Trade policy

The Government has appointed a committee of experts to formulate a national trade policy for Sri Lanka. This follows severely contentious situations that emerged when the former Government attempted to negotiate multiple trade agreements with India and China, even managing to sign one with Singapore. 

The present Government’s stance on trade has been an indistinct one, with more preference placed on import substitution. However, the country’s debt and other dynamics demand a stronger export push, which needs the right framework. Policymakers have to keep in mind that exports are part of trade, and it is difficult to boost exports if Sri Lanka is not tied into global value chains and does not champion market reforms.  A breakthrough in Sri Lanka’s export strategy would serve as a springboard for the country to become a high-income economy. Sri Lanka’s merchandise export strategy needs to be revolutionised by diversifying to the export of medium to high technology products such as machinery and equipment, electronics, vehicles and pharmaceuticals, and value-added mineral products from the traditional low technology products, such as garments and tea. 

Vietnam, a well-known achiever in Asia, diversified its exports from agriculture and natural resources based products to apparel in the early 1990s and then to electronics in the late 2000s, and thus stands amongst the leading exporters in the global production network today. Sri Lanka should also look beyond its traditional export markets. Exports to the West have accounted for over half of its total exports, supported by preferential access to some extent. While GSP and GSP+ programs have supported Sri Lanka in boosting its exports in the past, such benefits are short-lived and will not be available for an upper-middle-income economy.

Therefore, Sri Lanka should gradually shift its focus towards exporting to emerging Asia and other non-traditional markets. 

In addition to the diversification of merchandise exports, Sri Lanka needs to focus on further improving services exports. In addition to the already earmarked services sectors, such as tourism and IT-BPO, measures should also be taken to improve exports of other important services such as logistics and financial services. The Colombo Commercial and Financial Hub, once ready for operation, would enable Sri Lanka to earn additional foreign exchange through the export of these services.

Sri Lanka needs to form strategic economic partnerships with other nations, particularly the regional countries, to promote its exports and maximise benefits from the movement of capital and human resources. Sri Lanka could yet again learn from the experience of Vietnam, which rose to become a leading emerging Asian economy driven by export growth.  Since 1995, Vietnam actively signed multiple free trade agreements (FTAs), which resulted in the lowering of tariffs on Vietnamese exports, thereby paving way for the expansion of its exports sector as well as its economy. While taking measures to reap the most from the existing FTAs, measures should be taken to establish new trade pacts with other trading giants while preserving the country’s sovereignty and independence.  Such trade agreements would assist domestic exporters to integrate into global value chains (GVCs), thereby improving access to markets, while also promoting competition, improving efficiency and supporting innovation. More crucially, Sri Lanka should also increasingly focus on attracting non-debt creating financial flows to support reaching a higher growth trajectory through increased domestic production. 

Although inflows of FDIs to Sri Lanka have gradually risen over the past decade, it remains well below the levels experienced by its regional peers. For instance, Vietnam, with the implementation of investor-friendly policies and reforms over the years, has been successful in attracting substantially high FDI to productive and tradable sectors. These are the multiple efforts that also need to be made by Sri Lanka, and it is hoped that the Government moves towards these goals in tandem with a progressive trade policy.