By Imesha Dissanayake

Introduction

Sri Lanka known for its biodiversity and strategic location, is increasingly challenged by the global climate crisis. With rising temperatures, extreme weather, and sea-level rise, the country faces disruptions across key economic sectors, particularly agriculture, tourism, and manufacturing. This article explores how trade policies can integrate climate action to transform vulnerabilities into opportunities, aligning economic growth with environmental sustainability.

The Climate-Trade Nexus

Climate change and international trade are deeply intertwined. Extreme weather disrupts trade by damaging infrastructure and reducing production in export-oriented sectors. Rising sea levels threaten port facilities, essential for Sri Lanka’s trade-dependent economy. Moreover, climate-induced resource scarcity, such as water shortages, could hinder agricultural and manufacturing outputs.

Agriculture is highly vulnerable to climate change, with regions like Sub-Saharan Africa and South Asia projected to face severe yield shocks. A 1°C rise in temperature could reduce agricultural export growth in low-income economies by up to 5.7%. Additionally, the simultaneous failure of crop systems in multiple food-producing countries could heighten trade volatility and food security risks.

Tourism is another sector at significant risk from climate change. Hotter summers may reduce the appeal of traditional summer destinations, while warmer winters threaten winter and mountain tourism. Coastal destinations face rising sea levels and extreme weather. With tourism contributing 10% of global GDP and one in 10 jobs worldwide, economies heavily reliant on tourism are especially vulnerable.

While less directly impacted, manufacturing sectors relying on climate-sensitive inputs, labour-intensive processes, or global value chains are exposed to risks from extreme weather. Disruptions to manufacturing hubs, such as the 2021 floods in Thailand, can result in significant economic losses, with cascading effects along supply chains.

Climate change is likely to reshape comparative advantages across regions. A 2.5°C temperature increase by 2060 could decrease export volumes by up to 5-6% in South Asia and Sub-Saharan Africa, and 3-4% in the Middle East, North Africa, and Southeast Asia. In contrast, Europe and North America would experience less than a 1% decline. Countries dependent on commodities or lacking diversification are particularly vulnerable, struggling to adapt their comparative advantages.

Trade as a Double-Edged Sword

International trade has both exacerbated and mitigated climate change. Energy-intensive industries and long transportation routes contribute to emissions. Conversely, trade can facilitate the diffusion of clean technologies, promote resource-efficient production processes, and create global markets for climate-friendly goods and services.

Sri Lanka has a unique opportunity to leverage trade as a tool for both economic growth and environmental sustainability. By adopting these strategies, the nation can position itself as a leader in sustainable development on the global stage.

The WTO studies that opening up trade in Energy-Related Environmental Goods (EREG) and Environmentally Preferable Products (EPP) could significantly boost global exports of these goods by 5% and 14%, respectively, by 2030. Eliminating tariffs and reducing non-tariff barriers by 25% on these products is projected to create substantial new trade opportunities, increasing trade value in real terms by USD 109 billion for EREG and USD 10.3 billion for EPP.

Regions exporting EPP could see growth of up to 30-40%, benefiting especially low-income countries with a comparative advantage in these goods. However, trade in EREG is expected to concentrate among large exporters with improved market access.

Despite these regional variations, the overall economic impact is positive. Freer trade in green technologies is predicted to boost global GDP by 0.8% by 2030, driven by reduced inefficiencies, increased productivity, and lower costs for energy-efficient technologies. This underscores a dual benefit: advancing environmental goals while enhancing global economic growth.

Integrating Climate Considerations into Trade Policy

1. Promoting Sustainable Trade Practices

Environmental Goods and Services: By fostering trade in environmentally friendly goods (Eg:  renewable energy products) and services, Sri Lanka can attract foreign investment, create export opportunities, and support global decarbonisation. Trade also plays a vital role in disaster response and economic recovery, as demonstrated by Pakistan's tax exemptions on flood relief imports in 2022.

Organic Agriculture: Leveraging its agricultural tradition of Chena cultivation, Sri Lanka can expand exports of organic products like fruits, tea, and spices, capitalising on a global organic food market projected to reach USD 658.38 billion by 2034 according to Precedence Research.

Eco-Tourism: With its natural beauty, Sri Lanka can attract eco-conscious travelers by promoting sustainable tourism practices, including eco-lodges, waste management, and conservation initiatives like the Pekoe Trail.

Green Building Materials: The production and export of eco-friendly construction materials (Eg:  bamboo, recycled plastics) offer another avenue for growth. Furthermore, the LEED-certified ITC Ratnadipa building exemplifies the potential for attracting foreign direct investment in this sector.

Trade in Services: Services like weather forecasting, insurance, and logistics can enhance climate preparedness and be traded internationally, adding value to Sri Lanka’s service sector.

Eco-Labeling and Certification: Transparent eco-labeling schemes, supported by frameworks like Sri Lanka’s National Framework on Eco-labeling, can improve market access for exports. Capacity building on international standards, such as ISO 14020, will be crucial.

Life Cycle Assessments (LCA): Encouraging businesses to conduct LCAs can identify environmental impacts and by-product opportunities, fostering sustainable practices and advancing a circular economy.

1. Leveraging Trade for Decarbonisation and Conservation

Sri Lanka can use trade agreements to boost exports of climate-friendly products (Eg:  organic goods) and advocate for environmental clauses to promote sustainability among trading partners such as APEC’s tariff reductions on 54 environmental goods.

Additionally, recent EU trade agreements with Japan, Singapore, and Vietnam incorporate advanced environmental commitments, offering a template for Sri Lanka to negotiate similar provisions in future trade deals.

Figure 01: Provisions on environmental goods and services are increasingly included in Regional Trade Agreements (RTAs)

Balancing Challenges and Opportunities

While integrating climate considerations into trade policy offers significant opportunities, there are challenges to navigate:

• Trade-Offs Between Trade Liberalisation and Environmental Protection:Concerns may arise about potential trade-offs between trade liberalisation and environmental protection. Sri Lanka will need to strike a balance to ensure its trade policies promote both economic growth and environmental sustainability.

• Capacity Constraints: Implementing these strategies may be hindered by limitations in human resources, technical expertise, and financial resources. Building institutional capacity and seeking international cooperation will be crucial.
• Non-Tariff Barriers: This can include stringent environmental regulations that Sri Lankan exports may not currently meet. Evolving regulations in key export markets like the European Union (EU) and Australia are increasingly focusing on environmental sustainability. Regulations such as Carbon Border Adjustment Mechanism (CBAM), the Corporate Sustainability Due Diligence Directive (CSDDD), and the European Union Deforestation Regulation (EUDR) will impact Sri Lankan exports, particularly rubber and smallholder manufacturers, by 2030 according to the Center for Smart Future. This will require businesses to adopt sustainable practices, traceability systems, and certifications to ensure compliance and avoid penalties. Sri Lanka must proactively address these challenges through policy and industry preparedness to maintain access to the EU market.

However, significant opportunities also exist:

• Access to Green Markets: By adopting sustainable practices, Sri Lankan exporters can gain access to rapidly growing global markets for environmentally friendly goods and services.
• Innovation and Technological Advancement: Integrating climate considerations into trade policy can incentivise innovation and investment in clean technologies and resource-efficient production processes, leading to long-term economic benefits.
• Enhanced Competitiveness: Sustainable trade practices can enhance Sri Lanka's overall competitiveness in the global marketplace, attracting environmentally conscious consumers and businesses seeking reliable suppliers committed to environmental responsibility.

Mobilising Trade Policy Actions: Practical Steps for Sri Lanka

To align trade policy with climate goals, Sri Lanka should focus on several actionable strategies:

• Strengthening Institutional Capacity: Building expertise in key government ministries, such as Trade and Environment, is essential. This can be achieved through training, knowledge exchange with other countries, and establishing inter-ministerial coordination mechanisms.
• Stakeholder Engagement: Collaboration with businesses, trade unions, and civil society is critical. Public-private partnerships and capacity-building programmes for exporters can foster innovation and readiness for sustainable trade practices.
• Trade Finance Instruments: Introducing financial incentives like preferential loans or risk-sharing mechanisms for businesses adopting green technologies can promote environmentally friendly trade.
• Monitoring and Evaluation: Regular reviews of trade policies' climate impacts, using transparent reporting and stakeholder engagement, can ensure policies remain aligned with climate goals.
• International Cooperation: Partnerships with development agencies, multilateral institutions, and countries committed to sustainable trade can provide technical assistance, funding, and knowledge-sharing opportunities.

Conclusion

Sri Lanka's response to the intertwined challenges of trade and climate change will define its economic trajectory. By prioritising sustainable trade practices, the nation can mitigate climate risks, enhance its global competitiveness, and contribute to a greener future. Collaboration, innovation, and bold policymaking are essential to navigate these uncharted waters, ensuring that Sri Lanka’s trade winds propel it towards a sustainable and prosperous future.

The Full Report can be accessed at; Sri-Lankas-Trade-Winds_Navigating-the-Currents-of-Climate-Change_final.pdf

The writer is an Economist attached to the Economic Intelligence Unit (EIU) of the Ceylon Chamber of Commerce (CCC). This article is part of the Strategic Insight Series that focuses on key contemporary topics that matter to the private sector.