The US tariff rate reduction, from an initial 44% to a subsequent 30% and now to the current 20%, is accompanied by requirements for trade balancing. 

The initial 44% rate was introduced based on Sri Lanka’s 88% trade deficit with the US. In 2024, Sri Lanka had a trade surplus of $ 2.6 billion, with exports to the US totalling $ 3 billion and imports from the US amounting to $ 368.2 million. 

To reach the current rate and potentially reduce it further, Sri Lanka is exploring ways to address this trade deficit. Engaging in imports from the US is a key part of this strategy, with Sri Lanka even being open to US fuel imports via competitive bidding.

However, the revenue impact of imports from the US in addition to the effects on export revenue due to tariffs has been raised as a key concern. While a precise assessment of the exact impact on revenue is not currently feasible, stakeholders anticipate a considerable impact if the prices of imported goods are not competitive.

Impact will be minimal but not zero

Speaking to The Sunday Morning on revenue impact, Frontier Research Deputy Head of Macroeconomic Research Anjali Hewapathage noted that usually, a tariff implied the textbook impact of an export revenue hit. But in the context of effective tariffs across the globe rising, it implies varied impacts, which get matched off against each other. Hence, she added that the overall quantifiable impact was not very straightforward.

“Sri Lanka’s overall export revenues have been fairly resilient even in the context of tariffs. Sri Lanka doesn’t seem to have done much frontloading compared to East Asia. However, even beyond the expiration of a frontloading window, we think impact will be minimal but not entirely zero. However, we interpret a tariff of 20% as positive news on a comparative basis to peers,” she said.

Hence, she noted that it was a competitive rate whereby overall export revenue could sustain enough resilience, especially given the niche export market that Sri Lankan apparel exports had dominance in. 

Recently, it was reported that samples of US-origin West Texas Intermediate (WTI) crude oil were being tested at present in Sri Lanka’s laboratories as part of plans to include it in future petroleum import tenders. With shipping times of approximately three weeks and raised costs as concerns in this regard, early planning by traders is required. 

Sri Lanka’s total fuel imports amounted to $ 4.3 billion in 2024, while the monthly oil bill amounts to $ 300-400 million. According to previous statements made by the Government, imports can be considered from the US if it is cost effective. 

Explaining how Sri Lanka could balance the impact on revenue with this potential increase in expenditure, Hewapathage highlighted that while oil imports from the US might be a potential clause contested during tariff negotiations, in terms of practicalities of importing as well as refining and usage, WTI was not a perfect substitute for Brent.

She explained that WTI had higher costs of freight, and if that was a clause Sri Lanka had agreed to, WTI imports then implied higher relative costs.   

“However, these should be viewed in the context of falling oil prices globally and Sri Lanka’s expansion in solar adoption. There could be extremely structural demand drivers in the domestic economy that minimise the costs of specific terms on higher imports from the US,” she added.

According to Hewapathage, what balances out a potential rise in expenditure is how other foreign exchange inflows/revenues perform. Accordingly, if tourism and remittance inflows are sustained, rising import expenditures may not have drastic consequences.

Central Bank of Sri Lanka (CBSL) data states that Government revenue surged to Rs. 1,942.36 billion during the first five months of 2025, marking a 19.95% increase from the Rs. 1,619.23 billion recorded in the same period in 2024. This has largely been attributed to higher tax collection, with Government tax revenue rising by 20.87% to Rs. 1,802.48 billion from Rs. 1,491.25 billion a year earlier. Moreover, tourism revenue in the first half of the year stands at $ 1.71 billion.

What can SL offer?

Further, Verité Research Lead Economist Mathisha Arangala highlighted that the exact impact on revenue from potential imports from the US would depend on what Sri Lanka offered in return.

Arangala explained that if Sri Lanka had promised the US zero tariffs on certain goods, there would be a certain revenue loss. However, the extent of this loss would depend on the specific products involved.

In previous press conferences on tariff discussions, Treasury Secretary Harshana Suriyapperuma announced that Sri Lanka had been as open as possible in negotiations, considering how best the country could accommodate US requirements within competitive parameters. He added that Sri Lanka had discussed imports of high-tech goods and knowledge transfer, while also exploring the possibility of importing oil from the US.

Commenting on potential oil imports, Arangala highlighted that the impact on revenue would also be dependent on several factors.

“If the Government has promised to make specific imports from the US, such as oil, the revenue impact would be determined by whether US oil is more expensive than the oil currently being imported. The Government can make decisions for State-Owned Enterprises such as the Ceylon Petroleum Corporation, which would ultimately incur a loss if oil is purchased at a higher price just because buying American oil is a requirement,” Arangala added.

However, he noted that further research was needed to assess the exact impacts.

Commenting on the measures Sri Lanka could take to mitigate the potential impact on revenue from increased imports from the US, Arangala pointed out that if there was a revenue impact, it meant that Sri Lanka was still focusing on indirect taxes, such as import taxes and Value-Added Tax (VAT) on products sold. This will have a substantial impact even in the future, as indirect taxes affect all consumers and business activities in the country equally.

“Going forward, Sri Lanka must focus on shifting away from having a bulk share of taxes as indirect taxes and rely more on direct taxes, such as corporate and income taxes. This does not necessarily mean increasing direct taxes, but rather improving revenue collection methods. This has often been discussed, especially in relation to tax avoidance, but action remains to be taken,” he said.

He further highlighted that, in the long term, addressing the root of this issue would help compensate for and mitigate potential impacts and losses from situations of this nature.

Competing in a shrinking market

Meanwhile, Verité Research Director of Research Subhashini Abeysinghe commented on export revenue implications while noting two critical potential impacts.

She noted that since demand in the US market would shrink along with high taxes due to increased prices, Sri Lanka would have to compete in a shrinking market. In such a market, high-cost producers are always at a disadvantage. Unfortunately, Sri Lanka is known as a higher-cost manufacturer, especially in the apparel sector.

Moreover, Abeysinghe noted that buyers always preferred to pass on the cost of the tax to suppliers and consumers. Accordingly, US importers could potentially seek to determine what percentages could be absorbed. Low-cost, large-scale manufacturers would likely have better margins than Sri Lankan manufacturers. 

According to Abeysinghe, this is also likely to pose a disadvantage for Sri Lankan manufacturers, as they might find it difficult to absorb a major share of the tariffs compared to regional competitors such as Vietnam and Bangladesh, who might be able to absorb a larger percentage.

“This could mean that the US would likely prefer to buy from markets that absorb a larger share of the taxes, a challenge Sri Lanka would have to face despite achieving a favourable level playing field otherwise,” Abeysinghe added.

Industry concerns

Many industry stakeholders are awaiting the finalisation of discussions.

Sri Lanka’s cumulative total exports, including both merchandise and services, were estimated at $ 8,337.86 million for the first half of 2025, making a notable 6.7% growth compared to the same period in 2024. Earnings from export of apparel, tea, coconut products, spices and concentrates, and food and beverages increased by 8.19%, 8.16%, 32.4%, 29.64%, and 17.22%, respectively, during the period.

Exports to the United States, Sri Lanka’s single largest export destination, accounting for 23% of the latter’s merchandise exports, slightly decreased by 0.73% to $ 252.34 million in June 2025 compared to June 2024. However, exports to the US over the cumulative period from January to June 2025 increased by 4.61%, reaching $ 1,434.99 million.

Discussing export revenue implications, Sri Lanka Logistics and Freight Forwarders’ Association (SLFFA) Chairman Channa Gunawardena noted that the current position was a comparative improvement against the previous one, especially considering that Sri Lanka was now on par with two key regional competitors – Vietnam and Bangladesh.

However, he noted that rate volatility still prevailed to a certain extent, especially as the countries were still engaged in the negotiation process. Hence, he stated that the industry was awaiting finalisation regarding the tariff agreement.

Based on the current situation and the 20% tariff, former Chairman of the Sri Lanka Shippers’ Council (SLSC) Sean Van Dort told The Sunday Morning that the revenue impact would depend on the pricing offered by potential imports from the US. 

For instance, if Sri Lanka were to import oil, several factors would come into play in determining impact, such as pricing of oil by companies, their competitiveness in the global market, and delivery times and shipping costs, especially when compared to the usual importers to Sri Lanka.

Van Dort noted that one industry concern regarding oil imports was the potential increase in domestic energy prices. However, he added that if the prices were competitive, there would not be a significant difference.

While Sri Lanka exports approximately $ 3 billion worth of goods to the US, over 70% of these exports come from the apparel sector, with the US accounting for over 40% of the apparel business directly.

Commenting on the implications for export revenue, Joint Apparel Association Forum Sri Lanka (JAAFSL) Secretary General Yohan Lawrence acknowledged that, on the positive side, product migration was unlikely to happen if the rates remained at the current level, since competitors were also at the same level.

“There will be a notable impact on the demand side based on these terms. However, it is difficult to assess the extent of the revenue impact at the moment. There will certainly be a considerable impact, given that this will lead to inflation in the US and a contraction in demand. The industry will witness this with the arrival of bookings for the next season,” he said. 

Meanwhile, Free Trade Zone Manufacturers’ Association (FTZMA) Chairman Dhammika Fernando stated that Sri Lanka’s openness to imports did not necessarily mean the Government would engage in many of them, although oil was one possibility. As crude and refined oil are controlled by the commodity market through open market bidding, he noted that the repercussions would not be similar to a government-to-government transaction.

“There will, however, be an impact on the country’s foreign income when trading with the US. Nevertheless, the impact on apparel is somewhat improved because the two main competitors are at the same level,” he noted. 

Discussing potential imports, he also noted that Sri Lanka was somewhat lacking in products to offer the US in a trade-off. He highlighted the timely need for a comprehensive agreement with the US to balance the situation going forward, which would be to Sri Lanka’s advantage.

Fernando further noted that in such a trade agreement, conditions such as lower tariffs for US vehicles could be viable, since this would not be problematic in terms of other importing destinations, such as Japan, as the trade agreement could be used as a justification. He expressed the belief that such an agreement could also serve as a stepping stone for trade agreements with other important trade partners.

$ 634 m worth of export losses

Currently, a quarter of Sri Lanka’s total exports faces at least a 20-percentage-point increase in tariffs. 

According to a recent Institute of Policy Studies (IPS) study, from 7 August, the trade-weighted effective tariff rate of the US for Sri Lanka will be 29.9%, compared to 10.2% in April 2025 when the Most Favoured Nation (MFN) tariff was in effect. 

Sri Lanka’s main exports to the US, wearing apparel and rubber products, will face tariffs of 36.8% and 20.2%, respectively. The study also assesses that this rate could lead to export losses of $ 634 million and put nearly 16,000 jobs at risk, mostly female workers in the apparel industry. 

With the 20% tariff rate offered, this could decrease Sri Lanka’s real GDP by -0.082%, assuming that wages are flexible enough to maintain full employment after the tariff shock. If unemployment is allowed in the model, real GDP could fall by -0.222%.

On balancing, the analysis examines removing para-tariffs, such as the CESS and Ports and Airport Development Levy (PAL), for US imports under a reciprocal arrangement. While this could boost US imports of soybean residuals by 39.8%, meat products by 61.8%, and dairy products by 37.9%, it may have mixed effects. 

Accordingly, as animal feed producers might utilise soybean residuals, low-cost imports can strengthen the sector, leading to beneficial nutritional effects on households. However, sector growth could be limited if meat imports from the US flood the market. 

Moreover, competition from imports in industries such as dairy and meat production might cause losses in domestic value addition, as indicated by a potential negative real GDP impact if Sri Lanka removes para-tariffs for the US while facing a 20% tariff imposed by the US. The removal of para-tariffs may produce a net positive economic effect only at a reciprocal rate of 10-15%, according to estimates.