Close economic ties and virtual ‘free trade’ between the small island economy of Sri Lanka and its growing big neighbor – India, appear to have created scope for the former to integrate into the supply chains of the latter. The paper is aimed at studying whether Sri Lanka has been integrating into the Indian manufacturing processes in line with emerging trade patterns based on ‘global product sharing’. In spite of popular perceptions about the deeper integration of Sri Lanka into Indian supply chains, the study suggests that Indo-Lanka Free Trade Agreement (FTA) has not led to a breakthrough in the ‘old style’ trade integration between the two countries. While Sri Lanka’s trade expansion under the FTA has brought about peculiar outcomes, the country’s integration to Indian manufacturing processes has performed slowly and continued to remain weak. The specific policy issues related to Indo-Lanka FTA itself and to the bilateral trade expansion appear to have hindered their productsharing. Generally, trade and growth patterns in both Sri Lanka and India are different from the experience of East and Southeast Asian countries which created opportunities to accommodate the formation of globalized supply chains of fragmented manufacturing processes. The study draws out conclusions and inferences with policy relevance for bilateral trade, while notifying the danger of bilateral ‘free trade’ against rising protectionism.
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