A successful trade relationship with the US, once built on economic policy and mutual benefit, now has to take another factor into account: President Donald Trump’s personal beliefs and views. Sri Lanka recently discovered the consequence of this, receiving a postponed 44% tariff on all exports to the US due to the protectionist stance that a trade deficit represents little more than open theft. Sri Lanka’s ability to reduce this ‘theft’ to zero is limited, but the island still has options it can pursue.
There are several underlying issues with the situation that should not, but probably will, be overlooked. To begin with, there has been controversy regarding the tariff formula at the heart of the Trump administration’s ‘Liberation Day’ tariffs. Instead of basing tariffs on existing trade barriers, the formula divides the US’ trade deficit with a country by the imports from said country, then halves the resulting figure.
Further, as pointed out by economists like Dr. Asanka Wijesinghe of the Institute of Policy Studies, the formula uses the incorrect figure for the elasticity of import prices with respect to tariffs. By underestimating how much tariffs will increase prices in this manner, the formula produces tariffs that are roughly four times higher than they should be.
Ignoring the other factors, this single correction would bring Sri Lanka’s 44% tariff down to around 10%, which happens to be the administration’s tariff floor.
At least 50 nations are known to be actively negotiating trade deals. The UK was first to announce their tariff deal in early May, though it proved to have limited scope. Despite the variety in goods and services traded between the two countries, the deal only touches specific sectors, such as cars, steel, and aluminium.
Other sectors, such as pharmaceuticals, financial services, and electronics, have been left for future negotiations. Of the UK’s exports to the US, worth £196.3 billion, a 25% tariff was placed on cars and car parts coming into the US, on top of the existing 2.5%. This has now been cut to 10%, but only for 100,000 UK cars in 2025. By comparison, estimates put the UK’s total car exports to the US at just over 100,000 units last year. It remains to be seen how the current tariffs will impact future sales.
Around the same time, he announced that most new tariff deals would be implemented unilaterally, with custom agreements being made only with the US’ top trade partners. Other countries would be informed of their new tariff rates via letters from US officials. According to Trump, this was necessary given there were too many countries to deal with in the allotted time of 90 days, which by then was nearing the halfway mark.
If Sri Lanka is handed such terms, they may or may not be as tolerable as the UK’s agreement. On the other hand, the UK and US have left the door open for future talks. Open dialogue would be invaluable for Sri Lanka in the long-term regardless of immediate events.
Building Rapport Despite Diplomatic Strain
President Trump also came under bipartisan fire for contemplating, and then accepting, Qatar’s proposed gift of a ‘palace in the sky,’ a super luxury Boeing 747-8 jumbo jet. Worth $400 million, it would reportedly require another $1 billion and between 2-4 years to retrofit before it could be used as part of the Air Force One fleet. Despite criticism that accepting such a gift would violate the foreign emoluments clause of the US Constitution, intended to prevent foreign influence over US officials, Trump maintains that the plane constitutes a gift to the US as a country, not the president.
In any case, his positive relationship with Qatar has been developed over years and multiple billions in investments in US businesses, a far cry from 2017 where he asserted the Middle Eastern country has “historically been a funder of terrorism at a very high level.”
This is hardly the first time a sitting US president has received lavish gifts, despite the jet by far being the most expensive. Trump’s predecessors have received silk carpets, jewellery, and even a pair of pandas on one occasion. However, this particular dynamic appears unique, perhaps underscored by a comment made by South African President Cyril Ramaphosa during a visit to the White House in the same month. “I’m sorry I don’t have a plane to give you,” he commented after Trump admonished a reporter for asking about the jet. Delivered lightly, this statement nonetheless highlights that more leaders see the need to approach Trump as an individual in addition to dealing with the US government as an institution.
Ramaphosa had no jet, but he had not come unprepared; his gift of a 14 kg book on South Africa’s golf courses was accompanied by billionaire South African businessman Johann Rupert and a pair of professional golfers. Trump has long been seen in close proximity to the world’s richest individuals, and his affinity for golf is similarly well known, and Ramaphosa evidently saw value in appealing to these tastes.
Sri Lanka cannot give the US a luxury jet either, but crafting a personal, friendly relationship with the administration could lay the foundation for more stable trade relations. Given the multiple crises the island has endured in recent years, its businesses can ill afford an uncertain future.
The Risk
According to an analysis based on 2024 data by Dr. Asanka Wijesinghe, Sri Lankan exports are severely exposed to the US’ reconfigured trade policy. Valued at $2.93 billion, 95.6% of Sri Lanka’s exports to the US are currently subject to a 10% global tariff, pending an increase to the 44% tariff that is supposed to come into effect in July if no changes are made. Apparel (knit or crocheted), accounting for 37.7% of Sri Lanka’s US-bound exports, previously had a base Most Favoured Nation (MFN) tariff of 16.65%. It was raised to 26.65% in early April.
Additionally, the Trump administration’s Section 232 tariffs on steel, aluminium, and auto parts affects 4.2% of the US’ imports from Sri Lanka. While the impact on competitiveness is a concern here, the implementation of these tariffs carries complex reporting requirements that Sri Lankan exporters have to address or risk punitive measures.
This includes accurately reporting both the content and origin of steel and aluminium in a given product. If the aluminium content’s origin is unknown, for instance, it will default to Russia, carrying with it the country’s 200% tariff. Products with partial steel or aluminium content will have their tariffs calculated proportionally to said content’s value, and products with both could receive stacked tariffs. There are exemptions for certain materials and components, but they apply universally, offering Sri Lanka little advantage over its competitors.
The Response
Sri Lanka has certain actions at its disposal that can mitigate the impact of tariff-imposed volatility on its exporters and broader economy. President Trump’s preference for tech industry-style ‘move fast and break things’ policy making means that seismic changes can be introduced with little to no warning, as they were with the April ‘Liberation Day’ tariffs. As such, Sri Lanka’s response has to take effect in both the short and long-term, with the former starting immediately and the latter extending at least as far as the remaining duration of the US president’s current term of office.
Despite the US administration announcing that most countries will receive ‘unilateral’ tariffs, hope endures among Sri Lankan investors that favourable terms will be reached in due course. These negotiations, Dr. Wijesinghe expects, are exploring how Sri Lanka can shift some of its purchases to US products, such as oil, or remove duties on others, such as soybean residues. Ultimately, the island’s ability to reduce the US trade deficit as requested is limited, but negotiations of this nature will play an important role in the greater plan.
Another immediate requirement is to build exporter capacity for compliance. Technical assistance must be provided to exporters, especially SMEs, to meet the new reporting requirements. Guidance on calculating the steel and aluminium content of derivatives is called for, and the country of origin must be certified to avoid the 200% tariff associated with Russian materials. A dedicated trade helpdesk may be able to achieve this.
A tariff risk assessment framework could additionally help the country proactively monitor and respond to future changes in the trade environment. President Trump has long expressed a desire to wield tariffs as a diplomatic sword, and in the lead up to the Liberation Day announcement he told at least one outlet that there would be “not too many exceptions.” Sri Lanka’s response following the April 02 announcement was to appoint a committee to investigate the US tariff impact and develop solutions, but there was precious little time for this.
If not for the 90-day pause period, the consequences would have been immediate and catastrophic. In the future, the country must be more proactive regarding early warnings about tariff changes and US foreign policy updates, actively assessing sectoral vulnerabilities to reformulate national trade strategy as needed.
In the long run, US protectionism means that the task of diversifying Sri Lanka’s export destinations and raw material sources must now take an even higher priority. This will not be straightforward in all cases; apparel, for instance, may be of limited interest to neighbouring markets like Bangladesh and India where native industries will not appreciate the competition. Yet there may be other avenues for expansion, such as in the wellness sector. In the same vein, sourcing inputs locally or substituting with regional alternatives can reduce exposure to origin-based tariff penalties.
Unfortunately, one of the hard truths the country may have to swallow is that economic blows will come hard and fast, making damage control the only option in certain situations. The Liberation Day tariffs, in another administration, may have been shared months or years in advance of their implementation, allowing time for the world to adjust. President Trump has indicated many times that his tenure will not follow this tradition, and he has already acted as such on several occasions.
The ripples of this are felt within the US as well as without. Shuttering the US Agency for International Development (USAID), for one, displaced around 20,000 workers at the same time it hampered or eliminated non-governmental organizations (NGOs) or government-backed programmes in Sri Lanka.
This is one of the emerging hallmarks of the second Trump administration: the willingness to set widespread changes in motion and reorient after the fact. This approach has both supporters and opponents, but a country like Sri Lanka will inevitably be hard pressed to keep track of the ripples that follow each policy update, especially in the interest of developing a cohesive response. Regardless, this climate appears set for the foreseeable future, and the country must implement early warning systems to monitor and respond to evolving US trade policy.
Such a system may not be limited to official government channels either. President Trump has used his X (formerly Twitter) and Truth Social accounts to make announcements in the past, and this habit has continued in 2025. It may likewise be prudent to monitor social media updates from officials like United States Secretary of the Treasury Scott Bessent, US Trade Representative (USTR) Jamieson Greer, and so on, who are actively involved with US trade policy and negotiations.
The US tariffs have strained Sri Lanka’s export economy, and the broader market is still recovering from the briefly implemented 44% reciprocal tariff. However, as evidenced by other nations’ outcomes, a more personal and strategic, diplomatic approach with Trump himself could help the country set itself on firmer ground.