• Industry seeks clarity as regional competitors secure preferential access to American market

Sri Lanka’s apparel industry has weathered difficult years with discipline and steady growth. In 2025, export earnings crossed $ 5 billion, with the United States alone accounting for about $ 1.9 billion. Orders from the European Union (EU) and the United Kingdom also strengthened, helping the sector maintain momentum in a fragile global economy.

Now, however, a new set of trade arrangements between the US and two of Sri Lanka’s regional competitors has introduced fresh uncertainty.

Bangladesh has secured a deal that reduces reciprocal tariffs on its exports to 19% overall, with a clause allowing zero tariffs on specified volumes of garments made using US-origin cotton and man-made fibres. 

India, under an interim arrangement still being finalised, is expected to receive an 18% baseline tariff on textile exports and access to similar sourcing-linked benefits.

Sri Lanka, meanwhile, continues to export to the US under a 20% tariff arrangement that has yet to be finalised into a permanent agreement. 

The one or two percentage point gap may appear small. But the sector is built on tight margins and long-term buyer relationships; hence, perception and certainty matter as much as arithmetic.

The tariff gap and the question of certainty

Joint Apparel Association Forum Sri Lanka (JAAFSL) Secretary General Yohan Lawrence believes the deeper issue is not the marginal tariff difference but the absence of closure.

“Ignoring the fact that companies may have factories in Bangladesh and India, at the end of the day, the problem for Sri Lanka is that it has still not finalised its deal,” he said.

He acknowledged that a 1% or 2% difference in tariffs was unlikely to trigger an immediate shift in orders. Buyers weigh many factors, from compliance standards to product specialisation. However, uncertainty over the final rate creates hesitation.

“So whilst the 1% or 2% may not be sufficient to move orders, the problem is that until Sri Lanka finalises the deal of even the 20%, there is a sense of unease until the final agreement is made,” he said.

Bangladesh’s deal and the sourcing clause

The Bangladesh-US agreement, signed on 9 February, has drawn attention across the region because of its sourcing-linked zero-tariff provision.

Under the arrangement, tariffs fall to zero for certain volumes of garments made with US-origin cotton and man-made fibres. The clause is conditional and applies to specific categories. Still, it introduces a new variable in a highly competitive ready-made garment market.

India’s interim framework appears to mirror that facility. Indian Commerce Minister Piyush Goyal has publicly stated that India will enjoy the same benefit as Bangladesh once the agreement is finalised.

Will factories move?

One fear voiced quietly in industry circles is that Sri Lankan manufacturers with existing operations in Bangladesh or India may channel future expansion there, using those locations as export bases for the US market.

Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe addressed the issue of assuming that tariff changes alone would drive such decisions. 

“Relocation of manufacturing is less likely to be a result of specific deals for two reasons,” he said.

He pointed first to volatility in recent US trade policy. In recent months, certain agreements with other countries have been partially reversed or adjusted. In that environment, making long-term capital decisions purely on a tariff concession is risky.

“As a result, for any manufacturing firm, whether based in Sri Lanka or elsewhere, making a relocation decision purely on a tariff structure that could change again in a volatile environment would be difficult to justify. Tariff decisions alone are unlikely to be enough to drive such movements,” he said.

Sri Lanka’s apparel sector has evolved towards higher-value, niche, and more technical products. It operates within constraints of land, labour scale, and cost structure. Bangladesh, by contrast, has built massive capacity in large-scale, lower-cost production.

Expansion in Bangladesh may continue, Damsinghe suggested, because of that scale advantage, not because of a 1% or 2% tariff shift.

In other words, the competitive map was already shaped by differences in scale and cost. The new tariff arrangements may amplify those differences, but they are unlikely to create them from scratch.

EDB concerns

The Export Development Board (EDB) is clear that Bangladesh’s formal deal does affect Sri Lanka’s position.

“There is clearly an issue. Bangladesh’s tariff rate for exports to the US is lower than Sri Lanka’s, and the country has also concluded a trade agreement with the US. That will have an impact on us,” said EDB Director of Policy and Strategic Planning Kumudunie Mudalige.

Several leading Sri Lankan apparel companies already operate factories in Bangladesh. With a lower tariff secured and a formal agreement in place, those firms may strengthen their presence there.

“What could happen is that some of our leading manufacturers, especially those who already have operations in Bangladesh, may choose to strengthen and expand their presence there. That would have an impact on us. 

“We are already seeing existing manufacturers in Bangladesh scaling up their operations so that they can export from Bangladesh under the preferred tariff rate,” she said. 

Mudalige also pointed to sourcing patterns as a key factor. Bangladesh and India can leverage different raw material arrangements, including sourcing from the US to qualify for preferential treatment.

Sri Lanka’s industry, by contrast, sources a significant share of its inputs from China. That dependence complicates any rapid shift in sourcing strategy. It also places Sri Lanka in a delicate position geopolitically, as US tariff measures have been framed in part as responses to China.

Sri Lanka, Mudalige noted, lacked the scale to negotiate large raw material sourcing agreements with the same leverage as larger economies. The path available is continued engagement with Washington to narrow the tariff gap and secure clarity. 

The EDB’s role, she indicated, would be to support and push for further negotiations aimed at achieving a preferred rate.

SL’s strengths and limits

It is easy to frame the issue as a simple contest of percentages. But Sri Lanka’s apparel industry is built on different foundations from Bangladesh’s.

The country has carved out a reputation for compliance, sustainability standards, ethical manufacturing, and higher-end production. It is strong in lingerie, performance wear, and technically demanding categories that require skilled labour and tighter quality control.

These strengths have allowed the sector to grow steadily. In 2025, apparel exports rose by 5.42% year-on-year, reaching $ 5.02 billion. Fabric exports lifted the broader sector to nearly $ 5.5 billion. Exports to the EU surged by double digits in parts of the year, while the UK and other markets also recorded gains.

However, Sri Lanka cannot replicate Bangladesh’s sheer scale in low-cost basic garments. Nor can it match India’s vast domestic cotton base and integrated textile chain.

That structural reality means that some expansion into Bangladesh or India may occur regardless of tariff differentials. Multinational apparel groups often operate across several countries, allocating production according to product type, cost, and buyer requirements.

The US market and buyer calculations

For American buyers, tariffs are one element in a complex equation. They consider landed cost, compliance risk, lead times, quality consistency, and brand reputation. A 1% difference may matter for high-volume basic products. It may matter less for specialised or high-margin items.

Still, uncertainty over the final tariff arrangement introduces friction into planning. Large retailers and brands operate on long production cycles. If Sri Lanka’s rate remains provisional, procurement teams may factor that uncertainty into sourcing decisions.

Lawrence’s statement stressing urgency supports this reality. A finalised agreement would allow buyers to price contracts with confidence and reduce speculation about future shifts.

US-Bangladesh tariff deal: Key facts

• Agreement name: United States-Bangladesh Agreement on Reciprocal Trade 
• Signed: 9 February 2026
• Negotiation period: 9 months, started April 2025
• US tariff cap: Reduced to 19% on Bangladeshi imports (from prior 37%/35%)
• Zero-tariff option: Available for apparel/textiles using US cotton or man-made fibres
• Volume limit: Tied to value of US inputs supplied to Bangladesh factories
• Bangladesh VAT change: Removes discriminatory taxes on US firms
• Import easing: Fewer restrictions on US remanufactured goods
• Labour rules: Bangladesh strengthens worker rights enforcement
• Other pledges: Better export controls, anti-duty evasion cooperation
• Basis: Follows US Executive Order 14257 (April 2025)
• Bangladesh goal: Boost RMG exports to US by over $ 5 billion
• Impact: Improves market access for world’s No. 2 apparel exporter