Navigating trade in the new system following US President Donald Trump’s Liberation Day reciprocal tariffs poses significant challenges for Sri Lanka, as one of the worst hit countries in terms of tariff rates.
The US tariff announcements, risking a potential global trade war and plunging global stock markets into crisis, have resulted in a new system in global trade. Experts believe Sri Lanka must navigate cautiously, implementing long-awaited and essential policy changes pertaining to trade and engaging in effective trade discussions.
SL to diversify trade markets
Sri Lanka’s largest export markets consist of the US, European Union (EU), and the UK, with a notably lesser amount of exports to South Asian, ASEAN, African, and Middle Eastern markets. Meanwhile, India, China and the UAE are leading Sri Lanka’s import markets. These resemble a discernible disparity in the country’s trade approach and the focus on regional trade partnerships.
Speaking to The Sunday Morning, Deputy Minister of Foreign Affairs and Foreign Employment Arun Hemachandra stated that the authorities were undertaking a balancing act and aimed to diversify Sri Lanka’s trade markets, particularly given the current state of global trade where all countries engaged in global supply chains were experiencing the direct and indirect impact of the new trade dynamics.
Recently, the Ministry of Foreign Affairs chaired a meeting bringing together representatives of Sri Lanka’s overseas missions, both virtually and in person, with key stakeholders from the export sector, including the spice and IT industries, the Small and Medium-sized Enterprise (SME) sector, and the Export Development Board (EDB).
The discussions focused on strengthening economic diplomacy, expanding market access, and addressing tariff barriers that affect Sri Lanka’s exporters, engaging the country’s missions abroad to identify new opportunities, resolve trade challenges, and support local industries as keys to building a globally competitive Sri Lanka.
The Deputy Minister explained that the meeting had concentrated on seeking new trade possibilities as well. According to him, the authorities are currently actively engaged in exploring new markets beyond the traditional ones, leveraging this situation as an opportunity to investigate new areas. He remarked that there was now a coordinated and synchronised process linking all stakeholders on a single platform to manage international trade.
The US tariff rate for Sri Lanka stands at 44%, one of the highest imposed, which will be in effect from 9 April. Consequently, since 2 April, the Colombo Stock Exchange has witnessed a sharp downturn of Rs. 435 billion in value as of 8 April.
Commenting on Government initiatives in light of this, Hemachandra highlighted that following the US Liberation Day announcement, and even before the tariffs had been imposed and discussions initiated, the Ministry of Foreign Affairs, Foreign Employment, and Tourism had begun addressing the matter by inviting all stakeholders for broad discussions. Based on these discussions, a decision was made to conduct a study on the areas requiring focus.
“A committee has also been appointed by the President, with a composition of members who were involved in the previous discussions. Based on these discussions, we are currently working on these matters,” he said.
The Deputy Minister emphasised that the Government was acting responsibly, focusing on actionable responses to the US tariffs and exploring more avenues. Accordingly, the Government is attempting to renegotiate and reduce the tariffs, aiming to revert the rates to their original levels.
Furthermore, the Government is also examining potential import products from the US in order to achieve trade balance, in addition to exploring new markets that will help the country maintain effective exports.
“There are certain areas that Sri Lanka could explore. From a diplomatic standpoint, we are doing our utmost to renegotiate [the tariffs]. As the US move is somewhat unconventional and unprecedented, this imposes certain limitations and restrictions on the actions that can be taken,” Hemachandra added.
Doubling down on necessary reforms
Verité Research Director of Research Subhashini Abeysinghe, an economist with expertise in trade and global value chains, stated the urgent need for Sri Lanka to finally implement long-awaited trade policies in light of the emerging changes in the global trade system.
According to Abeysinghe, given the anticipated challenging period ahead, it is imperative that Sri Lanka undertakes actions that should have been implemented decades ago in terms of international trade. This includes doubling down on reforms to increase the global competitiveness of the country’s market, for which the Government has several options available.
She highlighted options such as cost reduction for Sri Lankan trade firms, noting that implementations like the National Single Window and a one-stop shop for investments were essential, plans that Sri Lanka had been considering to implement for decades.
“These are implementations that the country should have executed a long time ago, and hopefully, the current global trade changes will be considered as a wake-up call for Sri Lanka to finally take action on what should have already been done,” she said.
Moreover, Abeysinghe also stressed that Sri Lanka’s long-standing over-dependence on Western markets was problematic, emphasising the critical need for export market diversification and increased competition.
She added that despite boasting of its strategic location in the booming Asian region, Sri Lanka did not conduct sufficient exports to one of the largest markets in the global trade system despite being its closest neighbour or even to other Asian markets.
Abeysinghe also elaborated on the implications of the US tariffs, highlighting that the expectation from the US administration was that every country would enter into bilateral negotiations and offer to reduce tariff and non-tariff barriers faced by US firms.
However, she noted that the tariffs had been imposed on a large number of countries, adding that the capacity of these countries to reach out to the US administration for bilateral talks or to conclude mutually agreeable bilateral discussions within a short period was questionable.
Consequently, the system is likely to be rather chaotic, and particularly given limited capacity, the US will also have a prioritisation basis when selecting countries for discussions. Larger markets with more attractive propositions may receive preferential treatment and gain greater access to any potential benefits.
Abeysinghe added that while bilateral talks were important, the level of interest may be lower given Sri Lanka’s relatively small market size, a challenge that the country would need to overcome.
“Sri Lanka therefore faces a less favourable situation compared to several other countries, should concessions be an option. Even so, Sri Lanka must make every possible effort.
“Consequently, exports to the US will be affected. In this context, Sri Lanka must monitor the subsequent likelihood of extending beyond exports to the US and to other markets, depending on how other countries will be affected and other aspects such as a potential trade war, a potential slowdown of the global economy, and the contraction of other markets,” she noted.
Furthermore, Abeysinghe added that the dynamics of imports to the country would depend on the timing and nature of decisions that Sri Lanka would make in response to the emerging current system. Generally, countries enter into trade agreements with the US in response to tariffs. However, she also noted that reducing tariffs on the US while other import markets continued to be taxed at higher rates without a trade agreement was also problematic.
“We have long recognised that Sri Lanka must phase out its para-tariff system, reducing barriers; these are essential steps that must be taken. A significant portion of Sri Lanka’s imports originates from India and China, each accounting for approximately 20%, totalling 40%. These imports will likely remain competitive despite taxes,” she said.
US market and global trade system
Advocata Institute Chairman Murtaza Jafferjee highlighted how President Trump’s announcement of US tariffs was shaping global trade dynamics.
He elaborated that Trump had imposed unilateral tariffs on the whole world based on a flawed analysis of each country’s merchandise trade deficit (goods), adding that the US’s deficit based on goods and services was significantly less than what its President had said. The US runs a very large surplus in digital services such as advertising, cloud services, and software.
Jafferjee noted that despite the US representing just 4.5% of the global population, it represented 26% of global Gross Domestic Product (GDP) and 35% of global household consumption. Accordingly, the US is one of the largest consuming nations in the world for the simple reason that it is among the world’s richest nations, where American workers earn higher salaries than any of the other large developed economies in the world.
He also added that as the US Dollar was the world’s reserve currency, even trade deficits in goods and services were paid in US Dollars. The US represents 70% of global market capitalisation in terms of equities and the fixed income markets are the largest, and therefore all countries with a surplus recycle their money back in the US.
“The potential impact from the US action will not only have first-order effects directly between us and the US but also second-order effects, such as European incomes being impacted due to US tariffs on them, where they will have less money to buy from the US, which will lead to fewer tourists.
“There will also be a lesser impact involving second-order effects of European and Chinese trade leading to third-order effects upon us, since the reduction in their trade will further reduce incomes of workers in these countries. In other words, this will trigger a global recession and in some countries it will lead to a depression, which is a deeper and more prolonged recession,” he said.
Jafferjee stressed that the problem would be compounded since global financial markets were crashing, adding that the wealth effect would further dampen spending and investments.
“The longer this goes on, President Trump will come under increasing pressure from his party and his influencers, who are all multibillionaires, to reverse the tariff policy or reduce the size of these tariffs. Alternatively, the courts can intervene and place a freeze order for these tariffs, which have been enacted under the guise of a national emergency,” he added.
Addressing what Sri Lanka could do in the meantime, he placed emphasis on the need to make concessions to the US and remove all tariffs including para-tariffs on US imports, adding that ironically, this calamity may turn out to be a “liberation” for the 22 million people subjugated to massive para-tariffs in this country.
“Subjugation to massive para-tariffs, especially in the form of cess on specific imports, benefited no more than 100 families; these are the crony capitalist business families who have sucked the Sri Lankan consumer dry because the nexus between politicians and the crony businessmen is very strong.
“I am disappointed that the current President, who is enjoying unprecedented popularity and has led by example with his behaviour, has not had the courage to do away with the para-tariffs that he has criticised on many instances as creating monopolistic markets,” Jafferjee said.
Essential trade discussions
Speaking to The Sunday Morning, Ceylon National Chamber of Industries (CNCI) Immediate Past Chairman Canisius Fernando observed that in the evolving global trade landscape, Sri Lanka must actively engage in trade discussions, particularly negotiations with the US, to seek a reconsideration of its position, especially given that the country was in the process of recovering from economic turmoil.
He noted that these tariffs would invariably affect all international businesses, adding that engaging in trade disputes was not advisable for Sri Lanka.
Fernando also highlighted the necessity of maintaining effective trade relationships with other countries, especially major import partners such as China and India, as crucial concerns that should be addressed alongside Sri Lanka’s import tariff rates for the US and current trade dynamics.
“Considering Sri Lanka’s close relationship with India and India’s lobbying influence, Sri Lanka should work towards further strengthening its trade partnership with India, especially given Sri Lanka’s recent favourable diplomatic responses to India. Therefore, opportunities for Indian support have emerged in this context as well,” he said.
Commenting on the potential repercussions of failing to find solutions in approaching trade, he added that employment rates would be significantly impacted.
He noted that with approximately one million jobs associated with the apparel sector alone, encompassing both direct (350,000-400,000) and indirect (600,000) employment, the impact on employment opportunities and subsequent economic complications would be severe.
“If the tariff impositions unfold without solutions, Sri Lanka will need to broaden its market, exploring alternative options, particularly in Europe. Given the country’s economic situation, it is crucial to build a strong case for Sri Lanka, extending market focus further to Europe and other regions of the world,” he added.
Fernando further explained that Sri Lanka primarily imported electronic items from the US, while the majority of its imports came mainly from Korea, Japan, China, India, and Gulf countries.
The concern, however, is that if only the US is exempted from high tariff rates through reductions, Sri Lanka will likely experience an excess of American products. Therefore, carefully balancing trade relationships and considering the interests of all these partners is critical for the country’s economy.
Speaking to The Sunday Morning, National Chamber of Exporters of Sri Lanka (NCE) President Jayantha Karunaratne emphasised the importance of engaging in trade discussions in the current global trade environment.
He noted that Sri Lanka must engage in discussions with the US to resolve concerns regarding its high 44% tariff. Adding to this, Karunaratne addressed current import duty rates, suggesting that Sri Lanka might need to lower them. However, he also noted that lowering the tariff rate solely for the US would likely not be a viable solution, necessitating a uniform structure for all trade partnerships.
He also highlighted the prevailing tensions within the trade ecosystem, particularly given the pressure on the US from other countries globally, as well as internally.
“Finding immediate solutions will likely not be possible. Sri Lanka must persist with talks and negotiations, and make offers from our side as well. I believe Sri Lanka is currently pursuing this approach,” he added.
Commenting on alternative strategies for Sri Lanka in terms of trade, Karunaratne highlighted that while export diversification was important and the export sector had been focusing on it for years, achieving it was a challenging process that required substantial financial, infrastructural, and marketing changes.