Will India-Sri Lanka Trade Suffer Due to China’s Grip On Colombo?

Massive ingress of Chinese firms may well impact India’s 1998 Free Trade Agreement with Sri Lanka.

Image of Indian flag (L), Chinese flag (Centre) and Sri Lankan flag (R) used for representational purposes.

(Photo: Aroop Mishra / The Quint)

It’s rather a study in contrast. At a time when Indian Coast Guard ships were helping the Sri Lankan navy battle a disastrous fire on the container ship MV X Press Pearl, the Parliament was clearing a bill to set up a Special Economic Zone (SEZ) in the Colombo Port City (CPC), and more importantly, the terms of reference on an Economic Commission to govern it — both of which would give China an even larger stake in the island.

Though opposition was immediate, this was hardly the kind of massive protest evoked over another foreign investment, this time by India and Japan.

While this new development will raise further apprehensions in India, what is less apparent is the danger to Sri Lanka itself, in terms of the overweening role of China in — what is after all — a very small but proud and fiercely independent country.

The Backdrop — the Colombo Port City Project

The idea for CPC reclamation of some 579 acres was originally a dream project of the then President, now Prime Minister, Mahinda Rajapaksa — at a time when reclamation was already underway for the under-construction South Terminal of the port. The idea was taken up in an ‘unsolicited’ proposal from CHEC (China Harbour Engineering Company), and eventually became the largest project in Sri Lankan history. The whole thing went ahead unchallenged, with President Xi present at the launch in 2014.. The city is not just an add-on to the port. With a USD 1.5 bn investment from China, it is set to rival Singapore or Dubai as a financial hub.

Unlike Hambantota, which was originally a Sri Lankan development project built with Chinese loans, this was an outright Chinese virtual ‘buy’, with an early lease of 110 acres for 99 years.

That deal was blocked by the next government of President Sirisena, revived, and then postponed again just before the visit of Prime Minister Modi in 2017. Beijing threatened a lawsuit, and soon the project was underway again, this time with even more land than before.

Military aid as well as F-7 fighter jets and radar followed, annoying Delhi, already rattled by the appearance of Chinese submarines in a port call in 2014. Colombo, equally rattled by all this, refused further such calls.

But by then China was already heavily invested, in a range of projects to the tune of some USD 8 billion.

Meanwhile, in a stunning political turn-around, Rajapaksa was nominated prime minister by Sirisena himself.

As the constitutional crisis erupted, Beijing was quick to congratulate him unlike the condemnation from the rest of the world.

No surprise then that the New York Times was later to allege that CHEC gave USD 7.6 million to him in his re-election through another company. All charges were however dropped, as the Rajapaksa brothers re-entered the power corridors.

China Weighs in During the Pandemic

Sri Lanka’s economy suffered seriously under the COVID-19 pandemic, and an International Monetary Fund (IMF) program, which expired in 2020, seemed to be delayed despite requests for emergency financial support. With heavy external debt and low forex reserves, Colombo managed a USD 400 mn currency swap with India, which ended in February 2021.

That month, Colombo pulled out of the East Container Terminal (ECT) project, which provided for a Japanese loan at 0.1 per cent with the Sri Lanka Ports Authority having 100 percent ownership. It also seemed that the leadership was bowing to severe protests from some 223 unions and civil society groups against the ECT. A Japanese-funded commuter rail project was also cancelled earlier, while US grants for poverty alleviation were stopped due to ‘lack of partner country engagement’.

In March, the country publicly thanked China for voting against a Resolution condemning Colombo’s human rights record — India abstained — and equally gratefully accepted a USD 1.5bn currency swap from China.

In the same month, the government put out the Colombo Port City Economic Commission Bill, which, in its original form, would have given the President complete control nominating 5 out of 7 members; members didn’t need to be citizens, removed the Auditor General’s oversight, and provided tax exemptions for businesses considered ‘strategic’.

The Supreme Court, examining some 19 petitions, pointed out that there were no apparent guidelines for deciding this, and called it ‘unconstitutional’ without due notification on such guidelines. Other clauses that, for instance, restricted freedom of movement of Sri Lankan citizens in the SEZ were also struck down as unconstitutional, with the government then forced to present a revised bill in Parliament. That has now been passed.

The Dangers in the Bait

Inside Sri Lanka, there seems to be little outright opposition. The bill passed 149 to 58, which by itself is hardly surprising since the SLPF (Sri Lanka People’s Front) has a two-thirds majority of 145 in the 225-seat house. What is more notable is that even major opposition parties like the United People’s Party and its off-shoots oppose only the extra-constitutional clauses of the bill, and not the huge Chinese presence itself. Clearly, there are incentives.

The PM has not only promised 200,000 jobs in construction and 83,000 permanent ones. That’s a lot at a time of pandemic and employment contraction. The PM also promised that skilling levels required would be relaxed to allow 75 percent of job reservation for Sri Lankans.

Whether China will agree to that or not is to be seen; but it is certainly a powerful incentive for trade unions and politicians to welcome the deal, and economists to welcome it.

The problem is this. If those were the only considerations, these groups should have been welcoming India, US and Japan as well. Instead, they protested. Something’s amiss. Again, the top leadership, has intelligently steered clear of more loans and ensuing debt traps.

But in the final analysis, they’ve given a non-democratic and more-than-aggressive country some 15 plus projects all over the country, and most of them opposite India, and with reportedly more land to be transferred in the pipeline. Once Beijing gets a piece of the pie, it seldom stops wanting more.

India Without the Deep Pockets

For India, the lesson is that, keeping China out requires purses far deeper than ours. Rather sensibly then, India has chosen to go ahead with the West Container Terminal anyway, rather than sit it out. Indian firms could even consider using the SEZ for their own profit.

The dangers are more than obvious. Massive ingress of Chinese firms may well impact the 1998 Free Trade Agreement with Sri Lanka, given the danger of Chinese goods flooding the market under a local banner.

Then there is the ever-present Tamil nationalist issue, with Tamil groups inside and outside the country stating their strong protests. But the most obvious is this huge influence just on our doorstep, which is only likely to get bigger by the day.

Meanwhile, a trilateral secretariat has already been set up in the Sri Lankan Navy Headquarters, to facilitate the dialogue between Sri Lankan, Indian and Maldivian National Security Advisors.

Colombo may need some quiet assistance on the naval side, as it strengthens its presence near its major ports. But for that, Colombo has to be more alive to the geopolitical threats it faces, even as it manages its economy as best as it can. The fire on the MV X Press Pearl has now been doused with Indian help, but it may well need outside help should far larger fires erupt inside its own state. Beijing’s embrace can get uncomfortably tight.

(Dr Tara Kartha was Director, National Security Council Secretariat. She is now a Distinguished Fellow at IPCS. She tweets at @kartha_tara. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses, nor is responsible for them.)