RCEP and Sri Lanka: A new chapter in regional trade

In a rapidly evolving and increasingly uncertain global trading environment, Sri Lanka faces an important strategic choice. As supply chains are reconfigured and regional economic partnerships assume greater significance, the country must decide whether to deepen its integration with emerging regional trading blocs such as the Regional Comprehensive Economic Partnership (RCEP) or risk remaining on the margins of regional value chains and market opportunities. This question has attracted renewed attention in recent months, generating a broad policy debate on both the opportunities and challenges associated with accession to the world’s largest regional trade arrangement.

The discussion gained momentum following recent diplomatic engagements with Australia and New Zealand, both founding members of RCEP. During these discussions, Foreign Minister Vijitha Herath reportedly received encouraging signals regarding Sri Lanka’s accession efforts. These developments have revived interest among policymakers, business leaders, and trade experts in evaluating the country’s prospects of becoming part of an economic grouping that now accounts for nearly one-third of global economic activity.

Sri Lanka’s interest in joining RCEP is not new. In June 2023, the country formally submitted its Letter of Intent to commence the accession process and subsequently obtained Cabinet approval to proceed with the necessary documentation and preparatory work. Sri Lanka was the first country to formally submit its intention to join the agreement after its entry into force. Since then, several other economies, including Hong Kong, Chile, and Bangladesh, have also expressed interest in accession, highlighting the growing international appeal of the arrangement.

Against this backdrop, the Pathfinder Foundation recently convened an Ambassadors’ Roundtable in Colombo titled “Sri Lanka’s Pathway to RCEP and the Emerging Global Trading Order.” The event brought together senior Government officials, including the Deputy Minister of Industry and Entrepreneurship Development and the Secretary to the Ministry of Trade, Commerce, Food Security and Co-operative Development, alongside High Commissioners and Ambassadors from Australia, New Zealand, and Indonesia. Representatives from Government institutions, trade chambers, leading think tanks, and the private sector also participated in discussions on the changing global trade landscape and Sri Lanka’s potential pathway towards RCEP membership.

Accession is not without challenges. Increased integration inevitably brings greater competition, and some domestic industries may face adjustment pressures as markets become more open. Policymakers must therefore carefully balance the long-term benefits of liberalisation with the need to manage short-term adjustment costs. This may require targeted support measures, capacity-building initiatives, and transitional arrangements to help vulnerable sectors adapt to changing competitive conditions. Sri Lanka’s tariff structure also presents certain challenges

Broader strategic lens 

The discussions underscored the importance of viewing Sri Lanka’s engagement with RCEP through a broader strategic lens rather than as a response to recent diplomatic developments alone. While expressions of support from several RCEP members are undoubtedly encouraging, accession ultimately depends on Sri Lanka’s ability to undertake the necessary institutional, regulatory, and economic preparations required to meet the obligations of membership. Understanding both the opportunities and challenges involved is therefore essential.

RCEP is currently the largest regional economic integration framework in the world. It brings together the ten member states of the Association of Southeast Asian Nations (ASEAN) and five of its major dialogue partners: Australia, China, Japan, the Republic of Korea, and New Zealand. Collectively, these economies account for approximately 30% of global GDP, nearly 29% of global trade, and around 30% of the world’s population. After almost a decade of negotiations, the agreement was signed in November 2020 and entered into force in January 2022.

The origins of RCEP lie partly in the challenges created by the proliferation of overlapping free trade agreements across Asia. Prior to RCEP, ASEAN member states maintained multiple bilateral and regional agreements with different tariff schedules, rules of origin, and regulatory requirements. This phenomenon, often described as the “noodle bowl effect,” increased compliance costs for businesses and limited the full benefits of regional integration. RCEP was designed to address these inefficiencies by creating a more coherent and streamlined framework governing trade and investment across the region.

One of the most distinctive features of RCEP is the diversity of its membership. The agreement encompasses economies at very different stages of development, ranging from highly industrialised nations to middle-income economies and least-developed countries. This diversity has necessitated a flexible approach to integration while creating opportunities for less-developed members to benefit from deeper participation in regional markets and production networks.

RCEP is also comprehensive in scope. Its legal framework extends well beyond trade in goods and covers services, investment, intellectual property, competition policy, e-commerce, dispute settlement, economic and technical cooperation, and support for small and medium-sized enterprises. It is therefore best understood not merely as a trade agreement but as a broader framework for regional economic integration.

Opportunity to diversify export markets

For Sri Lanka, one of the strongest arguments in favour of joining RCEP is the opportunity to diversify export markets. Successive governments have recognised the risks associated with excessive dependence on a limited number of export destinations. At present, approximately 60% of Sri Lanka’s merchandise exports are directed towards the United States, the European Union, the United Kingdom, and India. While these markets remain critically important, such concentration leaves the country vulnerable to changes in demand, economic downturns, and policy shifts in a relatively small number of economies.

In contrast, RCEP countries currently account for only a modest share of Sri Lanka’s exports despite representing some of the fastest-growing markets in the world. Membership would provide Sri Lankan exporters with improved access to a vast and increasingly affluent consumer base, creating opportunities to expand both the range of export destinations and the diversity of products exported. Such diversification could strengthen resilience against external shocks while supporting long-term export growth.

The scale of the RCEP market itself represents a compelling attraction. With a combined population of approximately 2.3 billion people, the agreement encompasses some of the world’s largest and most dynamic economies. Intra-RCEP trade has expanded significantly in recent years, reflecting growing economic interdependence and integration among member countries. For Sri Lankan businesses, preferential access to these markets could create opportunities across a wide range of sectors, including manufacturing, agriculture, services, and technology-based industries.

With a clear strategy and firm commitment from the Government, Sri Lanka has an opportunity to position itself more effectively within one of the most dynamic regions of the global economy and to use RCEP accession as a catalyst for greater competitiveness, economic diversification, and long-term growth

(The author is an International Trade Economist with over 35 years of experience specialising in trade and economic policy, trade facilitation, and international economic and development policy. He holds a Bachelor of Commerce (Hons), First Class, from the University of Peradeniya, a PhD in Economics from the University of Melbourne, and a master’s degree in international economics from the University of London currently serves as Executive Director of the Pathfinder Foundation)

Regional value chains 

Another important consideration is the role of regional value chains. RCEP economies are deeply integrated into global production networks and account for a substantial share of global value chain trade. Major production hubs within the region, including China, Japan, South Korea, and several ASEAN economies, serve as critical nodes in international manufacturing and services networks. Greater engagement with these production systems could help Sri Lanka move beyond traditional export activities and participate in higher-value segments of regional supply chains.

Such integration has the potential to facilitate technology transfer, improve productivity, enhance skills development, and attract export-oriented investment. Participation in regional value chains can also support industrial upgrading by enabling domestic firms to specialise in particular stages of production while benefiting from access to larger markets and more sophisticated technologies.

Investment considerations provide an additional rationale for accession. RCEP economies collectively account for a substantial share of global foreign direct investment flows and have already played a significant role in Sri Lanka’s investment landscape. Over the past two decades, RCEP members have contributed a considerable portion of total FDI inflows into the country. As multinational companies increasingly seek locations that provide access to integrated regional markets, RCEP membership could enhance Sri Lanka’s attractiveness as an investment destination.

Important catalyst for domestic reform

Beyond trade and investment, accession could serve as an important catalyst for domestic reform. Many of the disciplines embedded within RCEP relate to areas such as customs modernisation, trade facilitation, investment regulation, services liberalisation, digital trade, and broader governance arrangements affecting the business environment. Progress in these areas has often been slower than policymakers and businesses would prefer. The accession process could provide an external framework that encourages reforms aimed at improving efficiency, transparency, and competitiveness.

Nevertheless, accession is not without challenges. Increased integration inevitably brings greater competition, and some domestic industries may face adjustment pressures as markets become more open. Policymakers must therefore carefully balance the long-term benefits of liberalisation with the need to manage short-term adjustment costs. This may require targeted support measures, capacity-building initiatives, and transitional arrangements to help vulnerable sectors adapt to changing competitive conditions.

Sri Lanka’s tariff structure also presents certain challenges. Compared with many RCEP economies, the country maintains relatively higher average tariff levels and continues to rely on a range of para-tariffs and other trade-related charges. Aligning with the more liberal trade regimes prevailing within RCEP may require significant policy adjustments and careful consideration of sectoral sensitivities.

Services and investment commitments present another area requiring attention. RCEP’s provisions extend beyond traditional trade issues and encompass broader regulatory disciplines. Compliance with these commitments may necessitate reforms to domestic regulations and institutional practices. While such reforms can generate long-term benefits, they also demand substantial administrative capacity and effective coordination across Government agencies.

Trade agreements require ongoing implementation, monitoring, and engagement long after negotiations have concluded. Strengthening institutional capacity should therefore be regarded as a long-term national investment that will support Sri Lanka’s broader economic objectives

Institutional readiness 

Institutional readiness therefore emerges as one of the most critical factors determining the success of Sri Lanka’s accession efforts. Negotiations involve extensive technical discussions across multiple policy areas and require sustained coordination among ministries, regulatory authorities, trade institutions, and private-sector stakeholders. Building a capable and technically proficient negotiating team is essential, particularly given the complexity and breadth of RCEP commitments.

A robust institutional framework is equally important. Responsibilities related to accession cannot remain fragmented across multiple agencies. Instead, a coordinated national approach is needed to align trade policy, investment promotion, regulatory reform, and implementation priorities. This should be supported by a clear negotiation strategy that identifies national priorities, assesses potential adjustment costs, and ensures that accession contributes meaningfully to broader development objectives.

Importantly, institutional capacity should not be viewed solely as a requirement for accession negotiations. Trade agreements require ongoing implementation, monitoring, and engagement long after negotiations have concluded. Strengthening institutional capacity should therefore be regarded as a long-term national investment that will support Sri Lanka’s broader economic objectives.

Sri Lanka’s renewed engagement with RCEP comes at a time when global trade and investment are increasingly shaped by regional economic frameworks. The opportunities associated with greater market access, stronger participation in regional value chains, enhanced investment flows, and deeper economic integration are significant. However, realising these benefits will require careful preparation, strategic negotiation, and sustained political commitment.

As the country remains at an early stage of the accession process, the immediate priority should be to strengthen domestic preparedness. Building technical expertise, improving institutional coordination, conducting rigorous impact assessments, and engaging closely with the private sector will be essential. With a clear strategy and firm commitment from the Government, Sri Lanka has an opportunity to position itself more effectively within one of the most dynamic regions of the global economy and to use RCEP accession as a catalyst for greater competitiveness, economic diversification, and long-term growth.