Beyond Tariffs: A CGE Analysis of Sri Lanka–Singapore Trade Relationships

This study examined the economic impacts of the Sri Lanka–Singapore trade relationship by comparing the effects of unilateral tariff liberalization and non-tariff barrier reduction through improvements in import efficiency. Using the Global Trade Analysis Project (GTAP) computable general equilibrium model, the analysis focused on machinery sector under two policy scenarios, partial tariff elimination and trade facilitation (import efficiency improvements) aimed at maintaining constant aggregate imports in each scenario. The results indicated that trade facilitation generates significantly large economic benefits for Sri Lanka than tariff reductions. An 8% improvement in import efficiency, in the machinery sector, led to substantial increases in real GDP, welfare, exports, and industrial output. In contrast, tariff elimination produced only marginal gains and, in some cases, negative welfare effects due to adverse impacts on terms of trade and government revenue. Allocative efficiency (US$ 3.07 million) and technical efficiency (US$ 9.13 million) emerged as the primary drivers of welfare gains under trade facilitation, while reductions in market prices further enhanced consumer welfare. The machinery sector, characterized by strong backward and forward linkages, responded more significantly to efficiency improvements. Additionally, trade facilitation increased government revenue by expanding the import base, whereas tariff reductions reduced fiscal income. Overall, the study highlighted that reducing nontariff barriers through trade facilitation is more effective than tariff liberalization in enhancing welfare and competitiveness. These results underscored the importance of prioritizing efficiency-enhancing reforms to maximize the benefits of trade relations in developing economies like Sri Lanka.