Sri Lanka has signed Free Trade Agreements (FTAs) with India, Pakistan, and Singapore, and most recently, with Thailand, but lacks one with China.
At a recent meeting of the China-Sri Lanka Joint Committee for Economic and Trade Cooperation, China’s Minister of Commerce Wang Wentao expressed hopes that an FTA between the two countries would be concluded in line with the principles of equality and mutual benefit.
Economists have highlighted the need to expand exports to China and address the trade gap, for which a potential FTA would serve as a significant tool.
Speaking to The Sunday Morning, Minister of Industry and Entrepreneurship Development Sunil Handunnetti acknowledged the recent committee, noting that it highlighted the need to expand trade and investment based on mutual understanding between the two countries. He stated that this presented a beneficial scenario for Sri Lanka, especially given the significant volume of trade activities conducted with China.
“This is an opportunity for Sri Lanka. We are initially looking at ways to expand the trade of specific products, including tea, cinnamon, spices, gems, and jewellery to China.
“We are assessing the facilities that would enable an FTA, given that China represents a substantial market opportunity, especially considering US tariff concerns and the present global trade context. However, there is no decision yet regarding establishing an agreement,” the Minister said.
Establishing a win-win agreement
Although Sri Lankan exports to China are relatively limited, it remains one of the 15 top export markets of the country. According to Export Development Board (EDB) data regarding exports in the first quarter of 2025, China has shown positive growth in the cumulative period of January to March 2025 compared to the corresponding period in 2024, amounting to $ 69.11 million and reflecting a 11.72% growth.
Meanwhile, Sri Lanka’s exports to FTA partners India and Pakistan accounted for 7.2% of total merchandise exports during the period from January to March 2025, increasing by 35.82% to reach $ 272.49 million compared to the same period in the previous year. Exports to India increased significantly by 40.66%, while exports to Pakistan declined by 12.77% over the cumulative period.
Speaking to The Sunday Morning, University of Peradeniya (UOP) Department of Economics and Statistics Senior Professor O.G. Dayaratna-Banda stated that an FTA with China presented a significant opportunity for Sri Lanka, provided a win-win arrangement was achieved.
Given that Sri Lanka is a net importer from China, there is a large deficit for Sri Lanka in terms of merchandise trade. Prof. Dayaratna-Banda noted that even regarding the service sector, Sri Lanka’s exports were limited despite China being a substantial market of approximately 1.4 billion people.
He explained that an FTA with China would be significantly beneficial for Sri Lanka, as long as a win-win arrangement was achieved, particularly as it would grant more opportunities to export to China. Accordingly, this should be negotiated and arranged to facilitate the export of designated products from Sri Lanka.
Prof. Dayaratna-Banda specifically pointed out rubber-related and mineral products, which are particularly significant for the Chinese manufacturing industry. Hence, he emphasised that an FTA would expand and facilitate significant market access for merchandise trade exports to China.
“Opportunities would also arise in relation to service trade. For instance, establishing specific arrangements for tourism presents a significant opportunity for Sri Lanka, particularly due to the higher income status of the Chinese population,” he said.
Prof. Dayaratna-Banda further explained that the Sri Lankan foreign trade and investment system was plagued by regulatory and institutional excesses, resulting in an over-regulated and over-institutionalised system that made investments and trade very challenging.
“Sri Lanka also faces dumping issues with China when it comes to merchandise trade. There is a perception that Sri Lanka receives very cheap products that can easily crowd out domestic production, which must be addressed, especially with anti-dumping measures outlined by the World Trade Organization (WTO).”
Moreover, commenting on the geopolitical context of the region, he explained that it was important that Sri Lanka championed a tripartite understanding among India, Sri Lanka, and China at the political level, while pursuing the country’s own economic interests.
“Sri Lanka must carefully distinguish between geopolitical concerns and economic concerns, establishing a proper foreign policy and pursuing it accordingly. Nevertheless, an FTA concerns trade and should ideally not warrant political issues or be contested on these grounds. However, at the security level, a proper understanding must be cultivated among all involved parties,” he said.
Resolving domestic trade barriers first
Sri Lanka’s overall trade with China is substantial, with China being a major import partner for the country and the 10th most important export destination.
In 2024, Sri Lanka’s exports to China totalled $ 251.91 million, while imports from China reached $ 4,332.48 million. According to the EDB, Sri Lanka’s exports to China have decreased by 2% in 2024 when compared to 2023, while imports from China have increased by 40% in 2024 when compared to 2023.
Verité Research Research Director Subhashini Abeysinghe, a specialist in trade and global value chains, stated that Sri Lanka must first address its domestic barriers to fully leverage FTAs with any country.
China is the world’s second-largest market, after the US, and one of the largest consumer markets due to its substantial population. Abeysinghe explained that any country seeking to increase its exports should be trying to export to a market of this nature, thereby growing exports accordingly.
“In the current geopolitical context, what any country should be concerned about is over-reliance on any particular location. Even Sri Lanka is significantly reliant on the US, making diversification critical. However, Sri Lanka hardly exports to China, as China is not a relatively major export destination for Sri Lanka, but rather a major import destination,” she said.
She further noted that diversification efforts should include exporting more to China. According to Abeysinghe, an FTA will help this scenario if Sri Lanka’s lack of ability to export to China is primarily due to Chinese tariff and non-tariff barriers. By this logic, Sri Lanka should be able to export more to China should these barriers be removed.
“However, our research shows that the reason behind the deficiency in exporting to China and many other markets is not necessarily because of barriers imposed by those countries, but rather a lot more due to barriers to trade and investment within Sri Lanka itself. This is within the Sri Lankan Government’s ability to address,” she added.
Abeysinghe emphasised that while FTAs were certainly beneficial, Sri Lanka would not be able to fully utilise them if the country signed agreements without first addressing its own domestic barriers that prevented it from succeeding in international markets.
Need to leverage an FTA to expand exports to China
Sri Lanka’s main export products to China in 2024 included tea in bulk, activated carbon, men’s and women’s undergarments, t-shirts, frozen fish, women’s outerwear, coco peat, fibre pith and moulded products, gloves, mitts and mittens of textile, and tea packets. This reflects that the exports to China remain largely limited to tea, garment, and coconut products.
Meanwhile, Sri Lanka’s main import products from China in 2024 were electrical and electronic products, woven fabrics, yarn, products of base metal, knitted fabrics, telephone sets, audio/video equipment and parts, products of plastics, petroleum oils, organic chemicals, and textile articles.
From 2019 onwards, bilateral trade with China has largely remained within the range of $ 3,000-5,000 million, while representing a consistent trade deficit for Sri Lanka. For instance, Sri Lanka’s trade balance with China for 2024 amounts to a deficit of $ 4,080.57 million.
Speaking to The Sunday Morning, University of Colombo (UOC) Department of Economics Lecturer Umesh Moramudali noted that Sri Lanka’s objective should be to increase its exports to China and other parts of the world using FTAs and attracting more Foreign Direct Investments (FDIs).
“Sri Lanka’s exports to China are quite marginal, while China accounts for nearly 20% of Sri Lanka’s total imports. Sri Lanka needs to expand its exports to China as part of a larger strategy to diversify both its export basket and destinations. FTAs should be utilised for this purpose, not merely as a tool of economic diplomacy or ongoing geopolitical rivalries,” he said.
Moramudali also pointed out that Sri Lanka had been considering joining the Regional Comprehensive Economic Partnership (RCEP) and already had FTAs with other countries, including India. Therefore, an FTA with China should be approached as part of this holistic strategy, alongside Sri Lanka’s broader export strategy, rather than as a mere bilateral deal.
“It doesn’t make sense to have FTAs for their own sake; they must align with the country’s export strategy and trade policy. Based on that, the Government can determine the extent of liberalisation for both goods and services, as well as the timeframe for implementation. This is where the Government’s clarity on its export strategy and trade policy becomes crucial,” he added.
According to Moramudali, from Sri Lanka’s perspective, the primary objective should be China. If possible, that FTA should also serve as a stepping stone to enter other export markets, especially given Sri Lanka’s very limited export diversification in terms of both markets and products. For instance, Sri Lanka relies heavily on apparel products, which constitute over 40% of the country’s exports and are heavily focused on the US and Europe.
He added that the objective of entering an FTA with China should also address this concern by promoting export diversification through attempts to export other products and by targeting China and the broader East Asian region, as this was a substantial export market. He emphasised that Sri Lanka must not rush into an FTA without considering these aspects.
“In previous negotiation rounds, China proposed liberalising 90% of tariff lines, and the feasibility of doing so remains questionable even at present, standing as one of the reasons the FTA did not proceed. Hence, Sri Lanka will have to adopt an approach where tariff lines are liberalised gradually,” he noted.
Moramudali further explained that the timing of this depended on the Government’s export strategy, trade policy, and overall macroeconomic vision and targets.
“Even with Singapore, Sri Lanka only committed to liberalise 80% of tariff lines, and that too in phases. As per the agreement with Singapore, 80% of tariff lines will be liberalised only by 2032. When the agreement was signed, goods liberalisation started with 50% of tariff lines being liberalised.”
Additionally, he highlighted that the question now was whether China was willing to reconsider and adjust this request to an overall tariff line liberalisation of 80%. He stated that the Chinese Commerce Minister had not indicated this technicality but only the preference to have the FTA.
Moramudali explained that if Sri Lanka were to accommodate China’s 90% request, it might lead to other countries with which Sri Lanka has FTAs, including Singapore and Thailand, requesting a similar level of liberalisation in terms of goods trade. This also implies that future trade agreements will also need to include 90% tariff line liberalisation.
“For example, if we allow 90% of tariff line liberalisation for China, India may ask the same with regard to the FTA with it. This will persuade India to push for the Economic and Technology Cooperation Agreement (ETCA) and request Sri Lanka to liberalise 90% of tariff lines with India as well,” he said.
He stressed that Sri Lanka was not currently in a position to accommodate such an approach. While Sri Lanka must engage in further trade liberalisation, it must be done in phases and with careful consideration.
Elaborating on FDIs, Moramudali explained that a comprehensive trade agreement would facilitate FDI entry because it required adherence to international law, making it subject to international courts. As a result, the country will commit to more than it has already committed to under domestic law, providing clarity for foreign investors.
According to Moramudali, Sri Lanka’s FTAs with Singapore and Thailand are comprehensive, while previous FTAs with India and Pakistan are not. FTAs with Singapore and Thailand have a separate investment chapter which provides protection for FDIs that come through the FTA.
“Any comprehensive FTA includes a separate investment chapter and what is promised under that cannot be easily diverged from. This provides a significant degree of predictability for companies wishing to invest,” he noted.