• Analysing impacts of the 44% reciprocal tariff on about 25% of SL’s total exports

As the United States imposes a 44% reciprocal tariff on all Sri Lankan exports, concerns are mounting over whether Sri Lanka has adequately anticipated and prepared for the fallout. While the measure is only one component of a wider recalibration of US trade policy under President Donald Trump, trade analysts and exporters argue that the warning signs were visible for months. 

With protectionist rhetoric steadily intensifying, many expected retaliatory action targeting countries with high import duties on US goods. Yet Sri Lanka, they contend, failed to adopt a forward-looking trade strategy or diversify market exposure. 

Now, with apparel, rubber, and value-added agricultural products directly in the line of fire, the country’s export competitiveness risks being notably eroded in one of its most critical markets, which takes in about a quarter of the country’s exports.

Lack of preparedness 

Speaking to The Sunday Morning, National Chamber of Exporters (NCE) Secretary General Shiham Marikar expressed his displeasure over the way the Government had been handling this matter. 

“We had already informed the relevant authorities a couple of months ago to put together a team and identify strategies on how to deal with this. This is not something that happened today. The US President has been doing this for a while,” he said.

According to Marikar, the warning signs were evident well in advance and the private sector had urged the Government months ago to prepare a response strategy. 

He stressed that Sri Lanka’s policy options were constrained by its current engagement with the International Monetary Fund (IMF). 

“We told the Government that we are still bound by the IMF’s rules and regulations. Therefore, an increase or reduction of any tariff is impossible. We are basically inside a box now. We can’t do anything beyond that. We just came out of a financial crisis, so a lot of diplomacy has to be used when negotiating,” he said. 

He further expressed frustration with the lack of official communication. “What we need now is for the Export Development Board (EDB), Ministry of Industry, or Department of Commerce to tell exporters what they are doing and what will happen. They have to tell exporters clearly that if they send a shipment today, their goods are going to be taxed at the US border.

“The officials should have prepared the Sri Lankan export sector two months ago, because we saw this coming,” he added.

A committee soon after tariff imposition

Hours after the tariff imposition, President Anura Kumara Dissanayake appointed a high-level committee tasked with evaluating the economic consequences of the reciprocal tariffs. The committee will also be responsible for recommending strategic responses to safeguard Sri Lanka’s trade and economic interests.

The panel includes leading figures from the country’s key economic institutions, among them being the Secretary to the Ministry of Finance, Governor of the Central Bank of Sri Lanka (CBSL), Chairman of the Board of Investment (BOI), Chairman of the EDB, and Director General of Economic Affairs at the Ministry of Foreign Affairs.

Also appointed to the committee are Senior Economic Adviser to the President Duminda Hulangamuwa, Ceylon Chamber of Commerce Chief Economic Policy Adviser Shiran Fernando, and prominent business leaders Ashroff Omar, Sharad Amalean, and Saif Jafferjee.

Attempts by The Sunday Morning to contact Hulangamuwa proved futile. 

Impact will be swift and severe: JAAF 

The Joint Apparel Association Forum (JAAF), in a public statement, noted that the proposed tariffs could significantly disrupt the country’s largest export sector and put thousands of jobs at risk.

“This tariff level is extremely high relative to our regional competitors,” said JAAF Secretary General Yohan Lawrence. “Sri Lanka could very quickly see its share of US business move to countries with lower tariffs than Sri Lanka has.”

The US is Sri Lanka’s largest single-country apparel market, accounting for over 40% of the sector’s total exports, which exceeded $ 5.5 billion in 2023.

“With tariffs coming into effect almost immediately, the impact will be swift and severe. Potentially, we could see the bulk of our US business migrate to competitor markets,” Lawrence added. “This volume of business simply cannot be replaced through other markets.”

“We are very appreciative of the immediate actions taken by the Government to discuss this situation and are working very closely with the authorities to see how best we could address the concerns raised by the US Government, whilst staying within the limitations of Sri Lanka’s ongoing IMF programme,” said Lawrence.

Opportune moment to relook at SL’s tariff structure 

The Ceylon Chamber of Commerce stated that this development posed a significant challenge to the country’s trade and economic stability. 

“We appreciate the President setting up a committee to evaluate the impact of the US tariffs and provide solutions to mitigate potential risks to the export sector. Since we are halfway through the IMF Extended Fund Facility programme and navigating a tight fiscal space, it is vital that Sri Lanka is able to negotiate down from the high tariff band,” it said. 

The chamber added that it was an opportune moment for the Government to relook at its tariff structure and implement measures that would improve trade facilitation and improve the ease of doing business.  

Cautioning against complacency

With apparel, rubber, and value-added agricultural products being among the top export categories to the US, NCE Secretary General Marikar urged the Government to act swiftly and communicate a clear strategy to exporters.

“This is definitely going to have a negative impact,” he said, speaking on behalf of affected exporters. “Our cost of doing business is going to increase, especially for the apparel and rubber sectors, as well as for value-added agricultural products.”

The consequences are already being felt on the ground. “Our members are calling and asking what is happening,” Marikar said. “We have put a hold on our US shipments. They are waiting to see how things unfold.”

He pointed out that there was a dire need for strategic diplomacy. “We must negotiate and ask the US to introduce this gradually, perhaps over the span of a year or two, giving us targets to meet, instead of doing it all at once. We must keep reminding them that Sri Lanka is governed by IMF rules. We simply cannot respond the way other countries can,” he noted.

He added that exporters were currently in talks with US buyers, with many shipments on hold. “Ultimately, the tariff will be paid by the buyer, but Sri Lankan exporters will lose their competitive advantage.”

Marikar further expressed dismay over the severity of the tariff. “Until today, we didn’t know the exact percentage of the tariff Sri Lanka would face. We are surprised to see 44%. We are either the second or third highest on the list. If it was 5% or 10%, we could have managed. But this is a huge amount. It adds serious pressure, especially on our apparel sector, which had about $ 3 billion in exports last year,” he said.

He further cautioned against complacency, noting: “There has to be a support mechanism. The apparel and rubber sectors cannot afford to lose the US market. If it is something unique like Ceylon Cinnamon, the US cannot get that from anywhere else. But they can buy apparel and rubber from many other countries.”

An inexplicable formula: Jafferjee

The tariff stems from a US policy doctrine known as ‘discounted reciprocal taxation,’ which adjusts import duties on a country based on the average tariffs it imposes on American goods. According to the US administration, Sri Lanka maintains average tariffs of up to 88% on American imports, prompting the White House to introduce a matching 44% tariff on Sri Lankan goods. 

Breaking down the proposed 44% reciprocal tariff, Advocata Institute Chairman Murtaza Jafferjee explained that the formula used by the US relied on dividing a country’s trade deficit by the elasticity of its exports, combined with an assumed pass-through rate. 

In Sri Lanka’s case, with $ 3.15 billion in exports to the US and $ 370 million in imports from the US, the trade deficit stands at around $ 2.7 billion.

“This formula takes the figure of $ 2.7 billion, multiplies it by four, then multiplies by a 25% pass-through rate, and finally divides by the $ 3.15 billion in exports,” Jafferjee said. “That gives about 88%, but frankly, I have never seen such a formula in my life and I struggle to understand its logic.”

He explained that the 25% pass-through rate reflected how much of the price impact from tariffs was actually felt by consumers, with the rest being absorbed along the supply chain. In the US, the rate tends to be low due to its economic scale, whereas Sri Lanka, being a price-taker, has limited room to pass on these costs.

Jafferjee further noted that a 10% price increase for highly elastic goods could lead to a 40% drop in demand. This suggests that for many of Sri Lanka’s export products, even moderate price increases could severely reduce competitiveness. He pointed out that tariffs in the apparel sector already ranged from 5% to 25% depending on the product, and the new tariffs would be added on top of this.

“Even if the weighted average is around 16%, many exporters don’t have profit margins anywhere close to 44% to absorb these costs,” he said. “Retailers in the US might try to pass some of that cost onto consumers, but most apparel is sold at discounts anyway, not at full retail.”

According to Jafferjee, shifting supply chains is not a simple fix. Buyers may be reluctant to move operations to China given the country’s own tariff challenges, while countries like Bangladesh also face barriers. “Supply chains are complex and switching them takes time and money,” he said. “This is not something you can pivot on overnight.”

He cautioned that the economic rationale behind the US move, namely to reduce its trade deficit, missed structural problems. “The US has a current account deficit of 7% of Gross Domestic Product (GDP). It is spending more than it earns, which is funded by capital inflows into government bonds and the stock market,” Jafferjee explained.

“The US contains 4.5% of the world’s population but accounts for 20% of global GDP and 70% of market capitalisation. Most of the world’s excess savings end up in US tech stocks like Apple, Meta, and Google,” he added.

Addressing the impact on Sri Lanka’s exchange rate, Jafferjee said that near-term effects would likely be muted, noting: “The rupee isn’t under pressure at the moment and the CBSL has been buying dollars due to high remittances during the New Year season.”

However, he warned that mid- to long-term risks were more pronounced. “If exports decline and global growth slows, this will impact Sri Lanka’s tourism and trade revenues. That’s when the rupee could start weakening,” he said. “But with the new CBSL Act in place, the Central Bank can’t actively manage the exchange rate. It can only step in to reduce short-term volatility.”

He added that the uncertainty surrounding the new tariffs extended well beyond Sri Lanka. “This isn’t just about us. Countries like Mexico and Canada are impacted as well. If the US imports less, global demand will contract, and while that could strengthen the US Dollar, it may also dry up the very capital flows America depends on.”

Jafferjee further explained the unpredictability of what lay ahead: “There’s no telling how this will play out. Sri Lanka will feel the brunt early on, particularly in apparel. But the global implications will be far-reaching and highly volatile.”

Warned against dismissing the unlikely: Damsinghe

According to Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe, what matters most is how this tariff was calculated. He said that it was not actual reciprocity, but based on the ratio of trade surplus to exports. 

Several analysts had already pointed out how unconventional this approach was, he noted. What this essentially means is that there was little anyone could have done, short of actually closing their trade balances.

“One particular point I had been observing over the past few months was what would happen to Vietnam. Vietnam had been making serious efforts to avoid tariffs – making deals, reducing tariffs, and adjusting its policies. But in the end, it turned out to be one of the biggest losers. None of those efforts mattered. Will it result in capitulation or indignation? And how will Trump react to that reaction?” Damsinghe questioned. 

The gap until the tariffs take effect on 9 April creates a window of opportunity. The actual tariffs could end up being higher or lower, depending on how others responded in the interim, he added.

“One key dynamic to watch will be currency depreciation, especially in East Asia. This could shape the next phase of trade flows and influence how global prices evolve. When we released an alternative report on Trump a few months ago, we warned against dismissing the craziest and the stupidest. We called it the ‘scenic route of history.’ Now we wait to see what unfolds,” he said.

Need FTAs with developed nations

Ernst & Young Sri Lanka Director – Business Consulting Talal Rafi told The Sunday Morning that high tariffs would also result in lower consumption leading to lower exports to the US market. When other regions such as Europe are also hit with tariffs, they will reduce imports, resulting in a global economic slowdown. 

“Sri Lanka’s reserves will be affected. The currency will come under pressure due to the current account deficit increasing, which will have an impact on our debt repayment capabilities.

“For exports to increase, we need to liberalise our economy. Even though the US has gone down the path of protectionism, the rest of the world is largely open to trade. Southeast Asia is the best example. 

“Sri Lanka is severely constrained because of the high tariffs it imposes on imports. As 80% of imports are intermediate and capital goods, high tariffs only make Sri Lankan exports more expensive,” Rafi explained. 

He added that high tariffs also made consumption in Sri Lanka expensive, where employees need higher salaries to survive, resulting in higher business costs. When Sri Lanka has one of the highest vehicle prices in the world due to extremely high vehicle import taxes, it indicates that many businesses which need vehicles for transport spend a great deal on leasing. 

“This results in their business costs increasing again. Therefore, we need to tackle the basic issues to make exports more competitive,” he pointed out.

“We also need Free Trade Agreements (FTAs) with developed nations like Japan. This is the way adopted by Vietnam, for example, and its exports are over $ 300 billion. 

“Sri Lanka needs to develop sectors in which it has a comparative advantage so that it has long-term export sustainability, especially in products we can produce at better prices and quality. We need to focus on specific sectors where we have better capabilities to produce when compared to the rest of the world,” he added.

Govt. chose to await official announcement

Meanwhile, The Sunday Morning reached out to Deputy Minister of Trade, Commerce, and Food Security R.M. Jayawardana to question why there appeared to be no early preparations for the potential imposition of such tariffs.

“How can we prepare for something in advance when it was neither announced nor implemented?” he responded.

Jayawardana said that there had been no prior indication of the tariff decision and that it was not possible to anticipate such a move, especially given its impact on multiple countries. He added that discussions had now been scheduled with relevant ministries and departments to address the issue.

However, Deputy Minister of Economic Development Prof. Anil Jayantha Fernando stated that Sri Lanka would hold talks and negotiate the new trade tariffs imposed by the US on the country’s exports before Wednesday (9).

The Government was aware of the situation in advance but chose to await the official announcement of the US policy prior to initiating a response, according to Prof. Fernando.

“We were aware of the situation, but one country cannot interfere in another’s policy decisions before they are officially implemented. This is now part of the US’s policy approach and we must respond accordingly by assessing its impact on Sri Lanka,” he stated.

He expressed optimism that Sri Lanka would be able to secure a reduction in the newly announced tariffs, noting that the country was currently undergoing economic recovery under the guidance of the IMF.

Deputy Minister Fernando added that the Government was prepared to pursue alternative strategies should negotiations fail to produce favourable results.