Alongside beautiful landscapes, ecosystems, history and culture, one thing Sri Lanka seems to have in abundance are challenges. Just when the island nation was finding its legs – economically, the horizon is once again cloudy as the world order retreats from multilateralism to increased polarity. Herein lies the ‘double whammy’ to use an American term, with Sri Lanka facing down the double barrels of debt repayment and navigating the new complexity – formalised tariff’s from our ‘Indo-Pacific partners’ the United States administration led by President Donald Trump.  

Last week’s announcement by the United States (US) of a 30% tariff on Sri Lankan exports, while a reduction from the originally flagged 44%, remains a substantial levy on the country’s exports to key markets in the US. Local exporters and industrialists have warned for industry flight to more competitive destinations where regional nations have secured a ‘better deal’ in terms of tariffs. While there are some ‘negotiations’ on going on the matter between both nations, it is likely that come August, all Sri Lankan exports to the US will face this standard 30% duty, applied separately from any other sector-specific rates. The Government has pat itself on the back by calling the 44-30% reduction a victory of theirs. However, in reality for local exporters, on whom much depends on for economic recovery, views the change as going from ‘catastrophic, to nearly catastrophic’ – if that is worthy of celebration, so be it.

The Americans have been crystal clear about where they stand on the matter. Trump’s letter states: “We have had years to discuss our trading relationship with Sri Lanka, and have concluded that we must move away from these very persistent trade deficits, engendered by Sri Lanka’s tariff and non-tariff policies and trade barriers. Our relationship has been, unfortunately, far from reciprocal.” Sri Lanka exports roughly $ 3.15 billion annually to the US but imports just $ 370 million, yielding a sizable trade surplus. This disparity has given the US justification, under its adjusted framework, to reset rates on Sri Lankan goods entering American ports, The Sunday Morning reported yesterday. The new US tariffs stem from Washington’s push to apply ‘reciprocal’ duties aligned with the average barriers it faces in partner markets. For Sri Lanka, that baseline is high. US officials have estimated that Sri Lanka’s average applied tariffs on American goods reach close to 88%. However, Sri Lanka is not alone in facing this challenge. Many other nations are negotiating with the US on the same issue. Perhaps, the drift away from multilateralism and push to move out of the framework of the World Trade Organisation (WTO), might lead to the formation of a new world order. Time will tell; however, Sri Lanka has little time to adjust to the stark new realities and relationships which it has to navigate.

Sri Lankan apparel exporters voiced their concern with guarded language, so as not to antagonise the state in Colombo and Washington. The Joint Apparel Association Forum Sri Lanka (JAAFSL) last week acknowledged the recent drop from 44% to 30% as a sign of productive engagement.  However, it pointed out that, “If the 30% tariff stands, we risk seeing a migration of US buyers to lower-tariff countries,” Sri Lanka’s regional competitors for investments and industry are faring better in negotiating, and have a more robust economy to stand on, with a broader range of export industries and lesser red tape. As such they can be more competitive than Sri Lanka. The writing is on the wall for those who have the eyes to see it. Sri Lanka can either go with the flow internally ‘as has been the practice’ or use the challenging environment to rebuild and rebrand itself. This is a make or break moment, and the NPP Government, industry and public should take note of the consequences of not acting decisively and diligently. The world is going through a phase where big powers and growing powers are looking to their own interest. Smaller nations like Sri Lanka need to reinforce multilateralism, and become more investor friendly, and stable – both politically and economically, to remain relevant and afloat. Experts have also pointed out that in the longer term the island’s trade competitiveness will rely less on tariff maneuvering and more on domestic reforms, better domestic cost and efficiency, and export diversification, which are required to stay viable under the emerging global order.