Unveiling Trade Potential: An Ex-Ante Analysis of the Sri Lanka-Thailand Free Trade Agreement

Research team

Asanka Wijesinghe
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Nilupulee Rathnayake
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In early 2024, Sri Lanka and Thailand are expected to finalise the negotiations for a free trade agreement (FTA). The prospect of entering into an FTA with Thailand, an economy known for its diverse, competitive, and technologically advanced economy, presents both opportunities and challenges for Sri Lanka. In light of this context, this study delves into the economic implications of an FTA between the two countries and offers policy recommendations to ensure its effectiveness. The study conducts a comprehensive analysis on existing trade patterns, tariffs, tariff overhang, and the impact of eliminating tariffs on bilateral trade, trade deficits, and tariff revenue. Additionally, the study compiles lists of strategically important products-offensive lists-, that Sri Lanka and Thailand should aim to secure preferential tariff treatment. Employing a partial equilibrium estimation method, the study assesses the potential export gains from the FTA, running separate simulations for 47 sectors using GTAP sectoral Armington elasticities. The study reveals that complete tariff removal would have a significant positive impact on trade. However, it acknowledges the potential challenges associated with reducing protectionist tariffs, especially in electorally important sectors. In addition, a FTA could lead to an increase in Sri Lanka’s trade deficit with Thailand. The study recommends a comprehensive trade agreement that extends beyond tariff reductions, encompassing investment promotion and trade facilitation. It also advocates for a gradual phase-out of existing tariffs, backed by binding commitments, to mitigate abrupt economic disruptions.