The Significance of the Ceylon-China Trade Agreement of 1952

Email from 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)

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".