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Ajitha Tennakoon*

Paper prepared for the Second Annual Conference of the European Trade Study Group September 15-17, 2000, Glasgow, Scotland.†

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The purpose of this paper is to present a quantitative assessment of major unilateral and regionaltrade liberalization in Sri Lanka. The impacts of South Asian Free Trade Agreement (SAFTA),the Indo-Lanka Free Trade Agreement (ILFTA) and unilateral liberalization reforms on SriLanka’s economy, and its various sectors are assessed and analyzed. The GTAP (Global TradeAnalysis Project) model is used to analyze the welfare effects of trade liberalization in a multi-country, multi-sector, general equilibrium framework. The results suggest that the SAFTAgenerates significant gains to Sri Lanka, largely due to the benefits of preferential access to theregional market with more than 20% of world population. In this respect, regional free tradeagreements are far more preferable to unilateral liberalization. Our results have shown that if SriLanka could reduce its tariffs to 15 percent unilaterally while having free trade with SAFTAcountries, it would benefit even more. On the other hand, Sri Lanka suffers from a small welfareloss from ILFTA related liberalization. The results also imply that India benefits most from beinga member of SAFTA whereas there are adverse welfare effects for some other membereconomies.

Keywords: Trade Liberalization; Free Trade Agreements; GTAP, SAARC, SAFTA and ILFTA.

JEL classification: F13, F15, and F17.

*Address Correspondence to:

Ajitha Tennakoon

Department of Economics

The University of Auckland

Private Bag 92019

Auckland, New Zealand.

E-mail: a.tennakoon@auckland.ac.nz; Phone: (64-9) 3737599 Ex. 7670; Fax: (64-9) 3737427

† The author acknowledge the University of Auckland Graduate Research Fund and the Auckland Business

School Post-Graduate Research Grant for making available the conference grant.

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Sri Lanka embarked on comprehensive economic policy reforms in 1977, becoming the firstcountry in South Asia to emulate the export-driven growth strategies of the East Asian newlyindustrialized economies. Trade policy reforms were one of the key areas of this reform package.Trade reforms entailed the relaxation of controls on trade as well as the replacement ofquantitative restrictions including import quotas and import licensing by a revised system oftariffs. The prime objective of these policy changes was to pave the way for a greater outward-orientation and export led growth. Despite major macroeconomic problems, political disturbancesand ethnic conflicts, these policy reforms have been sustained and expanded over the past twodecades. Consequently, Sri Lanka today has become one of the most outward-orientedeconomies in the developing world.

An important element in Sri Lanka’s trade policy is a promotion of trade and economic co-operation in the region. Apart from various unilateral economic reforms undertaken since 1977,Sri Lanka took several major steps to reduce tariffs on a bilateral and regional basis with the aimof increasing the degree of integration into the world economy. As a member of the South AsianAssociation for Regional Co-operation (SAARC), and member of the Indo-Lanka Free TradeAgreement (ILFTA), Sri Lanka is committed to taking part in major bilateral and regional tradeliberalization over the next two decades. SAARC was established in 1985 as a regional groupingof seven South Asian countries - Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan andSri Lanka. As agreed upon by the members of the SAARC, the South Asian Preferential TradingAgreement (SAPTA) came into force with effect from December 1995, with the aim ofpromoting both economic cooperation and trade in the region through the removal of tariffs andnon-tariff barriers (Department of Commerce, 1995). The member countries of SAARC are alsonegotiating to establishing the South Asian Free Trade Area (SAFTA) not later than 2005. It isexpected that free trade in the SAARC market of over 1200 million people (one fifth of globalpopulation) should promote and expand trade and investment opportunities enormously formember countries.

Sri Lanka signed a bilateral free trade agreement with India in 1998 realizing the need to establishand promote free trade arrangements for strengthening intra-regional economic cooperation andthe development of national economies. As a close geographic neighbor and a close economicneighbor, India has been among Sri Lanka’s most important import supplier during the lastseveral years, reaching the top in the last three years. The close proximity and low border tariffsfacilitate trade and investment between the two countries, as well as investment by any thirdcountry in Sri Lanka aiming for the Indian market (Central Bank of Sri Lanka, 1998).

Although there are several studies discussing the likely effect of South Asian regional tradingarrangements (Panagariya, 1998, Srinivasan, 1998; Rajapakse and Arunatilake, 1997; Govindan1996; Srinivasan, and Cañonero, 1995) the impact of the SAFTA and ILFTA is not wellestablished. The purpose of this paper is to provide a computational analysis of the impact ofthese trading arrangements, along with unilateral trade liberalization efforts, on the economicwelfare, trade, and the intersectoral allocation of resources of SAARC members with specialreference to Sri Lanka. The applied general equilibrium model from the Global Trade AnalysisProject (GTAP) is used to run the simulations to quantify the impact of trade liberalization.

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This paper is organized as follows. Section 2 describes Sri Lanka’s pattern of trade and tariffschanges. Section 3 presents an overview of the GTAP model. Section 4 provides tradeliberalization scenarios that have been simulated using GTAP. Simulation results of theunilateral, bilateral regional are presented and discussed in Section 5. Section 6 concludes.

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At the time of independence, Sri Lanka was a prime example of an economy heavily dependenton a limited range of agricultural export commodities (Athukorala and Jayasuriya, 1994).Traditionally, Sri Lanka’s merchandise exports were dominated by three major exports, tea,rubber and coconut, which accounted for over 90 percent of total exports. Consequent to theeconomic reforms introduced in 1977 onwards, Sri Lanka economy has undergone majorstructural changes as can be seen in Table. 1. The GNP share of the primary sector (agriculture,forestry, and fishing) declined from 30 percent in 1978 to 26 percent in 1988 and further to 21percent in 1998, showing reduced dependence on agriculture for the growth of the economy. Thecomposition of exports also shifted from agriculture towards manufacturing, with the share ofagriculture in total exports declining from 79 percent in 1978 to 42 percent in 1988 and further to23 percent in 1998. The share of manufacturing sector, which was 14 percent in1978, expandedrapidly thereafter to 48 percent in 1988 and further expands to 75 percent in 1998 (Table. 2).Industrial exports, dominated by textiles and garments, have become far more important over thelast two decades in the composition of Sri Lanka’s exports. In 1998, textiles and garmentsaccounting for 52 percent of total industrial exports. Apart from textiles and garments,machinery, mechanical and electrical appliances, leather products and foot wear, rubberproducts, diamond and jewellery and petroleum products are the main categories of Sri Lanka’sexports.

As in the case of the export structure, the import structure also has changed drastically over thelast two decades shifting from the import of consumer goods to more growth orientedintermediate and investment goods. The share of investment and intermediate goods imports as apercentage of total imports had risen from 56 percent in 1977 to 75 percent in 1997 (Central Bankof Sri Lanka, 1997). Thus, Sri Lanka’s trade pattern indicates a change from being an exporter ofprimary products to an exporter of labor intensive industrial goods and from being an importer ofconsumer goods to an importer of machinery and other equipment as well as raw materials. SriLanka’s import items also diversified and include of textiles and clothing, petroleum, chemicals,machinery and equipment, transport equipment, food and drinks and other consumer goods.

Due to trade liberalization and outward oriented policies, Sri Lanka’s dependence on externaltrade has been increasing rapidly in recent years. By 1998, Sri Lanka’s ‘openness ratio’ hasincreased to 68 percent of GDP from the level of 58 percent of GDP in 1990. Despite theincreased in openness, Sri Lanka is still a minor participant in the global trade, with total exportsand imports amounting to only 0.08 percent and 0.1 percent of world exports and imports,respectively, in 1994. Moreover, South Asia as a whole with one-fifth of the global population isrelatively insignificant in world trade. Also trade among SAARC countries is very significant as aproportion to their total trade. While trade among SAPTA member countries accounts for as littleas 3 percent of their total trade, the South Asia region accounts for only 1 percent of world trade.

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As in the recent past, industrial countries continued to be the major buyers of Sri Lanka exports,while developing countries continued to be the major buyers of Sri Lanka’s imports. As can beseen from Table. 3, from 1990 to 1998, the NAFTA countries, mainly the USA, continued to bethe largest single buyer of Sri Lanka’s exports, accounting for 29 percent to 42 percent of totalexports during the period largely due to increased garment exports. The EU (mainly the U.K. andGermany), the second largest buyer, accounted for around 28 percent during that period. As aresult, the industrialized countries, taken together as a group, accounted for 63 percent of SriLanka’s total exports in 1990 and increased this share to 74 percent in 1998. However, the marketshare of Middle East countries has decreased from 18 percent in 1990 to 9 percent in 1998 (Table.3).

As shown in Table. 4, unlike in the case of exports, East and South East Asian countries appear asthe largest source for Sri Lanka’s imports during the period of 1990 to 1998. The market share ofRest of Asia and ASEAN countries as a group had risen from 33 percent in 1990 to 40 percent in1998 as percentage of Sri Lanka’s total imports. Along with Rest of Asian countries and ASEANcountries, the Middle East and SAARC countries maintain the market share of developingcountries at 63 percent for Sri Lanka’s imports during the year 1998. Japan (10%) regained itsposition as the largest single supplier of imports to Sri Lanka, displacing India (9%) during 1998,which had been the largest supplier since 1996. As a group, industrialized countries account for37 percent of Sri Lanka’s total imports in 1998.

Sri Lanka had a highly biased trade policy regime in favor of import substitution prior to 1977,consistent with the inward-oriented development strategy followed at that time. Both tariff andnon-tariff barriers were extensively used to control imports, for balance of payment reasons, aswell as to protect domestic economic activities and industrial enterprises, which were mostly staterun, against import competition. The tariff structure had rates ranging from 10 per cent to 500 percent and more than 19 major tariff bands (Central Bank of Sri Lanka, 1995, P.108). The exportsectors continued to be taxed to finance subsidies to consumers and to keep loss-making publicenterprises afloat (Lal and Rajapatirana, 1989). These restrictive trade policies had severe adverseimplications on overall economic growth and social welfare

Sri Lanka’s tariff reforms, in general, have focussed on rationalization and simplification of thetariff structure, lowering of high tariff rates, removal of quantitative restrictions and reduction ofexemptions. These reforms have been accompanied by other de-regulatory measures, namely,liberalization of exchange controls and elimination of state monopolies on economic activities.Through a gradual process, the number of tariff rate bands has been reduced from 19- a highlydispersed structure to 13 major tariff rates by 1990. In 1991, the tariff structure was furtherrationalized with the implementation of a four-band system consisting of 10, 20, 35 and 50 percent tariff rates. This system covered approximately 97 per cent of the tariff lines. In April 1993,distortions in the tariff system were reduced further by converting some specific tariffs to advalorem rates of 100 per cent. The maximum rate was reduced to 50 per cent in November 1993.

These tariff policy reforms continued to focus on stimulating export led growth by implementingmeasures conducive to enhancing the competitiveness of exports within the framework of asimple and transparent tariff structure. Accordingly, with the medium-term objective of movingtowards a lower uniform single tariff, a three-band rate structure of 10, 20 and 35 percent was putin place in February 1995 by reducing the maximum rate. The revised tariff structure has reducedeffective protection for domestic industries, thereby motivating them to be more efficient and tobe more competitive in international market (Central Bank of Sri Lanka, 1995, p.109).

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Following the recommendations made by the Presidential Trade and Tariff Commission in July1998, the three-band tariff system of 10, 20 and 35 percent rates for imports, which had beeneffective since February 1995, was replaced with a three band system of 5, 10, and 30 percentwith effect from 6 November 1998. Sri Lankan government envisages introducing a uniformexternal tariff of 15 per cent in the medium term. Sri Lanka does not maintain any non-tariffbarriers for economic reasons except a few maintained for national security and health reasons.Thus, the past trade policy liberalization initiatives have reinforced the role of tariffs as thecentral instrument regulating Sri Lanka’s merchandise trade. In turn, the tariff regime has becomeless distortive during subsequent rounds of reform (WTO, 1995, p.35).

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In this paper, we use the Global Trade Analysis Project (GTAP) a multi-country applied generalequilibrium model1 (Hertel, 1997) to empirically assess the impact of trade liberalization on SriLanka. The GTAP was developed by a consortium of international and national agencies co-ordinated through the Center for Global Trade Analysis, at Purdue University2. It is an attempt toprovide a computable general equilibrium model and to make the model, its software anddatabase available for applied general equilibrium analysis of global issues. Since this studyfocuses on global trading relations and detailed sectoral and regional trading activities of the SriLanka economy, many of the simulations we need to consider require a global perspective. Sincechanges in trade policies and production levels in any of the regions and sectors will have impactson other regions and sectors, even though our focus of this study is on results for Sri Lanka, it ispossible to incorporate the policy changes of other countries within a global CGE modelingframework. The GTAP facilitates for such multi-country, economy-wide analysis.

The most important feature of the GTAP is its global data base which is publicly available. Itcontains detailed bilateral trade, transport and protection data characterizing economic linkagesamong regions, linked together with individual country input-output data bases which account forintersectoral linkages within regions. The main source for this model is “The GTAP-4 Database”(McDougall et. al., 1998), which refers to 1995. Therefore, all of the analysis in this study wastaken from this base year. Version 4 of GTAP covers the 50 sectors within each of 45 regions3

(31 countries and 14 composite regions). The model is implemented using the GEMPACK(General Equilibrium Modeling package) software suite, developed at the IMPACT Project,Monash University. The GTAP software is designed to permit applications to be readilyreplicated by others. These features are designed to enhance the credibility and comparability ofglobal trade analyses. The GTAP system of equations is based on microeconomic foundationsproviding a detailed specification of household and firm behavior within individual regions andtrade linkages between regions. In addition to trade flows the GTAP model also recognizesglobal transportation and the mobility of investible funds. Perfect competition and constantreturns to scale are assumed for all sectors of each economy in the version used for this study.

1 The standard GTAP model is documented in Hertel (1997). The GEMPACK programme, from which the GTAP model is run is documented in Harrison and Pearson (1996).2 See the GTAP web site (www.agecon.purdue.edu/gtap for a detailed account of the project and its research network, modelling structure and apparatus, and database.3 Version 3 of the data had 30 regions and Version 2 comprised 24 regions. Both Version 2 and 3 data setswere based on 1992.

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Unlike most CGE models, GTAP utilizes a sophisticated representation of consumer demandswhich allows for differences in the income responsiveness of demand in different regionsdepending upon both the level of development of the region and the particular consumptionpatterns observed in that region. The single representative consumer purchases domestic andforeign goods and maximizes utility, given income and prices. For consumption demand a linearexpenditure system (LES) allows for cross-price effects in demand. Substitution possibilitiesbetween domestically and foreign produced goods of the same category are represented by nestedCES (constant-elasticity of substitution) functions. This concept of regional income is well suitedto computing equivalent variation (EV) as a measure of regional welfare, which arises due todifferent policy scenarios. As in the case with many of the CGE models, EV is an unambiguousindicator of welfare offered by the regional utility function in the GTAP model. In this studymajor focus is on welfare effects induced by the trade policy, reported as equivalent variation byregion in millions of 1995 US dollars.

In GTAP producers maximize profits subject to constant-returns-to-scale (CRTS) technology andevery sector produces a single output. Perfect competition is assumed. It is also assumed thetechnology is separable, such that individual intermediate inputs enter in fixed proportions toproduced output. Profit maximizing firms therefore choose their optimal mix of primary factorsindependently of the prices of intermediate inputs. Constant elasticity of substitution (CES)functions describe substitution possibilities between primary factors and market clearingconditions equate supply with demand each factor of production. For intermediate inputs, theassumption of a Leontief function implies no substitution between different intermediates orbetween them and a composite primary factor. The GTAP model employs the Armingtonassumption in the trading sector which provides the possibility to distinguish imports by theirorigin and explained intra-industry trade of similar products. Thus imported commodities areassumed to be separable from domestically produced goods. Imported intermediates are alsoassumed to be separable from domestically produced intermediate inputs.

We have aggregated 45 GTAP regions and 50 GTAP production sectors up to a level whichhighlights sectors and countries of interest for this study. Thus, the base model separatelyidentifies 10 aggregated regions and 10 aggregated sectors (in each region) listed in Table. 5 and6. The 10 regions constitute Japan, India, Sri Lanka, Rest of South Asia, NAFTA, EU, ASEAN,Rest of Asia, Middle East and Rest of the World. The country aggregation is chosen to reflect SriLanka’s major markets and major competitors. We keep India and Japan as separate countriesbecause of the growing importance of these countries as sources of imports to Sri Lanka. Sinceversion 4 of the GTAP database does not identify all the SAPTA member countries individually,all other SAARC members are included as Rest of South Asia. Since Sri Lanka’s trade amongEast and South East Asian countries are important, we divided Asian countries into two sectors asASEAN (Indonesia, Malaysia, Philippines, Singapore, and Thailand) and Rest of Asia (HongKong, Korea, Taiwan, and China). Because of the 10 region limitation, the remaining regions arealso aggregates. We aggregate all the member counties of European Union (United Kingdom,Germany, Denmark, Sweden, Finland and the Rest of European Union) together as one singleregion. NAFTA (the United States, Canada and Mexico) also treated as one single region. Wealso aggregate all the counties in Middle East as Middle East. All other countries are in the Restof the World (ROW) category.

The ten commodity categories in this model are intended to represent the commodities that are ofmajor interest to the Sri Lanka economy. Agriculture, Forestry and Fishing, Mining andQuarrying, Processed Food, Textiles, Wearing Apparels and Leather products, Petroleum, Coal

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products, Machinery and Equipment, Transport Equipment, Other Heavy Manufactures andServices (see the Table 4 for commodity details in each of the above categories).

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As mentioned before, Sri Lanka’s trade policy possibilities include unilateral trade liberalization,bilateral trade liberalization, and regional trade liberalization. As a member of the SAARC and amember of the ILFTA, Sri Lanka is committed to taking part in major regional trade liberalizationover the next two decades. Therefore, we focus on Sri Lanka’s principal trade policy options: (1)unilateral trade liberalization, (2) bilateral trade liberalization and (3) regional trade liberalization.Thus, the series of scenarios we simulated using the standard version of the GTAP model are asfollows:

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Experiment 1: Sri Lanka reduces its external tariffs to a 15 percent uniform rate unilaterally on aglobal basis; the rest of the world does not reciprocate.

Experiment 2: Sri Lanka reduces its external tariffs to zero unilaterally on a global basis; the restof the world does not reciprocate.

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Experiment 3: SAARC Free Trade Arrangement (SAFTA). This experiment involves thecomplete removal of import tariffs within the seven SAARC regions but maintained between therest of the world and SAPTA. We assume that each of the SAPTA countries represented in themodel reduce their tariffs on Sri Lanka’s imports to zero and that Sri Lanka reduces its tariffs onimports from them to zero as well. None of the members of SAPTA are assumed to impose anyexport taxes or subsidies on each other either in this scenario.

Experiment 4: Free Trade Agreement with SAARC and 15% Uniform External Tariffs. Thisexperiment involves the complete removal of import tariffs among SAARC countries but SriLanka maintained 15 per cent uniform external tariffs for non-member countries.

Experiment 5: Indo-Lanka Free Trade Agreement (ILFTA). Under this experiment we assumeall import tariffs between Sri Lanka and India are removed while those against the rest of theworld remain in place.

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Trade liberalization may bring competitive pressure on the formerly protected firms and inducethem to raise production and productivity. Thus, gains in economic welfare are expected to comefrom improved allocation of resources, lower prices to consumers and business firms. In thissection, the results of the trade liberalization policy simulations are presented and analysed.Table:7 presents the aggregate welfare effects of unilateral and regional/bilateral trade policyreforms on the Sri Lanka’s economy. As noted above, the specific measure of welfare used inthis paper is equivalent variation as expressed in millions of 1995 US dollars.

We start our experiment with unilateral trade liberalization scenarios. As can be seen from theTable. 7, in this first scenario, if Sri Lanka reduces its tariffs to 15 percent unilaterally, Sri Lankaexperiences a welfare gain as measured by equivalent variation (EV) over $201 US million or1.53 percent of GDP. As is to be expected while Sri Lanka’s volume of imports rises by 3.32 percent its volume of exports falls slightly by –0.30 per cent. Although Sri Lanka’s volume ofexports falls slightly, as a result of composite exports prices increasing by 1.09 per cent, itexperiences a small improvement in terms of trade by 1.50 per cent and real GDP by 0.84 percent (Table. 8).

Table. 9 presents the percentage changes in Sri Lanka’s output, domestic sales and export salesunder the various trade policy scenarios. As shown in Table. 9 (coloum-1), 15% uniform tariffwould adversely effect some sectors of the Sri Lanka’s domestic output, domestic sales andexport sales because of the increased competition for import competing industries. The largestdecline occurs to industry output of transport equipment (18 percent), machinery and equipment(16 per cent), textiles (8 per cent) and processed food (8 per cent). Similar patterns can be seen inthe decrease of domestic sales. Sri Lanka’s export sales also decline considerably under thisscenario. The large decrease occurs to Machinery and equipment (22 per cent), transportequipment (19 per cent) and processed food (16 per cent).

On the other hand, wearing apparel and petroleum product industries output increase by 21percent and 2 percent respectively. Similarly, Sri Lanka’s export sales of petroleum productincreases by 25 per cent and wearing apparel by 21 per cent. These commodities are important toSri Lanka’s total exports though these industries generate a low level of value added as theseindustries are based on imported raw materials.

In the second scenario, if Sri Lanka unilaterally removes all its import tariffs on a global basis, SriLanka experiences a significant welfare gain over $239 US million or 1.82 percent of GDP(Table. 7). At the same time, Sri Lanka also experiences only a slight improvement in the overallterms of trade by 0.4 per cent and real GDP by 1.7 per cent under this simulation. As can beexpected under the zero tariffs scenario, Sri Lanka’s quantity of imports increases by nearly 22percent while quantity of exports also increases by nearly 10 percent causing the recorded highesttrade balance of $772 US million of all the trade balance estimates (Table. 8).

Under the zero tariffs scenario, Sri Lanka’s industry output of most of the sectors declinedconsiderably as a result of import competition. The significant decline can be seen in transportequipment (25 per cent), mining and quarrying (23 per cent), processed food (16 per cent),machinery and equipment (13 per cent) and textiles (13 per cent). The contraction in these sectorsis accompanied by an expansion of the wearing apparel (52 per cent) and petroleum products (4

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per cent). The decline in domestic output is matched by falls in domestic sales and export sales.However, we can see considerable increase in export sales of petroleum products by 98 per centand wearing apparel by 55 per cent (Table. 9).

The third scenario represents the impact of Indo-Lanka Free Trade Agreement (ILFTA.). Underthis simulation, we assume Sri Lanka and India remove their import tariffs against each otherwhile maintaining their tariffs against the rest of the world. As shown in Table-7, Sri Lankaexperiences a small reduction in welfare of $1.73 million or 0.01 percent of GDP under thisexperiment. In contrast, India experiences a welfare gain of over $207 million or 0.06 percent ofGDP. The fact that Sri Lanka losses welfare in this scenario may be explained by its large initialshare of imports from India. In general, a country gains more from a preferential trade agreementif its imports little from the partner country and exports a lot to it (Schiff, 1996).

However, the comparing the results of all the experiments, this experiment reports the lowesttrade balance for Sri Lanka (Table. 8). Since the reduction in India’s tariff will allow Sri Lankato sell its exports at India’s domestic price, it can be expected that this agreement may narrow theSri Lanka’s vast trade deficit with India. As shown in Table. 9, our results also suggest that thisagreement would not effect adversely for Sri Lanka’s domestic output of or domestic sales(except transport equipment by 8 percent). On the other hand, Sri Lanka’s export sales increase inalmost all sectors except mining and quarrying and services. The largest increase occurs in thetransport equipment (32 percent), manufacturing equipment (9 percent) and agriculture (8 percent) sectors.

Experiment 4 represents the formation of SAARC free trade area (SAFTA). The welfare gainsfrom regional trade liberalization are the sum of trade creation benefits (increased trade betweencountries in the region) from free trade, minus the trade diversion losses caused by replacing nonSAFTA imports with now-preferred SAFTA goods; plus the terms of trade gains associated withincreased market access. In addition to that, competitive suppliers will enjoy greater market shareand consumers will have access to cheaper and better quality consumer goods. The region’sresources will be more rationally allocated.

We estimate that the SAFTA will increase Sri Lanka’s welfare by around $US 254 million or1.92 as a percentage of GDP (Table. 7). In this simulation it is shown that by allowing for freetrade, Sri Lanka’s volume of imports would increase substantially by around 8 percent while thevolume of exports only increase slightly by nearly 1 percent. The removing trade barriers amongSAPTA countries would increase the price of composite exports in Sri Lanka by 5 per cent as aresult of improved access to the SAPTA market and price of imports also rises slightly by 0.29per cent. In turns this leads to the terms of trade improvement for Sri Lanka of 3.91 per cent andreal GDP of 0.11 percent Table. 8).

Table. 9 (Column 4) represents the percentage change in regional output, domestic sales andexport sales under SAPTA. The substantial expansion that occurs in Sri Lanka’s domestic output(85 per cent) and export sales (801 per cent) in the transport equipment sector may reflect accessto cheaper imports of raw materials and spare parts within the region. The domestic output ofother heavy manufactures (5 per cent), machinery and equipment (4 per cent) and agriculture(2.per cent) also increases. Sri Lanka’s export sales of agriculture (33 percent), other heavymanufacturing (16 percent), textiles (13 percent), processed food (9 percent) and machinery andequipment (8 percent) also expand. However, not surprisingly, the wearing apparel, Sri Lanka’smain export item shows significant fall in domestic output (by 11percent) and export sales (by 12percent) as the domestic market is opened to more efficient overseas producers.

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However, as the largest supplier to the SAARC region and as a large country, India stands to gainmost from the improved market access that SAFTA promises to deliver. Thus, the largest welfaregains accrue to India by over $ 4445 US million (1.35 per cent of GDP) as shown in Table. 7.Under this simulation India’s import volume and export volume increase by 9.47 and 3.02 percentrespectively. As import barriers fall, imported goods become cheaper pushing down the marketprice for imports by 0.03 per cent and its exports price increase by 3.72 per cent and that leads toIndia’s terms of trade improved by 3.6 percent (see table. 8). India also has the potential for a0.41 per cent rise in real GDP due to the formation of SAFTA.

In contrast, our results also suggest that the SAARC free trade agreement may not be beneficialfor Rest of South Asia (RAS- comprising Bangladesh, Butane, Maldives, Nepal and Pakistan).The effects of the formation of SAFTA on the welfare of these countries will depend onindividual circumstances and should be assessed on a case by case basis. We are unable to assessthe welfare effects of SAFTA on RAS economies individually, since the GTAP considers thesecountries as one composite region.

As can be seen from the Table. 7, the welfare loss for RAS is $1575 US million or 1.72 per centof GDP. The volume of imports in RAS increases by 25 per cent while volume of exportincreases by 32 per cent because of the free access to the highly protected SAARC market (exceptSri Lanka). However, while the price of imports rises by 0.78 per cent, the price of exportsdeclines by 2.11 per cent, which results is a deterioration in the terms of trade by 4 per cent andthe real GDP by 0.57 per cent for RAS (Table. 8).

Under the experiment 5, we assume that Sri Lanka forms a FTA with SAPTA economies whilemaintaining 15% uniform external tariffs for all the other regions. As shown in Table. 7, ourmodel results indicate that a significant increase in welfare for Sri Lanka of around $443 USmillion or 3.35 as a percentage of GDP under this simulation. Indeed it is important to note thatthis simulation represents the highest degree of welfare gain for Sri Lanka of all kind of tradeliberalization options we considered in this study. Thus, there are two trade creation effects fromthis reform: first trade creation that results from Sri Lanka’s own liberalization and second, thatwhich results from SAFTA liberalization. As shown in Table. 8, Sri Lanka’s economy under thissimulation would be expected to gain from higher export prices (5.44 percent increase) andrelatively cheaper import prices (only the 0.29 percent increase). Consequently, we can see asignificant increase in terms of trade by 5.19 percent and real GDP by 0.98 percent.

Table. 9 (column 5) highlights the estimated percentage change in domestic output, domesticsales and export sales under this experiment. Sri Lanka’s domestic output and domestic sales oftransport equipment rise considerably by 53 per cent and 22 per cent respectively. The exportsales of transport equipment rise remarkably by 625 percent as a result of easy access to cheaperraw materials from the world and market access to the SAPTA market. Both exports ofagriculture and petroleum products rise considerably by 23 per cent. Both domestic output anddomestic sales fall in section of textiles, mining and quarrying, processed food and machinery andequipment. Export sales also decline in these sectors except textiles and machinery andequipment.

In contrast, this trade liberalization would cause substantial welfare improvement for India byover $4397 US million or 1.34 per cent of GDP for India (Table. 7). India’s prices of compositeexports rise significantly by 3.68 per cent and its prices of imports decline by 0.03 per cent. This

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leads to a considerable terms of trade improvement of 3.57 per cent for India (Table. 8).However, this trade liberalization would lead to a welfare loss for the Rest of South Asia over $-1592 million or1.74 per cent of GDP (Table.7). Although the volume of exports increasesubstantially by 32 per cent for Rest of South Asia as a result of decrease in prices of compositeexports by 2 per cent this region would experience 4 per cent decline in terms of trade and 0.57per cent decline in real GDP (Table. 8). If Rest of South Asia maintains tariffs on imports fromRest of the World, while removing tariffs on imports from SAFTA there will be some tendencyfor trade diversion from rest of the world to SAARC.

In general, it is important to note that the benefits of preferential trading agreements cannot befully captured by a perfectly competitive static model. The GTAP model assumes constantreturns to scale and perfect competition in all sectors. Changing that to allow for increasingreturns to scale and imperfect competition in some sectors can raise very substantially theestimated impact of trade liberalization (see Dixit, 1988; Smith and Venables, 1988). The GTAPmodel also cannot capture dynamic effects of trade liberalization. In so far as trade liberalizationboosts investment and technology the effects reported here are underestimates of potential gains.Besides the welfare gains suggested by the simulations, preferential liberalization may have manynon-economic benefits, particularly social and political, that are difficult to account for in aquantitative way. Our model results also ignore the long-run effects of preferential tradearrangements. If SAFTA is implemented as planned and SAARC countries continue down thepath of non-discriminatory liberalization, the Rest of South Asian countries should benefit fromfreer regional trade in the long run. For these countries, the benefits of regional integration arelikely to be large, because their initial levels of trade are small, and India and Pakistan are largeenough countries to make a big difference to them.

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This paper shows the effects of trade liberalization by Sri Lanka at a regional and national level.Our estimation results imply that SAFTA generates significant benefits for both Sri Lanka andIndia but adverse welfare effects for other SAARC members or Rest of South Asia (RAS). Thus,SAFTA offers more welfare gains to Sri Lanka than any of the unilateral or bilateral options weconsidered, largely due to the benefits of preferential access to the SAARC market with morethan 20% of world population and from a favorable terms of trade effect. Our results also showthat while Sri Lanka trading with SAARC countries under the SAFTA and maintain 15 percentuniform tariffs on a global basis at the same time, it will gain the highest welfare. The Indo-Lankafree trade agreement leads to a considerable export expansion of some sectors in Sri Lanka,despite a small welfare loss. However, potential improvements in trade with India are quitesubstantial. On the other hand, the welfare gain for Sri Lanka is boosted by its own unilateralreduction of tariffs, despite the negative impact on the competitiveness of domestic industryoutput and exports sales of some sectors of the economy which are competing with imports. Froma comparison of all the trade liberalization scenarios Sri Lanka can reap most of the gains fromreform on a regional basis.

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Athukorala, P. and Jayasuriya, S., (1996), “Trady Policy and Industrial Growth: Sri Lanka”, DiscussionPapers, series A, 96.21, La Trobe University, December

Central Bank of Sri Lanka. (1997), Annual Report, Colombo.

Central Bank of Sri Lanka. (1998), Annual Report, Colombo.

Department of Commerce. (1996), Agreement on SAARC Preferential Trading Arrangement (SAPTA)With Consolidated National Schedules of Concessions, Department of Commerce, Colombo.

Dixit, A. (1988), Optimal Trade and Industrial Policies for the U.S. Automobile Industry. In R. Freenstra(ed.), Empirical Methods for International Trade, Cambridge, Mass, MIT Press, 141-65.

Govindan, K. (1996), “A south Asian Preferential Trading Arrangement: Implications for Regional Tradein Food Commodities”, Journal of Economic Integration, Vol.11, No. 4, 478-491.

Hertel, T.W. (1996), Global Trade Analysis: Modeling and Applications, Cambridge University Press, NewYork and Cambridge.

Lal, D. and Rajapathirane, S. (1989), Impediments to Trade Liberalization in Sri Lanka, Gower for theTrade Policy Research Center, London.

McDougall, R. A., Elbehri, A. and Truong, T. P. (1998), Global Trade, Assistance, and Protection: TheGTAP 4 Data Base, Center for Global Trade Analysis, Purdue University.

Panagariya, A., 1998. Trade Policy in South Asia: Recent Liberalization and Future Agenda, department ofEconomics, University of Maryland, College Park MD, December.

Rajapakse, P. and Arunatilake, N. (1997), “Would a Reduction in Trade Barriers Promote Intra-SAARCTrade?: A Sri Lankan Perspective”, Journal of Asian Economics, Vol. 8, No.1, 95-115.

Schiff, M. (1996), “Small is Beautiful, Preferential Trade agreements and the Impact of Country Size,Market Share, Efficiency and Trade Policy,” Policy Research Working Paper 1668, The World Bank,October.

Smith, A. and Venables, A. (1988), “Completing the Internal market in the European Community: someIndustry Simulations,” European Economics Review, 32, 1501-26.

Srinivasan, T. N., (1998), Developing countries and the Multinational Trading System: From GATT tothe Uruguay Round and the Future, Delhi: Oxford University Press.

Srinivasan, T. N. and Cañonero, G. (1995), “Preferential Trading Arrangements in South Asia: Theory,Empirics and Policy”, a mimeo.

World Trade Organization (WTO) (1995), Sri Lanka Trade Policy Review, Geneva, WTO.

13

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1978 1988 19981 Agriculture, Forestry and Fishing 30.4 26.3 21.3

2 Mining and Quarrying 2.3 2.7 1.8

3 Manufacturing 18.5 15.4 16.5

4 Construction 4.8 7.3 7.1

5 Services 43.9 48.2 53.0 Electricity, Gas, Water and Sanitary Services 0.5 1.2 1.4 Transport, Storage and Communication

10.8 10.8 11.2

Wholesale and Retail Trade 19.9 19.9 22.3 Banking, Insurance and Real Estate 2.4 4.4 7.5 Ownership of Dwellings 3.8 2.6 1.9 Public Administration and Defence 3.8 5.4 4.9 Services, (n.e.s.) 4.3 3.8 3.9

6 Gross Domestic Product 100.0 100.0 100.0

7 Net Factor Income from Abroad -0.6 -2.6 -1.3

8 Gross National Product 99.4 97.4 98.7

(a) At current factor cost pricesSource: Central Bank of Sri Lanka, Annual Report, 1998.

14

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1978 % 1988 % 1998 %1. Agricultural exports 10,416 79 20,104 42 70,225 231.1 Tea 6401 49 12,299 26 50,280 161.2 Rubber 2021 15 3706 8 2,808 11.3 Coconut products 1271 10 1538 3 6,110 21.4Minor Agricultural products 723 5 2561 5 11,027 4

2.Industrial Exports 1849 14 22673 48 229,437 752.1 Textile and Garments 481 4 14260 30 159,303 522.2 Petroleum products 945 7 2265 5 4,662 22.3 Other 423 3 6148 13 65472 21

3. Mineral Exports 928 7 4149 8 3,863 23.1 Gems 531 4 2070 4 3,577 13.2 Other 95 1 543 1 286 04. Unclassified 302 2 1536 3 2,803 15. Total Exports 13193 100 46928 100 306,328 100

Source: Central Bank of Sri Lanka, Annual Reports, Various Issues

15

7DEOH�����'LUHFWLRQ�RI�([SRUWV�IURP�6UL�/DQND Rupees Millions.

Region 1990 1991 1992 1993 1994 1995 1996 1997 1998

ASEAN 3110 4670 2580 4014 6227 7177 6353 7805 7344

(4.23) (5.85) (2.45) (2.97) (4.00) (3.74) (2.87) (2.89) (2.42)

EU 20264 23342 36178 43950 50580 61716 68014 81112 83592

(27.59) (29.23) (34.41) (32.57) (32.53) (32.16) (30.69) (30.05) (27.60)

INDIA 826 522 503 955 1170 1634 2370 2582 2434

(1.12) (0.65) (0.48) (0.72) (0.75) (0.85) (1.07) (0.95) (0.80)

JAPAN 4102 4204 5611 7150 8167 10269 14172 13815 12669

(5.59) (5.27) (5.34) (5.30) (5.25) (5.35) (6.39) (5.12) (4.18)

NAFTA 21619 25291 39279 51291 58361 72733 80739 103109 127948

(29.44) (31.68) (37.36) (38.00) (37.53) (37.90) (36.43) (38.20) (42.24)

SAARC 2016 1989 1972 2501 3124 3590 3617 4402 4900

(2.75) (2.49) (1.88) (1.85) (2.01) (1.87) (1.63) (1.63) (1.62)

REASIA 1477 1673 2610 3285 4305 5483 6516 8039 7555

(2.01) (2.09) (2.48) (2.43) (2.77) (2.86) (2.94) (2.98) (2.49)

MIDEAST 13383 13539 10557 12496 13845 13914 16818 19876 27275

(18.22) (16.95) (10.04) (9.25) (8.90) (7.25) (7.59) (7.36) (9.00)

Row 6641 4615 5845 9309 9714 15404 23019 29207 29157

(9.04) (5.78) (5.56) (6.90) (6.25) (8.03) (10.39) (10.82) (9.63)

Total 73438 79845 105135 134951 155493 191920 221618 269947 302896

Source: Central Bank of Sri Lanka, Annual Reports, Various Issues and authors calculations.Notes: Percentages are given in parentheses.ASEAN: Indonesia, Malaysia, Philippines, Singapore, and Thailand.EU: Austria, Belgium –Luxembourg, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Portugal, Spain, Sweden, United Kingdom, Ireland.NAFTA: USA, Canada and Mexico.SAARC: Bangladesh, Maldives, Nepal and Pakistan (excluding India)Rest of Asia: Afghanistan, China, Taiwan, Hong Kong, Korea, Myanmar and otherMiddle East: Bahrain, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Saudi Arabia, Syrian Arab Republic, United Arab Emirates, United Arab Republic, (Egypt), Yeman, other.Rest of the World: All other countries

16

7DEOH����'LUHFWLRQ�RI�,PSRUWV�WR�6UL�/DQND Rupees MillionsRegion 1990 1991 1992 1993 1994 1995 1996 1997 1998

ASEAN 13815 17298 23229 28084 31069 34966 37868 44011 54465(13.16) (13.67) (15.63) (15.44) (14.03) (14.32) (13.64) (13.23) (14.77)

EU 16450 19942 23499 31715 39637 43662 49314 57049 64868(15.67) (15.76) (15.82) (17.44) (17.89) (17.88) (17.76) (17.15) (17.60)

IND 4731 9105 13230 16569 19985 24045 31056 33023 34837(4.50) (7.19) (8.90) (9.11) (9.02) (9.85) (11.18) (9.93) (9.45)

JPN 13035 14828 18215 21870 26021 25556 27488 28275 35903(12.42) (11.72) (12.26) (12.03) (11.75) (10.47) (9.90) (8.50) (9.74)

NAFTA 9108 7912 8028 7097 14814 9698 12960 17022 19774(8.67) (6.25) (5.40) (3.90) (6.69) (3.97) (4.67) (5.12) (5.36)

SAARC 2645 3846 4969 4122 4195 3870 4692 6354 7001(2.52) (3.04) (3.34) (2.27) (1.89) (1.58) (1.69) (1.91) (1.90)

REASIA 21320 30655 34566 47660 52138 59209 64743 84156 95744(20.30) (24.22) (23.26) (26.20) (23.54) (24.27) (23.31) (25.30) (25.97)

MIDEAST 12135 11175 8775 9896 11961 17870 22997 31130 24051(11.56) (8.83) (5.91) (5.44) (5.40) (7.32) (8.28) (9.36) (6.52)

ROW 11758 11803 14069 14871 21679 25316 26603 31625 32047(11.20) (9.33) (9.47) (8.18) (9.78) (10.37) (9.58) (9.51) (8.69)

TOTAL 104997 126564 148580 181884 221499 244192 277721 332645 368690(100) (100) (100) (100) (100) (100) (100) (100) (100)

Source: Central Bank of Sri Lanka, Annual Reports, Various Issues and authors calculationsNotes: Percentages are given in parentheses.ASEAN: Indonesia, Malaysia, Philippines, Singapore, and Thailand.EU: Austria, Belgium –Luxembourg, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Portugal, Spain, Sweden, United Kingdom, Ireland.NAFTA: USA, Canada and Mexico.SAARC: Bangladesh, Maldives, Nepal and Pakistan (excluding India).Rest of Asia: Afghanistan, China, Taiwan, Hong Kong, Korea, Myanmar and otherMiddle East: Bahrain, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Saudi Arabia, Syrian Arab Republic, United Arab Emirates, United Arab Republic, (Egypt), Yeman and other.Rest of the World: All other countries

17

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Aggregated Region GTAP Region

1.ASEAN-5: Indonesia(idn) Malaysia (mys) Philippines (phl) Singapore (sgp) Thailand (tha) Viet Nam (vnm)

1. EU (eu) : United Kingdom (gbr) Germany (deu) Denmark (dnk) Sweden(swe) Finland (fin) Rest of European Union (reu)

2. IND (ind) India (ind)

3. Japan (jpn) Japan (jpn)

4. Sri Lanka Sri Lanka (lka)

5. NAFTA (nafta) : United States of America (usa) Canada (can) Mexico (mex)

7 Rest of South Asia (ras): Bangladesh Bhutan Maldives Nepal Pakistan

8. Rest of Asia (reastasia); Hong Kong (hkg) Korea (kor) Taiwan (twn) China (chn)

9. Middle EAST: Rest of Middle East (mideast)

10. Rest of World (row): Rest of the World (21 regions).Source: Mcdougall et.al. (1998).

18

7DEOH�����&RPPRGLW\�$JJUHJDWLRQ�RI�WKH�0RGHOAggregated Commodity GTAP Commodity

(1) Agriculture, Forestry and Fishing (AGRI) Paddy rice (pdr) Wheat (wht)

Cereal grains nec (gro) Vegetables, fruit, nuts (v_f) Oil seeds (osd) Sugar cane, suger beet (c_b) Plant based fibers (pfb) Crops (nec) Bovine cattle, sheep and goats, horses (ctl) Animal products nec (oap) Raw milk (rmk) Wool silk-worm cocoons (wol) Forestry (for) Fishing (2) Mining and Quarrying (MINQ) Coal (col)

Oil (oil)Gas (gas)Minerals nec (omn)

(3) Processed Food (PROF) Bovine cattle, sheep and goat, horse meat prods (cmt)Meat products nec (omt)Vegetables oils and fats (vol)Dairy products (mil)Processed rice (pcr)Sugar (sgr)Food products nec (ofd)Beverages and tobacco products (b_t)

(4) Textiles (TEXT) Textiles (tex)

(5) Wearing apparel (WEAP) Wearing apparel (wap) (6) Petroleum, Coal products (PECP) Petroleum, coal products (p_c) (7) Machinery and Equipment (MAEQ) Electronic equipment (ele)

Machinery and equipment nec (ome) (8) Transport Equipment (TREQ)

Motor vehicles and parts (mvh) Transport equipment nec (otn)

(9) Other Heavy Manufactures (OTHM) Leather products (lea)

Wood products (lum)Paper products, publishing (ppp)Chemical, rubber, plastic products (crp)Mineral products nec (nmm)Ferrous metals (i_s)Metals nec (nfm)Metal productsManufactures nec (omf)

(10) Services (SERC) Electricity (ely)Water (wtr)Construction (cns)Trade, transport (t_t)Financial, business, recreational services (osp)Public admin and defence, education, health (osg)Dwelling (dwe)

Source: McDougall et al. (1998).

19

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Regions E1 E2 E3 E4 E5

ASEAN 4.37 27.12 -10.81 -172.95 -164.76

0.0007 0.0044 (-0.0018) (-0.0281) (-0.0269)

EU -97.48 -125.67 -43.73 -652.40 -737.98

(-0.0012) (-0.0015) (-0.0005) (-0.0079) (-0.0089)

IND -0.95 17.01 207.05 4445.28 4397.97

(-0.0003) (0.0052) (0.0629) (1.3498) (1.3355)

JPN 18.42 -11.08 -56.18 -798.59 -765.14

(0.0004) (-0.0002) (-0.0011) (-0.0157) (-0.0150)

LKA 201.84 239.86 -1.73 253.55 442.63

(1.5295) (1.8175) (0.0131) (1.9213) (3.3541)

NAFTA -23.55 -4.72 -24.47 -370.89 -396.13

(-0.0003) (0.0000) (0.0003) (-0.0046) (-0.0049)

RAS -21.82 -25.98 -6.19 -1574.64 -1592.56

(-0.0238) (-0.0284) (-0.0068) (-1.7209) (-1.7405)

REA 18.09 9.82 -5.99 -403.22 -375.79

(0.0012) (0.0006) (-0.0004) (-0.0261) (-0.0244)

MIE 10.20 24.57 -2.01 -129.64 -116.67

(0.0020) (0.0048) (-0.0004) (-0.0251) (-0.0226)

ROW -47.81 -32.44 -16.35 -70.51 -109.43

(-0.0012) (-0.0008 (-0.0004) (-0.0029) (-0.0018)

Source: GTAP Model Simulations.Notes: The welfare effects as a percentage of GDP are in parentheses. E1: Unilateral Trade Liberalization; 15% Uniform External Tariffs. E2: Unilateral Trade Liberalization; Zero External Tariffs. E3: Indo-Lanka Free Trade Agreement. E4: SAARC Free Trade Agreement (SAFTA). E5: SAFTA and 15% Uniform External Tariffs

20

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Real Terms Balance Volume of Volume of Exports ImportsExperiments GDP of Trade of Trade Exports Imports prices prices

(percentage) (percentage) ($ US mil.) (percentage) (percentage) (percentage (percentage)

Sri LankaE1 0.84 1.50 -149.00 -0.3 3.32 1.09 0.00E2 1.67 0.35 -771.54 9.72 21.95 0.27 0.01E3 -0.08 0.15 -80.74 2.08 3.36 0.32 0.02E4 0.11 3.91 -189.64 0.88 7.54 4.62 0.29E5 0.98 5.19 -285.97 -0.31 8.97 5.44 0.27

IndiaE1 0.00 0.01 11.52 0.02 0.00 0.01 0.00E2 0.00 0.03 20.76 0.06 0.04 0.04 0.00E3 0.02 0.18 -44.43 0.25 0.54 0.18 0.00E4 0.41 3.60 -1109.38 3.02 9.47 3.72 -0.03E5 0.41 3.57 -1092.74 3 9.38 3.68 -0.03

Rest of South AsiaE1 -0.01 -0.04 8.83 0.00 -0.08 -0.03 0.01E2 -0.02 -0.04 12.22 0.00 -0.09 -0.03 0.02E3 0.00 -0.01 1.90 -0.01 -0.03 0.00 0.01E4 -0.56 -3.9 -1333.88 31.66 24.98 -2.11 0.78E5 -0.57 -3.92 -1322.73 31.54 24.83 -2.12 0.78

Source: GTAP Model Simulations. Notes: E1: Unilateral Trade Liberalization; 15% Uniform External Tariffs. E2: Unilateral Trade Liberalization; Zero External Tariffs. E3: Indo-Lanka Free Trade Agreement. E4: SAARC Free Trade Agreement (SAFTA). E5: SAFTA and 15% Uniform External Tariffs

21

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Sector E1 E2 E3 E4 E5Industry Output

AGRI -0.96 -3.55 -0.02 2.14 1.45MINQ -7.57 -23.11 -1.37 -9.23 -15.93PROF -7.60 -16.11 -1.59 -2.29 -9.12TEXT -8.43 -12.58 -0.79 -2.81 -10.70WEAP 20.55 52.36 1.21 -11.30 4.47PECP 1.64 3.92 0.08 0.86 2.66MAEQ -15.95 -12.84 5.93 3.80 -11.57TREQ -18.01 -25.03 -3.65 84.70 53.06OTHM -4.70 -6.02 1.17 4.59 0.07SERC 0.70 0.78 -0.01 0.03 0.94

Domestic SalesAGRI 0.82 -2.40 -1.61 -4.11 -2.90MINQ -2.42 -5.50 -0.10 -0.28 -2.37PROF -6.83 -15.70 -1.89 -3.31 -9.33TEXT -8.89 -15.81 -1.33 -7.23 -15.44WEAP 4.39 6.72 0.21 3.85 7.95PECP 0.81 0.51 0.07 0.91 1.91MAEQ -4.48 -18.26 -0.09 -3.79 -8.04TREQ -17.87 -29.54 -8.38 -9.28 21.95OTHM -1.01 -9.60 -1.32 -1.03 -2.02SERC 2.83 4.65 0.40 2.26 4.70

Export SalesAGRI -9.74 -9.26 7.87 33.14 23.03MINQ -8.53 -26.38 -1.61 -10.89 -18.45PROF -16.14 -20.71 1.72 9.36 -6.46TEXT -6.79 -0.96 1.17 13.11 6.40WEAP 21.48 55.00 1.26 -12.19 4.25PECP 24.57 97.94 0.51 -0.76 23.32MAEQ -21.67 -10.14 8.96 7.59 -13.33TREQ -19.08 9.12 31.91 800.74 624.86OTHM -11.74 0.82 6.01 15.61 4.32SERC -15.00 -27.78 -3.00 -16.46 -26.80

Source: GTAP Model Simulations.Notes: E1: Unilateral Trade Liberalization; 15% Uniform External Tariffs. E2: Unilateral Trade Liberalization; Zero External Tariffs. E3: Indo-Lanka Free Trade Agreement E4: SAARC Free Trade Agreement (SAFTA). E5: SAFTA and 15% Uniform External Tariffs

22