Hafiz Wasim Akram
Alam Ahmad
Alam Ahmad
Leo-Paul Dana
Leo-Paul Dana
Asif Khan
Samreen Akhtar
Samreen Akhtar
Department of Marketing & Entrepreneurship, Dhofar University, Salalah 211, OmanCollege of Administrative and Financial Sciences, Saudi Electronic University, Riyadh 13316, Saudi Arabia
LUT School of Business and Management, Lappeenranta University of Technology & ICD Business School, 75010 Paris, France
Institute of Management Technology (IMT), Nagpur 441502, Maharashtra, India Author to whom correspondence should be addressed. Sustainability 2024, 16(2), 582; https://doi.org/10.3390/su16020582Submission received: 8 November 2023 / Revised: 1 December 2023 / Accepted: 7 December 2023 / Published: 9 January 2024
This article examines bilateral trade relations between the two important countries of South Asia, India and Sri Lanka, in light of the South Asian Free Trade Area (SAFTA) and the India–Sri Lanka Free Trade Agreement (ISFTA). The analysis period spans the years 1995 to 2020. The primary analysis found that bilateral trade has been sluggish and that the SAFTA and ISFTA agreements have had no discernible effect on these two countries’ bilateral trade performance. The causes of lackluster trade performance were investigated using the “revealed comparative advantage” and the “trade complementarity” indices. Clear evidence was found demonstrating that the reason for the bilateral trade’s consistent lackluster performance is due to both countries’ lack of revealed comparative advantage in the majority of product groups, followed by export similarity in the product groups where they do have a comparative advantage. The findings also confirm the suspicion of many observers that they are competitors rather than natural trading partners. Although any substantial future increase in their bilateral trade is improbable and fanciful, the paper reflects on methods of strengthening bilateral trade.
South Asian countries are some of the least economically linked in the world, despite their close geographic proximity and the fact that they have bilateral and multilateral free trade agreements (FTAs) among themselves. Because of protectionist regulations, high logistical costs, a wider trust deficit, and a lack of political will, among others, trade in South Asia is still far lower than it could be (only 5% of the region’s total trade with the world). This makes South Asia one of the most disconnected and disunited regions in the world, more particularly when it is compared with other regions such as North America, the Pacific, and East Asia, where intraregional trade is very high, and even among sub-Saharan Africa countries, where intraregional trade has been on the increase over the years due to the concrete steps taken by the administrations of those countries to create transparent mechanisms for trade facilitation. For the sake of achieving the goals of bilateral and multilateral trade agreements among countries, it is vital to expand connectivity in the South Asian region. This can be accomplished by boosting and facilitating bilateral and intra-regional trade. Access to new markets and more foreign direct investment (FDI) in a variety of industries would both be possible as a result of this type of endeavor, which would be made possible by the free flow of commodities, services, people, and knowledge. The consequent expansion of the economy would not only help to reduce the level of mistrust that exists in the area but would also bring prosperity to the trading countries.
As is evident, bilateral trade is an important element behind the development of contiguous countries, and this applies to India and Sri Lanka, two important countries from South Asia and the Indian subcontinent [1,2]. They have had a relationship for more than 2500 years, and their linguistic, cultural, and social linkages and bonds are centuries old. According to World Bank data [3], these two developing countries are home to more than 18% of the world’s population, which constitutes 2.49 percent of the total land surface area of the world and represents 3.19 percent of the world’s GDP at the current US dollar [4,5], but their bilateral trade has been hovering around 0.75 percent of their total trade with the world since 1995. There has been a consensus among scholars like Akram [1,6], Joshi [7], Julian and Ahmed [8], Inikori [9], Khan [10], and Zahonogo [11] that trade is an important aspect influencing the economic progress of a nation, and that taking recourse to international trade indubitably brings about absolute gains for the partners involved. This becomes more relevant when they badly need deeper involvement in several areas of economic development, including a vibrant atmosphere for small and medium enterprises and environmental sustainability [12,13,14]; entrepreneurial spirit, as it brings about economic development [15,16,17,18,19]; entrepreneurial traits and assets that have a role in shaping globalization [20]; international joint ventures [21]; and innovation systems [22,23]. India’s reliance on international trade for a good number of agendas involving domestic development, such as increasing exports, reducing the trade deficit, establishing a favorable environment for private sector development, development of business-friendly infrastructure, peace and security, terrorism control, promoting regional-balanced development, etc., are clearly visible in India’s active pursuit and follow-up of the South Asian Association for Regional Cooperation (SAARC), South Asia Preferential Trading Arrangement (SAPTA), South Asia Free Trade Area (SAFTA), ASEAN–India Free Trade Agreement (AIFTA), and bringing all five countries of BRICS on one platform [1]. The South Asian Free Trade Agreement (SAFTA) is a treaty in which both India and Sri Lanka are parties. For Sri Lanka to avail of the benefits of trade and investment, productivity gains, and increased competitiveness, apart from the advantages mentioned above, it must be involved in SAFTA, FTAs with India, Pakistan, Singapore, and the Asia-Pacific Trade Agreement (APTA).
Nevertheless, both countries know the importance of good trade relations, as the countries’ and regions’ prosperity is dependent on bilateral and multilateral trade [7]. They have tried their best in the past to be members of important agreements at the bilateral and regional levels, as is clear from the works of Kelegama; Mukherji and Iyengar; and Sikdar [24,25,26], among others. However, any perceptible continuous increment in their bilateral trade has been elusive during the last two decades, barring a few years, especially after 2000, when their bilateral trade rose to some extent. The lack of any discernible continuous increase in their bilateral trade necessitates an investigation to determine the cause.
In this paper, we examine the present status of the bilateral trade between India and Sri Lanka, two South Asian countries. We investigate whether free trade agreements such as SAFTA and ISFTA have brought about any change in their trade profiles or not. Following a thorough examination, the cause of India–Sri Lanka trade sluggishness was attempted to be identified by utilizing Balassa’s [27] revealed a comparative advantage index and a trade complementarity index, as mentioned by the World Bank [28]. The persistently low level of trade for a long period and the lack of meaningful improvements in bilateral trade over the years despite lofty expectations raise several concerns. Are they afflicted with poor economic connections, suffocating trade and impeding the growth of trade relationships? Is it the case that they are incapable of cultivating latent trade potential? Is there a lack of trade complementarity between them that prevents them from satisfying each other’s import requirements? Are they not naturally trading partners [1]? There are various things to consider in order to establish the underlying causes of their weak and restrained trade. Political and social issues, most notably the strained ties between economies, are not included in the present study. The current article focuses solely on economic considerations, primarily using Balassa’s “Trade Complementarity Index” and “Revealed Comparative Advantage Index” [27].
Thus, the paper attempts to answer the following research questions: RQ 1:Have free trade agreements such as SAFTA and ISFTA led to significant changes in the trade profiles of India and Sri Lanka over time?
RQ 2:What are the underlying causes of the persistently low level of bilateral trade between India and Sri Lanka?
RQ 3:Does Balassa’s Revealed Comparative Advantage Index reveal distinct comparative advantages for India and Sri Lanka in certain industries?
RQ 4:Does the Trade Complementarity Index indicate a high level of trade complementarity between India and Sri Lanka?
RQ 5:To what extent are poor economic connections and trade barriers contributing to the sluggishness in trade and impeding the growth of trade relationships between India and Sri Lanka?
RQ 6:Can the lack of meaningful improvements in bilateral trade between India and Sri Lanka be attributed to their inability to cultivate latent trade potential, or are there other factors at play?
RQ 7:Are India and Sri Lanka not naturally trading partners, and if so, what factors contribute to this lack of natural trade compatibility between the two countries?
The selection of India and Sri Lanka as the focal points of this research paper is particularly pertinent due to their unique position in the South Asian region and the presence of significant trade agreements like SAFTA and ISFTA. These two countries share close geographic proximity, historical trade ties, and cultural affinities, making them an intriguing case study for assessing the impact of trade agreements. Moreover, the sluggishness in their bilateral trade despite the existence of such agreements raises critical questions about the effectiveness of regional trade pacts and the underlying factors influencing trade dynamics. By examining the revealed comparative advantage and trade complementarity indices, this research paper offers empirical evidence that sheds light on the challenges faced by India and Sri Lanka in terms of enhancing their trade relationship. The confirmation of their status as competitors rather than natural trading partners underscores the need for a nuanced understanding of regional trade dynamics. Overall, this study provides valuable insights into the complexities of bilateral trade and offers important lessons for policymakers aiming to bolster economic cooperation between neighboring countries in South Asia.
This research paper stands out as a unique contribution to the field of international trade for several reasons. Firstly, it focuses on the bilateral trade relationship between India and Sri Lanka, two significant South Asian countries with historical ties and shared economic interests. Secondly, it scrutinizes the impact of two crucial trade agreements, SAFTA and ISFTA, over a span of 25 years (1995 to 2020), offering an extensive and detailed analysis of their effectiveness in promoting bilateral trade. What sets this paper apart is its utilization of the “revealed comparative advantage” and “trade complementarity” indices to systematically investigate the reasons behind the consistently lackluster trade performance. The uncovered empirical evidence, which highlights the lack of comparative advantage and export similarity in crucial product groups, challenges conventional assumptions about regional trade dynamics. Additionally, the paper addresses the crucial issue of whether India and Sri Lanka are competitors or natural trading partners, adding a valuable dimension to the understanding of their economic relationship. Lastly, this paper’s reflection on potential strategies to strengthen bilateral trade provides practical insights for policymakers and stakeholders in fostering economic cooperation. In essence, this research paper offers a comprehensive, empirically grounded, and nuanced analysis of the complexities surrounding bilateral trade, making it a unique and valuable addition to the literature on international trade dynamics in South Asia.
Also, neighboring countries can benefit from this research by gaining a deeper understanding of the factors influencing bilateral trade dynamics, especially when dealing with neighboring economies of varying sizes and capabilities. Additionally, the paper’s reflection on strategies to strengthen bilateral trade, despite the challenges, can offer valuable lessons and potential approaches for fostering economic cooperation within the South Asian region. As such, this research contributes to the broader discourse on regional trade in South Asia and offers insights that can be adapted and applied by neighboring countries to enhance their own trade relationships and economic cooperation efforts.
The remainder of the paper is organized as follows: Section 2 discusses the findings of previous research. Section 3 includes notes on the research design, and Section 4 contains a thorough discussion of the results. The paper is concluded in Section 5.
Comparative advantage theory, originally formulated by David Ricardo in the early 19th century, stands as a cornerstone in the study of international trade [29,30]. The theory is grounded in the idea that countries should specialize in the production of goods and services where they have a comparative advantage, i.e., the ability to produce these items at a lower opportunity cost compared to their trading partners [31]. This specialization allows countries to maximize their productive efficiency, leading to greater overall economic welfare [32]. The Heckscher–Ohlin model, developed by Eli Heckscher and Bertil Ohlin, posits that countries should specialize in producing goods that are intensive in terms of the factors of production they possess in abundance [33,34]. This model emphasizes the role of factor endowments, such as labor and capital, in shaping trade patterns. The Heckscher–Ohlin model has provided a theoretical framework for understanding the determinants of comparative advantage, highlighting the importance of resource endowments. Extensions of the Heckscher–Ohlin model, such as the Stolper–Samuelson theorem, delve deeper into the effects of changes in factor prices on trade patterns. These models offer insight into how shifts in relative factor endowments can influence comparative advantage [35]. Factor-specific models are crucial to understanding the nuanced dynamics of comparative advantage, particularly concerning factors like skilled labor, capital, and technological advancements. Empirical studies play a pivotal role in testing and validating the predictions of theoretical models. One widely used method is the measurement of revealed comparative advantage, introduced by Bela Balassa. This approach assesses a country’s comparative advantage by comparing its actual export patterns with the predictions of the Heckscher–Ohlin model. Balassa’s method provides a quantitative tool for assessing comparative advantage and has been influential in empirical research [27]. Leamer and Levinsohn [36] conducted a seminal empirical analysis of international trade theories, including the Heckscher–Ohlin model, using real-world data. Their work assessed the alignment between theoretical concepts and empirical evidence [36]. Their research contributed to bridging the gap between theory and practice, offering valuable insights into the factors that influence comparative advantage in the real world.
In recent years, the concept of global value chains has gained prominence in the study of comparative advantage. GVCs involve the fragmentation of production processes across countries, challenging traditional notions of comparative advantage. Researchers have explored GVCs impact trade patterns and have highlighted the importance of factors like supply chain connectivity and technological capabilities. The GVC perspective has expanded our understanding of how countries participate in and benefit from international trade [37]. Another significant development in the field is the consideration of firm-level heterogeneity. Melitz’s model of firm selection and trade emphasizes that not all firms participate in international trade, and those that do can experience different levels of success. This approach introduces a new dimension to comparative advantage by accounting for firm-level productivity differences [38]. Heterogeneous firm models have implications for trade patterns and the distributional effects of trade within countries.
In the context of our research on “Do Trade Agreements Enhance Bilateral Trade? Focus on India and Sri Lanka,” Comparative advantage theory serves as a vital framework for understanding the dynamics of trade agreements. The theory suggests that trade agreements should ideally align with the comparative advantages of the signatory countries. In the case of India and Sri Lanka, identifying these comparative advantages is the first step. India, as a diversified economy, excels in information technology, pharmaceuticals, and services. Sri Lanka, on the other hand, has a niche in the apparel and textile industry, tea production, and tourism. A well-designed trade agreement should encourage specialization in these sectors, thereby promoting efficiency and enhancing bilateral trade.
The research question at hand seeks to understand whether trade agreements, such as the one between India and Sri Lanka, indeed enhance bilateral trade. Comparative advantage theory provides valuable insight into this inquiry. Trade agreements often involve provisions for tariff reductions or eliminations, reducing trade barriers [39]. These changes should ideally facilitate the exchange of goods and services that align with the comparative advantages of the countries involved. By analyzing the India–Sri Lanka trade agreement through the lens of the comparative advantage theory, researchers can assess how tariff changes have impacted trade. Have tariff reductions led to an increase in exports from India and Sri Lanka in sectors where they possess comparative advantages? Have these reductions made imports more affordable, stimulating demand for goods and services in which the partner country specializes?
Moreover, trade agreements often address non-tariff barriers, including regulations, standards, and customs procedures [40]. These can pose significant obstacles to trade. Comparative advantage theory suggests that reducing such non-tariff barriers can further enhance trade, especially in sectors where the countries have comparative advantages [41]. Therefore, researchers should investigate whether the agreement has harmonized regulations or reduced these barriers, ultimately fostering more substantial bilateral trade. Beyond the immediate impact on trade volumes, comparative advantage theory encourages the exploration of the broader economic implications of trade agreements [42]. Economic welfare is a key consideration. The theory predicts that countries specializing in their comparative advantage sectors should experience improved economic welfare. Researchers can assess this by examining changes in GDP, employment levels, consumer prices, and other economic indicators. A positive shift in these metrics would signify the potential benefits of the trade agreement for both India and Sri Lanka. Additionally, it is crucial to evaluate the trade balance. If one country within the trade agreement consistently experiences a significant trade surplus while the other faces persistent deficits, it may indicate an imbalance in how comparative advantages are leveraged. Ideally, a balanced trade relationship, where both countries benefit, is considered a desirable outcome [43].
Trade complementarity theory is a valuable framework for understanding how trade agreements can enhance bilateral trade [44], and it is particularly relevant to our research on “Do Trade Agreements Enhance Bilateral Trade? Focus on India and Sri Lanka.” This theory posits that countries often trade with one another because their goods and services are complementary rather than directly competitive [45]. In other words, they produce different products that, when combined, create greater value and utility for consumers and businesses. In the context of India and Sri Lanka, trade complementarity theory suggests that these two countries may have goods and services that are naturally complementary. India’s strength in information technology and services, for example, may complement Sri Lanka’s expertise in the apparel and textile industry, tea production, and tourism. By trading these complementary goods and services, both countries can benefit from increased economic activity and improved consumer welfare. Therefore, examining how the India–Sri Lanka trade agreement aligns with this theory becomes crucial in assessing its impact on enhancing bilateral trade. To determine how the India–Sri Lanka trade agreement relates to trade complementarity theory, this research delves into the specifics of the agreement and assess whether it encourages the exchange of complementary goods and services. The agreement’s provisions, such as tariff reductions or eliminations, non-tariff barrier reductions, and investment facilitation, should ideally facilitate the trade of complementary products [46]. For instance, if the trade agreement has provisions that reduce tariffs on IT services from India while simultaneously making it easier for Sri Lankan apparel and textile products to enter the Indian market, it aligns with the theory. These provisions can incentivize companies in both countries to engage in trade that enhances the value of their respective products and services. Furthermore, the research should investigate whether the trade agreement promotes cooperation in areas where India and Sri Lanka have complementary strengths, such as joint ventures or technology-sharing initiatives [47]. Such collaborative efforts can lead to innovation and increased productivity, contributing to the overall enhancement of bilateral trade. Trade complementarity theory also extends to assessing the economic impacts of the trade agreement. Researchers analyze whether the agreement has led to an increase in the production and export of complementary goods and services, ultimately benefiting the economies of both India and Sri Lanka. Additionally, it is crucial to consider the long-term prospects of the trade agreement. Does it create an environment that encourages businesses in India and Sri Lanka to continuously explore complementary trade opportunities? Is there evidence of sustained growth in trade volume and value? Assessing the agreement’s long-term impact on bilateral trade can help policymakers and stakeholders make informed decisions about the future of their economic relations [48]. Thus, trade complementarity theory is closely related to our research on “Do Trade Agreements Enhance Bilateral Trade? Focus on India and Sri Lanka.” It offers a lens through which we can examine whether the India–Sri Lanka trade agreement encourages the exchange of complementary goods and services, ultimately enhancing bilateral trade. By assessing the alignment of the agreement with this theory and analyzing its economic impacts, our research can provide valuable insights into the effectiveness of the trade agreement and its potential to promote economic growth and cooperation between these two countries.
The literature, including that characterized by classical and neoclassical schools of thought, views trade as the primary driver of economic expansion. It emphasizes the importance of trade in fostering economies of scale, strengthening economic structure, and increasing competitive market forces. The new theories of economic growth have placed emphasis on an open trade policy framework, arguing that this better directs available resources to industries in which they can be used to their greatest benefit [49,50]. They emphasize that a country with a higher degree of economic openness tends to grow at a faster rate through technology absorption than a country with a lower degree of openness. Bhagwati [51] is a proponent of the neoclassical view that a nation’s economic growth can be attributed to its exports, and that this growth, in turn, can be attributed to the positive effects of competition on the human skills and technological foundation of the nation. Romer [52] lays out the theoretical foundation for economic growth through trade openness, which incorporates the spillover effects generated by technical progress, human capital, and investment in knowledge-based sectors. Agrawal and Kamakura’s study [53] challenged the conventional wisdom surrounding the influence of the country of origin on consumer behavior. Their research suggests that while country of origin is a relevant factor, it is just one of many cues in the complex landscape of consumer decision-making. They argue that product quality plays a more significant role in price differentials among brands, challenging the notion that a brand’s country of origin alone dictates price premiums or discounts. This perspective sheds valuable light on the multifaceted nature of consumer perceptions and purchasing decisions.
What can be inferred from the available literature is that bilateral trade can bring about welfare gains for the trading countries and is applicable to these two South Asian countries, India and Sri Lanka, as well.
Towards this end, a good number of scholars have attempted to find out what should be done to achieve the desirable aspects of bilateral trade as far as the two countries mentioned above are concerned. For instance, through the use of a gravity equation with multilateral trade parameters, Fratianni and Oh [54] examined the connection between RTA size and openness. Taneja et al. [55] attempted to compare the features of formal and informal trade between two important South Asian countries, India and Sri Lanka. They stated that while the free trade agreement (FTA) between India and Sri Lanka is a step in the right direction, it does not address the issue or the challenges of transaction costs that arise in the transactional context. The authors find that formal trading has higher transaction costs than informal trading, implying that reduced transaction costs in formal trade may enhance trade between the two countries. They emphasize that the number of administrative obligations at each stage of the trade transaction, including shipping barriers, must be considerably reduced. It is rightly stated that international shipping is vital for international trade. Streamlining and minimizing redundant and wasteful procedures and the use of electronic media could help to achieve this. The increasing focus on electronic data exchange (EDI) systems is a welcome move in this regard, as it will likely lessen the interface between dealers and government authorities. The authors argue that reducing restrictions on trading through official channels could address the issue of high transaction costs. This would also have a far more significant influence on the South Asian region in terms of commercial expansion. According to Taneja et al. [55], the prevalence of informal trade between the two countries has decreased since liberalization, and further tariff reductions and domestic tax harmonization would further reduce the incidence of informal trade.
Weerakoon and Thennakoon [56], in their seminal study on “India–Sri Lanka FTA: Lessons for SAFTA,” pointed out that the signing of the India–Sri Lanka Free Trade Agreement (ISFTA) two decades ago was a significant step forward for the two emerging countries of South Asia to harness their economic and trade complementarities. The post-ISFTA performance of trade between the countries, as expected, shows that exports are increasing. According to them, imports have also increased significantly, accompanied by strong product growth and diversification. The authors added that, though ISFTA was only intended for the trade of goods, it has resulted in increased trade. Over time, investment flows and service integration between the two countries have also increased. The authors further state that, although the ISFTA has resulted in a significant increase in bilateral trade, the agreements remain rather restrictive because of the magnitude of the negative lists kept by both countries. While initiatives are being made to trim the negative lists as part of the ongoing comprehensive economic partnership agreement (CEPA) discussions, the quantum of the reduction in the negative list is likely to be limited due to the legitimate concerns of economists about the impact of the pruning on some important industries, like agriculture, which is very sensitive to foreign competition. Sri Lanka, in particular, is unlikely to press for more liberalization because it had yet to fully experience the implementation of previously agreed-upon parameters until 2008.
Joshi [57] investigated whether the Free Trade Agreement (ISLFTA) between the two burgeoning SAARC countries, India and Sri Lanka, has created or diverted trade. The strategy employed in the paper was similar to that employed by Romalis [58] to investigate NAFTA using the six-digit HS classification of products to employ tariff variations at the product level and has developed seven panel sets of data from 1996 to 2006. Investigating the impact of commodity and time changes in ISLFTA tariff preferences on the importing of different products from the control nation to the ISLFTA region, the ISLFTA resulted in virtually limited business for the control countries. Joshi [57] further stated that consumers in India and Sri Lanka can purchase a number of the most competitive products from regional vendors, allowing them to consume more for the same amount of money, and claims that ISLFTA is among the few agreements that are actually fruitful in South Asia. The success of ISLFTA demonstrates that if the demands, concerns, and challenges of weaker economies are treated adequately and favorably, the size differential between FTA members is unimportant.
Sikdar [26] investigated the trade pattern between India (South Asia’s largest country) and Sri Lanka by constructing a competitive benchmark based chiefly on the two economies’ fundamental endowments, preferences, and technologies. The study proposes a novel method for determining the comparative advantages of two emerging South Asian economies linked by international trade, as well as obtaining the benefits of such free trade. The author states that, in the immediate aftermath of the ISFTA coming into force, the export growth in both economies became fascinating, and an analysis of the structure of trade between them indicated that trade volume rose for several products that were of little importance for both countries prior to the ISFTA’s adoption. As a result of the FTA’s adoption, many items became commercially feasible. Thus, it is possible that these items were exported from one country to another as a result of numerous concessions exchanged. That paper concluded that the countries’ bilateral trade flow increased as a result of easier access (either duty-free or at a reduced rate) to their markets, which surely helped to expand trade within the South Asian region as well as global trade. However, in order to keep the expanding trade momentum going, additional goods with comparative advantages should be traded.
De Silva et al. [59] conducted an intriguing empirical inquiry into the consequences of liberalizing trade on Sri Lanka’s agricultural sector. Based on national data (1960–2010), the study presented a quantitative examination of the effects of trade policy on agricultural growth in Sri Lanka. To determine whether trade policy improvements increase agriculture sector growth, the researchers used the ordinary least square (OLS) approach and models of multiple regression. The empirical findings demonstrate that trade liberalization positively impacted agricultural sector growth, and that, as a result, agricultural productivity in Sri Lanka could improve. To improve agricultural productivity further, more emphasis should be placed on reducing excessive and unspecialized workers in the agricultural sector.
Kelegama [60] investigated the India–Sri Lanka Free Trade Agreement (ISFTA). In the analysis, the author highlights both the positives and negatives of the agreement. The study demonstrates that the FTA has been proven to be beneficial for Sri Lanka, but its full potential could not be harnessed due to some issues such as access to the Indian market and the supply capacity of Sri Lanka for a few products. The paper states that the agreement between the two burgeoning countries of South Asia, which aimed to address several of the FTA’s problems in a larger economic framework, failed to take effect due to a lack of political foresight and entrepreneurial leadership in Sri Lanka. Kelegama [60] further states that, although the ISFTA has been in existence for the past 12 years and has a long list of accomplishments, it is not without flaws. Sri Lanka has yet to fully realize the FTA’s full potential, and the study contends that strengthening, extending, and broadening the FTA is the path forward in this respect. To give the FTA additional energy, policy mechanisms under the aegis of the various governments must be formulated, and the trade–investment connection is an invaluable component that might be leveraged for this purpose.
Kelegama [24] states that, although the purpose of a free trade agreement is that the contracting parties should have a win–win situation, the contracting countries ought not to be bothered about trade deficit or lopsided export basket. They must move ahead to maximize the benefits of the free trade agreement. The paper states that it is without doubt that the agreement between the two countries (ISFTA) has clearly proven to be beneficial for Sri Lanka, but more effort ought to be made to expand the scope so that Sri Lanka can reap the full benefits in an equitable manner. The author states that non-tariff barriers (NTBs) in India are currently being addressed as one of the most important issues. The author concludes that Sri Lankan exports have built a name for themselves despite significant non-tariff hurdles in the Indian market. A stronger economic relationship with India could result in even more beneficial consequences, but Sri Lanka’s interests ought to be properly promoted to achieve that objective, which was attempted by the proposal for the Economic and Technology Cooperation Agreement. This will lay the framework for island exporters and investors to capture a larger portion of India’s rapidly developing market.
Using a gravity trade model, Taguchi and Rubasinghe [61] examined the impact of trade agreements on Sri Lanka. The SAFTA (a multilateral agreement among eight countries in South Asia), the ISFTA (a free trade agreement between India and Sri Lanka), and the PSFTA (an FTA between Pakistan and Sri Lanka) are the three FTAs included in the study. The gravity trade model estimation findings demonstrated that the ISFTA produced trade creation effects, which could not be substantiated in the SAFTA, and that the PSFTA only had trade creation effects on imports from Sri Lanka. The authors state that differences in preferential tariff rates and the presence of long negative lists among the multiple FTA agreements appear to be reflected in these results. Taguchi and Rubasinghe [61] conclude that the strategic relevance of the estimation results is that there is still a significant amount of room for the SAFTA and PSFTA’s trade benefits to grow over time if the tariff reduction timetable in the SAFTA could be streamlined and the sensitive list items in the SAFTA and PSFTA could be decreased.
Subsequently, Khalid et al. [62] looked into the relationship between SAARC countries’ regional trade and the region’s food security issues. The paper econometrically analyzed the factors affecting the volume of food trade using data from Pakistan, India, Sri Lanka, and Bangladesh from 1990 to 2018. They point out that if resources are efficiently employed, the region’s (South Asia) higher consumption and greater import requirements can be met through adjacent trading partners. Their findings reveal that importing or exporting countries’ gross domestic product (GDP) and investment from abroad (FDI) have a positive impact on regional trade. However, the bilateral rate of exchange between trading partners has a detrimental impact on trade volume. Using Johansen’s cointegration test, their findings revealed that there was no long-run link between trade volume and food security. Khalid et al. [62] suggested that policymakers should concentrate on ways to improve the environment in Pakistan and India so that they can not only meet rising global food demand, but also increase their competitiveness in major export markets for both high-quality and low-quality priced goods. Pal and Pohit [63] sought to answer a key research question: why, even after a decade of implementation, do Indian exporters (13 percent) use the ISFTA route for trade far less than their Sri Lankan counterparts (65 percent)? Non-tariff barriers (NTBs), according to the authors, are being blamed in existing studies for impeding trade growth. Pal and Pohit [63] state that NTBs, on the other hand, have been classified as a sub-class of non-tariff measures (NTMs), which represent a more limited concept of discovering hidden impediments in the international trade process.
The research conducted by Murshed, Abbass, and Rashid [64] addresses a crucial and timely topic related to renewable energy adoption in selected South Asian economies: Bangladesh, India, Pakistan, and Sri Lanka. The study’s focus on the economic transition from non-renewable to renewable energy sources in the context of the United Nations’ 2030 Sustainable Development Goals agenda is particularly pertinent. The authors’ exploration of how trade and financial liberalization policies can influence this transition adds a valuable dimension to the research. The paper’s empirical approach, employing econometric analyses, provides quantitative insights into the relationship between trade openness, foreign currency inflows, and the adoption of renewable energy resources in the region. The findings, suggesting that higher levels of trade openness and increased foreign currency inflows contribute to greater renewable energy consumption, are significant and have important policy implications. These results underscore the potential role of trade agreements and foreign investment in advancing renewable energy initiatives and achieving energy sustainability in South Asia.
Kumar [65] offered a comprehensive analysis of regional trade integration in South Asia within the context of multilateral trade agreements. The research was timely, given the increasing importance of regional cooperation and integration in the global economy. The study employed the trade intensity index and autoregressive multilateral framework to evaluate trade relationships among four major South Asian countries: India, Bangladesh, Pakistan, and Sri Lanka. One of the paper’s notable strengths is its focus on both short- and long-run trade complementarities, which provides a nuanced understanding of trade dynamics in the region. The identification of long-run trade complementarities between Pakistan and Sri Lanka and short-run complementarities between India and Bangladesh, as well as India and Sri Lanka, offers valuable insights into potential areas of collaboration and competition among these countries. The paper also underscores the significance of its findings for policy implications. The idea that trade barriers hinder regional trade integration in South Asia and that greater trade openness can foster balanced economic development is a crucial takeaway.
Jain [66] assessed the broader implications of this relationship, not only on the Indo-Sri Lankan ties, but also on India’s role as a leader in the South Asian region. The article critically examines China’s substantial investments and engagement in Sri Lanka, a phenomenon observed in several South Asian countries, under the guise of economic development. One of the strengths of the article is its historical context, which provides readers with a well-rounded understanding of how the Sino–Sri Lankan relationship has evolved over time. The mention of China’s economic, military, and diplomatic assistance to Sri Lanka is significant in highlighting the depth of this engagement. Furthermore, the article’s exploration of how these developments have affected India’s role and influence in the region contributes to a nuanced analysis. The mention of China’s ambitious projects like the Maritime Silk Route and the Belt and Road Initiative adds an important dimension to the article. By examining the strategic implications of China’s actions, the paper encourages readers to consider the long-term goals and motivations behind Chinese investments in Sri Lanka and the broader region.
Gurtu et al. [67] presents an insightful analysis of the impact of free trade agreements (FTAs). The article’s emphasis on the role of FTAs in shaping the economic activities of participating countries is particularly relevant in today’s globalized economy. It offers valuable insights for policymakers and researchers alike by shedding light on the potential desirability of FTAs and their role in improving economic activities.
Marwah et al. [68] wrote a commendable work titled “Political Economy of Trade in BIMSTEC: A Contemporary Perspective”. The study delves into the nature and evolution of BIMSTEC, focusing on intra-regional trade dynamics, particularly trade relations with India and China. The article serves as a valuable contribution to the understanding of regional cooperation and trade in South and Southeast Asia. They propose recommendations for strengthening BIMSTEC’s identity and effectiveness. The suggestions, including a focus on connectivity, improved logistics, and the establishment of a BIMSTEC university, reflect a deep understanding of the soft power elements that can enhance the regional organization’s appeal and viability. These recommendations offer actionable insights for policymakers and stakeholders involved in regional cooperation efforts.
Samarakoon and Sarvananthan [69] provided a thought-provoking analysis of the Memorandum of Understanding (MoU) between India and Sri Lanka for the construction of a bridge across the Palk Strait. The study’s focus on the potential impact of this proposed bridge on trade, services, and travel between the two countries, as well as the broader implications, is of significant interest. The article effectively highlights the potential benefits of the bridge in terms of facilitating trade and travel between India and Sri Lanka, as well as the broader South Asian region. It also raises an important point about the bridge serving as an alternative to the Sethusamudram project, potentially mitigating environmental concerns. However, to further strengthen the article, it could have delved deeper into the potential negative consequences and challenges associated with the bridge construction. Additionally, discussing potential mitigation measures for addressing environmental and social impacts would have provided a more comprehensive analysis.
Nevertheless, there are a good number of studies that have tried to explore the causes of lackluster bilateral trade; it can be deduced that the available literature is devoid of any study that has tried to answer the following questions from basic economic angles. Thus, the present paper answers the following questions: Are India and Bangladesh afflicted with poor economic connections, suffocating trade and impeding the growth of trade relationships? Is it the case that they are incapable of cultivating latent trade potential? Is there a lack of trade complementarities between them that stunt them from satisfying each other’s import requirements? Are they not naturally trading partners? Answers to these questions from an economic perspective are missing in the literature, and this paper makes important contributions to the literature in terms of bridging that vacuum. Firstly, it frames the untouched areas of research and then proposes them in terms of research questions. Secondly, we attempt to answer the proposed questions based on suitable econometric equations and validate them using supporting evidence.
To analyze the status of Indian–Sri Lankan trade and determine the impact of the “South Asian Free Trade Agreement (SAFTA)” and the “India–Sri Lanka Free Trade Agreement (ISFTA)” on their bilateral trade, the research employed a quantitative research design to analyze the bilateral trade prospects between India and Sri Lanka in light of the SAFTA and ISFTA agreements.
The study utilized secondary data on bilateral trade flows, trade agreements, and trade indices from the World Trade Organization (WTO), United Nations Conference on Trade and Development (UNCTAD), and research papers from the period of 1995–2023.
The process of collecting research papers spanning this period involved a systematic and multifaceted approach. This procedure aimed to ensure the comprehensive coverage of relevant scholarly works, trade agreements, and bilateral trade data to facilitate a thorough analysis of the research question (Figure 1). The collection of research papers began with an exhaustive search across reputable academic databases, including, but not limited to, academic journals, conference proceedings, and research repositories. Online databases such as Scopus, Web of Science, and Google Scholars were systematically explored. Keyword searches were conducted using a combination of terms related to trade agreements: bilateral trade, India, Sri Lanka, SAFTA, ISFTA, and relevant trade theories. Boolean operators and advanced search filters were employed to refine the search results and identify papers that directly addressed the research topic. The search process also extended to institutional websites and repositories of organizations specializing in trade research, such as the World Trade Organization (WTO) and the United Nations Conference on Trade and Development (UNCTAD). These organizations often provide access to a wealth of research reports, policy briefs, and working papers related to international trade agreements and trade dynamics. Additionally, prominent think tanks and economic research institutions were explored for publications that could contribute valuable insights to the research paper. To ensure the inclusion of the most recent research papers, a timeframe extending to 2023 was adopted. This approach enabled the incorporation of the latest developments in India and Sri Lanka’s trade relationships, as well as any recent assessments of the SAFTA and ISFTA agreements. The selection criteria for research papers involved a meticulous review of abstracts and titles to assess their relevance to the research questions. Papers that demonstrated a direct or tangential connection to the impact of trade agreements on bilateral trade between India and Sri Lanka were considered for inclusion. Moreover, citation networks were examined to identify seminal papers and those frequently cited in the literature, as these often represent foundational contributions to the field. By following citation trails, additional research papers that might have been missed during initial searches were uncovered, enriching the pool of resources available for analysis.
The cited papers in the research on this topic form a cohesive body of literature that is closely related and collectively contributes to the overarching objectives of the current work. These papers share common themes, methodologies, and research questions, creating a network of knowledge that enriches the understanding of trade agreements and bilateral trade dynamics between India and Sri Lanka. Firstly, the cited papers are related to each other through their shared focus on the impact of trade agreements on bilateral trade. They collectively form a research context that highlights the significance of trade agreements in shaping economic relationships between countries. These papers delve into the empirical assessment of these trade agreements, evaluating their effects on trade flows, tariff reductions, and trade complementarity. This empirical focus establishes a foundation for the current work’s quantitative analysis of the SAFTA and ISFTA agreements’ impact on India and Sri Lanka’s bilateral trade.
Moreover, the cited papers contribute to a shared understanding of the theoretical underpinnings of trade agreements and bilateral trade. They explore trade theories such as comparative advantage, factor proportions theory, and the gravity model, providing theoretical frameworks that guide the analysis of trade dynamics. For instance, Moktan [70] applied these trade theories to assess the expected and observed outcomes of trade agreements. This theoretical grounding aligns with the current work’s methodology, which employs trade theories to evaluate the SAFTA and ISFTA agreements’ impact on India and Sri Lanka’s trade complementarity and revealed a comparative advantage. Additionally, the cited papers are interconnected through their exploration of regional trade dynamics and trade agreements’ roles within broader regional contexts. Many of these papers consider the South Asian region as a whole, examining the relationships between countries beyond India and Sri Lanka. This broader perspective is evident in the paper by Akram [1], which evaluated the trade potential within the South Asian Association for Regional Cooperation (SAARC). While focusing on regional dynamics, these papers provide insights into the importance of bilateral trade relationships within larger regional trade blocs. This regional context is relevant to the current work, which seeks to understand how India and Sri Lanka’s bilateral trade fits into the broader regional and global trade landscape. Furthermore, the cited papers collectively offer insights into the calculation and application of trade indices, such as the revealed comparative advantage (RCA) and the trade complementarity index (TCI). These indices serve as analytical tools for assessing the comparative advantage and trade complementarity between countries. Also, the cited papers contribute to a shared exploration of policy implications arising from trade agreements and their impact on trade dynamics. These papers offer discussions on the potential consequences of trade agreements for industries, tariffs, and trade patterns. Understanding these policy implications is essential for the current work, as it seeks to evaluate not only the statistical significance, but also the real-world implications of the SAFTA and ISFTA agreements on India and Sri Lanka’s bilateral trade.
The analysis began by examining the trends and patterns of bilateral trade flows between India and Sri Lanka during the study period. The “revealed comparative advantage” index and the “trade complementarity” index were calculated to assess the comparative advantage and trade complementarity between the two countries. The RCA (revealed comparative advantage) was calculated by employing the formulation given below:
