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JKS Weerasekera
by Dr. J. B. Kelegama
(Keynote Address at the Fiftieth Anniversary Celebrations of the historic "Rubber-Rice Pact" between Sri Lanka and China at the BMICH on 2O December 2OO2)
(Keynote Address at the Fiftieth Anniversary Celebrations of the historic "Rubber-Rice Pact" between Sri Lanka and China at the BMICH on 2O December 2OO2)
The Ceylon-China Trade
Agreement of 1952 was undoubtedly the most useful trade agreement negotiated by
Sri Lanka and one of the most successful and durable Trade Agreements in the
world, having been in operation for thirty years. It is therefore useful to assess the significance of the
agreement and to refresh our memory regarding the circumstances that led to it
and the person who played the key role in bringing it about - R. G. Senanayake.
Rice Shortage
1952 was a very bad
year for Sri Lanka. Premier D. S. Senanayake had died and Dudley Senanayake had
just formed a new government when the country had to face a world shortage of
rice. The government was committed at that time to provide every adult person with
two measures of rice per week at a subsidized price, but rice was not available from the traditional
suppliers - Burma, Thailand and Indo-China - and the world market price of rice
had risen by 38 percent between 1951 and 1952. Sri Lanka was therefore
compelled to buy 60,000 tons of rice from the U.S.A. and 10,000 tons from
Ecuador at high prices, although this
variety of rice was not suitable to the Sri Lankan palate. She was however not
in a position to buy all the rice she needed at this high price as her foreign
exchange resources were limited; besides, distribution of this rice would have pushed the food subsidy bill to
intolerable levels.
The country was also
facing a foreign exchange crisis in 1952 caused by a dramatic fall in her export pricesbrought about by the quick end of the Korean
War boom. The end of the Korean War and the drastic reduction of commodity
purchases by the West - in particular, of natural rubber by the United States -
led to a collapse of Sri Lanka’s export prices by 23 percent between 1951 and
1952. The price of natural rubber declined by 36
percent, of tea by 10 per cent, and of coconut oil by 40 percent. Import prices
increased by 8 percent and terms-of-trade fell by 28 percent.
The trade surplus of
Rs. 345 million in turned into a trade deficit of Rs. 200 million in 1952 and external assets fell by 30 percent. In
this critical situation Sri Lanka attempted to negotiate with the U.S.A. for a
loan of US$ 50 million and for favourable prices few rubber exports and rice
imports, but failed. The country was facing an unprecedented crisis: she could not find enough rice to feed her
people and she had no
prospect of a favourable market for her rubber exports.
It was in this grim
setting that R. G. Senanayake, the then Minister of Commerce, played his
stroke. He found out that China
was prepared to sell rice to Sri Lanka in exchange for rubber. At that time China was unable to obtain rubber as a result
of prohibition of rubber exports from Malaya following a U.N. resolution
preventing the sale of rubber to China. ( Compare Iran/Iraq today- same UNCLE SAM tactics 60 years on! )
Thus China wanted
rubber as badly as Sri Lanka wanted rice. R. G. Senanayake was quick to realize
the mutual benefits of trade with China, and negotiated the Ceylon-China Trade
Agreement or the Rubber-Rice Pact in Beijing towards the end of 1952. He stated
in Parliament:
"We waited for foreign aid, foreign assistance.
As you know Sir, over and over again, we made appeals for Point Four aid, we
waited four long years. We have got in the form of assistance only a cook for
the Kundasale Girls’ School. Therefore in these
circumstances, it was necessary that we should go where it was possible to get our
requirements".
Opposition to the
Agreement
The Agreement was
negotiated in the teeth of opposition from some of his own colleagues in the
cabinet. Indeed,the opposition of J.
R. Jayewardene, the Minister of Finance, was well known.
The cabinet was
advised by the newly created Central Bank under an American governor. (Shades of Mahendran- Ccntral Bank Bond Scam
today)
Opposition also came
from R. G. Senanayake’s predecessor in the ministerial post, from the American government, and from some of the local newspapers which carried on a virulent press campaign against any dealings with Communist China.
S. P Amarasingham’s
informative book "Rice and Rubber: The Story of China-Ceylon Trade"
provides a detailed account of the strong opposition R. G. Senanayake had to
face in negotiating the Agreement. The American government invoked the Battle Act which prevented it
from giving aid to countries selling strategic materials to Communist countries
and cut off aid to Sri Lanka.
In addition, she stopped selling sulphur needed by Sri
Lanka’s rubber plantations. This was the price that had to be paid for trading
with China.
Prime Minister, Dudley
Senanayake, however, fully backed his Minister of Commerce and was prepared to
pay this price; he realized that the benefits to Sri Lanka from the agreement
far outweighed losses consequent to the cutting-off of American aid. He argued:
"Ceylon’s oil
trade pattern has been knocked out by changes in the world market and we have
to seek new markets for our needs of essential foodstuffs and for our
exports".
Rebutting the charges
that the Trade Agreement was opening the door to communist influences in Sri
Lanka, he pointed out:
"Communism thrives in many places not through
an understanding of that particular ideology but through poverty and want. I am confident that our Trade Agreement with
China will instead of opening doors to communism help us to stand firmer
against it".
It is a tribute to the
two Senanayakes that they displayed remarkable pragmatism and courage in
negotiating the Trade Agreement. They did not allow their prejudices or
ideological considerations to stand in the way of deciding what was in the best
interests of the country;nor were they
intimidated by threats of big powers.
R. G. Senanayake
stated:
"I have always
held the view that political ideologies
should not stand in the ways of countries trading with each other if that trade is to their
mutual advantage.
He foresaw as far back
as 1952, the emergence of China as a world power. He stated in a speech:
"Talking of China
in particular, it would be
unrealistic to ignore a nation of 500 million in our continent with a united
and cohesive government for the first time in many centuries. She is bound to
be a major factor in world trade".
As he foresaw, China
has now become the seventh largest exporter in the world and the largest trader
among developing countries whose purchases and sales influence the world
markets. In 2000 for instance, her exports were US$ 249 billion and imports US$
225 billion. If we include Hong Kong’s trade with China (as the greater part of
Hong Kong’s trade is entrepot trade with China) then China becomes the fourth largest exporter in
the world after USA, Germany, and Japan, its exports amounting to $ 452
billion.
The Agreement
The Trade Agreement
signed in 1952 was for five years and renewable; there was, however, an annual
Trade Protocol specifying the quantities of commodities to be exchanged in the
ensuing year, which had to be negotiated every year. The trade was based on
barter exports and imports to balance every year, only the outstanding balance at the end-of-the year
was to be settled in foreign exchange. Trade however was rarely balanced in the following years but
the outstanding balance was generally carried forward to the next year without
settlement in foreign exchange. In the first part of the agreement there were
specific commitments by Sri Lanka to purchase rice, and for China to buy
rubber; the values were to balance. Thus in 1953, Sri Lanka agreed to buy
270,000 tons of rice from China which in turn agreed to purchase 50,000 tons of
rubber, these quantities were exchanged on the basis of world market prices and
were equal in value. In addition, China agreed to pay a premium price for rubber over the world
market(Singapore) price and
further, handling charges for rubber exports in Colombo.
Thus in 1953, China
paid for Sri Lanka rubber Rs. 1.74 per lb.
whereas the average world market price was Rs. 1.05 per lb. This premium varied with every five-year
agreement. The handling charge which was fixed at five cents per lb. too varied
in subsequent years. China also agreed to supply rice to Sri Lanka below market prices - at £
54 or Rs. 720 per ton in 1953. Thus Sri Lanka benefited both ways from the agreement. The second part of the
agreement covered trade in other commodities - those Sri Lanka and China wanted
to buy and sell - but without specific commitments; the total value of exports
and imports however were expected to balance every year.
In view of the
substantial mutual benefits, the Trade Agreement was renewed every five years
by R. G. Senanayake’s successors in his Ministerial post - in 1958, 1962, 1967,
1972 and 1977 - and was wound up, in the sense that the barter element was
given up, in 1982 when it was
found that the barter of rice and rubber was no longer in mutual interest Sri
Lanka had almost reached self-sufficiency in rice and needed only very small
quantities from abroad while China was able to purchase rubber from several
rubber producing countries ( Fantastic mutual benefit)without restriction and without paying a
premium.
R. G. Senanayake paid
an important tribute to China after negotiating the Trade Agreement, when he
concluded his cabinet paper on the subject in the following words:
"We noted on the
Chinese side the absence of the spirit of bargaining and haggling on
comparatively small points. On the other hand, they gave us the impression of
being large minded and forthright in their dealings".
I can confirm this as
I conducted trade negotiations with China over a dozen times.
Benefits from the
Agreement
The significance of
the Ceylon-China Trade Agreement lies in the positive benefits Ceylon received
during the thirty years of its duration. Those benefits exceeded expectation as China expressed her gratitude to Sri Lanka for
supplying her rubber when other rubber producers were not prepared to do so and
in spite of the opposition and denial of aid by the US government. These benefits are discussed in detail below.
(1 ) The premium over
world market price for rubber was estimated between Rs. 68 and Rs. 95 million
in 1953 alone. It was about 56 per cent more than the world market price in
that year. No estimates are available for successive years, but the premium was
substantial; for even a ten cents premium meant Rs. 200 per metric ton and Rs.
10 million for 50,000 tons.
(2) The handling
charge of 5 cents per lb. In 1953 was equal to Rs. 100 per metric tat. Or Rs. 5
million for 50,000 metric tons of rubber. As the charge and quantity varied
from year-to-year, the total sum too changed, but it was significant.
(3) The sale of rice
by China to Sri Lanka at prices below the world market resulted in net benefit
of about Rs. 92 million in 1953 alone. Although there was a net benefit in the
following years, no estimates have been made. China agreed to sell rice at the
same price Burma sold rice to Sri Lanka with certain adjustments for
differences in quality and transport costs. China never tried to exploit the
rice market to her advantage. Even when she did not have an exportable surplus,
she supplied Sri Lanka with rice direct from Burma under a triangular trade
arrangement, but charged us only the price she paid Burma - not a cent more -
even when she had reason to charge something more.
(4) As a result of the
agreement a grant of about Rs. 125 million was extended by China during the
ten-year period 1958-68 to meet part of the costs of rubber replanting.
Thousands of acres of uneconomic rubber land were replanted thereby
revitalizing our rubber industry.
(S) China continued to
purchase Sri Lanka’s rubber at a premium even when other markets were prepared
to sell her rubber at lower prices.
(6) Sri Lanka found an
assured market for her rubber and an assured source of supply for her rice and
insured herself to a great extent against vagaries in the world market. She
also diversified her export end import markets.
(7) The Trade Agreement benefited the Ceylonese
traders as against non- national traders by creating a new marketfor them. In spite of the opposition from non national trading
establishments - particularly British managing agency houses - R. G. Senanayake reserved the export of rubber
to China for the Ceylonese traders. He also reserved China for the Ceylonese
importer under his policy of Ceylonizing the external trade of the country
(8) The Trade
Agreement laid the foundation for expanding trade between Sri Lanka and China
even after the barter agreement ceased to operate. in 2001 for instance China
and Hong Kong (which mainly re-exports China’s products) constituted the
largest supplier of imports valued at Rs. 64 billion to Sri Lanka.
(9) Economic
Cooperation between Sri Lanka and China began with the Trade Agreement. It was
expanded by leaps and bounds with establishment of diplomatic relations with
China by S. W. R. D. Bandaranaike and closer relations under Sirimavo
Bandaranaike as symbolized by the Bandaranaike Memorial International
Conference Hall (BMICH), textile mills at Veyangoda and Pugoda, other grants
and interest free loans. Economic co-operation thereafter is demonstrated by
the superior courts complex, Gin ganga scheme and assistance to restore
Abayagiri dagaba.
(10) The Ceylon-China
Trade Agreement with its price concessions for both Sri Lanka’s exports and
imports and assistance to rubber replanting by China was perhaps the first
instance of a developing country giving economic assistance to another
developing country. In other words, it was the first time where Economic
Cooperation among Developing Countries or South-South cooperation took place.
(11) Finally, Ceylon
China Trade Agreement and closer commercial and economic relations laid the
foundations for a firm friendship between Sri Lanka and China, which-. was
strengthened, expanded, and cemented by the Bandaranaike governments. China’s
friendship for Sri Lanka has been demonstrated not only in trade and economic
cooperate" but also in times of National
crisis. There was only China to warn other countries to keep their hands off
Sri Lanka" at the height of the Indo- Lanka crisis in June-July 1987. This friendship was demonstrated again
thereafter by the visit of Prime Minister of China and his offer of Rs. 375
million in economic assistance.
China Today
China today is the
worlds fourth largest industrial producer behind the US, Japan and Germany.
China makes more than 50 percent of the worlds cameras, 30 percent of the
world’s air conditioners and television sets, 25 percent of the world’s washing
machines and nearly 20 percent of the worlds refrigerators. One private company
- Guangdong Galanz Enterprise - accounts for 40 percent of all microwave ovens
sold in Europe and Wenzhou, a city in Eastern China sells 70 percent of the
worlds metal cigarette lighters. China is also among the world’s biggest
producers of aluminium, copper and steel. Nearly half of all goods China
exports are made by foreign companies manufacturing in China such as Motorola,
Philips, Nokia, Sony, National and Toshiba. China has become the world’s
manufacturing powerhouse as the world’s largest manufacturers are locating
their manufacturing bases there or purchasing their requirements from Chinese
enterprises. More than 400 of the world’s top 500 transnational corporations
have invested in some 2000 projects in China attracted by its low costs of
production not only due to low wages but also lower non-wage costs and high
productivity. China has consequently become the largest recipient of foreign
direct investment among developing countries - $ 47 billion in 2001 and
estimated $ 50 billion in 2002. The US is the second largest investor in China
behind Hong Kong; between 1980 and 2000 the US has invested $ 30 billion.
For decades, China
exported mostly low-end products like textiles and toys to the US, but now it
is exporting high-tech computers, electrical and electronic products there.
Sino-US trade has increased sixfold over the past decade. China’s manufacturing
prowess is pushing down prices of a growing range of industrial, consumer and
even agricultural products all over the world bringing benefits to the world’s
consumers. In the US market for example, Chinese kitchen appliances like
griddles, tools and metal implements, sporting goods, ceiling fans, light
fixtures, TV and audio equipment are so cheap and competitive that the American
domestic producers of these goods have been forced to cut their prices. Chinese
made shoes account for about 80 per cent of all footwear imports of the US. In
Japan Chinese small refrigerators and washing machines are 20 to 30 percent
cheaper than Japanese models and the Japanese manufacturers too have to cut
their prices. The rapid increase in productivity in China is illustrated by the
decline in price at home of a 21 inch colour TV set from $ 400 in 1995 to $ 80
in 2002.
Fears were expressed
in some Asian countries particularly after China’s entry to the WTO, that
rapidly growing China would compete with their exports and also suck in foreign
investment from around the world and pose a threat to neighbouring countries.
China therefore felt a need to prevent the notion of China as a threat from
growing any stronger by proving that its rapid economic growth and opening to
the outside world will also benefit the neighbouring countries. The concrete
action it took to prove this theory was an agreement with ASEAN to begin talks
on a free trade agreement within 10 years; China will thus offer its large and
growing market for ASEAN’s exports. In the first half of 2002 alone exports of
eight Asian countries to China jumped by 50 per cent offsetting the fall in
their exports to Japan. Besides, Chinese investments in ASEAN increased from S
26 million to $ 148 million over the last two years. There is no doubt that
China has already become the engine of economic growth in Asia.
Principal trading
partner
China will always be a
principal trading partner of Sri Lanka. China as mentioned earlier, including
Hong Kong which mainly re-exports Chinese products is the largest suppler of
imports to Sri Lanka. In 2001 China including Hong Kong accounted for 13.4 per
cent of our total imports as compared to 11.1 per cent from India and 6.2 per
cent from Japan. As regards exports however, China and Hong Kong account for
only a very small amount - only 1.2 per cent of our total exports. We want to
share in Chinas rapid growth; we want China to buy more of our exports and
simultaneously make investments in new industries to expand and diversify our
export structure. We must therefore strengthen and expand our existing economic
relations, if necessary by a new trade and investment agreement to ensure that
Sri Lanka will be in China’s focus in its great march to economic super power
status.
China regards Sri
Lanka as one of her old friends with whom it has a special relationship. The first
stride to build this friendship was taken by R. G. Senanayake fully backed by
the then Prime Minister Dudley Senanayake in the face of internal and external
opposition. The two senior officers who accompanied R. G. Senanayake to China -
M. F. de S. Jayaratne, the Permanent Secretary and C. E. P. Jayasuriya, the
Director of Commerce - told me before they died that full credit must be given
to R. G. Senanayake for successfully concluding the Rubber-Rice pact with China
and perhaps no one else could have done it.
China is carrying out
economic reforms to modernize the country, but whatever economic and social
system China may build and whatever changes in leadership and policies it may
have, its friendship with the old friend Sri Lanka is likely to remain intact
as in the past. This takes my memory back nearly 40 years to a historic
statement made by one of China’s great leaders. It was in 1964 that I
accompanied Dr. N. M. Perera, the then Minister of Finance to meet Marshal Chen
Yi, the deputy Prime Minister and Minister of Foreign Affairs to ask for more
aid to Sri Lanka (Prime Minister Chou en Lai was not in Peking and hence the
meeting with the Deputy Prime Minister). Marshail Chen Yi was virtually dying
at that time and he was very feeble. When Dr. Perera requested more aid,
Marshall Chen Yi stated: "Minister China is still a poor country. You came
to Peking through Canton and you would have seen the poverty there. China is
the largest courtly, in Asia with one of the oldest civilizations in the world
and we have a moral obligation to help smaller Asian countries like yours. We
will give you some aid but not very much because we are still poor. However
when China becomes a fully developed rich country we will give you all you need
to discharge our historic obligation". These words still ring in my years.
Within a few weeks Marshall Chen Yi was dead.
I want to conclude by
referring to the former Premier Li Peng who underlined the enduring character
of our friendship at the banquet given in his honour by the Sri Lanka
government in the following memorable words:
"The Sino-Sri
Lanka relationship has become a model relationship between states with
different social systems. We believe that, thanks to joint efforts of the two
governments and the two peoples, Sino-Sri Lanka friendship will surely roll on
incessantly like the Yangtze River and Mahaweli Ganga".
