higher the degree of own liberalization and improved market access the higher the gains in GDP, exports and imports, but also the higher the sectoral reallocation and adjustment costs.

**Table 3: Key macro implications of simulated scenarios, percentage deviations from the baseline**

||**Para-tariff**<br>**liberalizati**|<br>**on**|**China F**|**TA**|**India FTA**||**Full refor**|**m**|
|---|---|---|---|---|---|---|---|---|
||2023|2028|2023|2028|2023|2028|2023|2028|
|GDP|0.77|1.97|0.83|1.37|0.94|2.18|1.37|2.81|
|Exports|7.6|18.3|3.3|7.52|3.8|19.3|7.52|24.23|
|Imports|5.4|9.8|4.2|11.11|5.1|11.6|11.11|18.86|

Source: Staff estimates based on LINKAGE CGE simulations.

**The sectoral impacts of scenarios are driven by the relative liberalization of imports and exports and initial trade shares with integrating countries** . Sectors where products are exposed to tougher competition as a result of the reduction of imports duties, might be crowded out by imports. At the same time if they constitute important inputs to domestic production of the same or other sectors, the domestic output of sectors which use those inputs intensively might expand. With better access to foreign markets certain domestic products become more competitive abroad and enjoy higher sales on foreign markets.

**Under the unilateral para-tariffs liberalization scenario the key sectors that benefit from the lower import duties are wearing apparel and textiles, services, trade and transport.** For some these sectors, demand is being stimulated either by their use in trade (trade and transport) or by higher spending power of consumers due to faster growth of income. As resources are attracted into sectors which become more competitive, selected sectors are bound to see their output declining due to finite availability of capital and labor. A few sectors experience small declines of domestic output, while they are being replaced by more competitive imports. Those negatively affected include other agricultural products, milk and food products. Under unilateral liberalization scenario exports of wearing apparel expand mostly to the United States and rest of the world, while additional exports of machinery and other manufacturing products are mostly directed to India, rest of Asia, the United States and rest of the world (Figure 15).

**Under the FTA with China the results are also largely driven by Sri Lanka’s unilateral liberalization of para-tariffs with the decline of the same sensitive sectors as in the previous scenarios** (Figure 11). In this scenario, the main sectors experiencing expansion of output include textiles and wearing apparel, whose output gains are driven solely by exports to China (Figure 12). Contrary to previous scenarios sectors experiencing gains in output and exports to China include also other crops, fishing products, chemicals, rubber and plastic products and other manufacturing goods.

**Under the FTA with India the output of wearing apparel and textiles as well as other crops expand the most** (Figure 9). The expansion of those sectors is mostly driven by a boost to exports to India, with exports of other machinery and other manufacturing goods also expand to the rest of the world and the rest of Asia (Figure 10). Similarly, to unilateral scenario, several sectors would be expected to see their output decrease slightly relative to the baseline 2028 level (their level is still above their current values). Sectors experiencing negative impacts include vegetables and fruits, other agricultural goods, food and milk products. Those results are mostly driven by the unilateral liberalization of para-tariffs in those sectors and not by specific commitments in their FTA with India.

**In the full reform scenario, the results are more pronounced, with an increase of exports of 24.2 percent relative to the baseline, compared with 18.3 percent under para-tariff liberalization alone** . Sectors like wearing apparel, which has one of the highest increases of production, are benefiting from cheaper imported inputs derived by an increase of imports due to lower tariffs, and therefore becoming

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