Deepening trade relationships between Pakistan and Sri Lanka: an analysis using the GTAP model

This study examines the economic effects of the deepening trade relationships between Pakistan and Sri Lanka with particular focus on the liberalisation of products in Sri Lanka’s negative list under the Pakistan-Sri Lanka Free Trade Agreement. Using the GTAP model and database, the study simulates tariff elimination scenarios for importable agricultural items in the negative list and selected food manufacturing sectors. The results show that tariff liberalisation generates negative welfare effects for Sri Lanka in all scenarios owing to reductions in tariff revenue, terms of trade, and savings and investments. When agricultural products in the negative list are liberalised, the equivalent variation declines by US$ 1.87 million, although allocative efficiency improves by US$ 0.542 million. To further assess likely market responsiveness, a sensitivity analysis was conducted by changing Armington substitution elasticities. The results indicate a marginal improvement in allocative efficiency when the substitutability between the domestic and imported goods is stronger. The findings suggest that liberalising agricultural products currently included in the negative list does not generate significant benefits to the Sri Lankan economy; therefore, these items may be best left unchanged.