Trump tariffs: How can Sri Lanka mitigate the pain?

The Trump tariffs are likely to incentivise countries to improve access to markets outside the US via trade agreements

The global trading system faces a significant shock following the imposition of new US tariffs. These measures, announced on 2 April (‘Liberation Day’), represent a drastic escalation of the ‘America First’ trade policy under President Trump. Given the US’s position as the world’s largest economy (accounting for roughly a quarter of global GDP in 2023) and largest importer, such unilateral actions inevitably risk widespread economic disruption.

The tariffs announced on 2 April were beyond what anyone could have imagined in terms of their size, the countries covered, and how they were calculated. But that has indeed been the style of the Trump administration. It should be clear to everyone by now that the world must brace itself for a turbulent ride as the ‘America First’ trade policy unfolds under the leadership of President Trump. 

Sri Lanka exports around $ 3 billion worth of goods to the United States, accounting for around 25% of the country’s total exports. Apparel is the largest export product to the US (68%), followed by rubber products (10%), and tea and spices (2%). Sri Lanka does not have a trade agreement with the US to cushion the blow. Even when the US GSP program (a unilateral preferential access arrangement for imports from developing countries) was active, it provided preferential access to only 8% of Sri Lanka’s exports to the US. The program has not been renewed by the US since it expired in December 2020. 

The article argues that the impact of Trump tariffs will extend beyond exports to the US. The pressure to offer quick fixes by entering bilateral talks with the US remains high. However, this article highlights the importance of going beyond such quick fixes. Sri Lanka will be better off using this moment as an opportunity to implement broad-based reforms to enhance its global competitiveness. Such reforms will help Sri Lanka weather the impact better, seize opportunities that arise with shifts in global trading patterns and at the same time positively impact its engagement with the US. 

The impact of tariffs will extend beyond exports to the US

The relatively higher tariff rate imposed on Sri Lanka at 44% compared to many competitor countries subject to lower tariffs makes Sri Lankan exports significantly less competitive in the US market. Only eight of the 187 trading partners listed face a higher tariff rate than Sri Lanka. For example, Sri Lankan exporters will end up paying 18% more in taxes when exporting to the US than Indian exporters, who face a lower tariff rate of 26%. 

This is bad news for Sri Lankan exporters. Many were already finding it challenging to be cost-competitive vis-à-vis their competitors even before Trump tariffs. This external shock hits Sri Lanka at a time of significant economic fragility. The country is still navigating the aftermath of an unprecedented economic crisis, leaving it with a diminished capacity to absorb such blows.

The expected contraction in overall US demand will only add to the pain. The Liberation Day tariffs are an addition to the existing tariffs. Such high taxes and the resulting increase in prices will negatively impact US consumer demand. Reports state that US consumer confidence hit a four-year low towards the end of March 2025. Together, these taxes and the unfolding trade war have increased the risk of the US going into a recession. 

The uncertainty and volatility in the tariff regime over the coming days, weeks, and months—resulting from further revisions to the tariff regime—will be another pain point. This uncertainty will make buyers hesitant to place orders and deter investors from proceeding with their investments. The tariff regime will continue to undergo revisions in response to actions by foreign governments as well as entities within the US. Larger trading partners may opt to retaliate —China has already announced 34% retaliatory tariffs on all US imports. 

China’s response to US tariffs has increased fears of a full-blown trade war between the first and second largest economies in the world, which together account for 43% of the global GDP. This escalation is bound to further slow down the already sluggish global economic growth. As a result, exporters may experience reduced demand not just in the US, but in other markets as well. 

The US tariffs underscore the long-recognised need for Sri Lanka to diversify its export markets beyond heavy reliance on the US and EU, collectively accounting for over 48% of exports. Despite its strategic location, Sri Lanka has historically underperformed in penetrating dynamic Asian markets. The current disruption should lend fresh urgency to this ‘pivot to Asia’. Trump tariffs should act as an incentive to double down on efforts to diversify markets. While the current shifts in the trading regime may appear bleak, they also present opportunities. As US policies reshape global trading patterns, Sri Lanka should strive to seize the opportunities that arise with it

What can Sri Lanka do?

Countries like Sri Lanka that cannot afford to retaliate are lining up to negotiate a reduction or elimination of tariffs. According to the US administration, over 50 countries directly contacted the White House to initiate trade talks. As countries line up with what they can offer in return for lower tariffs, some are likely to receive preferential treatment over others, depending on the importance of their markets and the attractiveness of their offers. Sri Lanka already seems to be falling behind the line. 

Vietnam, which faces a higher tariff than Sri Lanka at 46%, has agreed to reduce tariffs on US goods to zero. Cambodia, facing an even higher tariff of 49%, wants to reduce tariffs on US goods to 5%. Elon Musk’s Starlink is also seen as a bargaining chip, given the Trump administration’s close ties to the billionaire. Vietnam rushed to approve Starlink’s internet service even before the Liberation Day tariff announcement. 

The temptation and pressure to cherry-pick things just to please the Trump administration remain high. However, Sri Lanka will be better off using this moment as an opportunity to implement long-delayed reforms that are beneficial for the country, which at the same time will positively impact its engagement with the US. 

Reduce domestic trade and investment barriers

The method used to calculate tariffs is problematic and has little to do with reciprocity. For example, Sri Lanka’s 44% tariff was calculated by dividing Sri Lanka’s trade deficit of $ 2.8 billion by the value of imports from Sri Lanka to the US of $ 3.2 billion, to arrive at 88%, and then dividing that by two. 

While the US tariff calculation methodology appears flawed, the situation could serve as a catalyst for Sri Lanka to address its own long-standing trade barriers. These barriers are not specifically designed to prevent imports from the US. All imports, regardless of origin, are subject to high taxes. In fact, Sri Lanka imposes multiple taxes on imports. Non-tariff barriers (i.e. unnecessarily burdensome and time-consuming regulations and procedures) are a significant problem faced by both exporters and importers in Sri Lanka.

The question to ask is whether Trump’s tariffs can serve as a wake-up call for Sri Lanka to implement the reforms that are beneficial to the country, which have been delayed for too long. High trade barriers have hurt the Sri Lankan economy by undermining its trade competitiveness and attractiveness for export-oriented investments. Although the need to reduce these barriers has been long recognised, successive Governments have failed to make meaningful progress. For example, Sri Lankan businesses have been waiting for nearly three decades for a trade single window – an automated trade platform that eliminates the need to submit multiple documents manually to multiple organisations. The same is true for the so-called “one-stop shop for investments”. 

This inertia is reflected in Sri Lanka’s disappointing, poor performance in both exports and foreign direct investment (FDI). The country’s exports of goods and services as a percentage of GDP dropped from 39% in 2000 to 20.5% in 2023. FDI has remained below $ 1 billion annually on average for over two decades. Previous export targets, such as doubling goods exports from $ 10.6 billion in 2011 to $ 20 billion by 2020, were significantly underachieved. Goods exports stood well below the target, at $ 12.8 billion, at the end of 2024. The challenge of achieving the new export target of $ 36 billion by 2030 has only become more daunting with the ‘America First’ trade policy and the resulting trade war between the world’s largest trading nations. 

Strengthening the government procurement framework in line with international best practices offers another avenue for reform with potential economic and diplomatic benefits. The US International Trade Administration website lists Sri Lanka’s government procurement framework and practices as highly problematic. Concerns include the acceptance of unsolicited proposals, procurement that bypasses the competitive bidding process, and a general lack of transparency and accountability. This poses challenges not only for US businesses but for Sri Lanka as well. 

Improving procurement processes is a priority area identified by the IMF governance diagnostic, which highlights it as essential for reducing corruption and improving the management of public finances. Recommended reforms include developing a procurement law in line with international best practices, eliminating unsolicited proposals for public procurement, and enhancing the disclosure of information, including procurement contracts. Fast-tracking these reforms would strengthen governance and public financial management while also positively influencing Sri Lanka’s engagement with the US.

If Sri Lanka can commit to clear timelines and follow through on implementation (which it rarely does), it could help convert the current adverse situation into a favourable one. 

Pivot to Asia, better late than never 

The US tariffs underscore the long-recognised need for Sri Lanka to diversify its export markets beyond heavy reliance on the US and EU, collectively accounting for over 48% of exports. Despite its strategic location, Sri Lanka has historically underperformed in penetrating dynamic Asian markets. The current disruption should lend fresh urgency to this ‘pivot to Asia’. 

Trump tariffs should act as an incentive to double down on efforts to diversify markets. While the current shifts in the trading regime may appear bleak, they also present opportunities. As US policies reshape global trading patterns, Sri Lanka should strive to seize the opportunities that arise with it. 

Proactively working to eliminate domestic trade and investment barriers will be critical for successful market diversification. Additionally, addressing some of the key supply-side constraints faced by Sri Lankan businesses that undermine their competitiveness will complement these efforts. These can range from upskilling the country’s workforce and investing in quality investment zones to boosting agricultural productivity. 

The Trump tariffs are likely to incentivise countries to improve access to markets outside the US via trade agreements. The renewed interest in concluding the EU–India Trade Agreement, which has been in the making for over a decade, is a good example.  Sri Lanka has, for too long, shied away from trade agreements. The country’s attempts to diversify into Asian markets will depend on its ability to reduce barriers faced by its firms in these markets via trade agreements. This requires more than just repeated rounds of negotiations: it requires Government investment in a robust institutional framework that supports the negotiation of good agreements. 

Finally, bolstering economic diplomacy to provide practical, on-the-ground support for firms entering new markets is vital. Accessing new markets is inherently challenging, and even more so in the current environment. Firms need access to reliable information about the market, regulations, standards, buyers, and support with networking. The cost of acquiring such information can be significantly high and act as a barrier, especially for small and medium enterprises. 

These reforms—reduction in domestic barriers to trade and investment, strategic trade agreements, and effective economic diplomacy—are mutually reinforcing. While the Trump tariffs present a painful immediate challenge, they also create a stark imperative for Sri Lanka to finally implement the reforms needed to build a more resilient and competitive economy. 

(Subhashini Abeysinghe is a Research Director, and Mathisha Arangala, a Lead Economist at Verité Research, a think tank based in Colombo.)