A Legacy of Mutuality: The Rubber-Rice Pact
To understand why an FTA with China is not merely an economic calculation but a continuation of history, one must revisit 1952. In the early years of the People's Republic of China, when much of the world imposed embargoes and refused recognition, Ceylon (as Sri Lanka was then known) took a bold step. The two nations signed the Rubber-Rice Pact, a barter agreement whereby Sri Lanka supplied natural rubber to China and received rice in return. It was one of the first international trade agreements Communist China signed with a non-communist country, a testament to the mutual trust and pragmatic solidarity that has defined the relationship ever since.
That pact was not merely transactional; it was foundational. It enabled both nations to withstand external pressures and meet the essential needs of their people—food security for Sri Lanka, industrial inputs for China. As the Chinese Ambassador to Sri Lanka recently noted, the spirit of the Rubber-Rice Pact—independence, self-reliance, solidarity, and mutual assistance—remains a valuable legacy for both countries. In 2027, we will commemorate its 75th anniversary alongside 70 years of formal diplomatic relations. What better way to honor that legacy than by elevating the economic partnership to a comprehensive, modern framework?
The Cost of Standing Alone
Sri Lanka's current trade architecture is a patchwork of limited bilateral agreements with India, Pakistan, Singapore, and Thailand. Meanwhile, China has signed 24 free trade agreements covering 31 countries and regions. The world is not waiting. After a five-year hiatus during the crisis years, Sri Lanka restarted FTA negotiations with several Asian partners in 2023, including China. But progress has been halting, and the risk of further delay is real.
Remaining outside major trade agreements means Sri Lankan exporters face tariff disadvantages in key markets. It means the country misses out on the investment flows that follow preferential trade arrangements. Most critically, it means Sri Lanka's trade deficit—which widened to over $6 billion in 2024—continues to weigh on its recovery. The status quo is not neutral; it is costly.
Unlocking the Chinese Market
The most tangible benefit of an FTA with China is access to the world's second-largest consumer market. China's real consumption capacity ranks first globally when measured by purchasing power parity. For Sri Lankan products that already enjoy a reputation for quality—tea, spices, gemstones, garments, and fisheries—tariff-free access to 1.4 billion consumers represents a transformational opportunity.
Chinese Commerce Minister Wang Wentao has explicitly stated that an FTA would help Sri Lanka's competitive products gain greater market access and support the diversification of its export markets. This is not empty rhetoric. For Sri Lanka, whose export basket remains dangerously concentrated on the United States and Europe, China represents an alternative demand center that can absorb both traditional and non-traditional exports.
Capital Without Restraint?
One of the most persistent constraints on Sri Lanka's growth has been the limited availability of long-term capital. Sri Lanka maintains foreign exchange controls, and while the rupee is freely convertible for current account transactions, capital account restrictions remain significant. An FTA, coupled with the ongoing financial cooperation between the two countries, could begin to ease these constraints.
China's massive capital reserves, combined with its policy banks and sovereign wealth funds, represent a potential source of patient capital that Sri Lanka desperately needs for infrastructure, industrial upgrading, and export capacity building. Already, Chinese policy banks have restructured billions in Sri Lankan debt, extending maturities and reducing interest rates. The currency swap agreement between the People's Bank of China and the Central Bank of Sri Lanka—originally signed in 2014 and renewed in 2021—provides a mechanism for liquidity support that can mitigate foreign exchange pressures.
It would be a mischaracterization, however, to suggest that an FTA would automatically result in unrestricted capital flows. China's own experience with capital account liberalization has been gradual and pragmatic. What an FTA can do is create the institutional framework and confidence that encourages investment. As Chinese officials have noted, the early conclusion of an FTA would "boost the confidence of Chinese investors to invest in Sri Lanka". That confidence is currently lacking, and without it, capital remains on the sidelines.
Manufacturing Partnerships and Trade Facilitation
The FTA's provisions on trade facilitation could be equally transformative. Sri Lanka's effective protection remains high due to para-tariffs that compound import costs and create compliance burdens. An FTA would commit both parties to minimize these non-tariff barriers, creating a smoother flow of goods that benefits consumers and producers alike.
Chinese manufacturers have already signaled interest in deeper integration. At the 2025 Sri Lanka-China Trade and Investment Forum, Chinese chambers of commerce highlighted opportunities in textiles, machinery, electronics, and private investments under the Belt and Road Initiative. The China Chamber of Commerce for Import and Export of Textile Products noted that Sri Lanka's well-established garment processing industry, with its preferential access to EU markets under GSP+ status, positions it as a valuable partner for Chinese firms looking to expand production overseas.
This is the kind of partnership that moves beyond extraction to genuine capacity building. Chinese firms bring technology, capital, and access to global supply chains. Sri Lankan firms bring local knowledge, existing market relationships, and preferential access to Western markets. The complementarity is real.
Ports as Gateways, Not Barriers
The vision of trade conducted with minimal customs interference—approaching the model of a customs union—is ambitious but not fantasy. Both the Colombo Port City and Hambantota Port are already Chinese-invested projects that could serve as nodes in a seamless trade corridor. Hambantota, in particular, has attracted major Chinese industrial investment, including a planned refinery that would be the largest in Sri Lanka's history.
If an FTA includes robust trade facilitation measures—digital customs procedures, risk-based inspection, and mutual recognition of standards—the ports could evolve from bottleneck points into genuine gateways. The National Single Window System that Sri Lanka has been developing could be integrated with Chinese customs platforms, reducing clearance times and costs. This is not about surrendering sovereignty; it is about operational efficiency that benefits both sides.
The Verdict of Economic Models
The economic evidence, while mixed, supports the FTA case when examined carefully. A World Bank simulation found that an FTA with China would drive growth in textiles and wearing apparel, with output gains driven by exports to China, while also benefiting chemicals, rubber, plastics, and other manufacturing sectors. The same analysis found that full reform would increase exports by 24.2 percent relative to baseline.
Some models suggest Sri Lanka could experience welfare losses in a full liberalization scenario with China alone, primarily due to trade diversion and increased import competition. But this is precisely why the FTA must be comprehensive and paired with adjustment support. The World Bank analysis also found that employment shifts away from agriculture toward textiles and apparel, with the wearing apparel sector seeing net employment increases. The transition is manageable if properly sequenced and supported.
The Time Is Now
Sri Lanka cannot afford to remain on the sidelines of Asian economic integration. The question is not whether to engage with China—that engagement is already deep and multifaceted—but whether to formalize and expand it through an FTA that protects Sri Lankan interests while maximizing mutual benefit.
2027 offers a symbolic deadline that carries real meaning. Seventy-five years after the Rubber-Rice Pact demonstrated that two unequal nations could forge a partnership based on mutual respect, Sri Lanka and China have the opportunity to write the next chapter. A comprehensive FTA would not be a departure from that history but its logical culmination.
The alternative—continued drift, sporadic negotiations, and the slow erosion of competitive advantage—is a choice for isolation by default. In a world of mega-regional trade blocs and deepening supply chain integration, such a choice carries consequences. The Rubber-Rice Pact showed that Sri Lanka can be a pioneer rather than a follower. The question for 2027 is whether it will choose to be one again.