Trump tariffs expose Sri Lanka’s uncompetitive trade policy: Advocata

By Advocata Institute

The recent imposition of tariffs on trade by the United States on Sri Lankan exports is a wake-up call. While concerns about the bilateral US-Sri Lanka trade imbalance have been noted, a close reading of the Office of the US Trade Representative’s (USTR) findings suggests deeper grievances—rooted not only in tariffs, but in the wide array of non-tariff barriers and para-tariffs Sri Lanka continues to maintain.  

Sri Lanka’s protectionist trade regime—characterised by ad hoc levies, price controls, import quotas, midnight gazettes and opaque customs practices—has long been a source of concern for trading partners. Many of these measures lie outside the WTO framework, creating both inefficiencies and unpredictability in the trading environment. 

This moment should be seen not merely as a diplomatic challenge, but as a strategic opportunity to initiate and accelerate long-overdue trade reform. Rationalising our tariff structure, rapidly phasing out para-tariffs, addressing behind-the-border barriers, and improving trade facilitation will not only help rebuild trust with key partners like the US, but also improve Sri Lanka’s overall competitiveness and resilience as well as the appreciation of gains on trade. 

Trade policy must now move beyond protectionism and towards enabling integration into global value chains. The cost of inaction will be borne by Sri Lankan exporters, consumers, and our broader growth ambitions. 

While tariff rationalisation and the removal of non-tariff barriers are urgent priorities, they are only the first steps toward a broader, more strategic reset of Sri Lanka’s trade and competitiveness agenda. 

Global trade patterns are shifting rapidly, shaped by geopolitical rivalry, supply chain realignments, and the revival of regional trade agreements. From the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to the Regional Comprehensive Economic Partnership (RCEP), countries are moving decisively to lock in market access, deepen integration, and improve resilience. Sri Lanka, however, risks being left behind. 

Sri Lanka must now actively consider accession to regional trade blocs and seek bilateral agreements with both traditional and emerging partners. Improving trade facilitation, digital trade readiness, and regulatory coherence will further boost productivity and investor confidence 

India and Sri Lanka share a unique and evolving economic relationship rooted in geography, history, and culture. With India projected to become the world’s third-largest economy by 2030 and Sri Lanka seeking to stabilise and grow post-crisis, deepening bilateral economic integration offers mutual benefits. The Indo-Sri Lanka Free Trade Agreement (FTA), in force since 2000, provides a strong foundation, enabling over 60% of Sri Lankan exports to benefit from preferential access. However, Sri Lanka has not fully realised the benefits of this agreement. Due to non-tariff barriers (NTBs), complex rules of origin, and tariff quotas on key export items—such as tea and garments—have constrained trade. Moreover, Sri Lankan manufacturers have struggled to integrate into Indian supply chains due to limited industrial alignment and technical bottlenecks. These are not reasons to abandon the agreement, but rather imperatives to improve it. 

It is time to revive and conclude the Comprehensive Economic Partnership Agreement (CEPA) with India—a framework negotiated over 13 rounds and nearly finalised in 2008. CEPA aims to go beyond goods to cover services, investments, and regulatory cooperation. If well-designed and transparently negotiated, it could address many of the constraints holding back Sri Lankan exporters, support investment inflows, and enable service-sector expansion—particularly in IT, logistics, and education. 

Gain from greater integration

Sri Lanka can gain from greater integration, especially by tapping into India’s expanding middle-class—expected to reach 700 million by 2030—and attracting Indian investment into tradable sectors. Investment in ports, energy, IT, and hospitality can enhance Sri Lanka’s competitiveness, job creation, and foreign exchange earnings. Colombo and Trincomalee ports, grid connectivity for affordable power, and service sector integration—particularly in IT, aligned with Sri Lanka’s ambition to grow its tech workforce—are promising avenues. 

Sri Lanka’s path to deeper integration must also address domestic constraints: a narrow export base, protectionist policies, and ageing demographics. However, with targeted reforms and investment, Sri Lanka can participate in India’s supply chains through niche products and intra-industry trade, rather than competing head-on. Indian firms investing in Sri Lanka can re-export to India, leveraging their networks while transferring skills and technology locally. 

Policymakers can institutionalise collaboration through a bilateral Economic Cooperation Council or joint task force focused on trade, investment, and regulatory alignment. Regular exchanges among academics, think tanks, and officials can help adapt successful Indian policy lessons to Sri Lanka’s context—paving the way for shared growth and regional stability. 

Globally, countries are deepening ties to protect against trade shocks and seize new markets. The EU has accelerated negotiations with ASEAN states and Mercosur; Canada is expanding its trade footprint across Asia; and blocs like the CPTPP and RCEP are fostering tighter regional integration. If Sri Lanka remains on the sidelines, it risks being left out of emerging trade frameworks that will define global commerce over the next decade. 

Deepening trade ties with India is not without challenges. But the alternative—continued stagnation and vulnerability to arbitrary tariffs or shifting investor sentiment—is far worse. Sri Lanka must move beyond domestic hesitation and re-engage India in good faith. A renewed CEPA—anchored in mutual benefit, transparency, and safeguards for sensitive sectors—can serve as a cornerstone of a modern, outward-oriented economic strategy. 

We urge the Government of Sri Lanka to seize this opportunity—push for the implementation of CEPA, invest in domestic capacity to meet quality standards, and remove barriers that hold our firms back from regional value chains. If we act decisively, Sri Lanka can transform a once-contentious FTA into a platform for inclusive growth and sustained global relevance. 

The Advocata Institute strongly urges the Sri Lankan Government to eliminate para-tariffs such as CESS and the Ports and Airports Levy (PAL), which have long hindered Sri Lanka’s trade competitiveness. These additional taxes that sit on top of general import duties increase costs for businesses making it expensive for inputs for manufacturing, disincentives entrepreneurs in taking risks in the global market ultimately making Sri Lankan exports less competitive in global markets. These tariffs also make day to day items expensive for the average Sri Lankan to serve a narrow interest of people. Removing para-tariffs and accelerating the current program of tariff reform to be more uniform would not only cushion the impact of US tariffs but also enhance Sri Lanka’s overall economic resilience. 

US trade tariff policy 

There is growing concern over the US government’s proposed tariff hikes, particularly the 44% tariff on Sri Lanka. These tariffs, part of a broader 10% universal duty on all imports, threaten to disrupt trade relationships, impact key industries such as the apparel sector, and exacerbate economic challenges for developing economies reliant on US markets. The new trade measures by the Trump administration include a universal 10% tariff on all imported goods, effective April 5, and additional “reciprocal tariffs” targeting specific countries with which the US has significant trade deficits, set to begin 9 April. Sri Lanka is set to be hit with a 44% tariff. The US is Sri Lanka’s largest export destination, accounting for approximately 23% of total merchandise exports in 2024, with apparel making up over 70% of these exports. The new tariff threatens the competitiveness of Sri Lankan garments in the US market, potentially leading to reduced orders. 

Trump’s trade policy is largely driven by domestic political pressures, and his desire to tap into populist sentiments of his electoral coalition, positioning himself to be the protector of American industry and Jobs. Another driver of the policy is the US strategic competition with China and the Trump administration’s desire to use tariffs as a blunt diplomatic instrument to assert its influence in a fractured world. 

These policies are however based on flawed economics. The notion that imposing tariffs will “balance” trade deficits between countries is rooted in outdated mercantilist thinking. Just as businesses and families buy goods and services from some people and sell their labour and products to others, so do countries. The idea that trade has to be balanced between two countries is as flawed as thinking that just because we buy our groceries from the supermarket we must also sell to them in order to benefit from the transaction. 

Illogical as they are, Trump policies expose the protectionist policies of Sri Lanka, and the country’s lack of export diversification and lack of integration into regional value chains. 

Sri Lanka’s protectionism

 For nearly 20 years, Sri Lanka has been engaging in a similar protectionist policy regime. Protecting domestic industrialists at the cost of the competitiveness of the overall economy. 

With Sri Lanka facing a 44% tariff, the country’s apparel and textile sector—one of its largest export industries—will suffer significant losses. Given Sri Lanka’s dependence on US demand, these trade measures, could lead to: 

1. Reduced competitiveness in key export industries. 

2. Global supply chain disruptions as buyers shift to countries with lower tariffs. 

3. Declines in investment and employment, further straining an already fragile economy. 

Similar consequences will be felt in Vietnam, Bangladesh, Cambodia, and Myanmar, where heavy tariffs will challenge their economic stability. The entire South Asian region faces risks of declining foreign investment and trade uncertainty, further slowing economic recovery efforts. 

Sri Lanka’s dependence on a few export markets is a direct result of pursuing a failed import substitution policy in the guise of ‘industrial policy’ that has caused corruption, political dysfunction and incentives domestic entrepreneurs and capital to produce for the domestic market in order ‘to save dollars’. Ironically, the logic that has shaped Sri Lanka’s trade policy is similar to the one pursued by Trump. 

Advocata Institute recommendations 

To strengthen Sri Lanka trade competitiveness and mitigate the impact of US tariffs, Advocata Institute recommends the following policy actions: 

1. Eliminate all para-tariffs on imports signalling Sri Lanka’s openness to trade with the world. 

2. Negotiate with the US on tariff levels with US imports with US tariff levels to promote fairer trade conditions.

3. Accelerate the program to move towards a more uniform and a simplified tariff facilitating trade and eliminating room for corruption. 

Bracing for Trump’s tariff storm

By Dhananath Fernando

Originally appeared on the Morning

US President Donald Trump’s second term seems to be keeping all people around the world on their toes. The changes and policies, along with their implications, will be complicated, and we have to do our homework to gain an advantage or at least survive in this game.

The new Trump administration has suggested reciprocal tariffs, meaning the same tariff rates applied to each country that they charge for US products. 

Already, a 10% tariff is in effect for non-energy products from Canada and a 25% tariff on energy-related products from Canada. Additionally, a 25% tariff has been imposed on Mexican products, alongside an additional 10% tariff on Chinese products, bringing the total tariff on Chinese products to 21% (from around 11% previously).

SL’s opportunities and challenges

Before Sri Lanka gets affected by any reciprocal tariff, we first need to understand our total exports, including services. 

According to Harvard’s Atlas of Economic Complexity, we export about 21% to the United States. When it comes to apparel, about 40% of our apparel exports are destined for the US. 

Accordingly, the first line of impact for Sri Lanka would be potential consumption contraction in the US. With high tariffs even against Canada, China, and Mexico, as well as increased prices of essential products, the US consumer will likely reduce spending on non-essential items such as seasonal clothing. It is normal consumer behaviour to postpone purchasing decisions if expenditure on essentials like energy and rent increases.

The second line of impact has both positives and negatives. China and Mexico also supply apparel to the US. If relative prices of Sri Lankan apparel become lower following the 25% tariff for Mexico, we might gain an advantage. 

Similarly, we could become more competitive than China, which now faces an overall 21% tariff. Therefore, we must be cautious and prepared, recognising it is not just tariffs on Sri Lanka directly but also tariffs on others that can bring us opportunities or challenges.

The danger lies in the final stage if the US imposes reciprocal tariffs. The US would consider imposing the same tariffs for Harmonised System (HS) codes as the other trading country imposes on US products. 

There is discussion that the US might not only consider customs duties but also other tariff barriers and even non-tariff barriers. In that case, Port and Aviation Levy (PAL), Commodity Export Subsidy Scheme (CESS), Social Security Contribution Levy (SSCL), and Value-Added Tax (VAT) might be considered, according to some reports. 

This decision depends entirely on the Office of the US Trade Representative (USTR) defining ‘unfair trade practices.’ Media reports indicate that the USTR is expected to analyse all data and make a decision on reciprocal tariffs by 1 April.

We must recognise that Sri Lanka’s average tariff rates are significantly higher than those proposed by the US to China, Mexico, and Canada. A 25% tariff in Sri Lanka is considered low, as our effective tariff rates reach nearly 100%, and for vehicles with excise duties, it exceeds 200%. It is joked that even Trump would become confused if he learnt about Sri Lanka’s tariff structures and that he might learn a tough lesson from us.

In the context of reciprocal tariffs, price-sensitive product categories such as food, apparel, and rubber products may face higher prices in US markets. Ultimately, the real impact will depend on how other competing export markets are affected by US tariffs and non-tariff barriers and how these affect US consumption and global economic growth under new trade dynamics.

Meanwhile, Europe and other powerful countries are targeting the US with reciprocal tariffs, which could trigger global supply chains to consider relocation and create new incentive structures. This can present either an opportunity or a disaster for Sri Lanka.

Solutions

To attract new supply chains and assembly components, we must quickly work on basic factor market reforms. Having adequate land ready for industry and a flexible labour force with business consciousness is essential. Secondly, simplifying and lowering our tariff structure is critical, even though it might be somewhat late. 

Additionally, exploring exports towards East Asia and the Indian market is increasingly vital. Whether our US market shrinks or not, we should prepare to explore other markets, primarily India and East Asian countries. Strengthening foreign relationships, activating business chambers, and intensifying diplomatic missions to strengthen ties is necessary. 

Accelerating regional free trade agreements and conducting market sentiment research can help Sri Lankan entrepreneurs expand their exports. Fundamentally, economics never expires – even during trade wars or crises, strong economic fundamentals provide the best way to survive and thrive. We must move from hope to action.

Where did Sri Lanka export all products to in 2022?

Source: Harvard Atlas of Economic Complexity

Where did Sri Lanka export textiles to in 2022?

Source: Harvard Atlas of Economic Complexity

Economics of tyre imports and import controls

By Dhananath Fernando

Originally appeared on the Morning

The recent discussion on restricting tyre imports to boost local production, with the stated objective of saving USD outflow from the country, requires closer examination. 

In Sri Lanka, import restrictions are often perceived as a measure to promote exports, but in reality, they have the opposite effect. Restricting imports discourages exports and reduces the productivity of local manufacturing. 

Moreover, this strategy burdens consumers with higher prices and fosters corruption among Government officials and politicians. Ultimately, it is a strategy with no winners, leaving everyone worse off in the long run.

A deep dive into the tyre market

Sri Lanka is a leading exporter of solid tyres, holding approximately 25% of the global market share. Solid tyres, used in heavy-duty vehicles like tractors and forklifts, represent a key segment of our exports. 

However, even as a global player in this industry, we rely on importing raw materials such as metal to remain competitive. Across all rubber products, Sri Lanka imports approximately $ 200 million worth of raw materials annually, as local rubber production is insufficient. In 2019, the total export value of rubber products was approximately $ 1 billion.

Typically, industries add about 30% value through their processes. In the case of pneumatic tyres, the current tariff structure includes a 20% general duty, a 10% Ports and Airport Development Levy (PAL), an 18% Value-Added Tax (VAT), a 25% or Rs. 330/kg Commodity Export Subsidy Scheme (CESS), and a 2.5% Social Security Contribution Levy (SSCL). 

The cumulative tax burden amounts to 75.5% on paper, but due to the cascading effect of VAT applied on top of other taxes, the effective rate is significantly higher.

Sri Lanka has approximately five million vehicles, including tuk-tuks and motorcycles, which are often referred to as a ‘poor man’s transport’. These high tariffs or import bans effectively double the price of tyres, placing a disproportionate burden on ordinary consumers. 

For instance, the tax relief provided by expanding the tax-free threshold from Rs. 100,000 to Rs. 150,000 results in a monthly saving of just Rs. 3,500 – an amount easily offset by the additional cost of a single tyre. 

High tyre costs also drive up transportation expenses across the board, including bus fares, tuk-tuk fares, and freight costs, cascading through the economy without any corresponding productivity improvements.

Moreover, the new generation of Electric Vehicles (EVs) requires specialised, high-quality tyres. Import restrictions could limit access to these products, reducing the efficiency and viability of EV adoption in Sri Lanka.

Supporting local production the right way

Does this mean local production should not be supported? Absolutely not. However, support should come in the form of reducing structural barriers rather than imposing tariff protections. 

For instance, the high cost of energy is a major driver of manufacturing expenses in Sri Lanka. Addressing this issue through energy sector reforms would make local products more competitive. Alternatively, the Government could share the risk by subsidising loan interest rates, enabling manufacturers to compete globally and focus on exports rather than relying on protectionist tariffs.

High tariffs only serve to make local production uncompetitive, forcing consumers to bear the cost of substandard products. Instead, removing barriers to business and fostering an export-oriented industrial strategy is the way forward.

The problem with CESS and import tariffs

The CESS was introduced by the Export Development Board (EDB) to encourage value-added exports and discourage raw material exports. Ironically, this tax on exports has been extended to imports, significantly inflating tariff burdens. Few people realise the original intent of the CESS and its unintended consequences on trade.

Debunking protectionist arguments

Two common arguments are often made in favour of high import tariffs:

Infant industry argument: The idea is that new industries require time to establish themselves. However, the tyre industry in Sri Lanka dates back to the 1970s – well past its ‘infant’ stage. After more than half a century, it should be thriving without protectionist crutches.

Comparisons to India and the US: While India and the US impose some high tariffs, these nations have vastly different contexts. India, with a population of over a billion, and the US, with 300 million high-income consumers, can leverage economies of scale to make protectionism viable. Even in these countries, protectionism has shown its limits, and they increasingly focus on global competitiveness.

The tragedy of corruption through protectionism

Another significant downside of protectionism is its susceptibility to corruption. Sri Lanka has already witnessed scandals such as the sugar and garlic scams, where the Special Commodity Levy (SCL) was manipulated overnight through ministerial powers. 

Similarly, protectionist tariffs can be arbitrarily increased by corrupt officials, allowing certain companies to gain undue advantages. These benefits can even be funnelled into campaign financing, creating a vicious cycle of corruption.

The International Monetary Fund (IMF) Governance Diagnostic Report highlights the vulnerabilities associated with protectionism, emphasising how such policies open the door to corrupt practices. By simply raising tariffs, policymakers can distort market dynamics, favouring a few while imposing costs on the wider public. This undermines the principles of fair competition and good governance.

The misguided USD savings argument

The notion that import restrictions save USD is flawed. Imports are driven by the ability to borrow in LKR rather than by direct dollar demand. With an appreciating currency and improving reserves, Sri Lanka has imported more without destabilising its economy. Restricting tyre imports could inadvertently increase wear and tear of other spare parts, like shock absorbers and rubber bushes, leading to higher overall costs.

If Sri Lanka continues to pursue import bans as a strategy to develop industries, it risks destroying exports, raising the cost of living, and undermining local industries’ competitiveness. Instead, we should focus on removing barriers to business and enabling local manufacturers to compete globally. 

Protectionism not only creates losers but also fosters corruption, making it an unsustainable and counterproductive strategy. A competitive, export-driven approach benefits everyone, ensuring a prosperous future for the economy.