Sri Lanka’s Trade Policies: Back to Protectionism

In 1977 Sri Lanka was the first of the South Asian countries to decisively move away from
the protectionist import-substitution trade policies that for many years had damaged their
economic efficiency and hobbled their economic growth. Albeit with back-tracking episodes,
Sri Lanka’s liberalising trade policy reforms-especially reductions in the average level of
import tariffs- were broadened and extended during the following 23 years. Together with
other economic reforms this supported the rapid growth of manufactured exports, and made it
possible for the economy to grow at moderate to high rates despite continuing political
turmoil and civil war. Protectionist pressures began to build in 2001, however, and starting in
November 2004, the relatively open trade policies of the past were explicitly and
systematically reversed. By 2009, mainly through the proliferation of a variety of para-tariffs,
Sri Lanka’s tariff policies were just as protective as they had been more than 20 years earlier.
The principal purpose of this paper is to describe, quantify and analyse these developments.
The paper concludes by pointing out the serious potential damage of the protectionist trade
policies to Sri Lanka’s future economic growth, and the resulting subversion of its
preferential trade agreements, especially the agreements with India (ILFTA), Pakistan
(PSFTA) and with the South Asian countries as a group (SAFTA). It also comments on the
resulting breaches of Sri Lanka’s WTO commitments (especially in agriculture), and the
more general issues that the unfettered use of para-tariffs by Sri Lanka and Bangladesh raise
for the world multilateral trading system.