Sri Lanka’s delicate tea-for-oil barter trade with Iran is suddenly under the spotlight as US President Donald Trump’s tariff threats loom large and Sri Lanka must, going forward, weigh its options both geopolitically and economically.
With the US as Sri Lanka’s largest export market – accounting for over 25% of total merchandise exports in 2025 – the island nation faces a stark choice: preserve an important energy lifeline or risk punishing duties on key sectors like garments and tea.
This comes amid escalating unrest in Iran, where reports of over 2,500 protest-related deaths have drawn global scrutiny, and potential US sanctions that could ensnare trading partners.
The controversy ignited amid escalating US sanctions on Iran, coupled with political unrest there. Trump has explicitly threatened 25% tariffs on countries doing business with Iran, a move that will hit Sri Lanka hard: Iran ranks among the top destinations for its tea, while the US absorbs over 20% of total exports, dominated by apparel (65–70% of US-bound shipments).
Last year’s ‘Liberation Day’ tariffs already hiked duties on Sri Lankan goods to 20%, framing this as part of a broader US trade war against the Global South.
A fragile state
Economist and University of Manchester PhD researcher Umesh Moramudali dissected the tariff mechanics and their disproportionate impact on Sri Lanka’s tea sector. “We are not entirely sure how these tariffs are going to be implemented, but if they are, then it will have some impacts on Sri Lanka’s tea exports,” he said. “On the other hand, all other countries are going to have the same level of tariffs, so a couple of things could happen. One is that exports from Sri Lanka would be reduced because cheaper exports would be prioritised.”
Moramudali dismissed recent coconut export milestones as an insufficient cushion for broader export vulnerabilities. “The fact that coconut exports surpass tea exports doesn’t really matter much here because we have an overall export problem, so just because coconut exports passed $ 1 billion doesn’t necessarily mean that it’s an excuse to reduce other exports. We need as much exports as possible because our exports have significantly reduced from 40% of GDP in 2000 to 20% around 2015 and we are still around that figure. We need to catch up.”
This export contraction underscores Sri Lanka’s fragility. Tea, a cornerstone earning over $ 1.4 billion in 2025, saw Iran import roughly 10–15% of volumes in recent years, per Sri Lanka Tea Board data.
Shifting to energy, Moramudali cautioned against panic over oil prices. “In terms of oil prices, I think it’s too early to say. When Venezuela was hit, there was actually an oversupply of oil in the global market. The question is whether that oversupply will continue, with oil coming in from Russia and other countries. If the oversupply vanishes for a substantial period, then we could see a consistent rise in oil prices. In that case, it would impact Sri Lanka’s payments, but that’s more on the relatively long-term horizon.”
He also highlighted logistical buffers: “There’s a lag between ordering oil and receiving it, so we’ll continue getting the oil we have already ordered and for which we have opened letters of credit. There won’t be an immediate impact. Whatever impact there is – based on the conditions I outlined – will come in a few months. Sri Lanka mostly buys refined oil from Singapore, so we should focus on oil prices there. It depends on what happens to those prices in the long term. Short-term fluctuations might not affect long-term refined petroleum prices in Singapore much, except by a very small margin. If they don’t affect it, there won’t be much of an impact for us, since we mostly buy refined oil from there.”
Singapore’s refined oil prices, benchmarked at around $ 80–85 per barrel last week (Platts data), have held steady despite Middle East tremors, buoyed by Asian supply chains. Yet, a sustained Brent crude spike above $ 90 – possible if Russian flows tighten – could add Rs. 50–100 billion to the Ceylon Petroleum Corporation’s annual import bill, straining forex reserves hovering at $ 3.5 billion.
Balancing relationships
Meanwhile, former Secretary to the President and former High Commissioner to India Austin Fernando framed the Iran ties through a pragmatic lens, emphasising barter arrangements that sidestep dollar shortages. “When it comes to Iran, we are buying through a barter system: we give tea, and they give us oil. If you do transactions like that, dollar involvement becomes small, which becomes a problem for them – a dollar problem. Iran was brought into this situation by Americans; they have a history of sanctions.”
Fernando speculated on ulterior US motives. “They will try to bring in one of the princes of Iran – or a former president’s family member. This could be an indirect way of hitting China.”
He urged diversification without rupture: “We should definitely try to find other markets for tea or anything else, because if we challenge Trump, he could impose big tariffs, and our garment industry – where we send 65–70% of our exports to the US – would suffer. He reacts in unorthodox ways.”
Fernando also warned against prematurely taking decisions to cease trade with global trading partners: “I don’t say we should be overly cautious or stop trade with Iran. We must not jump the gun. We should try to make up with both parties; it’s difficult, because pleasing Trump isn’t easy. If we stop the tea for petroleum barter, we face another problem: no crude oil. We have to balance trade relationships with political ones. Trump is targeting them not just for those countries, but to hit China, since Iran and Venezuela supply their oil.”
Garments, Sri Lanka’s export kingpin at 45% of total exports ($ 5.5 billion in 2025), route 65–70% of US volumes through preferential GSP+ access under EU deals, but US exposure remains acute. A 25% tariff could erode $1–1.5 billion in annual earnings, per Joint Apparel Association Forum estimates, risking 300,000 jobs in a sector employing one million.
Fernando’s barter reference ties to the 2018-2024 tea-for-oil deal, valued at $ 200-300 million yearly, insulating Sri Lanka from some sanctions via rupee-rial swaps. Ending it abruptly could leave refineries idle, as Sapugaskanda processes Iranian heavy crude optimally.
National interest over ideology
Former Foreign Secretary and former Permanent Representative to the UN in Geneva H.M.G.S. Palihakkara advocated restraint and non-interventionism.
“The situation in Iran is dire. In terms of Sri Lanka’s interests, we naturally consider it a purely internal situation in which self-determination should be made by the Iranian people, rather than external intervention – especially the use of external force for regime change. That’s something smaller countries in particular don’t normally advocate. It not only contravenes international law and norms, it’s also not in our interests, especially as we live in a highly asymmetrical neighbourhood. That is not a policy or principle we should or can adopt.”
He advocated for prioritising analysis: “That is not to say that anyone can justify what’s going on in Iran. If reports are true, peaceful protests – or whatever protests – have resulted in over 2,500 deaths. So it’s a rather complex situation. I think we need to monitor it carefully. But certainly, Sri Lanka needs to uphold the norm that regime change should be an internal affair.”
Palihakkara stressed national interest over ideology: “Sri Lanka will have to weigh the pros and cons. Our trade with Iran is not so great that it outweighs the kind of tariffs Trump is proposing on Sri Lankan exports to the United States. Certainly, we have to weigh that factor, because what matters is primary national interest. But it needs to be data-based rather than values-based.”
Palihakkara also pointed out that structural ties loomed large when trading with countries embroiled in geopolitical turmoil. “There are several structural issues in dealing with trade and economic cooperation with Iran. For example, the refinery we have – I’m told, though I haven’t studied or verified it – can handle only Iranian crude. So we need to see whether we need to diversify that. So the Sapugaskanda Refinery is one. The other is that the tea market is very important to us. So, irrespective of what regime is there – whether democratic or autocratic – if they buy our tea, we need to sell it.”
Commenting on US President Trump, Palihakkara cautioned over his unpredictability. “The third thing is, of course, Trump threatens so many things, but he doesn’t necessarily do all of them. It may be one way of exercising leverage, so we’ll have to watch and see. If we have to stop our tea trade with Iran because of this threat of a tariff – since the US remains our largest export market – then, as I said, we need to derive our actions from that data-based study. Our Commerce Department experts should be able to educate the Government on that, purely on data. If we are going to incur a net loss by paying a 25% tariff as against stopping trade with Iran, then obviously we should seriously consider a pause, more so as we struggle with forex reserve building to prepare for the 2028 debt repayment gauntlet.”
Sapugaskanda, built with Iranian aid in 1969 and upgraded via Uma Oya investments (2008-2024), processes 50,000 barrels daily, 40% from Iran. Retooling for lighter crudes from Saudi or UAE sources could cost $ 500 million, per industry analysts, a non-starter amid International Monetary Fund (IMF) bailout constraints.
Geopolitical coercion and the pivot East
Tricontinental: Institute for Social Research Researcher Shiran Illanperuma contextualised tariffs as imperial tools.
“US President Trump has threatened to impose a 25% tariff on countries doing business with Iran. Iran is one of the major destinations for Sri Lanka’s tea exports. Historically, Iran has also been an important investor in Sri Lanka, guiding the construction of the Sapugaskanda Refinery in 1969, and investing in the Uma Oya Hydropower Complex from 2008 to 2024.”
The math is stark and revealing: “Meanwhile, the US is Sri Lanka’s single largest export market, accounting for over 20% of exports. Simple arithmetic means that Sri Lanka, in its currently fragile state, would have to dial down its economic relations with Iran in order to safeguard its more commercially significant market access to the US.”
Illanperuma decried the pattern of US hegemony, particularly in the Global South. “However, these developments have to be understood in the context of last year’s ‘Liberation Day’ tariffs by the US, which already raised tariffs on Sri Lankan exports to 20%. The US has effectively imposed a trade war not just on China but the entire Global South, seeking to disrupt the process of South-South cooperation such as BRICS+. These tariffs are therefore not merely economic policies but tools for geopolitical coercion. The US has tried to use tariffs to influence India’s trade with Russia, Brazil’s internal judicial processes, and now to isolate Iran. For Sri Lanka, these threatened tariffs also amount to external interference over our sovereign right to conduct trade with other nations.”
He called for de-risking and for Sri Lanka to look at long-term strategies to navigate various geopolitical power blocs: “Sri Lanka’s trade exposure to the US market has therefore become a national security concern. In an era where the line between trade policy and national interests have become blurred, Sri Lanka should be seeking to reduce its exposure to the US market. The centre of gravity of the world economy has shifted to Asia. Sri Lanka must look East towards the Belt and Road Initiative and seek greater trade integration with the Eurasian landmass.”