By Dinouk Colombage
The recently announced tariff rates by US President Donald Trump have left many countries either unimpressed or breathing a sigh of relief for what some would describe as merely “a stay of execution.” 69 trading partners have been presented with revised tariffs, ranging from 50 to 10 percent, with the median being in the range of 17 percent.
While countries such as Norway and South Korea who find themselves on the lower end of the tariff spectrum at 15 percent, for countries such as Vietnam, one of the first to negotiate a trade deal with the U.S., this new announcement would certainly not be welcome news.
For the South-East Asian tiger economy, negotiations with the US saw Vietnam remove all tariffs on the USD 14.2 billion US exports to their markets. However, Vietnam still faces a 20 percent tariff on their USD 138 billion exports to the US. While Norway and South Korea were also engaged in negotiations with the Trump administration, the secrecy behind their talks will raise questions over whether some nations received more equitable terms than others.
Of course, on the US’s side President Trump can claim victory in securing beneficial trade agreements with Japan, the European Union, the United Kingdom, Vietnam, Philippines, and Indonesia. However, missing from this list are the two biggest markets, namely India and China, while a deal with America’s largest trading partners, namely Canada and Mexico, continues to elude Trump and his team.
With over USD 2.2 trillion worth of trade done between the US and these four economies, Trump will be feeling the pressure to secure similarly beneficial agreements.
Prior to the launch of his April “Liberation Day” tariffs, Trump had made China, Canada, and Mexico the focus of his economic struggle. While claiming that China was unfairly infringing on the global free markets through intellectual property theft and unfair trade practices, Mexico and Canada found themselves in Trump’s gunsight due to a host of economic and political reasons including his desire to see both countries strengthen border controls.
Following the announcement of the revised rates, Trump has turned his attention to India accusing them of financing the Russia-Ukraine conflict due to their purchasing of Russian oil, while suggesting that India is purchasing excess stock to re-sell on the open market.
When studying the Trump tariffs, it is still to be deciphered as to the methodology employed in deciding the final rate. Was it based on the economic benefits enjoyed by the US because of the relevant trade agreements? Or was it simply a case of Donald Trump pursuing an agenda of economic coercion that would allow him to shore up support among friendly nations while pushing back on China and Europe?
For Sri Lanka, the details of the trade agreement reached between the two administrations remains unknown. Shortly after the announcement by Donald Trump, Sri Lanka’s government announced that further negotiations with the US would continue, and that the details of these talks were confidential.
According to Section 2(b) of the executive announcement by President Donald Trump, “certain foreign trading partners identified in Annex I to this order have agreed to, or are on the verge of concluding, meaningful trade and security agreements with the United States. Goods of those trading partners will remain subject to the additional ad valorem duties provided in Annex I to this order until such time as those agreements are concluded, and I issue subsequent orders memorializing the terms of those agreements.”
For Sri Lanka, this will be good news if a further reduction in the tariffs is made possible. However, the burning question remains: what are these specific details, especially in terms of “security agreements”?
With the US purchasing 35 percent of Sri Lanka’s exports the country has found itself with a decision to make, either continue down a path of over-dependence on the US markets or attempt to diversify both the country’s export industries and target markets.
While this will certainly not be an easy task for either the administration or the export industry, the writing has been on the wall for the last several years.
In the past decade (2014-2024) Sri Lanka’s exports to the US have seen a minimal increase from USD 2.7bn in 2014 to USD 3.2 bn in 2024. During this same period, Bangladesh has enjoyed a far larger increase from USD 1.1 bn to USD 8.4 bn.
When comparing the two countries’ apparel industries the situation is more dire. Over the ten-year period, Sri Lanka’s apparel exports to the US were stagnant, reducing from USD 2.03 bn in 2014 to USD 1.9 bn last year. While Bangladesh’s apparel exports increased from USD 4.8 bn to USD 7.3 bn during this same period.
With apparel making up over two-thirds of Sri Lanka’s exports to the US and competitors such as Bangladesh and Vietnam (USD 9.8 bn in 2014 and USD 14 bn in 2024) enjoying significant increases in their shares of the US apparel market, the tough question that needs to be raised is whether apparel will remain Sri Lanka’s largest export contributor.
Following the 2022 financial crisis, economic recovery was built around the basis of re-orienting Sri Lanka’s economy with an emphasis on exports mainly in the fields of agriculture and services, while transforming the country into a logistics hub. Traditional industries such as garments were facing a ticking clock on its viability.
Among the youth, a growing call was made to “de-colonise” the country’s industries allowing for those traditional sectors to be replaced with higher paying/higher skilled jobs such as in the service sector. While the merchandise sector of the country remains the largest contributor to the country’s export earnings (USD 12.7 bn in 2024) the service sector demonstrated a faster growth last year with an 8.5 percent increase compared to 2023, as opposed to a 6.7 percent growth for merchandise.
An overnight switch is not possible, with the required training still to be implemented alongside securing markets large enough that would justify replacing the pre-existing focus on merchandise exports. However, with the Trump tariffs kicking off this year, the shift has, to an extent, hastened.
In June 2025 Sri Lanka’s merchandise exports recorded a 6.9 percent growth as compared to the same period last year, while service exports enjoyed a 16.4 percent growth compared to June 2023.
As the Trump tariffs begin to take effect in the global markets, shifts in countries’ exports to the US will doubtless be witnessed. However, with Trump not having imposed tariffs on America’s service imports the opportunity lies in waiting for countries such as Sri Lanka to benefit.
Along with diversifying the country’s export industries, a re-alignment of our export markets is also a necessity. With the country’s exports to the US remaining stagnant over the past decade, it is becoming increasingly clear that Sri Lanka must explore new emerging markets.
Traditionally Sri Lanka’s export markets are dominated by the US and Europe. However, the recent past has seen notable increases in the country’s exports to Asia, particularly India. Between 2014 and 2024 Sri Lanka’s exports to India has increased from USD 625 million to USD 886 million in 2024. With the Economic and Technological Comprehensive Agreement (ETCA) in the final stages of negotiations, the entrance of Sri Lanka into India’s markets will see a significant boost for the country’s export industries. With India traditionally guarding access to its domestic markets, the opportunity to enter with favourable terms should not be passed up.
Furthermore, entrance into India will allow the country to diversify its industries. Since 2022 an emphasis has been placed on developing Sri Lanka’s renewable energy sector with the purpose of not only ensuring 100 percent renewable energy power generation but also allowing the country to sell excess renewable energy to target markets such as India.
Projects with India such as the national grid connectivity and the oil pipeline connectivity will certainly bolster this endeavour, allowing for the much-needed diversification.
Alongside the expansion of Sri Lanka’s energy sector, the modernisation and growth of the country’s agriculture sector will also allow for expanded access into markets such as China and the Middle East. Currently Sri Lanka’s main export to China and the Middle East is tea, while several other agricultural produces also inhabit the top 10 exports to those regions.
With the Trump tariffs having thrown the country’s economic trajectory into uncertain territory, coupled with the continued secrecy around the ongoing negotiations with the US officials, the time is ripe for Sri Lanka’s trade re-alignment.
Whether or not the opportunity will be taken, or Sri Lanka’s export industry is comfortable with maintaining status quo remains to be seen. However, with competitor nations rapidly expanding the gap between them and Sri Lanka it appears more “when” than “if” Sri Lanka will re-orient its markets.
Dinouk Colombage previously served as the Director of International Affairs to President Ranil Wickremesinghe and is currently the Chief Research Officer for the Geopolitical Cartographer.
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.
