Impact of Relaxing Trade Barriers between Sri Lanka and India: A Computable General Equilibrium Analysis

Sri Lanka and India entered into the Indo-Sri Lanka Free Trade Agreement (ISFTA), marking their inaugural bilateral free trade agreement in 1998. Despite fostering an improvement in bilateral trade, the advancement has been muted owing to insular policies upheld by both nations. The inclusion of a negative list and import quota has positioned ISFTA more like a preferential trade agreement than a comprehensive free trade agreement. Amid the backdrop of fortified trade relations between the two nations, there arises a necessity to reevaluate the potential repercussions of easing trade constraints. In this context, an evaluation is undertaken to assess the influence of diverse policy reforms on the macroeconomic and trade landscapes of both countries, employing the global trade analysis project (GTAP) general equilibrium modeling framework. The study also extends to the implications for welfare and industry output. The findings of this study indicate that relative to the prevailing scenario, liberalisation serves to amplify both imports and exports, thereby engendering positive effects on the real GDP. This effect is discernibly more pronounced for SriLanka. Additionally, the research reveals that a mutually beneficial augmentation of welfare could be achieved by both nations through the liberalisation of their agricultural and food markets. However, it is suggested that Sri Lanka could potentially encounter welfare losses in the event of liberalising the manufacturing sector. Conversely, India experiences with the most substantial welfare gains upon the liberalisation of its manufacturing sector. It is advocated that due consideration be given to the liberalisation of the agricultural and food sector, facilitating the mutual gains from the free trade agreement.