Trump’s tariff shocks have exposed Sri Lanka’s neglect of its long-identified barriers to trade. With 44% of its exports affected, primarily garments and textiles bound for the US, its largest market, the country now faces the consequences of past reform delays.
Although Sri Lanka attempted tariff liberalization, export diversification, and trade adjustment policies at different times, as early as 2016, implementation has been inconsistent. A planned National Tariff Policy and initiatives such as the Trade Adjustment Programme and Export Strategy remain on the back burner, underutilized, or forgotten, a policy note by the think tank Centre for a Smart Future (CSF) shows.
Without institutional reform and sustained political will, Sri Lanka remains exposed to a global system increasingly shaped by bilateral deals and unpredictable trade hostilities.
Global trade is faltering. Due to Trump, the predictable, rules-based order that supported international commerce for decades is giving way to chaotic, uncertain disorder. This shift presents acute challenges for smaller economies such as Sri Lanka, which relies heavily on exports and external markets, especially as past reform efforts remain unfinished or untouched.
CSF identifies eight areas where urgent and sustained action is required. These include tariff liberalization, trade adjustment, export strategy, partnerships, negotiation capacity, international engagement, commercial diplomacy, and trade facilitation. Each area has a legacy of prior attempts, and the task now is not reinvention but rigorous implementation.
Sri Lanka in a Changing Trade Landscape
The United States launched global trade on April 2, 2025. The announcement of sweeping tariffs, billed as the most significant in recent US history, listed Sri Lanka among the most exposed nations. With 44% of its exports affected, the island ranked sixth globally and highest in South Asia. The blow was heavy as the US is Sri Lanka’s largest export market, responsible for 22% of total exports and 40% of textiles and garments, the country’s main goods export.
Sri Lanka’s political leadership responded swiftly, appointing an expert committee, sending a letter from our president to theirs and initiating preliminary dialogues with the US Trade Representative.
According to CSF, many of the strategies under discussion have been previously proposed, shelved, or only partially executed. The core problem lies less in policy design than in consistent political follow-through. A 90-day pause on the new tariffs offers little respite. With trade tensions escalating, particularly between the US and China, and nations scrambling to negotiate bilateral carve-outs, Sri Lanka faces an uncertain and more contested trading environment.
The CSF suggests the following eight priorities for Sri Lanka:
- Tariff and Para-Tariff Liberalization
Sri Lanka has acknowledged the distortions created by its tariff regime for years. Since the early 2000s, studies have flagged the complexity and high burden of para-tariffs. Initially intended to support local industry, these levies gradually became essential revenue sources. Despite repeated commitments to rationalize them, progress has been fitful and incomplete.
The most concerted liberalization effort came during 2016–2018, when Sri Lanka removed duties on more than 1,200 tariff lines. There was also a plan to phase out CESS and PAL, but political instability halted these reforms. In 2024, a National Tariff Policy sought to consolidate tariff rates into four bands. The reform, a condition under the World Bank’s RESET programme, was meant to start in 2025 but was delayed following elections. Recent policy references, however, suggest renewed interest.
Fiscal concerns remain central, with the Ministry of Finance leading the Tariff Policy Committee. Any reform effort must reconcile trade competitiveness with revenue imperatives.
- Trade Adjustment Support
Trade liberalization will cause dislocation. Sectors previously protected by tariffs may shrink or restructure. Recognizing this, Sri Lanka designed a Trade Adjustment Programme (TAP) during its 2016–2018 liberalization push: two elements from the TAP merit revival.
The first is the analytical model used to assess sectoral exposure. It combined trade data with indicators on employment, firm performance, and gender distribution, enabling evidence-based, rather than politically reactive, decision-making. The second is the proposed Trade and Productivity Commission, which was to review adjustment requests and recommend sequencing strategies based on qualitative and quantitative inputs.
Fiscal constraints mean broad subsidies are not feasible. A data-driven, transparent approach offers a path to targeted support, helping balance trade-offs and maintain credibility.
- National Export Strategy
Sri Lanka’s exports remain overly concentrated. A narrow range of products and markets has left the country vulnerable to external shocks, such as the latest US tariff hike. Unlike peers such as Vietnam, which have diversified through global production networks, Sri Lanka’s export profile has changed little since the 1990s.
The 2018–2022 National Export Strategy (NES), developed with the International Trade Centre and stakeholder input, offered a roadmap for diversification, including tailored interventions and innovation support mechanisms such as the Export Market Access Support Programme. Implementation, however, faltered amid political shifts and administrative inertia.
The 2025 Budget has announced a new export development plan. The NES provides a solid foundation for this effort. Achieving success this time will require insulating implementation from politics, building multi-party consensus, and ensuring continuity across electoral cycles.
- Trade Partnerships
Sri Lanka’s trade network is thin despite early FTAs with India and Pakistan. The FTAs with Singapore and Thailand were exceptions, but more recent deals focus narrowly on goods trade, lacking the depth seen in modern agreements.
Other Asian economies have taken a different path. Vietnam, for instance, now has 16 trade deals covering more than 60 countries, giving it preferential access to nearly 90% of global GDP. Sri Lanka, by contrast, remains outside the major regional blocs such as RCEP and CPTPP.
Negotiations with India on the Economic and Technology Cooperation Agreement (ETCA) have dragged on. These should be concluded urgently, with provisions for asymmetric benefits and early harvest schemes. Updates to bilateral investment treaties must follow where investment chapters don’t exist.
- Trade Negotiation Capacity
Sri Lanka’s trade negotiation machinery is rudimentary. There is no standing team, institutional framework, or chief negotiator. Instead, ad hoc teams are assembled per deal and dissolved after completion, leaving little institutional memory.
Attempts to establish a dedicated agency failed in 2018, and more recent proposals for an Office for International Trade remain uncertain. The Department of Commerce, caught in the transition, has struggled with clarity of mandate.
A permanent entity with negotiation expertise and stakeholder consultation capacity is now essential. It should coordinate across ministries, retain talent, and provide a stable platform for trade diplomacy. Without such a body, Sri Lanka risks entering complex negotiations at a structural disadvantage.
- Strategic International Engagement
The global trade order is fragmenting. As tariffs rise and multilateralism recedes, countries form new blocs and alliances to protect their interests. ASEAN issued a joint statement calling for WTO-led discussions in response to US tariffs. Others are negotiating new trilateral frameworks.
Sri Lanka has few strategic alignments. Its participation in SAARC, IORA, and BIMSTEC has yielded limited returns, and these platforms are ill-equipped to provide collective bargaining power in today’s environment.
The Ministry of Foreign Affairs must craft a more forward-looking engagement strategy. Decisions on WTO engagement, regional alliances, and bilateral diplomacy need to be coordinated under a coherent vision that anticipates—not just reacts to—global trends.
- Commercial Diplomacy
Diplomats are trade envoys. Commercial officers can help identify opportunities, negotiate access, and support exporters in a shifting global market. Yet Sri Lanka’s commercial diplomacy is under-resourced and poorly coordinated.
A 2024 CSF study highlighted fragmented mandates, lack of funding, and unclear monitoring systems. Officer postings often remain vacant. Where staff are present, they may lack commercial training or be burdened with consular duties. Budget constraints limit participation in trade events and networking opportunities.
Sri Lanka has diplomatic missions in 101 countries, but commercial officers are posted in only 28. Some high-potential markets, like Mexico, lack diplomatic presence, while others, such as Iraq and Jordan, lack commercial expertise despite growing exports.
A coherent strategy is overdue. It should identify target markets, allocate skilled personnel, and establish regular engagement between missions and exporters. A professionalized commercial service can be a cost-effective tool for trade growth.
- Trade Facilitation
Procedural delays hurt exporters. Sri Lanka has made limited progress since joining the WTO Trade Facilitation Agreement in 2017. Its implementation has lagged compared to peers, and many commitments were classified as requiring external support.
Key initiatives like the Trade National Single Window and the National Trade Facilitation Committee have seen repeated delays. A roadmap was approved in 2024, and a new phase began in 2025, improving implementation to 58% by April. Yet core reforms—such as customs law modernization—remain elusive.
Technology alone will not solve the problem. Institutional reform, accountability, and incentive restructuring are equally important. Without addressing these underlying issues, digital tools will deliver only incremental gains.
Implementation!
Execution is now the central challenge. The government must draw on the best available expertise and create inclusive mechanisms for consultation. Advisory bodies should reflect the full diversity of the private sector, not just large exporters. Experienced public officials must be redeployed to provide continuity and institutional knowledge.
The CSF says its Policy Note is not a blueprint for reinvention but a call for persistence. Many of the necessary reforms are already known. The challenges remain in adapting them to current conditions, institutionalizing their implementation, and staying the course amid global uncertainty.