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Sri Lanka scrambles for ways to make a deal on US reciprocal tariffs tremblor
View(s):By Kapila Bandara
Sri Lanka is seeking points of leverage and will explore export alternatives with the United States to overcome the uncertainty arising from heavy tariffs imposed by the Trump Administration this week calibrated to the trade mismatch.
A Cabinet minister is convinced talks can help, acknowledging that reciprocal tariffs were a “shock’’. Another minister indicated hope in an alternative export channel. But the path is inactive and not for apparel. A deputy minister, too, echoed the need for talks with Sri Lanka’s largest trade partner in terms of the trade value.
A presidential panel featuring some apparel heavyweights and tyre exporter Michelin Lanka (Pvt) Ltd., was named to make recommendations. An earlier panel had reviewed the scenario in March and assumed US duties may be similar to that announced on powerful countries and blocs.
By late 2024, on the campaign trail, Donald Trump had dangled the prospect of a 10%-20% universal tariff and countries took note. The US posted a record US$1.2 trillion trade imbalance last year that became an irritant for President Trump, who had returned for a second tenure pledging to review tariffs and other trade barriers even before his January inauguration. President Trump’s ‘Liberation Day’ declaration on reciprocal tariffs refers to being free from foreign products dependence.
Liberal economist and Nobel Laureate Paul Krugman called out “false claims’’ and “complete falsehoods’’ about trading partners, pointing to less than 3% average tariffs on US goods in the European Union as against 39% cited.
US Census Bureau data show that Sri Lanka’s trade deficit has widened from US$2.327 billion a decade ago in 2014 to US$2.647b in 2024.
Minister of Industry and Entrepreneurship Development, Sunil Handunneththi, has said the tariffs are a “shock’’ and “unexpected’’, but that he believes it can be resolved through talks. Sri Lanka needs to widen its reach into other trading regions, he said.
Apparel makers raised concerns about a “national urgency’’.
Minister of Labour and Deputy Minister of Economic Development, Dr Anil Jayantha Fernando, acknowledged exports could become pricier, earnings could decline, and profits of exporters could drop.
Sri Lanka cannot influence US trade policy decisions, he said. “What we should do is negotiate. An exchange of ideas has taken place.’’
He pointed to “several alternatives’’, including the US Generalised System of Preferences (GSP) program, under which he believes special advantages could be discussed. “There is room to intervene and take measures to secure it.’’ He also said the tariff structure can be simplified in some ways and can be discussed in time to come.’’
But, the duty-free GSP path is problematic since it has not been renewed by Congress after authorisation lapsed in 2020, Congressional documents show. Still, Congress has allowed retroactive effect from the day after expiry to when reauthorisation is effective. US Trade Representative Office documents say that about 3,451 products from Sri Lanka are eligible for duty-free access. Conditions include giving the US adequate market access and product quantity limits.
“Import-sensitive’’ products such as most textiles and apparel are excluded.
On 20 September, 2023, the US House Ways and Means Subcommittee on Trade held a hearing on GSP reauthorisation. There was bipartisan interest in reauthorising.
Dr Fernando said that through state-level discussions with the US, a better trade and investment policy can be approached. He expects a mutually beneficial outcome.
Discussions were held with relevant institutions and exporters before this situation emerged, on how to respond, he noted.
He hopes a reduction can be negotiated before April 9 considering difficult economic circumstances and the IMF programme.
During September 2023 talks on the Trade and Investment Framework Agreement, the United States asked for greater market access for agricultural products, including animal feed. Sri Lanka was asked to reduce agricultural trade barriers.
Sri Lanka sought market access for high-value and value-added agri products including organic spices and concentrates, as well as extending GSP to apparel, textiles, and leather products.
Chathuranga Abeysinghe, the deputy minister of Industry and Entrepreneurship Development, posted on his Facebook account that Sri Lanka stayed silent because of the “negligible’’ trade deficit with the US.
The first review committee discussed the scenario on a ‘what if’ basis on 13, 20, and 26 March, he says. The Industry Ministry joined.
Still, everyone expected tariffs equivalent to that imposed on other countries, he notes. “Honestly, not just us, but the world did not predict tariffs on such an unscientific basis.’’ He suggested negotiations.
Mr Abeysinghe writes that he woke up to the news of 44% imposed on Sri Lanka, arguing that the basis itself is a “big problem’’. But, Sri Lanka had paid attention over the past month, he says.
The magnitude of the 44% tariff tremblor plus a10% ad valorem duty (in proportion to the value) aftershock took the Government and exporters by surprise in an environment where global trade policy uncertainty had heightened, trade volume estimates were cut for 2025 and 2026, and global growth lowered by multilateral bodies that had flagged more protectionist policies reflected in a new wave of tariffs causing distortions in trade flows and rattling the world trade order.
The US Trade Representative’s Office laid down the rationale: “Reciprocal tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the U.S. and each of our trading partners.’’
Reports from Washington say President Trump is open to making a deal. On Wall Street, the Dow Jones Industrial Average, the Nasdaq, and S&P 500 cratered. The White House cheered. The global blowback was swift.
Sri Lanka’s apparel industry described the situation as “serious’’, asking that it be addressed “as a matter of national urgency’’. The industry fears “significant’’ disruption of the country’s largest export sector’’.
Yohan Lawrence, secretary general of the Joint Apparel Association Forum, said in a statement: “This tariff level is extremely high relative to our regional competitors. Sri Lanka could very quickly see its share of US business move to countries with lower tariffs than Sri Lanka has.’’
For apparel exports, the US is Sri Lanka’s largest single-country market, accounting for over 40% of the sector’s total exports, which exceeded US$5.5b in 2023, the industry noted.
Separately, exporter data show that Mas Intimates (men’s and women’s underwear, women’s and men’s
outerwear, and other electrical and electronic products), Brandix Apparel (men’s and women’s underwear, women’s and men’s outerwear, and travel goods, bags etc), Mas Active Trading, Michelin Lanka (Pvt) Ltd., (pneumatic and retreated rubber tyres and tubes, motor vehicles and parts, etc), and Hirdaramani International were the top 5 in 2023.
“The impact will be swift and severe. Potentially, we could see the bulk of our U.S. business migrate to competitor markets. This volume of business simply cannot be replaced through other markets.”
Mr Lawrence appreciates the Government’s consultations with the industry and other stakeholders. The industry is “working very closely with the authorities to see how best we could address the concerns raised by the US Government, while staying within the limitations of Sri Lanka’s ongoing IMF programme’’.
The Ceylon Chamber of Commerce, the National Chamber of Commerce, the Institute of Policy Studies did not respond to requests for immediate comment.
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