🧾 The Context: US Reciprocal Tariff Policy and a Shifting Trade Landscape
On March 4, 2025, the United States implemented new tariffs on imports from Canada, China, and Mexico, marking the beginning of what may escalate into a global trade war. These tariffs fall under the Presidential Memorandum on Reciprocal Trade and Tariff, which mandates that the US match its trade partners’ tariff levels—making trade policy fully reciprocal.
The Office of the US Trade Representative (USTR) is investigating “unfair trade practices” and will publish results by April 1, 2025. Targeted practices include:
- High tariffs
- Value-added taxes (VAT)
- Subsidies and exchange rate interventions
- Regulatory and non-tariff barriers
⚠️ The US tariff system covers over 13,000 tariff lines, across 200 trading partners, with 2.6 million tariff combinations—any overhaul will have global consequences.
📊 Potential Effects on Sri Lanka’s Export Economy
Sri Lanka is a small, export-reliant economy, with the US accounting for 25% of its total exports. Key sectors exposed to potential tariff hikes include:
- 👕 Wearing apparel
- 🧤 Rubber and plastic products
- 🥫 Food and beverages
🔍 Tariff Differential: Sri Lanka vs. US
|
Sector |
Tariff by SL (%) |
Tariff by US (%) |
Difference (SL - US) |
|
Wearing apparel |
6.8 |
0.4 |
+6.4 |
|
Rubber & plastic goods |
7.5 |
0.4 |
+7.1 |
|
Food & beverages |
6.1 |
0.9 |
+5.2 |
Sri Lanka imposes higher tariffs and para-tariffs (CESS, PAL, SSCL) on US goods. If the US reciprocates, Sri Lankan exports will face higher price points, losing competitiveness in the US market.
👩🏭 Employment Risks and Export Exposure
👕 Apparel Sector in Focus
The apparel sector, employing over 475,000 workers (of whom 70.5% are women), is already under pressure due to potential GSP+ loss in the EU. US tariff increases would double the strain.
🇺🇸 US Apparel Imports (2024)
|
Exporter |
Tariff in 2023 |
Post-March 4, 2025 Status |
|
China |
11.5% |
Increased |
|
Mexico |
0% (USMCA) |
Increased |
|
Sri Lanka |
0% (MFN) |
May increase if reciprocal |
👉 Short-term opportunity from trade diversion may exist—but it will vanish if SL also faces new tariffs.
🛑 VAT Confusion and Broader Trade Instability
The US’s inclusion of VAT in its definition of "unfair trade practice" adds global confusion. VAT is applied non-discriminatorily in over 170 countries and is not a trade barrier.
- Including VAT in reciprocal tariffs would result in inflated tariffs.
- This could trigger retaliation, inflation, and supply chain disruptions.
📉 US households could face an estimated USD 1,200/year in added costs due to new tariffs.
🔄 Sri Lanka’s Trade Vulnerability: No Shelter in a Protectionist World
As global trade heads toward protectionism, Sri Lanka's vulnerability grows:
- ❌ Export growth becomes unsustainable
- ❌ Domestic market is too small to absorb excess production
- ❌ WTO and multilateral systems risk ineffectiveness
🔧 Sri Lanka’s Response: Reform, Reorient, Reinforce
✅ 1. Phase Out Para-Tariffs
- Reduce anti-export bias
- Align with global tariff norms
- Already underway via FTAs with Singapore & Thailand
✅ 2. Deepen Regional Trade Ties
- Accelerate FTAs with East Asia
- Upgrade Indo-Lanka FTA
- Eliminate quotas (e.g., apparel to India)
✅ 3. Build Trade Resilience
- Shift to high-value exports
- Enhance digital infrastructure
- Improve logistics and customs systems
📌 Conclusion: Charting a Path in a Fragmenting Global Order
With global trade cooperation under threat, Sri Lanka must adapt quickly:
- 🛡️ Reduce vulnerability to US reciprocal retaliation
- 🌏 Expand regional & South-South partnerships
- 🔧 Reform domestic trade policies for competitiveness
The decisions made in 2025 will shape Sri Lanka’s export future in a world no longer ruled by liberal trade norms.
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