By Lahiru Thilakarathna
Is the Sri Lankan agrifood export sector in trouble due to the ongoing tariff encounters with the United States, and if so, to what extent?
The answer depends on several factors, and a precise quantitative forecast of the effects is not possible given insufficient data. However, a general forecast of outcomes can be ascertained by reference to the available literature and data.
A product wise analysis is a complex statistical exercise beyond the purpose of this article, which is to provide a general picture of the possible effects of tariffs at sectoral and product category levels, as per categorisations of the Export Development Board.
For this forecast, the relevant factors considered include the share of US bound agrifood exports from the total agrifood exports of Sri Lanka, pass-through rate of tariffs on agrifood ex-tariff prices, import prices and retail prices in the US, and import demand elasticity of agrifood products in the US.
There are other underlying factors that influence prices and demand fluctuations that are related to the characteristics of the export products themselves, such as whether they are homogeneous or heterogeneous and differentiated or undifferentiated[1].
From 2022 to 2025, the share of US bound agrifood exports constituted on average eight percent of total agrifood exports[2], with 2024 recording 7.7 percent and 9.2 percent in the first quarter of 2025. Products under the categories of spices and condiments, rubber, coconut, and essential oils have the highest share of US-bound exports from total exports.
Spices and condiments, including cardamoms, had an average export share of 31.04 percent, with the figures for garcinia being 17.31 percent, tamarind 19.61 percent, cinnamon 15.48 percent, turmeric 10.16 percent, cloves 10.16 percent, vanilla 13.89 percent, and gherkins 8.96 percent. All these items contribute significantly to US-bound exports.
At the same time, rubber products, encompassing gaskets, washers, seals, and so on, of hard rubber at 38.18 percent, rubber plates, sheets, rods of vulcanized or unhardened rubber at 32.33 percent, and industrial and surgical gloves of rubber at 18.73 percent; coconut products, such as coconut oil with a 35.78 percent share, coconut water at 33.75 percent, coconut cream at 31.35 percent, coconut flour at 30.94 percent, and coir twine and ropes at an impressive 86.41 percent; essential oils at 32.31 percent; and the honey sector, represented by natural honey averaging 31.95 percent, constitute the categories with the highest share of exports to the USA.
While potatoes show an isolated high figure (20.74 percent) in one year, their consistent export pattern to the US remains limited in volume. However, tea export products bound to the US, as an overall category, represent only 3 to 4 percent of the total tea exports of Sri Lanka and are not expected to be as severely affected as other product categories.
Therefore, farmers, plantations, processors, traders and exporters of products categories with higher shares of US bound exports could be severely affected in the form of reduced import demand, decreased revenues and contraction profit margins.
Thus, the answer to the first part of the question is yes, there will be trouble. In turning to the more complex second part of the question; what is the extent of the trouble, the answer must rely on the insights drawn on academic literature on pass-through rates of tariffs on agrifood ex-tariff prices (export prices) , import prices, and consumer prices in the US and import demand elasticity of agrifood products in the US.
The pass-through rate of tariffs refers to changes in prices of products, at the country of export or at the country of import, measured as a percent of tariff rate. A 100 percent pass-through rate of tariff on the import price means that the product’s import price has increased by exactly the rate of the tariff.
For example, a 20 percent tariff on 100 tea bag pack with an export price of USD 10 amounts to USD 2 in tariffs, which renders the import price to become USD 12. Therefore, pass-through rates on exporter selling princes (ex-tariff prices, importer prices and retail/consumer prices in relation to the US market has to be explored.
Tariffs can force exporters to reduce ex-tariff prices to remain competitive in the markets of the import destinations. This is particularly the case where the exported product is undifferentiated, homogenous or substitutable, such as bulk goods, raw materials, commodities and agrifood products.
Therefore, the pass-through effects occur at the export side, as a reduction in quoted export prices, where exporters attempt to maintain market access, availability and demand for their products in foreign markets by absorbing a portion of the tariff cost.
In respect of products exported to the US, according to a Harvard working paper[3] (2020), ex-tariff prices of undifferentiated goods like agrifood products decreased by more than 25 percent of the tariff rate. Meaning, foreign exporters reduced export prices by a quarter of the applicable tariff rate causing declines in net profits in order to remain competitive.
At the current rate of 44 percent, exporters are likely to decrease export prices by 11 percent. If this holds true, we can expect on average at least 11 percent decline in revenue from most undifferentiated agrifood exports to the US.
The impact of tariffs extend beyond the borders of exporters to the borders of the importers that have to decide whether importing is profitable even at reduced ex-tariff prices. The extent of the impact of tariff rates are generally the heaviest on the importer.
The same Havard paper indicates that in respect of import prices the pass-through rate reaches 95 percent after one year from the effective date of tariffs.
This is almost one to one pass-through of tariff costs. Under the current rate import prices of Sri Lankan agrifood exports are expected to increase by 44 percent at the US border. The importer is expected to incur an additional cost 44 percent on top of the ex-tariff prices, reduced or otherwise.
Consequently, if an agrifood export product is not differentiated with branding, value-addition, or has distinct characteristics or superior quality or non-substitutable by means of unique geographical, agro-climatic, or indigenous nature, of it or its constituents, there is high risk of reduced import demand for such undifferentiated export products.
However, product differentiation may not guarantee inelastic demand if additional tariff costs are economically unjustifiable from the point of view of the importer.
In the context of the US market, importers and retailers have to bear the largest portion of tariff rates, well more than what is passed on to consumers. According to the above quoted Harvard paper, consumer prices increased only by 0.7 percent of products tariffed at 20 percent in the short-run of (18 months).
It appears that the retailers are absorbing costs of tariffs by lowering profit margins, but there has been evidence that retailers did not incur a drastic reduction in profit margins, at least in the short-run.
Firstly, moderating loss of margins were possible due to front-running inventories; increasing importing of products, in this case from China, to stockpile imported products in anticipation of higher tariffs. Second, the importers and retailers diverted import orders to countries tariffed less to reduce costs.
Third, retailers “spread price increases” across imported products affected by tariffs and also unaffected products to increase the margin of the latter to offset any losses incurred by reduced margins on the former.
Retailers use such schemes to maintain consumer demand as long as possible to continue a steady and predictable stream of revenue. However, the paper expects that if tariffs apply for a longer period, more than 18 months, retailers will eventually pass on the cost of tariffs to the consumer, reducing consumer demand.
This as pointed out before can severely decrease consumer demand for elastic and undifferentiated products, such as agrifood exports from Sri Lanka.
Similarly, the paper expected continued reduction in ex-tariff prices of products imported to the US, further eroding profit margins of exporters, subject to the pressure to maintain access to the US market at competitive prices under lower consumer demand conditions.
These findings and conclusions are important to the Sri Lanka agrifood export sector because if the retailers have not employed or not in a position to employ such schemes to minimise tariff pass-through to consumers, either separately or in combination, then eventually costs of tariffs will pass to the consumers reducing demand for undifferentiated agrifood products.
Such a reduction in consumer demand inadvertently leads to a decrease in demand from the importer, already bearing a one to one pass-through rate, which pressurises exporter to sell at further reduced export prices (ex-tariff price), mostly of undifferentiated / homogenous products, at ever lower profit margins, or risk losing access to the US markets.
Therefore, increases in prices in the US market for imported products with susceptible to demand elasticity can cause large drops in demand from consumers, retailers and importers, requiring exporters to on one hand continue to reduce ex-tariff prices until the pre-tariff market equilibrium price is achieved while on the other hand striving to maintaining the similar level of demand for their products nevertheless shrinking profit margins mostly incurred by exporters.
Exporters are likely to endure short-term reduction of profits or even losses rather than risk losing access and unavailability of their products in the US market , which could cause long terms losses as losing either B2B or B2C customers to alternative suppliers or products, and usually done with the expectation of tariff rates to be transient or be short-term in duration.
A reduction in profit margins eventually compel exporters and downstream value chain actors to cut costs by laying off workers, closing operations and limiting investments on expansions and growth, if high tariff rates continue to apply medium to long-term. This can cause serious economic and social consequences at both micro and macro levels.
Tariff rates are expected pass-through at 25 percent on to most Sri Lankan agrifood export prices as new ex-tariff prices, and at 95 percent on to import prices increasing prices at the US border, and at a minimal increase of 0.7 percent per 20 percent tariff rate on to retail prices in the short-term, with a higher pass-through rate on retail prices expected over time reducing consumer demand of such agrifood products.
However, how much would the quantity demanded decrease due to increases in import prices affected by additional tariff costs, which in the US has nearly a one to one pass-through rate, depends on the import demand elasticity specific to a country.
According to a working paper[4] (2016) produced by project PRONTO titled “Import Demand Elasticities Revisited”, import demand elasticity is defined as “the percent change in import quantities if the price of the imported goods changed by 1 percent”. Therefore, the import demand elasticity of the US for agrifood imports needs to be explored.
The same paper provides that economically and physically larger countries, as per GDP and surface area, have higher import demand elasticities, meaning that 1 percent increase in import prices would lead to higher percent decline in the quantity of imported products, possibly due to more availability of domestic substitutes or alternative suppliers.
The US is amongst the top three countries with the highest import demand elasticity. The paper provides that homogeneous/ undifferentiated agrifood products face more import demand elasticity than heterogeneous/ differentiated products from the manufacturing sector in 158 countries out of 167.
Therefore, Sri Lankan agrifood products bound to the US can expect to have higher reduction in quantity demanded from US importers as a result of the new tariff rate than manufacturer sector exports like apparel, machinery and tools.
The paper estimates that a 1 percent increase in import prices will reduce quantity demanded for agrifood products by 1.04 percent and by 0.99 percent for manufacturing sector imports.
This is a one-to-one decrease in the quantity demanded; for example, if the import price of an agrifood product rises by 50 percent then import demand for that agrifood product is expected to drop by 50.2 percent. This represents a very negative outlook for undifferentiated/ homogeneous agrifood export products and the export sector of Sri Lanka.
As a rough estimate, holding all other factors constant, the percentage decline of the quantity of demand for Sri Lankan agrifood exports in the US in mid-long term can be calculated using the following variables and formulae, assuming the new tariff rate of 44 percent represents the final tariff rate and does not add on top of any existing tariff rates.
Variables
- New tariff rate = (Tn) = 0.44
- Old tariff rate = (To) = 0.125
- Tariff pass-through rate to export prices = (θex) = 0.25
- Tariff pass-through rate to import prices = (θimp) =0.95
- US Import demand elasticity (agrifood products) = ε = −1.04
Formulas
- Ex-tariff price (Pex) = Export price (Pexp) x (1 – Tn x θex)
Suppose current Pexp = USD 1, and due to T = 0.44, Pexp is reduced by θex = 0.25 to be competitive on US markets resulting in Pex = USD 0.89. This contracts revenues by 11 percent.
- Change in import price (ΔPimp) = Tn import prices (Pimptn) – To importer price (Pimpto)
Pimpto = To export price x (1 + To x θimp)
Pimptn = Pex x (1 + Tn x θimp)
Actual change in importer price is equal to the difference between import prices under new tariff rate (Tn) and import prices under old tariff rate (To) subject to respective pass-through rate (θimp).
- Percent change in import price (%ΔPimp) = (Pimptn / Pimpto) x 100.
The actual percent change in import price is (Pimptn / Pimpto) x 100.
- Change in quantity of demand (ΔQ ) = %ΔPimp x ε
Therefore, decrease in quantity of demand at the importer level, ignoring retail prices in the short-run due to negligible pass-through rates (0.07 per 0.20 tariff rate), can be estimated using percent change in import prices (% ΔPimp) and import demand elasticity (ε ) as in equation d.
For example, if we suppose that export price under To (Pexp) is 1 USD per Kg of product AG:
As per formula a; ex-tariff price (Pex) under Tn for one Kg of AG is 0.89.
As per formula b; Change in import prices (ΔPimp) = USD 0.14
Import price under old tariff (Pimpto) = USD 1.12
Import price under new tariff (Pimptn) = USD 1.26
As per formula c; percent change in import price (%ΔPimp) = +12.81%
As per formula d; Change in quantity of demand (ΔQ) = –13.32%
Therefore, the demand for AG contracts by 13.32 percent in the US market under Tn.
Accordingly, if we assume that To of 12.5 percent is uniformly applied to all agrifood export products from Sri Lanka, then due to the increase in the U.S. tariff on Sri Lankan agrifood products (from 12.5 percent to 44 percent), the import price rises by 12.81 percent, resulting in an estimated 13.32 percent decrease in quantity demanded, assuming all other factors remain constant.
On the other hand, if the new tariff rate is added on top of existing tariff rates, the quantity demanded will decline at a higher percent.
This can be calculated by adjusting Tn to include both To and new tariff rate. Thus the new Tn = 0.44 + To (estimated as 0.125, representing a lower-end general tariff rate for Sri Lankan agrifood exports) .
Tn = 0.44 + 0.125 = 0.565
Based on this adjustment the decreased quantity demanded is found by using formula d. The results show that import price can increase by 17.96 percent compared to 12.81 percent under non-adjusted Tn. Similarly, quantity demanded can decrease by a crippling 18.63 percent at the level of US importers compared to 13.32 percent under non-adjusted Tn.
The forecasted contraction of 18.63 percent of US bound agrifood exports, which amounts to a share of eight percent of total Sri Lanka agrifood exports in the 2022-2025, corresponds to a decrease of 1.5 percent in the total quantity of agrifood exports from Sri Lanka. Although this figure is not alarming, the decline in specific product categories and products that are heavily dependent on US bound exports, mentioned above, are extensive and severe.
In the final analysis, exporters, producers, processors, and farmers can face not only declines in profit margins but also declines in demand for agrifood exports from the US market. If the government fails to obtain concessions via a bilateral deal with the US, exporters failing to find alternative markets will have to continue to reduce export prices or risk losing access to the US market.
Lahiru Thilarathna is an international lawyer, development economist, investor and entrepreneur specialising in agrifood, tourism and logistic sectors. He disclaims any responsibility for any losses, damages or other costs whatsoever arising as a result of decisions or actions taken based on the information provided within this article by anyone or entity. This article represents his personal views on the possible effects of current US tariffs and does not constitute any type of advice, recommendation or official forecast.
Factum is an Asia-Pacific focused think tank on International Relations, Tech Cooperation, Strategic Communications, and Climate Outreach accessible via www.factum.lk.
The views expressed here are the author’s own and do not necessarily reflect the organization’s.
[1] Homogeneous products are identical in quality and function, making them interchangeable, such as table salt or refined sugar. Heterogeneous products differ in quality, features, or brand, like smartphones, which vary in operating systems and design. Differentiated products are distinguished by branding or unique features, even if the core product is similar, such as Dilmah and Melsna with their distinct marketing strategies. Undifferentiated products are marketed with minimal emphasis on brand differences, focusing on cost-effectiveness, like generic bleach which performs similarly to branded counterparts without unique selling propositions.
[2] The data was retrieved from the Export Development Board online database: https://stat.edb.gov.lk. Sri Lankan export volume data, in unit Kg, shipped to the world and the US were collected under eight product sectors: Tea, Rubber and Rubber Based Products, Coconut and Coconut based Products, Spices, Essential Oils and Oleoresins, Fruits, Nuts and Vegetables, Cut Flowers and Foliage, Other Export Crops and Food, Food and Beverages, consisting 99 individual product types. Rubber and rubber-based products are included as the operations and structures of rubber plantations and producers are closely interconnected with those of other agrifood sectors, especially in organisations that operate across multiple sectors. Last accessed April 6, 2025.
[3] Tariff Passthrough at the Border and at the Store: Evidence from U.S. Trade Policy (2020) : https://www.hbs.edu/ris/Publication%20Files/20-041_168e07a0-b045-4a3b-9902-fefc2e86f704.pdf, last accessed on 06/04/2025
[4] Import Demand Elasticities Revisited (2016); https://wiiw.ac.at/import-demand-elasticities-revisited-dlp-4075.pdf, last accessed 06/04/2025
