The global trade landscape is being rocked by seismic shifts, threatening to destabilise fragile economies such as Sri Lanka. Escalating trade wars and protectionist policies are triggering new vulnerabilities, just as our economy was recovering from an economic crisis. In these turbulent times, Sri Lanka stands at the crossroads. Its response will determine if it weathers the storm and emerges stronger, or succumbs to the harsh winds of global economic disorder.
A rude awakening
The recent announcement by the United States of significant trade tariffs has sent shockwaves through global markets, with Sri Lanka particularly vulnerable given that the US is its top export destination, accounting for 22% of total exports and 40% of textile and garment exports. This stark reminder of the interconnectedness of the global economy and the fragility of smaller players underscores the urgent need for Sri Lanka to fortify its trade defenses.
In the face of this challenge, Sri Lanka’s response must be swift and strategic. The government’s decision to appoint an expert committee to strategise a response is a welcome first step, but it must be followed by concrete action. This includes not only addressing the immediate crisis but also laying the groundwork for long-term trade resilience.
Learning from the past
Sri Lanka’s trade and competitiveness reforms have long been an unfinished agenda, and we must now prioritise and fully implement these to build resilience and secure our place in the evolving global economy.
The Centre for a Smart Future (CSF) put forward eight recommendations on priority reforms and strategic initiatives that the country must take, and published them as a Policy Note. Many of the strategies discussed here and in the Policy Note are not novel – they have been proposed or attempted in the past. The challenge lies not in identifying the right solutions but in consistently implementing them. Sri Lanka must resist the urge to reinvent the wheel and instead learn from past experiences, building on what was already initiated.
CSF’s ‘Eight Priorities’
We believe that the path to a resilient trade future for Sri Lanka rests on eight key priority areas:
1. Doubling down on tariff and para-tariff liberalisation: Sri Lanka’s complex web of para-tariffs has long hindered its trade competitiveness. Simplifying the tariff structure, as outlined in the approved ‘National Tariff Policy,’ is essential, but it must be done in a way that considers the impact on domestic industries and the need for revenue generation. The Ministry of Finance’s lead role in the Tariff Policy Committee highlights the importance of balancing trade liberalisation with fiscal realities.
2. Designing credible trade adjustment support: As Sri Lanka liberalises its trade regime, it may consider support to domestic industries and workers affected by the changes. This support must be evidence-based, targeted, and fiscally responsible, building from past efforts like the Trade Adjustment Programme (TAP). The setting up of a Trade and Productivity Commission, as previously proposed, could provide a valuable platform for public-private dialogue and informed decision-making.
3. Implementing a focused national export strategy: Sri Lanka’s over-reliance on a few export sectors and markets has left it vulnerable to external shocks. Diversifying exports is crucial, requiring a well-crafted and effectively implemented National Export Strategy that learns from the successes and failures of previous strategies like the 2018-2022 NES. Securing bi-partisan support for such a strategy is essential to insulate it from political cycles and ensure consistent implementation.
4. Deepening and widening trade partnerships: Sri Lanka has been slow in expanding its trade partnerships, lagging behind regional peers such as Vietnam and Thailand. The nation must actively pursue new bilateral and multilateral agreements, with a focus on comprehensive agreements that promote deeper integration, such as RCEP and CPTPP. Concluding the Economic and Technology Cooperation Agreement (ETCA) with India should be a priority, with Sri Lanka seeking favourable terms and an “early harvest” program.
5. Enhancing trade negotiation capacity and private-public consultation: Sri Lanka’s capacity to handle complex trade negotiations is woefully inadequate. Building a permanent and skilled negotiation team, perhaps through the establishment of an Office for International Trade, coupled with robust and transparent mechanisms for private-public consultation, is essential for advancing the nation’s trade agenda.
6. Rethinking strategic international engagement: In an increasingly fragmented global order, marked by events such as the US tariff increases, Sri Lanka risks isolation. We need to strategically engage with regional and international blocs (beyond overrelying on SAARC) to build alliances and safeguard our interests. The Ministry of Foreign Affairs must take a leading role in this strategic realignment.
7. Advancing commercial diplomacy: A strong commercial diplomacy apparatus is vital for promoting exports and navigating international challenges. Sri Lanka must invest in its foreign service and commercial officers, addressing issues such as lack of clear vision, underfunding, and fragmented institutional structures. Strategic allocation of commercial officers to high-potential markets, even those without a strong diplomatic presence, is crucial.
8. Accelerating trade facilitation: Streamlining trade processes and reducing bureaucratic hurdles is essential for improving efficiency and competitiveness. Sri Lanka has been slow to implement trade facilitation measures under the WTO Trade Facilitation Agreement (TFA) and must accelerate its efforts in this area, including the crucial modernisation of its customs laws and procedures. This requires not only technological upgrades but also reforms to people, processes, and incentive structures within relevant agencies.
Implementation with inclusivity and expertise
The success of these reforms hinges on the process through which they are implemented. The government must draw on the best possible sources of expertise in the country and ensure an inclusive and transparent process for dialogue and consultation. Advisory committees must better represent the diverse ecosystem of firms, including SMEs and new entrants, and public officials with experience in trade and investment should be brought back into strategic roles.
A call to action
Sri Lanka stands at a critical juncture. The choices made today will determine its economic trajectory for years to come. The path to resilience and prosperity lies in embracing bold reforms, fostering strategic partnerships, and building a trade infrastructure that is robust and adaptable. The support of multilateral institutions and development partners can be invaluable, but these actors must also learn from past efforts to ensure more effective and sustainable support. This is not the time for half-measures or piecemeal efforts; Sri Lanka’s future depends on decisive action.
This article was written by Anushka Wijesinha and Senith Abeyanayake at the Centre for a Smart Future (CSF). To read the full Policy Note that this article is based on, visit csf-asia.org/knowledge-insights.
