Trade relations between the EU and Sri Lanka are governed by a cooperation and partnership agreement that came into force in April 1995. Modern trade relations between Sri Lanka and China began in 1952 with the signing of the rubber rice pact, a few years before formal diplomatic relations were established. Despite the continued absence of an active trade agreement, overall trade between the two countries doubled between 1990 and 2000, from US$125.6 million to US$256.2 million. Figure 3 visualizes Sri Lanka`s primary imports from China, including half-products, easily rubberized knitters and nitrogen fertilizers. In contrast, Sri Lanka`s main exports to China (as well as the top five) include: specialized vessels; Tea Gems Shoe components Coconuts and other vegetable fibres. Sri Lanka is open to trade, accounting for 53% of GDP. Nevertheless, its share of GDP has steadily declined since the early 2000s, after peaking at 88.6% in 2000. The country mainly exports tea products, clothing, retreaded or used rubber and petroleum tyres. Major imports include oil, gold, clothing and automotive. Sri Lanka`s main trading partners are the European Union (28.6%), the United States (24.9%), India (6.7%), China (3.7%) and the United Arab Emirates (2.6%), mainly from India (21.1%), China (19.7%), the EU (8%) and the United Arab Emirates (7.3%) (WTO, latest data available).
The country`s trade policy aims to improve access to the international market for Sri Lankan products. As a result, the government has signed several bilateral and multilateral trade agreements, including at the regional level. China and Sri Lanka are currently negotiating a free trade agreement. However, while China insisted on a free trade pact, Sri Lanka said it wanted more time to negotiate the agreement, as the government is concerned about the economic impact of a hasty agreement on its economy (Sri Lanka had requested a review of the agreement after a decade, to which China did not subscribe). Chart 3: Major imports and exports between Sri Lanka and China As shown in Chart 2, China had become Sri Lanka`s third largest import partner until 2010. Until 2015, China`s imports to Sri Lanka amounted to $3727 million and accounted for 20% of total imports to Sri Lanka, just below India, which accounted for 23% of imports. However, under liberalized and globalized economic conditions, the growing deficit should not be seen as a major problem.