Chinese Foreign Ministry spokeswoman Hua Chunying told reporters in Beijing that China had placed great importance on its relations with Sri Lanka and was ready to continue its cooperation in all areas, including trade and the economy. In contrast, India signed its first free trade agreement with Sri Lanka in 1998 (although it came into force in 2000) and, despite several shortcomings, the ISFTA has helped expand trade between two countries. However, neither country welcomes the level of trade integration achieved by the free trade agreement. In 2017, only about 6% of imports from India came from the ISFTA (i.e. using duty-free access provided by the ISFTA), indicating a significant underutilization of the free trade agreement. The ISFTA has a number of shortcomings, including the lack of removal of non-tariff barriers (NB) faced by exporters, as well as other duties and taxes in addition to tariffs. For example, the ISFTA does not eliminate all marginal taxes. Sri Lanka levies two taxes called Cess Levy and Port and Airport Levy (PAL) and these taxes sometimes outweigh the tariff benefits imposed by the ISFTA. From Sri Lanka`s perspective, more than 60% of goods exported to India used duty-free access provided by the ISFTA. Nevertheless, export growth to India remains slow and exporters have faced many NB, such as regulatory issues related to goods exports to India. India-led South Asia has seen a terrible development in regional trade integration, with intra-regional trade accounting for only 5% of total trade flows.
Perhaps the growing power of China`s trade relations in South Asia can help to change this dismal situation. Discussions at ministerial level on an agreement have not taken place since March last year. Discussions between lower-level officials have made little progress, Weerasinghe said. We can get a deeper perspective of the import-to-GDP ratio, which is seen as a better indicator of a country`s trade dynamics. Since 2000, Sri Lanka`s import rate relative to GDP has declined, as has the export rate of GDP.