In a move that has sent shockwaves through the global economy, U.S. President Donald Trump last week announced a sweeping 30 percent reciprocal tariff on imports from Sri Lanka citing that he deems have “unfair trade advantages” over the United States.
Sri Lanka, a small yet globally connected economy, has found itself on the receiving end of this protectionist policy.
This unprecedented move is being widely criticised for its irrationality and potential to cripple emerging markets that depend heavily on exports for economic survival.
As Sri Lanka grapples with the fallout, the country now faces a dual crisis: economic disruption and social upheaval.
Reciprocal tariff policy
Trump’s reciprocal tariff policy, touted as a way to “level the playing field,” arises from the fundamental misunderstanding of the complex interdependencies of global trade.
For a country such as Sri Lanka, which enjoys no disproportionate trade surplus with the U.S., the imposition of a blanket 30 percent tariff is not only unjustified but economically reckless.
It ignores key World Trade Organization (WTO) principles of proportionality and non-discrimination.
Sri Lanka is not a manufacturing giant with the ability to distort global markets; instead, it largely exports apparel, tea, rubber products, and IT services—none of which pose a direct threat to U.S. industries.
Thus, the move appears to be more about political posturing than sound economic reasoning.
Trump’s imposition of reciprocal tariff sends a clear and calculated message to countries that maintain strong economic ties with China: align with the U.S. or face punitive trade consequences.
At its core, the policy reflects a continuation of Trump’s “America First” doctrine, using tariffs not merely as economic tools but as instruments of geopolitical coercion.
Countries such as Sri Lanka, which rely heavily on trade with both China and the U.S., are caught in the crossfire of a global economic power struggle.
The tariff signals that Washington is willing to disrupt established trade relations to contain China’s influence, effectively warning smaller nations that their economic partnerships will be scrutinised and possibly penalised if seen as aiding China’s global ascent.
This message underscores a broader strategy of economic decoupling and realignment.
Trump’s tariff gambit aims to force countries to choose between U.S. and Chinese spheres of influence, pressuring them to reconsider infrastructure investments, trade deals, and strategic cooperation with Beijing.
For nations in the Global South including Sri Lanka, many of whom benefit from Chinese-funded Belt and Road projects, this creates an unstable environment where their sovereign economic decisions may provoke retaliation from Washington.
The underlying threat is that continued engagement with China could result in restricted access to the U.S. market, a move that could devastate export-dependent economies.
Ultimately, Trump’s tariff weaponisation reveals the deepening rift in global trade and the shrinking neutrality available to emerging economies.
Impact on exporters
The tariff could have severe consequences for Sri Lanka’s apparel sector, which is one of the country’s top export earners and a major employer.
The United States is Sri Lanka’s single largest export destination for garments, accounting for approximately 40 percent of total apparel exports.
A 30 percent tariff would drastically erode the price competitiveness of Sri Lankan garments in the U.S. market, leading to a likely drop in orders from American buyers who may shift sourcing to countries with more favourable trade terms, such as Vietnam, Bangladesh or Mexico.
The immediate impacts could include shrinking profit margins, factory closures, and widespread job losses, especially in free trade zones such as Katunayake, Biyagama, and Koggala.
The apparel industry employs over 350,000 workers directly, with hundreds of thousands more depending on it indirectly through logistics, support services, and rural supply chains.
If U.S. demand plummets, small- and medium-scale garment factories could be the first casualties, potentially triggering a wave of unemployment, wage suppression, and social unrest.
A prolonged disruption could discourage foreign investment in Sri Lanka’s garment sector, reducing innovation and expansion potential in the long run.
Orders from major U.S. retailers such as Walmart, Target, and GAP have already begun to shrink, industry officials say. Exporters, already faced with tighter margins and rising costs, are reconsidering expansion plans and even cancelling contracts with local suppliers. The ripple effect on ancillary industries—from textile dyeing units to logistics providers—is already being felt.
Impact at grassroots level
The tariff shock is not confined to boardrooms or export zones; it is now trickling down to rural and urban communities alike. In towns such as Avissawella, Pannala, and Katunayake, where garment factories are the main employers, thousands of workers—primarily women—are under threat of losing their livelihoods.
The impact extends beyond employment: loss of income means children being pulled out of school, families skipping meals, and households defaulting on micro-loans. For many, this is not merely an economic crisis but a humanitarian one.
Already, several garment factories have announced temporary shutdowns or layoffs. The Joint Apparel Association Forum (JAAF) estimates that the sector may lose tens of thousands of jobs in the next six months if the tariff remains in place.
Smaller factories, which operate on thin profit margins, are especially vulnerable. For a country where the apparel industry accounts for roughly six percent of GDP and employs over 400,000 people directly, the fallout could be catastrophic. The closure of factories also means reduced export earnings, further weakening the rupee and straining the already fragile fiscal position.
Alternatives
In the face of declining access to the U.S. market, Sri Lanka must urgently diversify its trade portfolio. Strengthening ties with regional blocs such as ASEAN, re-negotiating better terms with the EU under the GSP+ scheme, and exploring new markets in Africa and Latin America could offer some respite.
Domestically, investment in high-value industries such as IT and pharmaceuticals might help cushion the blow. However, these strategies require time, political stability, and financial resources—luxuries Sri Lanka currently lacks in abundance.
Given the coercive tone of the U.S. policy, Sri Lanka may find it increasingly tempting to pivot towards China and Russia, both of whom have historically offered financial aid and strategic partnerships with fewer political strings. China, through its Belt and Road Initiative, already has a strong footprint in Sri Lanka’s infrastructure and logistics sectors.
Russia offers potential in energy and defence cooperation. However, a shift towards these powers comes with geopolitical risks, particularly in terms of debt diplomacy and political alignment. Such a pivot would also require recalibrating Sri Lanka’s traditionally non-aligned foreign policy.
A slippery slope
The macroeconomic implications are deeply troubling. A drop in exports means a widening trade deficit, reduced foreign exchange inflows, and increased pressure on the rupee. Foreign direct investment, already lukewarm, could dwindle further due to investor uncertainty. Inflationary pressures may rise as the cost of imported inputs and essentials increases.
The Central Bank may be forced to hike interest rates to protect the currency, which would further dampen economic activity. In short, the tariffs risk pushing Sri Lanka back into the kind of economic instability witnessed during its 2022 crisis.
Socially, the consequences are equally severe. Unemployment, particularly among young women, could lead to increased crime, drug abuse, and social unrest. As families lose their primary sources of income, poverty levels will rise, reversing years of progress in human development indicators.
The informal sector, which often acts as a safety net during economic downturns, may be overwhelmed. Moreover, public trust in political institutions may erode further, particularly if the Government fails to cushion the blow or diversify the economy effectively.
In the U.S., Trump’s policy is likely to benefit a narrow segment of domestic manufacturers who compete directly with imported goods. However, these gains are limited and come at a high cost to American consumers, who will face higher prices.
Geopolitically, China may ironically benefit if countries such as Sri Lanka pivot Eastward, deepening its influence in the Indian Ocean. Domestically, politically connected business elites in Sri Lanka who can pivot quickly or who have diversified portfolios may find ways to benefit amid the chaos.
The biggest losers are Sri Lanka’s working poor, particularly women employed in the apparel sector, small and medium exporters, and the rural economy. With their jobs at risk and few safety nets, these groups face a bleak short-term future.
The Government, too, stands to lose public confidence and fiscal ground if it fails to respond effectively. Consumers in both countries also lose, as prices rise and choices shrink.
Navigating the crisis
To face this crisis, Sri Lanka must adopt a multi-pronged strategy. Immediate measures should include negotiating exemptions or revised terms with the U.S. through diplomatic channels and leveraging multilateral platforms such as the WTO.
Though the country has been deploying similar measures, many analysts say Sri Lanka’s offer to the negotiation table is not enough to convince Trump’s administration. The island nation needs to put its act together in removing para-tariff and non-tariff barriers.
Domestically, stimulus packages for affected sectors, re-skilling programs for displaced workers, and targeted welfare programs are crucial. In the long-term, the country must invest in innovation, logistics, and regulatory reforms to make its exports more competitive.
Strategic alliances with alternative trade partners, careful foreign policy balancing and internal political consensus are essential to weather the storm. But all of these measures are easily said than done.
