US President Donald Trump shocked the world on 2 April by announcing his Liberation Day tariffs – a spate of import tariffs on imports coming into the US.
There was an inkling of his propensity to do this; firstly, there were his chief economic advisers like Peter Navarro and Stephen Miran, who have consistently championed America First (and in particular, anti-China) trade and economic policies.
Secondly, in February, two months before Liberation Day, President Trump increased tariffs on Chinese imports by 10% and on Canada and Mexico by 25%. A spate of retaliatory tariffs followed.
Despite these warning shots, the world was still rocked when Trump announced the universal ‘reciprocal’ tariff package. Although the basis of calculating this ‘reciprocal’ tariff is peculiar, Sri Lanka was among the highest-tariffed countries. Based on Sri Lanka’s trade deficit with the US, a tariff of 44% was applicable.
On 9 April, Trump announced a 90-day pause for countries to negotiate and strike deals with the US. It was set to expire this month, but the White House has announced that the expiry has been postponed to 1 August.
As expected, countries have been jostling for an audience with the US Trade Representative (USTR), including Sri Lanka. Big shots like China have obviously been more successful in this endeavour than small sprats like Sri Lanka. Later, on 9 July, letters were issued to several countries, imposing slightly reduced, albeit still high tariff rates – including Sri Lanka.
SL-US trade
In 2024, the US imported $ 3 billion worth of goods from Sri Lanka, while Sri Lanka imported $ 366 million worth of goods from the US. Just to put this into perspective, the US’s total imports in 2024 were a cool $ 3.2 trillion.
Imports from Sri Lanka account for less than 1% of the US’s import bill. The US has much bigger fish to fry; for instance, China (13% of imports), Canada (12.5%), and Mexico (15.5%). So, as you can see, in terms of priority we are somewhere at the bottom.
In 2024, the US imported $ 108 billion worth of apparel from the world. Sri Lanka’s share of these imports is just 2%. About 24% of apparel imports come from China, 15% from Vietnam, 9% from India, and 7% from Bangladesh.
Even in apparel, we are not in the top 10 source markets for the US; we are the 14th. Other than China (145% tariff) and Vietnam (46%), Sri Lanka faced the highest Liberation Day tariff imposition among these countries (Sri Lanka – 44%, India – 26%, Bangladesh – 37%).
In June, the US and China announced a de-escalation deal. Although the specifics are not known, there seems to be progress on de-escalating the trade war between the two nations. Just last week, Vietnam, a major competitor for Sri Lanka on apparel, secured a trade deal with the US, where the 46% tariff was reduced to 20%.
In a further attempt to try to tighten the screws on China, the Vietnam deal also includes a 40% tariff on any goods ‘transhipped’ via Vietnam. It has been alleged that many of Vietnam’s exports to the US are actually Chinese products transhipped to avoid US tariffs.
On 9 July, the White House announced that it would impose a reduced 30% tariff on Sri Lanka. Although less than the initial 44%, this is still a significant blow for Sri Lankan exports.
Remedial measures for Sri Lanka
At the panel I spoke at in April on Trump’s tariff package, we discussed what remedial measures existed for Sri Lanka and its exporters. Besides the urgency of seeking a bilateral deal with the US, there was little else we could do to mitigate what was happening.
One remedial measure discussed was the possibility of re-routing our exports to the US via zero-tariff or low-tariff hubs. However, this would depend on how strict the US would be on imposing ‘rules of origin.’
While it is illegal to reroute goods produced in one country and label them as produced in another, with sufficient amounts of value addition in the country they will be finally exported out of, this is a possible solution.
However, it depends on (i) how the rules of origin are defined, (ii) what can be considered as ‘value addition,’ and (iii) how the US would determine the country of origin. With the Vietnam deal and subsequent letters sent to other countries, it seems there will be strict rules of origin and this is, therefore, not a feasible strategy for countries like Sri Lanka to employ.
Sri Lanka obviously cannot flatten its trade deficit of over $ 2 billion by simply buying more from the US. Further negotiations are possible, but a beneficial bilateral deal seems far from the horizon. Transhipping is not feasible. A 30% tariff looms. Repercussions are significant.
In this context, what exists to be done? For starters, it is best we focus on reforming the things within our control.
Lowering trade barriers and simplifying tariffs: While the basis of the US’s calculation on the applicable tariff is not technically ‘reciprocal,’ even if it was truly reciprocal, Sri Lanka would be disadvantaged here too.
Sri Lanka’s top apparel export to the US is women’s intimate wear. It faces a tariff of 2-16% depending on the Harmonised System (HS) code. It is a simple, single tariff. On the other hand, if we look at what the US’s top export to Sri Lanka is, which is animal fodder, it faces a multitude of import tariffs: a 20% Customs duty, 10% PAL, and then a 18% VAT, amounting to an effective tariff rate of 55%.
So we are not reciprocating the US’s simple and low tariff structure. Sri Lanka’s notorious para-tariff regime disincentivises production by increasing costs. This is in fact noted in the White House’s letter to President Anura Kumara Dissanayake.
The removal of these para-tariffs is a key lever in expanding export-oriented production, not just with the US but with the world as well. The priority then should be to lower trade barriers and simplify our complicated tariff schedule. The Government must really play its part in driving forward the long-stalled trade reforms.
Innovate and become cost-competitive: Sri Lanka’s apparel exports to the US have a higher per-unit cost at entry than apparels coming in from many of our competitor nations. That is due to the high value and technical products made by Sri Lankan manufacturers for labels like Nike and Lululemon.
If push comes to shove, that is if tariffs change the price landscape significantly, would US consumers continue to demand the high-value apparels produced in Sri Lanka or would the significant price differential deter demand? How do manufacturers provide the same, high-quality outputs at a lower cost? The answer is to keep innovating and adopt technology to become more cost competitive.
To innovate, incorporate emerging technologies, and make ‘smart’ factories requires quite large capital investments. However, Sri Lanka is notoriously bad at attracting investments.
Having banked excessively on a failed strategy of tax incentives to attract foreign direct investments but failing to get the basics right – like ensuring ease of doing business, a stable and consistent policy environment, and addressing corruption and governance vulnerabilities – has made Sri Lanka an altogether unattractive place to invest in compared to Asian and African counterparts.
Even Colombo’s Port City, a purpose-built special economic zone, has failed to attract any significant large-scale investments. Therefore, we must obviously get the basics right first.
New markets, new products: Sri Lanka’s export basket has changed very slightly over the decades. Our major export markets are, and have always been, the US, UK, and EU. Our major exports are, and have always been, tea, rubber, and apparel. The apparel sector is reeling from the uncertainty of Trump’s tariffs, while the tea industry is facing challenges of its own.
Despite Americans encouraging trading partners to set up production in the US, this is obviously not feasible for our traditional products like tea, rubber, and apparel. It may also be cost-prohibitive for other types of foods. It is obvious, therefore, that we must start looking beyond these traditional goods and markets.
Our closest neighbour, India, has 600 million people in its middle class. There are two billion people in the Asian middle class. However, neither Asia nor India have been tapped significantly as export markets for Sri Lankan products.
Sri Lanka must urgently look towards its regional counterparts as trade partners. To really unleash export growth, we must strengthen regional bilateral and multilateral trade partnerships.
(The writer is a Co-Founder of Arutha and a Director at the organisation. Arutha is an economic research and civic education organisation established in 2022, with a primary focus on public debt and taxation)