zealand is well recognized as the best place in doing business in the world which was ranked as the number one in Ease of Doing Business Index 2016 of the World Bank and Corruption Perception Index 2016 of the Transparency International might be reasons for this. According to stakeholders interviewed currently there are no major constraints with in the New Zealand border in doing business. Constraints faced by Australian and New Zealand Business People in Doing Business with Sri Lanka. 1. Inconsistent and Unpredictable Policies Tax policy uncertainty and its lack of clarity, ad-hoc policy changes are the most critical concerns today in Sri Lanka. The tax policy of the country took several shifts during a few months of This situation is hurting the business and investment climate of the country as this drives weakening confidence of both local and foreign investors and business people. 2. High Transaction Cost High transaction costs involved with regulatory compliances discourage the creation of new investment and limit the growth of existing companies. 3. Issues on Land Ownership Sri Lanka has imposed restrictions on the sale, transfer or lease to foreigners of land, properties and condominium units. The restrictions prohibit the transfer of any land to a foreigner, foreign company, a local company with more than 50 per cent foreign shareholding, with some exemptions. This is negatively affecting foreign investors interest in investing in Sri Lanka. 4. Inefficient functioning of Board of Investment (BOI) In Sri Lanka As the primary government authority responsible for investment in Sri Lanka, BOI has to be more vigilant and attentive. Though it was introduced as a one-stop-shop for investors, their performance is far below. Instead of resolving investment approval process by BOI on behalf of the investor, investors have to reach the respective ministries and line ministries. Unclear procedures and administrative barriers of BOI are reducing investors interest in Sri Lanka. 5. Issues in Business Registrations There is no online registration system except for submitting the name approval application for a business registration at the Department of Registrar of Companies; the responsible government agency for business registrations. An average registration at the Companies Registry takes 7 to 10 days

62 6. Lack of Competition Law Competition law aims to preserve and protect the competition process among competitors in a given market. Sri Lanka does not have a clear and specific competition law and there is no process suitable to facilitate competition within different sectors of the market Labour Shortage and Highly Unionized Labour Force There is a huge shortage of both skilled and unskilled labour in Sri Lanka, which creates significant difficulty in doing business in Sri Lanka. The business environment of Sri Lanka is highly politicized and workforce is highly unionized. Companies are facing lot of difficulties in their work due to these labour issues. 8. Finding a Suitable Business Partner It is very challenging to find a suitable business partner to represent long term distributors and agents with proven track records in an industry vertical and willing to jointly invest to grow the business. 17 Institute of Policy Studies and Law and Society Trust in Sri Lanka,

63 Annexures Annex 1: Key Steps for an Investor to follow in Establishing a Company in Sri Lanka 1 Submit Application to the BOI with - Project Proposal - Land Details and if possible a copy of the deed/lease agreement 2 Obtain Approval from the BOI (Also, BOIcordinates with the line agencies/ministries to obtain other relevant approvals) 3 Incorporate company at the Department of Company Registrar as a Private Limited Company) 4 Incorporated Company and the BOI will sign agreement (Only for section 17 approvals, Section 16 projects are not necessary to sign agreements with BOI) 5 Obtain Tax identification Number (TIN) and VAT Registration Number from the Department of Inland Revenue Source: Design by the Author based on BOI Information

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