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. 

Trump’s tariffs hurt us all, including SL

By Dhananath Fernando

Originally appeared on the Morning

US President Donald Trump’s administration’s wave of tariffs may have been framed as a protectionist strategy to ‘make America great again,’ but its global ripple effects are undeniable, and for countries like Sri Lanka, the consequences are quietly but steadily piling up.

To truly grasp the impact of US tariffs, we must first understand who bears the immediate burden – American consumers. When prices rise due to tariffs, it is not foreign producers footing the bill – it is American families. And when US consumers, who account for roughly 20-25% of global consumption, tighten their belts, the world feels it. Sri Lanka is no exception.

The triple blow of tariffs

At their core, tariffs are a triple blow to consumers:

1. Higher prices: Consumers pay more for goods, many of which cannot be easily substituted locally.

2. Artificial subsidies: Local industries that cannot compete globally get propped up, with the consumer footing the bill.

3. Corruption and rent-seeking: Tariffs empower lobbyists and politically connected businesses, leading to corruption, cronyism, and distortions in policy-making.

This is not unique to America; the theory holds true anywhere, including right here in Sri Lanka.

When US consumers are forced to spend more for less, their overall consumption drops. And because Sri Lanka’s key exports – apparel, rubber, food, and gems – rely heavily on US demand, this can shrink our export revenue and threaten local jobs.

Flawed economics, real consequences

The US Trade Representative’s rationale for reciprocal tariffs rests on a flawed understanding of trade balances. They have calculated tariffs based on the trade deficit with individual countries, assuming this reflects both tariff and non-tariff barriers. It doesn’t.

Moreover, their economic modelling assumes a price elasticity of four and an import-tariff elasticity of 0.25. Multiplied together, these yield a neutral effect, essentially arguing that price and demand perfectly balance out. But that is theoretical fantasy. In reality, trade relationships are nuanced and complex.

Sri Lanka made a similar mistake in past free trade talks with India and Singapore, obsessing over trade deficits rather than economic opportunity. Now, we find ourselves at the receiving end of the same misguided thinking.

Tariffs don’t build industries 

Some argue tariffs create jobs and strengthen domestic industries. But Sri Lanka’s own experience disproves that. For decades, we have imposed tariffs of over 300% on vehicles. Has that turned us into a car manufacturing hub like Japan or South Korea? Not even close.

In fact, the sectors most protected in Sri Lanka – construction materials, footwear, and others – remain stagnant, rent-seeking, and politically captured. Consumers pay exorbitant prices, innovation is stifled, and exports are virtually nonexistent in these areas.

What should Sri Lanka do?

Given our size and economic position, retaliation is not an option. But this global shake-up gives us a golden opportunity for reform. 

Here is what we can do:

1. Unilaterally clean up our tariff system: Eliminate para-tariffs like Ports and Airport Development Levy (PAL) and Value-Added Tax (VAT) on imports. Not because the US is forcing our hand, but because it is the right move for our own competitiveness.

2. Engage strategically with the US: While we may not be a major trading partner to the US, our strategic location in the Indo-Pacific could be a valuable card at the negotiation table. A peaceful, open Indian Ocean is in everyone’s interest.

3. Leverage regional alliances: India has used tariff adjustments as a negotiation tool, and Sri Lanka could align with Indian supply chains to access broader markets. Since much of what we export – like high-value apparel – cannot easily shift to East Asia, regional strategies are critical.

4. Don’t import for the sake of it: Matching trade deficits by simply importing more from the US will not work. We cannot absorb their big-ticket exports – aircraft, weapons, or energy – and doing so irrationally would only hurt us further.

5. Join more regional trade agreements: But most importantly, let’s not wait for others. By unilaterally reforming our trade policies, we can unlock new markets and boost exports, while reducing consumer costs and curbing corruption.

Reform, not retaliation

Tariffs are not just about economics; they are about values. When governments shield inefficient industries and empower rent-seekers, it is the people who pay the price. Let us use this moment not to imitate protectionism, but to chart our own path – one that opens doors, not closes them.

The fundamentals of a healthy economy begin with open, fair, and efficient markets. Sri Lanka has the chance to lead by example.

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