The Sri Lanka-Thailand Free Trade Agreement (FTA) was signed by the two countries recently after lengthy discussions.
The total trade turnover between Sri Lanka and Thailand was USD 351.50 million, declining by 22% compared to the year 2021. However, the total trade turnover for the year 2021 showed an 11.28% increase.
Export earnings, represented by knitted or crocheted fabrics, printed books, newspapers, pictures, other products of the printing industry, and precious stones, increased in the year 2021. These earnings further increased in the year 2022, registering a 13.97% growth compared to the previous year.
The balance of trade has favoured Thailand, while the trade gap reduced over the years. Since 2018, there has been a significant reduction in Sri Lanka’s imports from Thailand. Imports from Thailand, with a much higher value amounting to USD 292 million, declined by 26% compared with the year 2021.
Sri Lanka’s exports to the Thailand market represent the 37th export market for Sri Lanka with a share of 0.46% in 2022. According to available data, precious stones and semi-precious stones became the dominant export item, accounting for 57.14% of the value of Sri Lanka’s exports to Thailand in 2022. Exports of precious stones are expected to almost double in 2022.
Sri Lanka has more opportunities to expand its market share of precious stones and semi-precious stones and gain more foreign exchange because other products and services are more competitive with world-class products. During 2021, Sri Lanka had a large net trade with Thailand in the exports of precious metals ($23.4 million), textiles ($14.1 million), and machines ($8.79 million). Electrical capacitors, apparel, and crustacean products have more opportunities to increase market share after the FTA.
Gems such as rubies, sapphires, and emeralds have the most export potential from Sri Lanka to Thailand, as do solid/cushion tyres, interchangeable tyre treads and tyre flaps, and black tea. Sri Lanka has the biggest supply capacity for black tea, and diamonds are the commodity with the highest demand in Thailand. Considering the expanding demand trend in Thailand and Sri Lanka’s sustainable supply capacity, there are opportunities for further growth.
In 2021, Thailand ranked 29th in the Economic Complexity Index (ECI 0.97) and 25th in total exports ($285 billion). That same year, Sri Lanka ranked 81st in the Economic Complexity Index (ECI -0.39) and 83rd in total exports ($14.1 billion). This data shows the importance of a strategic economic partnership with Thailand.
Another important factor is that around 5% of tariff lines will be partly freed from year 15 to 18, and nearly 15% of tariff lines will be in a negative list according to sources. It’s important to consider how to maximise the benefit of the FTA and enter the Thailand market with the benefit of tariff relief by providing competitive, quality, standard products. Sri Lankan exporters and the export community should carefully study this agreement and explore new areas for Sri Lankan products and services.
The Bangkok Post reported that a Thailand-Sri Lanka FTA is expected to expand Thailand’s economy by 0.02%, equivalent to US$80 million. This includes the expansion of investments and the value of Thai exports to Sri Lanka. Products that could benefit from the FTA include automobiles and auto components, machinery, electrical appliances, metals, sugar, and plastics.
Thailand could expand its investments in Sri Lanka, including processed foods, beverages, textiles, garments, and jewelry. When considering expanding the export-oriented production economy, Sri Lanka benefits from Thai investments in those areas.
One of the leading research firms published research on the Sri Lanka and Thailand FTA, investigating the economic implications and suggesting policy recommendations to ensure its effectiveness. The study conducts a comprehensive analysis of existing trade patterns, tariffs, tariff overhang, and the impact of eliminating tariffs on bilateral trade, trade deficits, and tariff revenue.
The study compiles lists of strategically important products — offensive lists — that Sri Lanka and Thailand should aim to secure preferential tariff treatment for. 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. A Thailand-Sri Lanka FTA could lead to an increase in Sri Lanka’s trade deficit with Thailand. Therefore, the authorities have a responsibility to carefully study the FTA and maximise the benefits to the country in future trade between Thailand and Sri Lanka.
The writer is an economist and a member of the Sri Lanka Council for Agricultural Research Policy.
