A Policy Paper on Emerging U.S. Reciprocal Tariffs and Sri Lanka–U.S. Trade Relations
Written on: March 7, 2025 By : Sanjaya Ariyawansa
Senior Economist The Ceylon Chamber of Commerce
Executive Summary
The United States (U.S.) remains Sri Lanka’s single largest export market, absorbing $2.98 billion worth of Sri Lankan goods in 2023—primarily in apparel (with knit women’s undergarments at $230 million) and rubber-based products. Concurrently, Sri Lanka imported about $516 million from the U.S., led by soybean meal ($98.1 million).
Against this backdrop, potential expansions of the U.S. “reciprocal tariffs” policy could considerably impact Sri Lanka’s exports. Reciprocal tariffs involve the U.S. raising its duties on imports from countries perceived as imposing higher (or otherwise unfair) barriers on U.S. goods. This approach is part of a broader “America First” trade policy, as laid out in recent executive orders and memoranda issued in the U.S. This paper provides a brief analysis and action plan for Sri Lankan policymakers to prepare and respond effectively to these developments.
1. Background on U.S. Policy and the “America First” Executive Actions
1.1 Recent U.S. Executive Directives
In a series of executive memoranda—including the “America First Trade Policy” memorandum—U.S. administrations have outlined a trade strategy aimed at:
• Reducing trade deficits and perceived imbalances by scrutinizing partners’ tariff and non-tariff barriers.
• Addressing “unfair and unbalanced trade” through broad measures—ranging from sectoral investigations to supplemental or “mirror” tariffs—intended to protect American industries and workers.
• Reviewing existing trade agreements (e.g., free trade agreements, the World Trade Organization framework) for alignment with U.S. national and economic security goals.
Among the key directives in these executive orders:
1. Investigations of Partner Tariffs
o If partner-country tariffs on U.S. exports are deemed excessive or discriminatory, the U.S. government can impose reciprocal or higher tariffs on imports from that partner.
2. Enhanced Powers for the Office of the U.S. Trade Representative (USTR)
o The USTR, in consultation with the U.S. Departments of Commerce, Treasury, and Homeland Security, is authorized to recommend policy actions, including tariffs, to redress perceived trade imbalances.
3. Emphasis on Economic and National Security
o U.S. trade policy is now closely tied to national security concerns, evaluating reliance on imports for critical products and the associated implications for the U.S. industrial base.
1.2 Significance for Sri Lanka
These directives underscore the rising probability of the U.S. taking a tougher stance on trading partners—potentially including Sri Lanka—if the U.S. deems Sri Lanka’s tariffs on U.S. goods as higher than “fair” levels. Moreover, as these executive orders call for actively reviewing all partners for reciprocal treatment, Sri Lanka must remain vigilant to safeguard its core exports, especially in apparel, which formed the lion’s share (over $2 billion) of total exports to the U.S. in 2023.
2. Sri Lanka–U.S. Trade Snapshot
2.1 2023 Trade Data
• Sri Lanka’s Exports to the U.S.: $2.98 billion, ranking apparel—particularly knit women’s undergarments ($230 million)—as the top product category.
• U.S. Exports to Sri Lanka: $516 million, led by soybean meal ($98.1 million).
2.2 Broader Economic Indicators
• Sri Lanka’s GDP (2023): $84.4 billion (rank 75/195), with a GDP per capita of $3,828 (rank 132/195) and a GDP per capita growth rate of 2.34% over 2013–2023.
• U.S. GDP (2023): $27.7 trillion (rank 1/195), with a GDP per capita of $82,769 (rank 9/196) and a 64.2% overall GDP growth (2013–2023).
• Economic Complexity: Sri Lanka’s ECI stands at –0.44 (rank 85/132), whereas the U.S. shows a robust +1.5 (rank 10/132), highlighting a more sophisticated and diversified U.S. industrial base.
2.3 Interdependence and Risk
With over a quarter of Sri Lanka’s total exports destined for the U.S., any hike in U.S. tariff rates—under reciprocal or related policies—could disrupt a significant source of foreign exchange and employment. On the flip side, Sri Lanka’s own tariffs on certain U.S. goods may invite scrutiny, potentially triggering reciprocal responses.
3. What Are “Reciprocal Tariffs”?
Definition: When a country (in this case, the U.S.) finds that another country imposes higher duties on U.S. goods, it may raise its own duties to match or exceed those levels, effectively seeking “tariff parity.”
Implications:
• Potential Duty Escalation: If the U.S. believes Sri Lanka’s tariff regime on American goods is “unfair,” it could impose higher import duties on Sri Lankan apparel, rubber, or agricultural items.
• Focus on Trade Balances and Deficits: Mirroring the directives in the executive orders, the U.S. looks to close bilateral deficits by leveraging import tariffs.
4. Potential Consequences for Sri Lanka
1. Competitive Disadvantage
o Higher tariffs on Sri Lankan apparel in the U.S. market could cause a shift of orders to countries like Vietnam or Bangladesh that maintain more favorable tariff arrangements.
o This could undermine Sri Lanka’s traditionally strong apparel sector—particularly sensitive categories like knit garments.
2. Macroeconomic Challenges
o Export Earnings: Any downturn in garment exports (the largest income component) can reduce foreign exchange inflows, straining Sri Lanka’s balance of payments.
o Investment Climate: Uncertainty around U.S. tariffs may deter foreign direct investment (FDI) in Sri Lanka’s
export-oriented industries, especially if investors foresee an unstable trade environment.
3. Sectoral and Social Impact
o Employment: Over 300,000 people are employed directly in the apparel sector, and job losses could disproportionately affect female workers.
o Small and Medium Enterprises (SMEs): Smaller apparel units, rubber accessory makers, and agricultural exporters could be hit hardest without the cushion of large capital reserves to handle tariff shocks.
5. Recommended Policy Responses
5.1 Bilateral Engagement
1. Dialogue with the USTR
o Schedule high-level talks to confirm how the U.S. evaluates Sri Lanka’s tariffs. Stress existing low or moderate tariffs for most U.S. imports.
o Advocate for maintaining or extending preferential structures (even if partial, sector-based benefits akin to GSP privileges).
2. Targeted Reciprocity Adjustments
o Consider adjusting Sri Lanka’s own tariffs on certain U.S. imports that are currently high, reducing potential triggers for U.S. reciprocal measures.
5.2 Market Diversification
1. Alternative Export Markets
o Strengthen trade agreements and marketing programs in the EU, India, and Asian economies to reduce overreliance on the U.S.
2. High-Value Products
o Move beyond “mass-market” garments to “specialty” or “sustainable” apparel lines, enabling Sri Lanka to command premium prices and withstand moderate tariff hikes.
5.3 Competitiveness and Compliance
1. Boost Productivity
o Provide technical assistance for apparel, rubber, and agricultural exporters to increase automation, reduce overhead costs, and adopt advanced logistics management.
2. Strict Compliance
o Maintain internationally recognized labor and environmental standards, which can build a positive reputation among socially conscious American consumers and policymakers.
5.4 Domestic Reforms and Transparency
1. Streamlined Customs & Trade Facilitation
o Accelerate the deployment of digital customs clearance systems to demonstrate transparency and efficiency—an important signal to the U.S.
2. Regulatory Coordination
o Ensure alignment among the Ministry of Trade, Export Development Board, and Finance Ministry to present coherent policy reforms to American counterparts.
5.5 Public-Private Collaboration
1. Joint Task Forces
o Form industry-specific task forces (e.g., apparel, tea, rubber) involving government and private chambers, focusing on readiness if U.S. tariffs shift suddenly.
2. Awareness Campaigns
o Provide SMEs with clear guidance on potential new documentation and origin requirements, enabling them to navigate compliance hurdles if reciprocal tariffs are enacted.
6. Six-Month Action Plan
Month 1: Initialize High-Level Committee
• Task Force: Central Bank, Ministry of Trade, Department of Commerce, Export Development Board.
• Assessment: Rapid review of any existing Sri Lankan duties on U.S. goods that might trigger reciprocity.
Month 2: Diplomacy and Industry Consultations
• USTR Engagement: Request an official meeting to clarify the U.S. stance on reciprocal tariffs.
• Domestic Forums: Host discussions with apparel, agricultural, and rubber sector representatives to gauge readiness and vulnerabilities.
Month 3: Drafting Policy Proposals
• Tariff Concessions: Identify which Sri Lankan tariffs on U.S. products could be adjusted to avert reciprocal action.
• Export Diversification Strategy: Launch promotional campaigns in the EU and Asian markets to offset potential losses in U.S. market share.
Month 4: Onsite Negotiations and Domestic Upgrades
• U.S. Visit: Send a high-level delegation (government + private sector) to Washington, D.C. to advocate for Sri Lanka’s position.
• Customs Overhaul: Begin rolling out upgraded e-Customs and advanced cargo-tracking measures to reduce potential trade friction.
Month 5: Industry Capacity Building
• Financial Incentives: Offer short-term credit lines or tax incentives for manufacturers upgrading machinery or meeting advanced U.S. compliance.
• Stakeholder Updates: Regularly inform exporters on the progress of bilateral talks, ensuring they can adapt production cycles if tariff changes loom.
Month 6: Finalizing Agreements and Beyond
• Draft Bilateral Arrangement: If negotiations progress, present for Cabinet approval any formal agreement or memorandum of understanding.
• Continuous Monitoring: Institutionalize a permanent unit under the Task Force to track updates on U.S. trade policy and respond in real time.
Conclusion
Recent “America First” executive memoranda and related U.S. policies, which seek stricter reciprocity in global trade, underscore the need for immediate, methodical action by Sri Lanka. With $2.98 billion in exports to the U.S. at stake—chiefly in apparel ($230 million in knit women’s undergarments)—the nation’s economic stability and employment landscape hinge on proactively managing the risk of reciprocal tariffs.
By following the recommended steps—strengthening direct engagement with the U.S., considering targeted tariff adjustments on U.S. goods, diversifying markets, and investing in competitiveness—Sri Lanka can bolster resilience while upholding vital trade ties with its largest export partner. Through a coordinated six-month roadmap, policymakers and industry can ensure that Sri Lanka remains a reliable and competitive supplier to the U.S., securing ongoing gains and protecting valuable sectors like apparel, rubber, and tea.
Written on: March 7, 2025
By : Sanjaya Ariyawansa
Senior Economist
The Ceylon Chamber of Commerce
Source:https://economy.lk/ ENB July 25, 2026
