This paper revisits the long standing controversy of trade and poverty linkage using a macro-micro
approach based on general equilibrium and microsimulation analytical frameworks. Sri Lanka, the first
country in South Asia which undertook trade reforms more than three decades ago, is taken as a case in
point in this study. The paper analyses the effects of trade liberalisation on income distribution and
poverty in the urban, rural and estate sectors in Sri Lanka using the first ever microsimulation model
built for the country in combination with a multi-household Computable General Equilibrium (CGE)
model. The results reveal that without any fiscal policy adjustments a 100% tariff cut would lead to an
increase in economic growth and a reduction in poverty incidence both in the short run as well as in the
long run. However, when the tariff cut combined with the fiscal policy adjustments to maintain the
budget neutrality, poverty outcomes showed mixed results. In contrast, results show that trade
liberalisation increases the income inequality in Sri Lanka.