Sri Lanka Must Act Fast to Offset the Blow from US Tariffs!

As the United States imposes sweeping reciprocal tariffs worldwide, Sri Lanka finds itself in particularly dire straits. The staggering 44% tariff rate—the sixth highest globally—poses a direct threat to Sri Lanka's US-dependent export market. This could trigger significant job losses and economic instability at a time when the country is still recovering from the 2022 financial crisis.

To put this into perspective, the new tariff represents an existential threat to Sri Lanka’s economic stability. The US is Sri Lanka's largest export destination, accounting for 23% of all merchandise exports and over 70% of apparel exports—the country’s most lucrative sector. With these new tariffs, Sri Lanka’s garment industry faces increased production costs and tougher competition from countries like Bangladesh and Vietnam, whose exporters enjoy lower tariff rates. The timing couldn't be worse, as Sri Lanka is only beginning to emerge from the devastating effects of the 2022 crisis, which included rampant inflation, fuel shortages, and painful debt restructuring.

In the face of this unprecedented challenge, Sri Lanka must respond decisively and strategically to navigate the road ahead.

Accelerate Economic Diversification 

First and foremost, Sri Lanka must fast-track its diversification efforts. While the country has long explored new markets and sectors, the urgency of the moment demands a sharper, more strategic focus. Opportunities lie in sectors such as renewable energy, pharmaceuticals, and advanced agricultural products. These industries align with global trends and can be marketed to emerging economies across Africa, Southeast Asia, and Latin America.

For instance, Sri Lanka’s expertise in agriculture could be leveraged to export organic produce to large and growing markets in India and China. Similarly, the country's potential in renewable energy technologies could be tapped to serve the rising demand for sustainable solutions in energy-hungry developing nations.

Strengthen Trade Ties with Emerging Blocs 

Complementing diversification, Sri Lanka should deepen trade relations with regional blocs such as the African Continental Free Trade Area (AfCFTA) and the Association of Southeast Asian Nations (ASEAN). AfCFTA economies are at a development stage that offers mutual trade opportunities, while ASEAN is not only geographically proximate but also among the world’s fastest-growing regions.

By forging stronger economic ties with these blocs, Sri Lanka can reduce its overdependence on traditional partners like the US. Diversifying its export base will help cushion the impact of current and future trade shocks while opening up long-term growth avenues.

Double Down on Diplomatic Engagement 

Diplomacy will also be critical. Sri Lanka should launch proactive efforts to negotiate exemptions or reductions in US tariffs. This includes not only direct bilateral engagement with Washington but also leveraging multilateral forums and strategic partnerships.

Deepening ties with the EU, Japan, India, and China could strengthen Sri Lanka’s bargaining position. These relationships could also unlock new investments, technology transfers, and trade concessions, all of which are essential to supporting Sri Lanka’s transformation into a more competitive and resilient economy.

Crucially, Sri Lanka should amplify its commitment to economic reform. Actively highlighting its participation in the IMF-supported programme—and steps taken to phase out its own high import tariffs—could reinforce its case for special consideration from the US. A transparent, reform-oriented narrative can improve international perceptions and build momentum for more favorable terms.

Foster Political Unity and Public Support 

At home, political consensus is equally vital. Although the National People’s Power commands a two-thirds majority in Parliament, economic policy must be framed as a national imperative rather than a partisan endeavor. A bipartisan approach would foster investor confidence, ensure policy continuity, and smooth the path for critical negotiations with international partners like the US and IMF.

Involving opposition parties in key economic decisions—or offering them concessions in other areas—can create a sense of shared responsibility. Such collaboration will reassure both the public and international stakeholders that Sri Lanka’s economic path is stable and reliable.

Equally important is public engagement. Many Sri Lankans are still reeling from the last crisis. The government must be transparent about the current challenges and clearly communicate the rationale behind its economic policies, including subsidy reforms and trade strategy. Public messaging should be honest yet hopeful, helping citizens prepare for short-term difficulties while understanding the long-term benefits.

Toward a Resilient Future 

While the new US tariffs present a stark challenge, they also offer an opportunity for transformation. By diversifying its economy, building new trade partnerships, intensifying diplomatic efforts, and fostering both political and public consensus, Sri Lanka can turn adversity into opportunity.

Success will depend on a coordinated and comprehensive strategy—one that unites economic, political, and diplomatic efforts in pursuit of a more resilient, inclusive, and forward-looking future. The writer is a Colombo-based political analyst and consultant. He previously served as Sri Lanka Country Director for the International Republican Institute, a US non-profit organisation that promotes democracy worldwide.

Quoted from Dailymirror