Tariff reform vs. the high-tariff lobby

By Dhananath Fernando

Originally appeared on The Morning

There was a recent news story that the Government is considering a new tariff policy. That may sound technical. It is not. It goes to the heart of how expensive life is in Sri Lanka.

A tariff, in simple terms, is a tax imposed by a government on goods imported from another country. The definition is straightforward. The system is not.

Millions of products cross borders every year. In Sri Lanka, each of these items is taxed at different rates at the point of entry. Every product that crosses the border is classified under what is known as an HS Code – the Harmonised Commodity Description and Coding System developed by the World Customs Organization (WCO).

At the global level, goods are identified using a six-digit code. Countries can then add additional digits to create more detailed classifications. That is where complexity begins. With eight or 10 digits, categories become narrower, rates become different – and discretion enters the system.

There are generally two types of tariffs. The first is an ad valorem tariff – a percentage of the value of the good. For example, a vehicle may be taxed at 20% of its declared value. The second is a specific tariff – a fixed amount per unit, such as a certain number of rupees per pair of shoes or per kilo of cement.

Not all tariffs are created equal. In principle, tariffs discourage trade. Governments justify them either as revenue measures or as tools to protect domestic industries. But when tariffs become excessively high, they stop being revenue instruments. They become barriers. Products simply do not enter the market because, after taxes, they are no longer affordable.

The type of tariff also matters. A specific tariff can disproportionately hurt lower-income consumers. Imagine a flat Rs. 500 tax on a pair of shoes. A pair worth Rs. 1,000 faces a 50% tax. A pair worth Rs. 30,000 faces less than 2%. The burden falls heavier on those buying lower-value goods. That is not progressive policy; that is distortion.

Sri Lanka’s deeper problem, however, is structural. We have operated for decades with a highly complex, cascading tariff system. Multiple rates across thousands of HS codes. Para-tariffs layered on top of Customs duties. Different treatment depending on how a product is classified.

Complexity creates discretion. Discretion creates room for corruption. When tariff rates differ significantly between similar HS codes, the official determining the classification holds enormous power. A small change in classification can mean a large difference in tax payable. That gap becomes fertile ground for rent-seeking.

But that is only one side of the story.

The real push for high tariffs does not primarily come from customs officials. It comes from vested interests within the private sector.

There are companies in selected industries that mainly serve the domestic market. If cheaper or better-quality imports were allowed to enter freely, many of these firms would struggle to compete. Instead of improving productivity or innovating, they lobby for protection.

Construction materials are a clear example. Tariffs in some segments go as high as 70% or 80%, often through para-tariffs such as Commodity Export Subsidy Scheme (CESS) and Ports and Airports Development Levy (PAL).

Over time, the high-tariff lobby has become highly organised. It operates almost like a cartel. It finances political campaigns across party lines. It frames the narrative around ‘saving dollars’ and ‘protecting local industry’ while consumers quietly pay the price. Many of these protected industries function as monopolies or oligopolies, operating in near-cartel structures with limited competition.

To further entrench protection, many of these products are placed on what is known as the ‘negative list.’ Even when Sri Lanka signs a free trade agreement, items on the negative list are excluded from tariff reductions. In effect, the agreement becomes hollow for those sectors.

The proposed new tariff policy seeks to address this. It is expected to introduce a simplified structure, perhaps four tariff bands such as 0%, 10%, 20%, and 30%, and to remove para-tariffs like CESS and PAL. If implemented properly, this would be one of the most significant trade reforms in decades.

But reform in Sri Lanka is never a straight road.

Lobbying groups typically use three tactics to dilute such reforms. First, they demand long phase-out periods of three to five years, arguing that the industry needs time to adjust. In practice, those years allow political pressure to build and reforms to stall.

Second, they push to expand the negative list, adding more items under protection so that even with a simplified tariff structure, meaningful competition never materialises.

Third, they invoke anti-dumping measures to reintroduce barriers through another door, effectively recreating protection under a different label.

Many governments have attempted tariff reform. The fact that we are still debating simplification after decades is itself evidence of how strong vested interests are.

Moving towards a four-band tariff system and eliminating para-tariffs is commendable. But it must be done decisively. Without expanding the negative list. Without excessive phasing. Without hidden backdoors.

Every delay strengthens cartels. Every compromise keeps prices high. And every year of hesitation quietly squeezes consumers, especially the poor, by denying them access to affordable goods and better living standards.

Tariff reform is not a technical adjustment. It is a test of political courage. The question is simple: do we design policy for protected producers, or for the broader public?

The answer will determine whether Sri Lanka remains a high-cost economy trapped by interests or becomes a competitive one driven by opportunity.

India signs, Sri Lanka hesitates

By Dhananath Fernando

Originally appeared on The Morning

India has been playing well, not only on the cricket field, but increasingly on the trade field too. Its recent trade agreement with the European Union (EU) will have implications far beyond New Delhi and Brussels. It will have consequences for Colombo as well.

For years, Sri Lanka benefited from the EU’s Generalised Scheme of Preferences Plus (GSP+) scheme. Under GSP+, developing countries such as Sri Lanka are granted zero or preferential tariffs when exporting to the EU, provided they comply with international conventions on human rights, labour standards, environmental protection, and democratic governance.

That preferential access created a clear incentive. Indian investors, who did not enjoy GSP+ access, saw Sri Lanka as a gateway to the European market. Apparel, seafood, rubber products, and several manufacturing segments directly benefited. Some firms chose Sri Lanka precisely because of the tariff advantage offered under GSP+.

But the landscape is changing.

India’s expanded access

With India now signing a comprehensive trade agreement with the EU, the relative advantage Sri Lanka enjoyed under GSP+ becomes less meaningful. If manufacturing in India now receives comparable or preferential access to Europe, the tariff incentive that once distinguished Sri Lanka begins to narrow. Moving a plant to India versus Sri Lanka may no longer differ significantly in terms of EU tariff treatment.

There is also a structural difference worth noting. GSP+ is a unilateral, discretionary concession granted by the EU. It can be withdrawn. A Free Trade Agreement (FTA), by contrast, is a negotiated, reciprocal arrangement between two sovereign governments. It carries a different level of predictability and legal certainty.

Not many people remember that India’s very first FTA with Sri Lanka was the India-Sri Lanka Free Trade Agreement (ISFTA), which was signed in 1998 and came into force in 2000. At that time, both countries were at roughly similar stages in their trade liberalisation journey.

Since then, India has moved decisively, signing agreements covering nearly 60 countries and major economic blocs. The EU deal itself took nearly two decades of negotiation. Meanwhile, Sri Lanka signed agreements with Pakistan, Singapore, and later Thailand, yet questions remain about the depth, utilisation, and consistency of these arrangements. The contrast in trajectory is clear.

India’s expanded access to the EU may even influence other global players. Trade relationships are strategic; one agreement often triggers recalibration elsewhere. When a major market opens up to India, others take note.

Sri Lanka’s reality

For small economies like Sri Lanka, FTAs are valuable tools for securing market access. But we must also be realistic.

Sri Lanka’s economic backbone consists largely of Small and Medium-sized Enterprises (SMEs). Compliance with rules of origin, certification requirements, and documentation under FTAs can be costly and complex. For many SMEs, the administrative burden itself becomes a barrier. Signing an agreement does not automatically translate into utilisation.

FTAs tend to attract larger-scale investors more than smaller domestic firms. Yet even large investors do not come only for tariff concessions. They come for stability, predictability, and policy credibility. A trade agreement cannot compensate for macroeconomic instability or regulatory uncertainty.

That is why Sri Lanka must go beyond simply negotiating more FTAs. We need unilateral liberalisation, simplifying imports and exports, reducing para-tariffs, rationalising Customs procedures, and creating a predictable trade regime. If we are serious about trade-led growth, openness cannot depend solely on negotiations abroad; it must be embedded at home.

India, of course, enjoys structural advantages Sri Lanka does not. It has scale, a vast labour pool, and a large domestic market that lowers production costs. Sri Lanka lacks that scale. But that reality is not an excuse for hesitation; it is precisely why we must integrate faster and deeper into global trade networks.

A simple lesson

One of the greatest advantages of an FTA is predictability. In countries like Sri Lanka, where governance structures are often weak and policy reversals are frequent, even unilateral tariff reductions can be undone with a change of government or pressure from lobbying groups. A binding agreement provides discipline. It locks in reform.

There are also widespread misconceptions about existing agreements. Take the ISFTA. Many assume it benefits India disproportionately. Yet the data tell a more nuanced story.

In 2021, Sri Lanka exported about $ 815 million worth of goods to India. Of that, roughly $ 525 million, around 64%, entered under ISFTA preferences. In the same year, Sri Lanka imported about $ 4.4 billion from India, but only around $ 208 million, less than 5%, came in under the FTA framework.

In other words, most Indian exports to Sri Lanka do not rely on ISFTA concessions; they enter under normal tariffs. By contrast, a significant share of Sri Lankan exports to India depends on the agreement. Even if one believes exports are ‘better’ than imports, the structure of the agreement clearly provides Sri Lanka meaningful access. Removing or weakening it would likely hurt Sri Lankan exporters more than Indian ones.

A similar pattern can be observed under the Pakistan-Sri Lanka Free Trade Agreement.

In this context, the Government’s proposal to remove para-tariffs such as cess and the Ports and Airport Development Levy (PAL) and move towards a four-band tariff structure is commendable. Rationalisation is long overdue. But reform must be consistent. While simplifying tariffs, we must avoid expanding negative lists, the products and services excluded from trade agreements. Expanding exclusions defeats the purpose of liberalisation.

India, for all its political rhetoric, has gradually opened its economy with limited and clearly defined sensitive sectors such as agriculture. In fact, India’s former Chief Economic Adviser recently wrote in The Economist that the country may be on the verge of becoming one of the world’s most open major economies.

For Sri Lanka, the lesson is simple. In a small island economy with limited domestic scale, there is no sustainable alternative to trade reform. Protection may feel safe in the short term, but isolation shrinks opportunity. The solution is not hesitation. The solution is faster, deeper, and more predictable integration into the global economy.

Trade is not a luxury for Sri Lanka. It is a necessity. And the reforms cannot wait.

Economic resolutions for 2026

By Dhananath Fernando

Originally appeared on The Morning

We all have New Year’s resolutions. Most of the time, they are not new at all. They are the things we always wanted to do, but never made time for, or never had the courage to start. So every year we repeat the same promise in different words, hoping that this time will be different.

Sri Lanka is not very different in 2026. As a country, we also have resolutions. They are familiar, inspiring, and regularly repeated. Yet they remain largely unfinished.

In many cases, we did not fail because we lacked effort. We failed because we misunderstood the problem. We kept chasing outcomes without fixing the process.

For years, our national resolution list has looked more or less like this:

• A trading hub in the Indian Ocean

• Export diversification

• A tourism paradise

All three are still worth keeping for 2026. But if we want them to be more than slogans, we have to turn them into a reform checklist and not just a speech.

Trading hub is not about ships

Becoming a trading hub is not primarily about the ocean, shipping containers, or building warehouses near the port. It is about building a policy environment that attracts competent people and serious capital, and allows them to move goods quickly, add value, and serve markets.

Trading hubs do not manufacture everything they consume. That is not the point. A trading hub brings things from all over the world, stores them, processes or packages them, trades them, adds value, and sends them back to where demand is. It is an ecosystem, not a factory.

That ecosystem depends on speed, predictability, and cost.

In Sri Lanka, the cost of trading is high not only because of distance but because of policy. Para-tariffs and complex border taxes raise input prices. Slow and discretionary Customs processes delay shipments. Barriers to entry in logistics and shipping reduce competition. Labour rules and immigration processes make it difficult to attract global talent or even short-term specialists.

If 2026 is serious about the trading hub dream, then the resolution is not to ‘become a hub.’ The resolution is to do the hard and unglamorous work: modernise the Customs Ordinance, simplify border procedures, reduce para-tariffs, and remove barriers for entry and ownership in shipping and related services.

We should also reform labour and entry processes so skilled foreigners can work here easily, contribute, and move on if needed. Trading happens when trading becomes easier and cheaper than in competing countries.

A hub is not declared. It is designed.

Export diversification cannot happen on speeches

Export diversification has been discussed for so long that it has become a classroom lesson. Yet our export basket remains narrow and our transformation has been slow.

The reasons are not mysterious. They are structural.

Export diversification depends on factor markets working well: land, labour, and capital.

In Sri Lanka, land is difficult to use productively because ownership, access, and clear titles are complicated. Labour shortages are real, but the deeper problem is skills. A modern export economy requires technicians, designers, engineers, supervisors, and managers, not only workers. Capital is also a constraint, and capital for new industries often needs to come from outside through foreign direct investment.

But investors do not move money just because a country ‘needs dollars.’ They look for a level playing field, regulatory predictability, and access to markets. They also look for reliable infrastructure and a stable macro environment.

So if 2026 wants export diversification, the resolution cannot be another line in a policy document. It has to be a shift in how we attract and support investment.

The Board of Investment must be strengthened and reoriented towards active investor facilitation, not paperwork. Industrial zones should be opened to professional private sector operation and management. The country must actively pursue market access and trade facilitation, because new industries will not come if they cannot sell competitively.

Diversification is not a solo act. It is a system working together.

Tourism paradise needs policy, not posters

Tourism is often marketed with sunsets and smiles. But higher-spending tourists do not arrive because we printed better brochures. They arrive because the product is better and the experience is seamless.

If Sri Lanka wants to be a tourism paradise in reality, then the policy environment must help the sector upgrade.

Hotels should be able to renovate and expand without construction costs being inflated by tariffs and restricted access to quality materials and modern designs. We cannot talk about high-value tourism while making it expensive to build high-quality tourism infrastructure.

Airports and connectivity matter too. Capacity constraints and slow expansion weaken the entire tourism plan. And aviation needs competition, not protection. Monopolies and market distortions in aviation may keep certain entities alive, but they keep the country small.

Tourist destinations also need better services. That means managing and leasing services properly, creating space for private investment, improving safety and cleanliness, and creating real spending opportunities beyond hotel walls. A tourist cannot spend money if there is nothing to do, nowhere to shop, and no quality experience to buy.

A tourism paradise is built on policy decisions, not on slogans.

The resolution underneath all resolutions

There is one resolution that sits underneath all the others: monetary stability.

None of the above dreams work if inflation rises, the exchange rate becomes unpredictable, and confidence collapses. Businesses do not plan long-term investments when the value of money itself is uncertain. Tourists do not come in large numbers when macroeconomic instability turns into shortages, controls, and political tension. Exporters cannot build stable supply chains when the policy environment swings with every crisis.

In that sense, the country’s New Year’s resolution is not only about what we want to become, but about what we must protect: low inflation, a sound currency, credible fiscal management, and rule-based policy.

New Year’s resolutions, whether personal or national, are more about process than promises. Outputs come when the process is followed. Pronouncing the outcome without committing to the steps is how we fail every year, as individuals and as a country.

So perhaps Sri Lanka’s economic resolution for 2026 should be simple: stop repeating the dream and start doing the list.

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.