Solutions to Trump’s tariffs lie beyond negotiating tables

By Dhananath Fernando

Originally appeared on the Morning

We all hope that by 1 August, Sri Lanka will secure a better deal with the United States on the proposed tariffs affecting around 25% of our total exports. Continued engagement is essential, but we must recognise a hard truth: the real solutions go far beyond negotiations.

Even if we manage to win a 0% tariff deal with the US, that alone won’t fix our export problem. Our exports aren’t underperforming because of foreign tariffs; they are underperforming because we are not competitive enough. The problem lies at home.

While diplomatic efforts must continue, meaningful results will only come from bold, domestic trade and investment reforms. And those reforms must happen together, not in isolation.

Consider the recent India-UK Free Trade Agreement. It is expected to boost bilateral trade by $ 34 billion. The UK will cut average tariffs on Indian goods from 15% to 3%. Tariffs on whisky and gin will fall from 150% to 75%, and down to 40% within 10 years. Car tariffs will drop from over 100% to 10%. On the other hand, 99% of Indian exports to the UK, including textiles, food, and footwear, will enter tariff-free.

What does this mean for Sri Lanka? Simply put, Indian products will now have a significant edge in markets we once competed in. Even though Sri Lanka benefits from the UK’s new Developing Countries Trading Scheme (DCTS), India’s preferential trade access will make its goods more competitive than ours.

India isn’t stopping there. Trade agreements with the European Union (EU), Chile, the Gulf Cooperation Council, New Zealand, the European Free Trade Association (EFTA, comprising Switzerland, Norway, Iceland, and Liechtenstein), and ASEAN are all underway. Each deal pulls the rug further from under our feet.

Unlike India, Sri Lanka is not a large market. We don’t have the leverage to bring global powers to the table. Beyond basic-level conversations with Bangladesh, China, and Indonesia, we haven’t shown much interest in trade deals. The agreements we have signed – with Singapore and Thailand – are gathering dust. The long-stalled Comprehensive Economic Partnership Agreement (CEPA) with India remains a missed opportunity.

Let’s be honest. Competing with India in terms of price, scale, and often even quality is becoming increasingly difficult. That’s why the rational path forward is clear:

1. Integrate deeper with India

2. Unilaterally reduce trade barriers

3. Use this openness to attract investment

India’s aggressive trade strategy gives its exporters – and its value chains – a global advantage. If Sri Lanka can position itself as a reliable partner within India’s export ecosystem, we can gain by being part of its value chain. But to do that, we must get our house in order.

Currently, all our focus is on negotiation tables. But investment will not come unless we fix our own fundamentals. That means reforms in land use, labour laws, and industrial zones. Investors are not waiting for handshakes and smiles; they are looking for reliable, efficient, and reform-oriented partners.

Meanwhile, new regulatory pressures are emerging in our traditional markets too. The EU’s new Corporate Sustainability Due Diligence Directive (CSDDD) will reshape how businesses operate. 

This law requires large EU companies – and by extension their global suppliers – to actively prevent human rights and environmental violations across their operations. Without flexible labour regulations and well-functioning industrial zones, Sri Lanka risks losing even the markets we already have.

So here we are, caught between slow internal reforms and an aggressive global trade race.

The opportunity is still within reach. Deeper integration with India, along with smart reforms, can turn Sri Lanka into a competitive, attractive export and investment hub.

One year ago, Parliament passed the Economic Transformation Bill. One year later, we are still talking, not doing. That alone proves that solutions to US President Donald Trump’s tariffs – and many of our economic woes – won’t be found across negotiation tables. They begin right here, at home.

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

Dr Wignaraja: Can Sri Lanka join Asian Supply chains?

by Dr Wignaraja on Daily Mirror

President Trump’s pledge to put America first during a global trade slowdown has sparked worries that the era of export-led growth has ended. Trade in Asia and globally has slowed since the 2008 global financial crisis but it is not the end of export-led growth. The real issue, however, is whether Sri Lanka can follow East Asia’s success in global supply chains amid slower trade growth and a likely rise in protectionism. Global supply chains refer to the geographical location of stages of production (design, production, marketing and service activities) in a cost-effective manner and linked by trade in intermediate inputs and final goods. For instance, the Toyota Prius—a hybrid electric mid-size hatchback car—for the US market was designed in Japan and is largely assembled there, but some parts and components are made in Southeast Asia and China. Supply chains exist in a wide range of manufacturing and services activities.  East Asia’s shift from a poor, less developed agricultural periphery to a wealthy global factory over the last half a century is an economic miracle. The extent of the region’s participation in global supply chains is significantly greater than elsewhere and has spurred East Asia’s global rise to the coveted “Factory Asia” league with the middle-income status for many economies.  In 2015, the developing economies in East Asia accounted for 34 percent of global supply chain trade with China making up 15 percent and Southeast Asia for 7 percent. This compares with 34 percent for the European Union, 10 percent for the United States and 5 percent for Japan.  However, South Asia is a relatively small player. India accounts for 1.7 percent of global supply chain trade and the rest of South Asia, including Sri Lanka, for 0.13 percent. Structural transformation and rising wages in China have encouraged an outward shift of labour-intensive segments of supply chains ranging from clothing to electronics. Sri Lanka has the potential to attract such supply chains from China. It is strategically located on the way to Europe, offers low wages with reasonable labour productivity and has a dynamic clothing industry. Close proximity to the large Indian market, which is a magnet for Chinese outward investment, is another advantage.  Smart business strategies and market-friendly national policies have supported East Asia’s achievement in supply chains. Being a big firm naturally creates advantages to participating in supply chains due to a larger scale of production, better access to technology from abroad and the ability to spend more on marketing.  It is crucial for small and medium-sized enterprises (SMEs) to work with large firms. Hence, smart business strategies, such as mergers, acquisitions and forming business alliances with multinationals or large local business houses are all rational approaches, as is investing in domestic technological capabilities to achieve international standards of price, quality and delivery. East Asia’s experience suggests that nimble SMEs can also join supply chains by locating to industrial clusters and reap the benefits of interdependence such as co-financing a training centre or a technical consultant to upgrade skills. Business associations can facilitate clustering by mitigating trust deficits to cooperation among SMEs and by coordinating collective actions for cluster formation. For instance, major industrial clusters are visible in Viet Nam near Ha Noi and Ho Chi Minh City, where large firms are surrounded by thousands of SME suppliers and subcontractors making garments, agricultural machinery and electronics goods. Turning to national policies in East Asia, modern cost-competitive infrastructure is crucial for supply chains. This means investing in world-class ports, roads to ports, logistics, electricity supply and information technology infrastructure. Maintaining open trade and investment regimes which encourage investment and transmit price signals to business are likewise important, as well as sound financial systems which emphasize competition among commercial banks and financial inclusion. High-quality, affordable technical and marketing support services and investing in education to develop skilled labour both help SMEs join supply chains. More controversial is the use of industrial policies in East Asia to target credit and subsidies to particular sectors or firms. Some oft-cited examples of failures include Korea’s heavy and chemical industry push, Malaysia’s national car project (the Proton) and China’s home-grown 3G mobile technology TD-SCDMA. More research is needed on good practices, as there is a high risk of government failure and cronyism associated with industrial policies. Joining supply chains will boost industrialization, jobs and incomes in Sri Lanka. There is no one-size-fits-all approach for Sri Lankan firms to join supply chains. Smart business strategies, facilitating business associations and market-friendly policies are all useful ingredients, while business and government collaboration is essential to tailor these ingredients to national circumstances. (Ganeshan Wignaraja is Advisor in the Economic Research and Regional Cooperation Department of the Asian Development Bank (ADB). The views expressed here are solely the author’s own and do not represent the position of the ADB. This is a guest article for the Ceylon Chamber of Commerce ‘Trade Intelligence for the Private Sector’ (TIPS) initiative that helps its member businesses be up-to-date on new developments in international trade. For more on the subject of this article, refer Production Networks and Enterprises in East Asia an edited volume by G. Wignaraja (2016))