Reimagining Sri Lanka-
European Union Relations

The United Kingdom officially left
the European Union on 31 January
2021 and after going through a
transition period of almost one year
on 24 December 2020. The EU and
UK concluded their trade and
cooperation agreement. Then on 31
December 2020 UK went onto EU
single market and the customs union.
Hence, goods moving between EU and
UK are now subject to different rules
and licensing and compliance
regimes.
Both EU and UK are important
economic and diplomatic partners to
Sri Lanka. After 5 years from the
Brexit referendum the future
connectivity between EU and UK
remains unclear. Hence, there is an
over-arching importance for Sri Lanka
to tap in to the opportunities
presented through re-alignment of
diplomatic and economic
relationships in Europe and to
develop solid relationships with
remaining EU countries who are
prominent players in the region.
Impact of Brexit on
Sri Lanka
Since 2016 which marked the
beginning of Brexit, the Sterling
Pound depreciated against many
currencies. However, as far as its
behaviour against the Sri Lankan
Rupee is concerned Sterling pound
has only gone from strength to
strength after the small initial dip in

  1. UK happens to be the largest
    contributor to the tourism sector in
    Sri Lanka in terms of guest nights.
    Hence, the appreciation of Sterling
    Pound against the Sri Lankan Rupee
    is beneficial for Sri Lanka. Due to this
    appreciation of the sterling pound
    against the LKR, the purchasing
    power of UK people in buying Sri
    Lankan goods increases substantially.
    This will help Sri Lanka with
    increasing its export volume to UK.
    The UK will no longer be part of the
    EU single market and the no trade
    concession, such as GSP Plus, will be
    offered as part of the EU policy. Most
    of the Sri Lankan exports to the
    European Union enters through UK.
    Therefore, Sri Lanka may not be able
    to receive GSP Plus for the goods that
    they export to both UK and EU
    through UK. Hence, Sri Lanka will
    have to find alternative trade
    gateways to EU because using UK
    gateway to EU will not enable them to
    access the GSP Plus tax concession.
    However, the indirect impact of the
    Brexit is difficult to assess. The world
    economy is integrated through a
    complex web of interrelated economic
    variables. The impact of Brexit may
    vary depending on the circumstances
    and the interaction of those economic
    variables. However, the immediate
    impact will be risk aversion. This will
    result in flight to quality, increasing
    safe haven assets like gold, USD and
    US treasuries while pressuring oil and
    commodities. The likelihood of US
    rate hikes are lower given the
    heightened risk of global economy.
    Brexit happened during a time
    when US was trying to raise its
    benchmark rates while the rest of the
    world was economically struggling.
    However, it must be noted that direct
    impact of Brexit on Sri Lanka will be
    negative. Because, both EU and UK
    are large trading partners of Sri
    Lanka.
    Overview of current
    relations between SL & EU
    During the last few years diplomatic
    relations between Sri Lanka and EU
    has grown stronger, with several high
    level dialogues between Colombo and
    Brussels. In the month of March, a
    delegation from European Union
    visited Sri Lanka to discuss early
    revival of investor dialogue between
    the two entities to ensure improved
    facilitation and promotion. Moreover,
    the EU-Sri Lanka joint commission
    seeks to build a partnership between
    the two entities by discussing bilateral
    and multilateral matters such as
    economic development and trade
    cooperation.
    Currently, countries like Germany,
    Netherlands, Denmark and Poland
    are sharing military ties with Sri
    Lanka. As per International news
    sources, like CNN and Reuters most
    of the European countries have
    already announced their interest to
    strengthen military and economic ties
    with Sri Lanka in the view of securing
    their spot in Indian Ocean and to
    benefit from the strategic position of
    Sri Lanka.
    The EU and Sri Lanka are closely
    linked economically. Many developing
    countries along with Sri Lanka has
    benefited from European Union’s
    Generalised scheme of preferences
    (GSP +) since its inception in 1970s.
    This scheme reduces import duties
    from products entering EU market in
    exchange for Sri Lanka abiding by
    international values and principles,
    including human rights and labour.
    However, in 2010, Sri Lanka lost the
    access to the GSP plus tax concession
    due to the poor implementation of the
    UN human rights convention but
    regained access in 2017.
    The European Union still stands out
    to be the biggest export market for Sri
    Lanka. In 2019, Sri Lanka exported
    goods worth USD 2.2 billion which
    amounts to 22% of total exports to the
    world and imported goods and
    imported goods worth 1.7 billion USD
    from the EU which accounts to 8% of
    total imports from the world. Among
    the EU member countries Sri Lanka
    boasts a trade surplus with 17
    member countries. In terms of total
    trade, Sri Lanka’s largest EU trading
    partners are Germany (25%), Italy
    (23%), France (13%), Belgium (10%)
    and the Netherlands (07%).
    Sri Lanka shares bilateral
    investment treaties (BITs) with several
    EU countries including Germany,
    Finland, France, Denmark, Sweden,
    Czech Republic, Romania,
    Netherlands and Italy. In 2018, Sri
    Lanka received USD 90 million
    Foreign Direct Investment (FDI) from
    EU which accounts for 5.6% of total
    FDI received. In comparison, India
    and China together accounted for
    65% of the total FDIs received by Sri
    Lanka.
    As far as tourist arrivals are
    concerned, Sri Lanka roughly received
    712,600 tourist arrivals from Europe
    in 2018 which accounts for 50.8% of
    total number of tourist arrivals of that
    year. Germany happened to be the
    largest market with 6.7% of total
    tourist arrivals. Moreover, around 350
    Sri Lankan workers have immigrated
    to Europe in 2019. Most of them are
    skilled workers.
    EU also plays a vital role in Sri
    Lanka in terms of knowledge
    exchange and cooperation, the EU
    and Sri Lanka engage through a
    variety of science and education
    exchange programmes such as
    Horizon 2020, the Erasmus plus
    which is considered to be the largest
    science and research programme in
    the world. Apart from EU awarding Sri
    Lankan with different scholarship
    schemes, EU also went on to support
    Colombo Scope 2019, a platform for
    local artists.
    Furthermore, EU has provided Sri
    Lanka with vital development and
    humanitarian assistance on
    numerous occasions. EU provided 40
    million Euros to finance the capacity
    development of authorities, 30 million
    Euros were granted for strengthening
    rural communities. 30 million Euros
    were allocated for the modernisation
    of agriculture, whilst 15 million Euros
    were granted for building institutional
    capacities and reducing language
    barriers to promote reconciliation
    efforts during post Brexit period.
    How could SL strengthen
    ties with EU
    In order to strengthen ties with EU, it
    is vital to increase Sri Lanka’s presence
    in the region by adding to already
    established 11 permanent diplomatic
    missions. These missions should
    engage in the economic diplomacy
    programme of Sri Lanka and have
    access to personnel with good business
    knowledge, soft skills and fluency in
    prominent European Languages such
    as German, French, Italian and
    Spanish. Currently linguistic
    differences between Sri Lanka and EU
    countries impede bilateral commercial
    ties. Therefore, it is essential to develop
    language capacity and cultural
    awareness in Sri Lanka by providing
    specific training to the Diplomats and
    aspiring diplomats who are studying
    International relations and global
    politics.
    To enter and remain competitive in
    the European market Sri Lanka needs
    to transform into a financial,
    technological and economic hub in
    the Indian Ocean. To do so Sri Lanka
    needs to improve the business
    environment for investments.
    Furthermore, Sri Lanka should
    encourage innovation, produce goods
    of high quality and move towards
    sustainable production concepts.
    Improving infrastructure services and
    enhancing the efficiency of cross-
    border procedures of the country is
    paramount for attracting investments
    from EU.
    Sri Lanka could strengthen their
    economic links with EU by designing
    and implementing coherent trade
    strategy alongside promoting the
    national export strategy. National
    export strategy must be revisited and
    strategised thoughtfully. It should be
    strategised in such a way that Sri
    Lankan products are able to compete
    in the European market. Moreover,
    the Sri Lankan government should
    focus on new range of export goods
    and services apart from the traditional
    export goods like Tea, Rubber,
    Coconut and Apparel.
    Furthermore, sustainable
    production concepts like green
    production, organic farming should
    be adopted by Sri Lankan companies
    since people in EU are highly
    concerned on quality and ethical
    practices. Small and Medium scale
    companies should be encouraged to
    work more efficiently.
    It has to be noted that Sri Lanka will
    lose access to GSP Plus in 2023,
    which shall result in increasing the
    relative prices of Sri Lankan exports
    to the EU. Therefore, Sri Lanka need
    to ensure preferential rates are
    provided post 2023.
    Covid-19 and Brexit have triggered
    many countries to rethink their current
    relationships with their global partners.
    EU happens to be one of Sri Lanka’s
    major trading and development
    partners. Sri Lanka has the potential to
    leverage on its existing ties with EU
    countries for a stronger and deeper
    integration. This will also help the
    island nation to mitigate and control
    uncertainties caused due to Covid-19
    pandemic and emerge stronger as a
    country after the pandemic.

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