In a bold and controversial move, U.S. President Donald Trump has announced a sweeping 44 percent reciprocal tariff on select imports from Sri Lanka, citing the country’s failure to provide fair market access to American goods. This decision has come as a shock to Sri Lanka, a small South Asian island nation already grappling with a fragile economic recovery following a prolonged financial crisis. The implications of this tariff are far-reaching and complex, affecting everything from exports and job creation to the Sri Lankan rupee and diplomatic ties with the U.S.
Vulnerable to trade shocks
Sri Lanka’s export economy is heavily reliant on a few key sectors, including apparel and textiles, tea, rubber-based products, and increasingly, ICT services. The United States is Sri Lanka’s largest single-country export market, especially for apparel, which alone accounted for over 40 percent of the country’s total exports in 2024.
In 2024, Sri Lanka sent exports worth about $2.8 billion to the U.S., with garments making up over half that figure ($1.5 billion). A 44 percent tariff could drastically reduce demand for these goods. Though tariffs are technically paid by American importers, the economic pain inevitably trickles down to exporting countries through reduced orders. Analysts estimate that Sri Lanka’s export earnings could fall by up to 40 percent or approximately $600 million annually, due to Trump’s decision.
“Sri Lanka could very quickly see its share of US business move to countries with lower tariffs than Sri Lanka has,” said Secretary General of the Joint Apparel Association Forum (JAAF) Yohan Lawrence. “With tariffs coming into effect almost immediately, 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.”
He said, “We are very appreciative of the immediate actions taken by the Government to discuss this situation. We are working very closely with the authorities to see how best we could address the concerns raised by the US Government, whilst staying within the limitations of Sri Lanka’s ongoing IMF program.”
“Our focus now is on engagement, agility, and ensuring Sri Lanka remains a trusted sourcing destination. However, this situation is serious and must be addressed as a matter of national urgency.”
A 44 percent tariff on apparel would be devastating. Manufacturers, already struggling to compete with regional rivals such as Bangladesh and Vietnam, would face steep cost disadvantages in the U.S. market. This could trigger a sharp decline in orders, prompting factories to scale back operations, lay off workers, or shut down entirely. While tea and rubber exporters might face slightly less immediate consequences, the overall impact remains significant.
Smaller garment firms that act as subcontractors for major exporters have already been asked to reduce their costs by 40 percent in response to the new tariff regime.
Never expected
The new Government, led by President Anura Kumara Dissanayake, was unprepared for the magnitude of the tariff increase. Government sources said they only anticipated a 10 percent tariff, in line with standard global practice.
Hours before Trump’s announcement, Minister of Industry and Entrepreneurship Development Sunil Handunneththi downplayed the potential impact. However, he later acknowledged the gravity of the situation, calling it a “big shock” and criticising the 44 percent rate as “unfair.”
Deputy Economic Development Minister Anil Jayantha said that the Government had been in discussions with the U.S. and was preparing to negotiate further. “But we can’t resist the US policy decision,” he said. “What we have to do is discuss the current situation. Already we have exchanged our views with the US. The new measure will be implemented from April 9. Before that, we are trying to see the possibility of reducing this amount, as our country is in a special position.”
He added, “Though we have a favourable trade balance with the US, we are in an IMF program and in the process of stabilising the country from an economic crisis. Because Sri Lanka is in a peculiar position, we have room to clarify this with their policies.”
Economic recovery
After years of financial mismanagement, political instability, and sovereign debt default, Sri Lanka had just begun to recover. Tourism was rebounding, and inflation was under control thanks to tight monetary policy and IMF-backed reforms. However, the economy remains vulnerable to external shocks.
The imposition of U.S. tariffs could derail this recovery. Export earnings are a critical source of foreign currency, and any reduction in revenue will strain Sri Lanka’s thin foreign reserves. Lower exports could reduce investor confidence, slow foreign direct investment (FDI), and damage Sri Lanka’s competitiveness.
Sri Lanka had been aiming to reach $45 billion in annual exports by 2030. Trump’s tariff move significantly undercuts this ambition. As of early 2025, Sri Lanka’s foreign reserves stood at just over $6 billion, bolstered by IMF disbursements and bilateral support from India and China. These reserves are crucial for managing imports, debt servicing, and currency stability.
A drop in export earnings from the U.S. would cut dollar inflows, placing pressure on the rupee. The Central Bank might be forced to intervene, risking depletion of reserves. A depreciating rupee could reignite inflation, hurt consumer spending, and reverse hard-earned economic gains.
The apparel industry directly employs nearly 350,000 people and supports over a million Sri Lankans when indirect employment is factored in. A slump in U.S. demand would have immediate and widespread repercussions for this workforce. Factories in rural areas, where jobs are scarce, could be particularly affected.
Other sectors such as IT, BPO, and rubber manufacturing could also face slowdowns, worsening already high youth unemployment. This could contribute to social unrest and further erode public confidence in the Government.
Sri Lanka – U.S. relations
The United States has long been a key partner for Sri Lanka—economically, diplomatically, and in terms of development assistance. However, the imposition of steep tariffs threatens to strain this relationship.
While the Trump administration said the tariff is necessary for trade fairness, Sri Lankan officials may view it as excessive and punitive. The fallout could disrupt cooperation in areas such as maritime security, climate change, and governance reforms. It may also prompt Sri Lanka to strengthen ties with China or Russia in search of alternative markets and support—a shift with potential geopolitical consequences.
In response, Sri Lanka will likely accelerate efforts to diversify its trade partners. Strengthening ties with India, ASEAN nations, and African markets, as well as leveraging the EU’s GSP+ framework, will be essential.
Digital exports, such as software and e-commerce, which are less vulnerable to tariffs, could offer some protection. However, these sectors require investment, innovation, and time to scale.
The Government faces a challenging balancing act. It must engage diplomatically with the U.S. to seek relief or product-specific exemptions, while also supporting affected industries through targeted subsidies, export incentives, and job retraining programs. Fast-tracking support measures such as concessional loans, improved trade logistics, and policy consistency will be key to containing the fallout and restoring business confidence.
Trump’s decision is part of a broader global trend towards protectionism. For small economies like Sri Lanka, this is a reminder of the importance of agility, resilience, and foresight in economic policy.
Building local manufacturing capabilities, enhancing export value chains, and investing in sectors with growth potential will be essential. Though the challenge is daunting, it also presents an opportunity to push for deeper reforms and a more self-reliant economy.
A test of resilience
The 44 percent tariff will reverberate across multiple dimensions of Sri Lanka’s economy, from trade and employment to reserves and international relations. However, with strategic planning, diplomatic engagement, and coordinated action, the country can weather the storm.
Historically, adversity has driven innovation and reform. Now, Sri Lanka must channel its collective effort to overcome this challenge and redefine its economic trajectory.
Successive Governments have mismanaged the country’s economic, tax, and trade policies. Trump’s move presents an opportunity for introspection and correction.
“All of us know that we have an issue with our tariff system which has a number of complexities. We have to discuss that and simplify it,” said Deputy Minister Anil Jayantha. “What we expect is to move forward with the US on a trade and investment policy after discussions.” CEO of Shippers Academy Colombo Rohan Masakorala, criticised the lack of preparation. “There was information of a possible tariff hike on March 5. But nobody prepared for it. Everybody is surprised today,” he said. “The main reason for this is our past bad economic governance. There is lack of openness and liberalisation in the economy. Trump’s decision is going to affect investments into Sri Lanka, current and future exports, and export diversification.”
He added, “There has been no standard tax policy and obviously, we have been a bad boy for the U.S. We don’t see the multiplier effects of economic policies. I don’t think we can change much through negotiations at this juncture.”
He also criticised earlier official comments. “Some officials said Sri Lanka is under the radar and wouldn’t be affected. Others said Trump may not even know about Sri Lanka.”
Economist Anushka Wijesinghe said that the tariff decision was linked to Sri Lankan policies such as non-tariff measures (NTMs), para-tariffs, and trade facilitation.
“Sri Lanka, unlike India, had not prepared to make concessions or show intent to the U.S. India had already promised to reduce tariffs on high-end bikes and bourbon from the U.S. while committing to reconsider a digital services tax,” he said.
Sri Lanka now faces a crucial test. Whether it sinks or swims in this new era of trade diplomacy will depend on the agility and foresight of its policymakers and the resilience of its industries.
