As a country highly dependent on external trade and value chains, with approximately a quarter of its trade involving the US, the nature of potential US tariffs has spurred concerns among exporters, alongside the need for confirmation regarding the implications for Sri Lanka.
The US is Sri Lanka’s single largest export destination, accounting for 23% of the island nation’s merchandise exports. Exports to the US in 2024 saw a hike of 5.49% to $ 2,909.97 million compared to 2023.
The Presidential Memorandum on reciprocal trade and tariffs of the US has called for studies on the “unfair trade practices” of US trade partners to determine reciprocal tariff rates as a countermeasure.
A matter that requires urgent address
Speaking to The Sunday Morning, National Chamber of Exporters of Sri Lanka (NCE) Secretary General/CEO Shiham Marikar stated that potential implications of the US tariffs on Sri Lanka was of significant concern, with discussions regarding its implications underway.
Accordingly, certain US-based ICT companies in Sri Lanka will fall under the taxes that Sri Lanka has introduced, which could possibly be grounds for reciprocal tariffs, if implemented.
“Sri Lanka cannot afford this. The US is one of our largest markets and we are looking to expand our market share and product basket in the US. Therefore, we have proposed studying its impact with the support of the Sri Lankan Embassy, in order to initiate discussions with US counterparts on the pros and cons and how these can be mitigated,” he said.
According to Marikar, the opportunity for timely engagement on this topic is passing by for Sri Lanka, and it should have been carried out a couple of months ago.
“At the time of the US elections, all countries were poised to find out what the impact would be in case of a new regime. For a country like Sri Lanka, which depends substantially on the US for exports as it is one of our largest markets, teams should have already been sent at the time of the elections to study the policies advocated by the candidates,” he added.
He further emphasised the need to negotiate an agreement prior to 2 April, as reversing any policies following implementation would prove to be extremely challenging, adding that the plan announced by the Minister of Foreign Affairs to visit the US for negotiations was a positive move.
According to Marikar, the majority of Sri Lankan exporters are still not fully aware of how this will unfold, with some assuming that such tariff measures will not be taken against the country. Hence, there is a need for a proper study and confirmation on Sri Lanka’s position in this scenario.
Speaking to The Sunday Morning, the Sri Lanka Shippers’ Council (SLSC) noted that there must be a proper direction on this matter, which had not manifested thus far. Accordingly, the SLSC is in the process of evaluating the situation to understand the full impact of the new developments coming out of the US administration.
The SLSC further stressed the need for swift Government action in this regard, emphasising that information on where Sri Lanka stood was important, as implementation would notably affect revenue.
Further, securing a trade waiver from the Government side is strongly believed to be a necessity. In addition, measures such as strengthening bilateral agreements is also required, especially given the extremely high cost of production in the country.
“Investing in necessary technology is essential, as less competitive pricing is another factor that affects Sri Lanka’s US market. The cost of production in the country is high due to high electricity, water, and logistics costs on top of manufacturing costs, and therefore requires concessions. Sri Lanka is not competitive enough despite the trade barriers on China,” the council noted.
The Sunday Morning learns from several stakeholders that while there is much conversation taking place about potential tariffs, they are awaiting official confirmation and a proper direction on the exact nature of the policies. These stakeholders are still in the process of studying and understanding the situation and are therefore unable to comment on the potential impacts as yet.
Apparel industry concerns
Currently, Sri Lanka exports approximately $ 3 billion worth of goods to the US with over 70% of these exports coming from the apparel sector.
Commenting on the apparel industry, a stakeholder told The Sunday Morning that the tariffs in effect on China, Mexico, and Canada could be favourable for Sri Lanka in terms of increased export opportunities, especially with their focus on China.
However, on the other hand, with the cost of imported goods in the US rising due to tariffs, downturns in consumption frequency are likely as well. It was also noted that with the US being heavily dependent on imported apparel, it would have to find a source for such imports, which meant that the impact may not be significant, although its exact impact is yet to be seen.
Addressing the potential economic implications of the US’s reciprocal tariffs on Sri Lankan trade and the overall economy, MAC Holdings Managing Director and Transport and Logistics Committee Chairman Andre Fernando noted that the introduction of such tariffs could lead to increased costs for Sri Lankan exports, making them less competitive in the US market, resulting in a decline in export volumes and revenue.
He added that the apparel sector, which constituted a significant portion of Sri Lanka’s exports to the US, could be particularly affected. Higher tariffs could lead to reduced orders from US buyers, impacting production and employment in Sri Lanka. Accordingly, the overall economy could experience slower growth due to reduced export earnings, which are crucial for foreign exchange reserves and economic stability.
“Given that a quarter of Sri Lanka’s trade is with the US and 70% of these exports are from the apparel sector, the country is highly vulnerable to changes in US tariff policies.
“The apparel sector’s reliance on the US market means that any increase in tariffs could lead to significant disruptions in trade flows, affecting the livelihoods of many workers in the industry. Diversification of export markets and products could help mitigate this vulnerability, but such changes take time and investment,” he said.
Fernando also highlighted that securing a trade waiver would be crucial for maintaining the competitiveness of Sri Lankan exports in the US market. It would help avoid the negative impacts of increased tariffs and ensure continued access to a key export destination. A trade waiver could also provide a buffer period for Sri Lanka to diversify its export markets and reduce dependency on the US.
He added that engaging in diplomatic negotiations and leveraging trade agreements could be essential strategies for securing such waivers and protecting Sri Lanka’s economic interests.
The nature of the impact
According to an Institute of Policy Studies (IPS) study, while mainly targeting imports from Canada (25% non-energy and 10% energy), China (10% energy), and Mexico (25%), and announcing 25% tariffs on the European Union (EU), the US has roughly 13,000 tariff lines, 200 trading partners, and about 2.6 million individual tariff rates.
Therefore, the announced tariffs and the suggested country-by-country reciprocal tariffs are likely to cause trade retaliations, resulting in profound repercussions on global economic dynamics. If implemented, these tariffs would significantly reduce Sri Lanka’s exports to the US.
Further, according to the study, a potential trade war between the EU and the US could heavily impact Sri Lanka’s economic landscape. While higher tariffs on Sri Lanka’s main export competitors would result in a positive impact on Sri Lankan trade, especially if the country is exempted, reprisal from those affected and potential logistical bottlenecks will reduce positive gains.
According to the IPS study, focusing on import tariffs and para-tariffs and excluding VAT, subsidies, and currency manipulation, Sri Lanka’s tariffs are generally higher than those of the US across most sectors when calculated as percentages of the product’s value. This disparity suggests that if the US increases its tariffs to match Sri Lanka’s, Sri Lankan exports will face higher prices in the US market, directly impacting them.
However, the severity of this export reduction depends on the difference between Sri Lanka’s and the US’s tariff rates, with industries like clothing, rubber/plastics, and food being particularly susceptible due to these tariff differentials. The precise impact on Sri Lankan exports can be quantified after the US announces its reciprocal tariff rates, as the effect depends on how Sri Lanka’s prices change relative to its competitors in the US market.
According to the available information, the nature of the tariffs, however, is far from straightforward. By designating several policies as ‘unfair trade practices,’ the United States Trade Representative (USTR) enables US authorities to adjust tariff rates accordingly.
Among the potential practices are high tariffs, value-added taxes, non-tariff barriers, subsidies, burdensome regulatory requirements, and exchange rate interventions, but not limited to them, with the completion of the plan scheduled for 1 April.
Commenting on the extent of the economic implications, Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe highlighted the complex nature of the US tariffs.
While a significant portion of Sri Lanka’s exports go to the US alongside a trade surplus with the US, in the context of America’s trade partners, Sri Lanka ranks in the 30s, with approximately 30 countries having more trade with the US than Sri Lanka. Therefore, it is possible that this may not be an immediate concern, in the sense that Sri Lanka would not be among the initial priorities for US tariffs.
Damsinghe highlighted the need to first understand how these reciprocal tariffs would work. If it is simply taxing the exact amount in reciprocity, then there is a considerable impact on the Sri Lankan system, although it might not be substantial either, considering Sri Lanka’s imports and exports to the US, as the tariff differentials there are not too high compared to other countries.
“In my view, beyond the direct reciprocity of the tariffs, it is also important to focus on other factors around tariffs, such as the strength of the currency, non-trade barriers, and ties with the US. In assessing the situation with all these factors in mind, Sri Lanka might not be in an excessively negative position in comparison to other countries,” he said.
Further, he remarked that global analysts were also of the view that the implementation of these tariffs might be more subjective and political rather than objectively based on the mere economic realities of countries. In that context, it is challenging to forecast the potential impact and it might not be straightforward.
“I wouldn’t expect Sri Lanka to be one of the countries that are hit the worst; it is probably more likely to be less impacted than other countries. However, due to the complex nature of the taxes, it is difficult to assess accurately,” he added.
Commenting on the effects on tariffs due to Sri Lanka being part of the International Monetary Fund (IMF) programme, Damsinghe said that while para-tariffs would emerge in future as part of the IMF programme, the programme traditionally did not have a sizeable role to play in trade negotiations, other than regarding the improved economic condition of the country.
Negotiations necessary
University of Peradeniya (UOP) Department of Economics and Statistics Professor Wasantha Athukorala said that the US economy was presently shrinking and its reserves depleting, leading to such tariffs.
According to Prof. Athukorala, the impact on countries such as Sri Lanka stems mainly from exports, given that around a quarter of the country’s exports are to the US. He said that the actual implementation of these tariffs may potentially lead to a significant reduction in export revenue, eventually necessitating the search for alternative markets if the situation becomes too intense.
“Therefore, it is imperative that Sri Lankan teams visit and engage in negotiations. However, as the current tariffs mainly target countries like China, there is also a possibility that Sri Lanka will not be faced with these tariffs. Despite this, negotiation is necessary,” he said.
Further, he stressed the need to expand the export market while moving into alternative markets as well, rather than solely focusing on traditional markets. Further, the diversification of export commodities is also essential to secure the country’s exports in the long run. He also noted that the Sri Lankan agreement with the IMF may not be significantly impactful in this context.
Govt. stance
Addressing these concerns in Parliament, Foreign Minister Vijitha Herath announced that the Government had established an Action Task Force to tackle the global challenges arising from new tariff policies introduced recently by the US.
Further, given Sri Lanka’s vulnerable economic condition and the lack of capacity to absorb further export tariffs, he explained that the talks would explore methods to prevent the implementation of these tariffs, with a diplomatic approach being essential.
Attempts by The Sunday Morning to contact Deputy Minister of Foreign Affairs and Foreign Employment Arun Hemachandra and Ministry Secretary Aruni Ranaraja were unsuccessful.