Sri Lanka has appointed a committee to review existing Free Trade Agreements (FTAs) and look into new ones.
According to President Anura Kumara Dissanayake, discussions have commenced with several countries and regions to expand FTAs.
Speaking to The Sunday Morning Business, Advocata Institute Chief Executive Officer (CEO) Dhananath Fernando noted that several FTAs were currently being discussed. He stated that Sri Lanka had ongoing conversations regarding FTAs with China and India, in addition to the recently signed agreement with Thailand, which he noted had yet to be fully enacted or operationalised.
With FTAs requiring significant pre-work, as both countries must negotiate tariff lines and other detailed commitments, Fernando stated that one possible approach would be unilateral trade negotiations, with the possibility to reduce tariff rates unilaterally, which he described as administratively easier in some cases.
While it would be ideal to negotiate FTAs with countries such as the US or the UK, those options are not feasible for Sri Lanka in the current geopolitical environment.
Thus, he said Sri Lanka must look towards India and the Association of Southeast Asian Nations (ASEAN) region, with agreements with countries such as Vietnam or South Korea being highly beneficial if negotiations were possible.
“However, it is important to remember that these are lengthy and detailed processes, and most countries undertake extensive assessments before deciding to sign such agreements. Hence, if Sri Lanka seeks fast reforms or rapid outcomes, ideally, unilateral reduction of certain regulations or tariffs may be the more practical path,” he added.
Addressing what Sri Lanka should ideally offer or how the country could create the right conditions to approach an FTA, Fernando noted that countries generally assessed potential gains, particularly whether an agreement could help reduce factor costs in domestic industries.
Lowering the cost of inputs, such as those used in construction or manufacturing, can reduce production costs for existing firms, making them more competitive and enabling them to export more.
Fernando added that another consideration was whether exporters currently faced market barriers due to tariffs in destination countries, and whether an FTA could reduce these barriers to make Sri Lankan products more competitive.
According to him, this forms the general framework through which FTAs are evaluated, reducing input costs locally, reducing costs in export markets, and improving competitiveness. He emphasised that regional trade was often more practical than distant markets such as the US or European Union (EU) due to logistics and proximity, which naturally shaped trade patterns.
Combating natural competition
Sri Lanka currently has several FTAs and trade agreements. The FTAs include the Indo-Sri Lanka FTA (ISFTA), Pakistan-Sri Lanka FTA (PSFTA), Singapore-Sri Lanka FTA (SSLFTA), and the most recent Sri Lanka-Thailand FTA (SLTFTA).
Trade agreements between Sri Lanka with India and Pakistan address trade in goods. They grant duty-free or preferential duty status to manufactured and agricultural items, provided these goods meet a 35% domestic value addition requirement.
The SSLFTA, signed in May 2018, is a comprehensive agreement encompassing trade in goods and services, as well as trade facilitation, procurement, telecommunications, e-commerce, and dispute resolution.
Other trade agreements include the SAARC Preferential Trading Arrangement (SAPTA), the South Asian Free Trade Area (SAFTA), the Asia-Pacific Trade Agreement (APTA), the Global System of Trade Preference (GSTP), and the new UK Generalised Scheme of Preferences (GSP) scheme – Developing Countries Trading Scheme (DCTS).
Speaking to The Sunday Morning Business, Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe noted that, over the past 10-15 years, the general direction of Sri Lanka’s trade policy discussions had been towards Southeast Asia and East Asia, including agreements with countries such as Singapore and Thailand, as well as conversations about China.
He added that alongside this, there had been a long-standing question about Sri Lanka’s ability to develop a closer trade relationship with ASEAN.
Damsinghe noted that beyond identifying specific countries for government-to-government agreements, the key issue was whether Sri Lanka was meaningfully integrated into supply chains that would allow such agreements to be commercially useful.
He stated that within South Asia, although there were discussions around updating the ISFTA and revisiting certain aspects of it, the broader issue was that South Asian countries tended to produce similar goods. This has resulted in natural competition within the region, creating both internal opposition to FTAs and limited support for deeper integration, except from smaller economies attempting to promote such agreements.
Damsinghe observed that similar questions arose with respect to Southeast and East Asia. He said that Sri Lanka must examine the actual business case for such agreements, particularly whether the country could integrate into supply chains dominated by East Asia, where competitive advantages were shaped by low-cost labour and geographical proximity to major manufacturing hubs.
Sri Lanka has long grappled with how to position itself within a pro-free trade framework, and while the direction of policy discussions may point towards greater engagement, the practical capacity to benefit is still uncertain.
“The focus should go beyond pursuing specific countries for agreements and rather on whichever FTAs the country is able to conclude successfully,” Damsinghe added.
An Asia-first approach
Meanwhile, speaking to The Sunday Morning Business, Verité Research Lead Economist Mathisha Arangala noted that Sri Lanka must prioritise securing access to Asian markets, especially with Western markets such as the US remaining unpredictable. While Sri Lanka currently benefits from EU trade preferences, he added that those concessions may not be guaranteed in the coming years.
Arangala explained that this made access to Asian markets essential, particularly India and Southeast and East Asia, including China, Japan, and South Korea, which he identified as key growth regions.
“One priority area is a comprehensive FTA with India. Sri Lanka already has an FTA with India, but it is not comprehensive. This has been stalling for a while due to disagreements on certain conditions.”
According to him, even with an FTA, Sri Lanka’s past experience shows that India maintains non-tariff barriers, along with product testing for categories such as processed foods, which has constrained Sri Lanka’s ability to export. He said that resolving these non-tariff issues was necessary before signing a new agreement with India or expanding on it.
Arangala also highlighted the importance of pursuing deeper integration with Southeast Asia, noting that Sri Lanka had been attempting to join the Regional Comprehensive Economic Partnership (RCEP). The RCEP is an FTA between 10 ASEAN member states and its five partners: Australia, China, Japan, New Zealand, and South Korea.
However, because the agreement is already in force, Arangala noted that Sri Lanka would have less leverage in negotiations.
Furthermore, he stressed that meaningful benefits from any FTA depended on Sri Lanka’s ability to cater to what these markets demanded. Sri Lanka’s current exports largely cater to Western demand, such as tea and apparel, which most Asian countries already produce domestically. Instead, he noted that these countries largely demanded products connected to supply chains such as motor vehicle parts, electronics, and other components.
Arangala noted that Sri Lanka already had access to many products. For instance, although Sri Lanka had zero-duty access to many Thai product lines even before the agreement, the country could not take advantage of this because it did not produce the goods for which Thailand has strong demand.
He stated that Sri Lanka therefore must diversify its product base to benefit from FTAs with Asian markets. However, he added that diversification itself depended on attracting investment into new products, since investors also expected access to these markets before committing.
Arangala further pointed out that global trade agreements were shifting beyond tariffs and non-tariff measures to include areas such as services, investment facilitation, supply chain resilience, sustainability, and technology transfer. He said that countries increasingly factored in geopolitical alignment, reliability, and security when determining supply chain linkages.
“Many modern agreements also include provisions on traceability, data sharing, secure supply chains for critical goods, and other sustainability-related and green requirements,” he noted, adding: “India has been signing such new-generation agreements with countries like Australia and the US. Sri Lanka must get into these areas.”
Further, addressing what Sri Lanka should prioritise in the coming years to make effective use of FTAs, Arangala emphasised the need to expand beyond goods and focus on services, particularly sectors like tourism, transport, and logistics. He noted that despite recent discussions on improving logistics infrastructure, Sri Lanka lacked a clear logistics policy outlining sectoral plans, investor incentives, and regulatory processes.
He added that attracting investment into new industries, such as electronics or semiconductor-related manufacturing, would require Sri Lanka to offer more than tax incentives. He pointed out that larger markets like India already had land, labour, and scale advantages, making it necessary for Sri Lanka to differentiate itself through efficiency and a conducive operating environment.
Arangala noted that smaller countries could compensate for limited land and labour through automation, efficient processes, strong education systems, and high-quality workforces. He described these as essential hygiene factors, noting that Sri Lanka sometimes fell behind even larger countries on many of them.
“Sri Lanka’s digitisation and single-window initiatives must progress faster. Moreover, the country should adopt a coherent national branding to position it to investors. Sri Lanka could brand itself around connectivity due to its location, or around compliance and sustainability,” he added.
Arangala further stressed that in order to attract investment and benefit from trade agreements, Sri Lanka must strengthen basic efficiency factors, establish a coherent branding strategy, improve logistics and services, and diversify its product base. He stated that these were essential if the country was to leverage FTAs and integrate into future supply chains.
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