During the past two decades, Sri Lanka has experienced economic growth through liberal economic policies, together with structural adjustment and other agricultural policy reforms. In Sri Lanka, new technologies and regulatory devices were used to mitigate environmental problems such as soil degradation. However, there has been concern about the impact of policy liberalization and implementation of the GATT/Uruguay Round Agreement Agriculture (GURAA) on the environment. This paper analyses the likely economy-wide effects of trade liberalization in non-plantation agriculture (especially rice and other field crops) in Sri Lanka, using a compatible general equilibrium (CGE) model. This model captures the environmental impacts of policy changes, particularly on-site and off-site effects of depletion of land quality. Preliminary results shows that trade liberalization in non-plantation agriculture is an environmentally friendly ('green') policy device which leads to both higher economic growth and reduced environmental degradation.