General equilibrium analysis of Sri Lanka's trade liberalization policy options

by Kadupitige Upalinie Ajitha Tennakoon

Institution: University of Auckland
Year: 2004
Record ID: 1299284
Full text PDF: http://hdl.handle.net/2292/14


Sri Lanka's trade regime has been gradually liberalized over the last two decades with the aim of deeper integration into the global economy. The purpose of this study is to present a quantitative assessment of the impacts of major unilateral, regional and multilateral trade liberalization on Sri Lanka, and rank the trade policy options in terms of their welfare effects. This study contributes to the empirical literature on trade liberalization. The Global Trade Analysis Project (GTAP) model is used to analyze the welfare effects of trade liberalization in a multi-country, multi-sector general equilibrium framework. The results show that if Sri Lanka implements the South Asian Free Trade Agreement (SAFTA), while maintaining 15 percent external tariffs for the rest of the world, this combined policy would provide the highest welfare gain to Sri Lanka. The SAFTA by its own would provide the second-highest ranked gain from the trade reforms due to the benefits of preferential access to the large SAARC market. The third-highest ranked policy option comes under the unilateral reduction of import tariffs to 15 percent scenario. As results indicate, the Indo-Lanka Free Trade Agreement (ILFTA) offers the fourth-highest policy option for Sri Lanka. Finally, the phasing-out of MFA on Textiles and Clothing under the Uruguay Round Agreement, rank as the fifth-highest policy option for Sri Lanka. Thus, regional trade liberalization is far more preferable to unilateral and multilateral liberalization. However, as the GTAP model permits, these rankings based on only to the static welfare gains, ignoring the dynamic effect of trade liberalization. In addition, the gravity model has been employed to examine the determinants of Sri Lanka's bilateral trade flows with her selected trading partners, in order to sort out the influence of geographical proximity versus preferential trading policies in creating a regional concentration in trade. Our results confirm the validity of geographical factors such as proximity and cultural familiarity, as determinants of Sri Lanka's trade with neighbouring countries. They suggest that the selected trading partners are ???natural trading partners??? of Sri Lanka.