Strategic pathways for Sri Lanka – navigating US reciprocal tariff regime: Part 2

The pathway ahead will require sustained policy momentum, strategic alliances, and pragmatic reforms 

Introduction

With the enactment of the US Executive Order on Reciprocal Tariffs—unveiled on 2 April 2025—Sri Lanka finds itself among the nations most heavily impacted, facing a 44% ad valorem duty on all goods exported to the US. The first part of this article series provided a comprehensive breakdown of the origin, rationale, and structure of this policy. It examined how countries were tiered and how Sri Lanka’s effective trade burden was assessed at 88%, culminating in its current tariff status.

Part 2 shifts focus from the cause and effect to the course of action. It evaluates the steps Sri Lanka can take to mitigate the economic fallout, adjust its trade orientation, and leverage this moment as a turning point for reform. Encouragingly, the Sri Lankan Government has already initiated concrete and timely action. These include launching diplomatic engagements and appointing a high-level committee to assess and respond to the challenge. While the situation is serious, it is far from insurmountable.

This article outlines short-term, medium-term, and long-term strategies for Sri Lanka and identifies opportunities for recalibration and resilience. The tone is intentionally constructive—because the present disruption, if managed skilfully, can also become a catalyst for transformation.

1.Immediate response: Structured engagement and policy alignment

In response to the US Executive Order, the Sri Lankan Government acted promptly by initiating a coordinated national response.

On 3 April 2025, President Anura Kumara Disanayake appointed a high-level expert committee tasked with assessing the implications of the reciprocal tariffs and advising on mitigation strategies. This committee includes senior officials from key economic institutions such as the Ministry of Finance, Central Bank, BOI, EDB, and Foreign Ministry, alongside representatives from the private sector and academia. Its scope covers a full-sectoral impact assessment and the formulation of a national action plan.

The Deputy Minister of Economic Development further clarified that the tariff was not a targeted action against Sri Lanka but part of a broader recalibration of US trade policy. In this context, the government has begun diplomatic engagements, including outreach to the US Trade Representative’s office, to advocate for Sri Lanka’s case, particularly in light of its IMF-backed reforms and developing country status.

The committee’s role is especially critical. It is well-positioned to assess and integrate many of the strategies discussed in this article—from trade diversification and tariff engineering to proactive WTO diplomacy and value chain strengthening. The Government’s willingness to act swiftly and seek expert input reflects the importance of aligning policy, diplomacy, and industry support in facing the reciprocal tariff regime.

2.Reframing the challenge

Before delving into long-term strategies, it is important to reframe the situation not as an insurmountable threat but as a disruption that can be managed through smart, data-driven policies.

It is crucial to note:

• The US tariff is not a sanction but a reciprocal tariff—a tool the US is using to press for “fair treatment” of its exports.
• The burden arises not from any single event or policy failure in Sri Lanka, but from global trade dynamics that the US perceives as structurally imbalanced.
• While Sri Lanka was flagged with an “88% effective trade burden,” the methodology behind that figure remains opaque. Regardless, the response must be diplomatic, data-backed, and forward-looking.

3.Strategic pathways for Sri Lanka

Sri Lanka’s response should be mapped over three time horizons—short, medium, and long term—each with specific policy levers and institutional actions.

A.Short-term (0–6 months): Stabilise and signal

Objective: Maintain business confidence, prevent export disruption, and open diplomatic channels.

Key actions:

1.High-level diplomacy

• Engage the US Trade Representative (USTR), Department of Commerce, and Congress through formal diplomatic channels.
• Utilise embassies and consulates to push for case-by-case tariff relief or targeted exemptions (as permitted under Annex II of the Executive Order).

2.Communicate transparently with exporters

• Coordinate with industry associations to relay tariff specifics, affected HS codes, and implications.
• Help exporters navigate potential duty drawback schemes or cost pass-through mechanisms.

3.Conduct a sectoral impact assessment

• Commission detailed impact modelling across apparel, rubber, agricultural exports, and logistics.
• Prioritise vulnerable supply chains and employment-intensive sectors.

4.Build multilateral coalitions

• Coordinate with similarly affected countries—like Vietnam, Cambodia, and Pakistan—to jointly raise concerns at the WTO or regional trade forums.

5.Safeguard forex flows

• Liaise with the Central Bank to monitor trade-related USD inflows and adjust reserves strategy if disruptions become prolonged.

B.Medium-term (6–24 months): Diversify and upgrade

Objective: Reduce vulnerability to US demand shocks by diversifying export destinations, upgrading value chains, and improving trade architecture.

Key strategies:

1.Market diversification

• Accelerate access negotiations with the EU (GSP+ requalification), UK DCTS, and East Asian economies.
• Expand bilateral agreements with Japan, South Korea, Australia, and the GCC.

2.Export value addition

• Promote higher-margin, branded apparel, specialty agricultural products, and processed goods that can absorb higher tariffs through premium positioning.
• Incentivise R&D and product innovation in existing export categories.

3.Investor confidence measures

• Reassure FDI investors that Sri Lanka remains committed to open trade and investment.
• Offer short-term incentives to retain export-focused investors considering relocation due to tariffs.

4.Improve trade facilitation and compliance

• Review and streamline customs procedures, labelling requirements, and licensing rules to eliminate perceived non-tariff barriers.
• Engage in regulatory harmonisation with key partners.

5.Negotiate for inclusion in exclusion lists

• Work with US authorities to demonstrate why certain goods from Sri Lanka should be reclassified under Annex II of the Executive Order.

C.Long-Term (2–5 years): Restructure and resilience

Objective: Future-proof Sri Lanka’s export economy through institutional reform and systemic repositioning.

Key policy pathways:

1.Trade policy modernisation

• Create a unified Trade Negotiation Authority capable of leading bilateral and multilateral negotiations.
• Upgrade digital infrastructure to support end-to-end export tracking and compliance.

2.Manufacturing ecosystem strengthening

• Transition from labour-cost arbitrage to skill, technology, and sustainability-based competitiveness.
• Promote domestic input linkages to reduce reliance on imported raw materials.

3.WTO engagement and legal recourse

• Consider dispute resolution avenues under the WTO’s Dispute Settlement Mechanism if the reciprocal tariffs are seen to breach MFN principles.
• Push for a global review of tariff methodologies, especially those involving “composite burden” indices like the 88% figure.

4.Green and ethical trade leadership

• Position Sri Lanka as a global leader in ethical apparel, organic agriculture, and fair trade.
• Align export strategy with ESG standards increasingly prioritised by Western buyers.

5.Export resilience planning

• Create a National Export Resilience Strategy with buffer funds, contingency trade arrangements, and early warning systems to preempt trade shocks.

4.Sector-specific priorities

Sri Lanka’s response must recognise the asymmetric exposure across sectors:

Apparel

• Engage US buyers directly to offer short-term cost mitigation.
• Negotiate fabric forward rules that allow reclassification under US customs exemptions.
• Scale e-commerce channels to bypass traditional markups.

Rubber and industrial goods

• Develop regional sales platforms in India, Southeast Asia, and Africa.
• Implement origin-based tariff engineering through regional partnerships.

Agriculture and plantation

• Focus on high-margin, GI-certified exports like Ceylon Tea, cinnamon, and king coconut.
• Leverage diaspora marketing to maintain brand loyalty in the US despite price increases.

Logistics and shipping

Develop warehousing and re-export models to segment high-tariff destinations.

Promote Colombo Port’s role in transshipment over direct-to-US models.

5.A coordinated national effort

Sri Lanka’s ability to adapt will hinge on whole-of-government and whole-of-society coordination.

The expert committee appointed by the President represents a critical institutional response. Its composition reflects broad stakeholder engagement, and its mission aligns with many of the actions outlined in this article. Follow-through will be essential, and the committee’s recommendations must translate into coherent policy, legislative action, and diplomatic communication.

6.A new model of engagement with the US

Beyond immediate remedies, Sri Lanka must begin crafting a new model of engagement with the United States.

This includes:

• Reinforcing shared geopolitical interests, including maritime security, democratic governance, and climate resilience.
• Offering cooperative frameworks in clean energy, health technology, and education exports.
• Building people-to-people linkages through diaspora networks, university partnerships, and digital diplomacy.

Conclusion: From retaliation to reinvention

Sri Lanka is at a crossroads. The 44% US tariff is not just a numerical penalty—it is a test of institutional maturity, policy agility, and economic imagination.

To its credit, the Government has moved quickly, launching diplomatic outreach and appointing an expert task force. These are foundational steps. The pathway ahead will require sustained policy momentum, strategic alliances, and pragmatic reforms.

As the global trade architecture becomes more contested, small but nimble nations like Sri Lanka must lead with clarity, courage, and coordination. The reciprocal tariffs, harsh though they are, may yet become the trigger for a long-overdue transformation.

Further analysis is available in the full policy brief “US Reciprocal Tariffs: Impact on Sri Lanka” [https://tinyurl.com/nhk258xm]

(The writer is a Chevening Fellow from St. Cross College – University of Oxford and a trade policy enthusiast.)