Singapore and Sri Lanka Looking For Mutual Gains from Free Trade Agreement

7 February 2018 Phoebe Sleet , Research Assistant, Indian Ocean Research Programme

Background

On 23 January, Singapore and Sri Lanka signed a free trade agreement (FTA) that, it is hoped, will encourage trade and foreign direct investment between the two nations. For Sri Lanka, a change in leadership has brought about a change in foreign policy outlook. Previously heavily dependent on China for economic support, Sri Lanka has begun to again engage more closely with its neighbours since the election to the presidency of Maithripala Sirisena. Singapore, long one of the most open economies in the world, is seeking to bolster its security and economic arrangements.

Comment

Sri Lankan diplomatic relations with Singapore have steadily progressed over the last few decades, with trade and investment seeing generally positive trends between the two states, although both countries agree that significantly more can be done to improve their economic relationship. That is particularly significant for Sri Lanka, which has been slow to liberalise its trade relations, with only four trade agreements signed prior to this one: bilateral agreements with India and Pakistan and two regional agreements with states in the Asia-Pacific. The FTA with Singapore, however, marks Sri Lanka’s first ‘modern and comprehensive’ agreement.

Sri Lanka is likely to immediately benefit from strengthened ties with Singapore. Sri Lanka’s credit rating is poised to improve as the resulting investments and account inflows are likely to help shield it from external economic vulnerability. Both states will also gain access to the other’s services markets and hopes are high that the agreement will help to boost Sri Lanka’s manufacturing and service industries.

For Sri Lanka, the signing of an FTA comes as part of a wider “Look East” policy that signals a further shift in Colombo’s foreign policy, away from dependence on Chinese investment and towards a more diverse approach that may open access to more markets in South-East Asia. In so doing, Sri Lanka stands to gain economic links with ASEAN and the economic and strategic benefits that such links would bring. Liberalisation and reform of the Sri Lankan economy has also been vital to attracting Singaporean co-operation, with fiscal policy liberalisation among a number of reforms that Singapore has eagerly welcomed.

Singapore is widely considered one of the most market-oriented economies in the world and the Sri Lankan FTA will be its twenty-first bilateral or regional trade agreement.  This agreement stands to reduce Sri Lankan tariffs on Singaporean goods by 80 per cent over 15 years, saving Singapore in the region of US$10 million. The strategy of removing barriers to trade and investment has been central to the growth of Singapore and this FTA has laid the groundwork necessary for Singapore to pursue further liberalisation efforts with Sri Lanka. While Sri Lanka is only Singapore’s thirty-seventh-largest trading partner, it is expected that this agreement will support new trade between the two states.

Crucially for Singapore, the FTA with Sri Lanka holds not only economic, but also strategic importance. While Sri Lanka is dependent on Chinese investment and has fewer reasons to be wary of Chinese ambitions (though it has recently been forced to cede a major port to China over outstanding debts, alarming observers both in Sri Lanka and regionally), Singapore has experienced somewhat more frosty relations with Beijing in the recent past. Though relations have thawed recently and the economic relationship between the two is robust as ever, Singapore is sensitive to China’s growing ambitions and its diplomatic and security ties with such partners as the United States, Australia, Japan and India, for instance, are efforts to counterbalance Chinese influence in the in the Indo-Pacific region.

Considering Sri Lanka’s central location in the Indian Ocean and its proximity to India, the island state is both strategically and economically an attractive location with which to build ties, particularly as it moves to revitalise its post-war economy. If this FTA delivers the benefits that it is intended to, it will contribute significantly to a deeper Singapore-Sri Lanka relationship.

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