Sri Lanka’s FTAs: A tale of missed opportunities
View(s):Why does Sri Lanka need FTAs? Can they make a difference to our export basket? Today, I take these questions to find answers. However, at the outset I must stress the fact that “FTAs should not be our cup of tea” unless we have a fairly open “free trade” regime; why?
Sri Lanka needs to diversify its export basket.
Invitation to neighbours
Sri Lanka is often recognised for having one of the most intricate and protectionist trade regimes in the world—a fact frequently criticised, even by US government authorities on their official platforms. Attempting to implement Free Trade Agreements (FTAs) within such a protectionist framework, like the one Sri Lanka has maintained with India, might lead to underwhelming outcomes.
As the saying goes, “before inviting our neighbours to dinner, we must first ensure that our own house is in order and well-prepared”. While our neighbours have undertaken reforms over a long period and are well-prepared for collaboration and integration, it is significantly challenging for a nation like Sri Lanka, which has largely overlooked such reforms, to align itself with them.
This issue has persisted for decades, dating back at least to the signing of the India-Sri Lanka FTA 25 years ago. The challenges were even more apparent when Sri Lanka entered into the Singapore-Sri Lanka FTA in 2018, which has since been put on hold.
Singapore, having long embraced reforms and achieved the status of a ‘free trade’ economy, had little to negotiate with Sri Lanka regarding tariff phasing-out schedules. In contrast, Sri Lanka faced substantial negotiations to accommodate even minimal tariff phasing schedules, because the country had not undertaken reforms.
FTAs in the world
During the 1970s and 1980s, the world began to witness the adverse outcomes of protectionist policies alongside the remarkable economic performance driven by trade liberalisation. This realisation sparked a wave of policy reforms aimed at fostering liberalisation and globalisation.
As part of these reforms, the pursuit of bilateral and multilateral FTAs emerged as a new trend. According to the trade agreement database of the World Trade Organization (WTO), the world had only 12 trade agreements in 1980. By the end of 2024, this number had grown exponentially to 374 agreements.
Why do countries opt for trade agreements? While free trade theories present a world with “zero-tariff free trade models” to confirm the superior economic outcome of free trade, such models do not exist in reality. For various reasons—both economic and non-economic reasons—countries often implement tariffs and non-tariff barriers.
However, the “fear of free trade” does not overshadow the “desire for free trade,” as its economic advantages remain compelling. FTAs are therefore considered a “second-best” solution, offering partial free trade benefits in the absence of a fully tariff-free global economy.
Stages of integration
While integration of countries through agreements can go deeper, the FTAs are the stepping-stone to bilateral or multilateral integration. The following steps display broader stages of bilateral or multilateral integration:
1. The first stage is known as “free trade area” in which the member countries agree to import goods and services freely from each other, while keeping their trade barriers against non-member countries.
2. The second stage, known as “customs unions,” is when the countries adopt free trade in goods and services plus common trade barriers against the non-member countries.
3. The third stage known as “common market” includes in addition to the above, free movement of the factors of production, particularly money and people. European Union (EU) established its common market in 1987.
4. The fourth stage known as an economic union entails, in addition to all the above, macroeconomic policy harmony as well. These policies are basically fiscal and monetary policies, but they can be extended to cover other sectoral policy areas such as transport, foreign sector, agriculture with common policies.
The European Union established its economic and monetary union under its well-known Maastricht Treaty in 1993. This Treaty also provides the framework for the establishment of the Euro Zone with a single currency by harmonising macroeconomic fundamentals and surrendering monetary policy autonomy to the Union.
Fast movers
If we examine the stages of integration closely, it becomes evident that Sri Lanka has not yet entered even the “first stage” of integration with its FTA with India, signed in 1999. The India-Sri Lanka FTA covers trade in only “some goods,” not all, and notably excludes services trade.
There were efforts to upgrade the India-Sri Lanka FTA to a Comprehensive Economic Partnership Agreement (CEPA) in 2003 and after its failure, later to an Economic and Technical Cooperation Agreement (ETCA) in 2015. However, both attempts were derailed by public protests at the time. As a result, even after 25 years, Sri Lanka remains tethered to an outdated FTA.
India, on the other hand, did not wait for Sri Lanka to catch up. Since initiating its FTA with Singapore in 2005, India has made significant strides, integrating with 17 more countries across the Asia-Pacific region.
India signed FTAs in 2010 and 2011 with the Association of Southeast Asian Nations (ASEAN), encompassing its 10 member states. Additionally, it has established bilateral FTAs with countries such as Chile, Australia, Japan, Mauritius, Singapore, the UAE, and South Korea. Unlike Sri Lanka’s FTA with India, these agreements—apart from the one with Chile (2007)—comprehensively cover trade in both goods and services.
Moreover, India has several pivotal FTAs with regional blocs under negotiation, as notified to the WTO. These include agreements with the European Union (27 European countries), the European Free Trade Association (EFTA, comprising four Northern European countries), and the Southern African Customs Union (SACU, consisting of five Southern African countries).
Export performance
India’s merchandise exports have undergone significant diversification and growth, soaring tenfold from US$42 billion in 2000 to $432 billion in 2023. This remarkable performance has been driven by India’s policy reforms and strategically crafted FTAs with nations across Asia, Europe, and Africa over the past two and a half decades.
During the same period, Sri Lanka’s exports grew more modestly, increasing only 2.4 times, from $5 billion to $12 billion by 2023. And Sri Lanka kept missing the opportunities it had to integrate with the global economy through both unilateral reforms and FTAs.
Despite attempts by the Sri Lankan government to expand the scope of the India-Sri Lanka FTA through initiatives like the Comprehensive Economic Partnership Agreement (CEPA) and the Economic and Technical Cooperation Agreement (ETCA), both efforts were ultimately abandoned. Similarly, Sri Lanka’s FTA with Pakistan, effective since 2005, was also proposed to evolve into a Pakistan-Sri Lanka CEPA in 2008, but the idea faded away.
Not walking the talk
In 2014, a China-Sri Lanka FTA was proposed, but negotiations stalled shortly afterward. During the same period, discussions surrounding a South Korea-Sri Lanka FTA also failed to progress.
Sri Lanka did achieve a milestone by signing a comprehensive bilateral FTA with Singapore in 2018. This agreement covered trade in goods, services, investments, economic and technical cooperation, and government procurement. However, it remains unimplemented to date. Similarly, an FTA with Thailand was signed in early 2024 but has yet to reach the implementation stage.
On another front, Sri Lanka began preparations in 2023 to join the Regional Comprehensive Economic Partnership (RCEP) group. This includes the 10 ASEAN member states and five of their FTA partners. Apart from that, Sri Lanka missed opportunities to engage with the EU and the UK through FTAs, which were never even brought to the discussion table.
20-year gap
The irony lies in the fact that Sri Lanka’s attempts to enter FTAs over the past 20 years have failed to reach the implementation stage. Only now when crises deepen has Sri Lanka realised the gravity of neglecting the opportunities it once had to expand and diversify its export base.
Throughout this period, we have watched neighbouring countries, including India, achieve rapid growth and exponentially increase their exports. Yet, until recently, Sri Lanka remained reluctant to acknowledge the significant role FTAs play in fostering economic growth and boosting exports. In light of the US reciprocal tariffs, the urgency for Sri Lanka to integrate more deeply with the rest of the global economy is now unmistakable.
(The writer is Emeritus Professor at the University of Colombo and Executive Director of the Centre for Poverty Analysis (CEPA) and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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