Sri Lanka’s economy is at a critical juncture in 2025 as the United States, under President Donald Trump, imposes a 30% tariff on all Sri Lankan imports, effective August 1. While this represents a reduction from an initially proposed 44% tariff—secured through recent diplomatic efforts—it still poses serious challenges for Sri Lanka’s export-driven economy.
This article explores the impact of Trump’s tariff on Sri Lanka, the outcomes of recent negotiations, and the strategies needed to secure better trade terms with the U.S., the island nation’s single largest export market.
The Economic Impact of the 30% Tariff
The U.S. remains Sri Lanka’s most important trading partner, accounting for 23% of the country’s total merchandise exports in 2024—valued at $3.4 billion. Over 70% of these exports are apparel products, making the garment industry the backbone of Sri Lanka’s U.S. trade. Other key exports include tea, rubber, precious stones, and seafood.
However, the newly announced 30% tariff, formally communicated to President Anura Kumara Dissanayake on July 9, 2025, threatens to disrupt this delicate economic balance.
Apparel Sector Risks:
- The garment industry directly employs over 300,000 people, primarily women.
- Industry leaders, including Yohan Lawrence of the Joint Apparel Associations Forum (JAAF), have warned that the tariff could slash demand, potentially putting up to 50,000 jobs at risk in the initial phase.
- The Free Trade Zone Manufacturers’ Association (FTZMA) has echoed these concerns, citing potential loss of competitiveness against regional rivals.
For comparison:
- Vietnam faces a 20% tariff.
- Bangladesh faces a 35% tariff.
- India’s tariff rate remains undisclosed, raising fears that Indian exporters might undercut Sri Lanka’s $618 million apparel market share in the U.S.
Beyond Apparel: Broader Export Challenges
While apparel is the biggest concern, the tariff also threatens other sectors:
- Tea, rubber, coconut products, and seafood face increased costs in the U.S. market.
- Competitors like the Philippines, exporting similar products such as coconut and activated carbon, secured a lower 20% tariff, giving them a clear price advantage.
- These tariff differentials risk reshaping market dynamics, potentially pushing Sri Lankan exporters out of key U.S. segments.
A Diplomatic Win – but Not Enough
Sri Lanka did succeed in reducing the initially proposed 44% tariff to 30%—a significant diplomatic achievement.
Deputy Minister of Foreign Affairs, Arun Hemachandra, noted Sri Lanka secured the largest tariff reduction among affected nations, signaling a “positive approach” from the U.S.
Treasury Secretary Harshana Suriyapperuma called the reduction a “good start,” emphasizing ongoing negotiations aimed at preserving Sri Lanka’s competitive edge.
However, analysts warn the deal fell short:
- Economist Talal Rafi suggested Sri Lanka could have followed Vietnam’s model—reducing tariffs on U.S. imports in exchange for a lower rate.
- Vietnam’s approach secured it a 20% tariff, preserving its strong competitive position in the U.S. market.
Criticism of Negotiation Strategy
Sri Lanka’s opposition parties have criticised the government’s handling of negotiations, blaming ineffective diplomacy for failing to secure better terms.
Key concerns include:
- Competitors like Vietnam and the Philippines gaining preferential treatment.
- Failure to fully leverage Sri Lanka’s own trade policy adjustments.
- Lack of transparency around negotiation details and strategy.
President Trump’s letter also warned that any retaliatory tariff increases by Sri Lanka would prompt equivalent U.S. hikes, forcing Sri Lanka to tread carefully in future negotiations.
The Path to Further Negotiations
Despite these challenges, Sri Lanka’s government is adopting a proactive stance. Officials have pledged to engage the U.S. with an open mind and genuine intentions to further reduce the tariff.
Treasury Secretary Suriyapperuma emphasized continuous dialogue, underscoring the importance of maintaining goodwill with Washington.
Central Bank Governor Nandalal Weerasinghe noted that while it’s too early to fully measure the tariff’s economic impact, strategic negotiations are essential to minimize damage.
A key part of this approach may involve aligning Sri Lanka’s own tariff policies with U.S. expectations—potentially reducing trade barriers to American goods, as Trump suggested in his offer to adjust tariffs further.
The Apparel Industry’s Hopes and Concerns
Sri Lanka’s apparel sector, a cornerstone of the economy, is pinning its hopes on these negotiations.
Industry bodies like JAAF are urging swift, effective diplomacy to bring the tariff closer to Vietnam’s 20% rate.
Manufacturers warn that even small percentage differences can significantly impact pricing in a hyper-competitive global market.
Trump’s letter included an invitation for Sri Lankan companies to invest in U.S.-based manufacturing, which would make their products tariff-exempt.
This option offers a potential workaround—but requires significant capital investment and long-term planning.
It may not offer relief quickly enough to address immediate economic pressures threatening jobs and exports in 2025.
Broader Implications for Sri Lanka’s Economy
The 30% tariff arrives at a time when Sri Lanka’s economic outlook is cautiously optimistic, buoyed by an IMF-backed reform programme and early signs of recovery from its recent debt crisis.
- However, global trade uncertainties—including Trump’s protectionist policies—pose risks to Sri Lanka’s fragile macroeconomic stability.
- The tariff could worsen Sri Lanka’s trade deficit with the U.S., which already imports seven times more from Sri Lanka than it exports.
- Reduced export earnings threaten currency market stability, particularly for the Sri Lankan rupee, which relies on consistent forex inflows from merchandise trade.
Economists warn that any significant hit to apparel exports could ripple across Sri Lanka’s entire economy, threatening livelihoods and slowing growth.
Looking Ahead: Strategies for Sri Lanka
To mitigate the tariff’s impact and secure better terms, Sri Lanka must prioritise a multi-pronged approach:
1. Aggressive Diplomacy:
- Engage the U.S. with a clear strategy to negotiate a tariff closer to 20%.
- Consider reciprocal reductions in tariffs on U.S. imports, following Vietnam’s model.
2. Diversifying Markets:
- Reduce dependency on the U.S. by expanding export markets in the EU, ASEAN, and South Asia.
- Strengthen trade ties with China and India while maintaining balance.
3. Supporting Industry:
- Provide subsidies or tax relief to apparel manufacturers to help them absorb short-term tariff costs.
- Invest in productivity upgrades and value-added production to maintain competitiveness.
4. Exploring U.S. Investment:
- Assess Trump’s proposal for U.S.-based manufacturing as a long-term strategy.
- Conduct detailed feasibility studies to evaluate capital requirements, logistics, and potential ROI.
5. Strengthening Trade Institutions:
- Improve the capacity of trade negotiators.
- Ensure better coordination between ministries, industry bodies, and exporters.
- Enhance transparency and communication with the public about trade strategy.
A Crucial Test for Sri Lanka’s Economic Strategy
The 30% U.S. tariff on Sri Lankan imports is a wake-up call, underlining the need for robust, strategic trade policy. While the reduction from 44% offers some relief, it still threatens the competitiveness of Sri Lanka’s vital apparel industry and broader economy.
Ongoing negotiations with the U.S. offer a critical window of opportunity to secure better terms. But success will depend on Sri Lanka’s willingness to adopt strategic diplomacy, targeted reforms, and careful long-term planning.
As Sri Lanka navigates these turbulent trade winds, proactive measures will be essential to safeguard jobs, ensure macroeconomic stability, and maintain its position in the global market.
