Tariffs Hobble Sri Lanka: A Critical Policy Analysis of Economic and Social Strain

Sri Lanka’s recent trade policy narrative is overshadowed by escalating tariffs that have severely impeded its economic revival and threatened social stability. Central among these are dramatically high U.S. import duties—approximately 44 percent—on key export commodities, including garments, rubber, and agricultural products. Discipline from global and domestic data, including World Bank, WITS, and CEIC, affirms that such protectionist measures stifle GDP growth, surge poverty rates, and expose Sri Lanka to structural vulnerabilities. This detailed analysis, drawing on credible data, case comparisons, and best practices, critically examines the ongoing tariff phenomenon, its implications, and offers policy pathways to restore economic resilience and equitable growth.

Context and Empirical Overview

Since peaking above 30 percent in the 1990s, Sri Lanka’s applied average tariffs have gradually declined to 4.43 percent in 2015 (CEIC/World Bank). Nonetheless, select duties—especially on imports like petroleum—inflation-adjusted, remain punitive, with maximum duties exceeding 600 percent . Meanwhile, Sri Lanka’s trade-to-GDP ratio stood at just 46.5 percent in 2022, signifying moderate global integration .

The dramatic imposition of U.S. reciprocal tariffs in 2025—44 percent—on $3 billion of Sri Lankan exports constitutes a watershed moment. This macroeconomic shock comes amid recovery from a deep financial crisis; Sri Lanka posted 5 percent GDP growth in 2024, but faces critical dangers ahead.

Economic Growth at Risk

The World Bank forecasts Sri Lanka’s economic expansion moderating to 3.5 percent in 2025, down from 5 percent the previous year . This modest projection encapsulates the critical drag effect of the U.S. tariffs, which target sectors — notably garments ($1.9 billion industry), supporting roughly 300,000 jobs.

Sri Lanka’s historic tariff liberalisation, highlighted by Free Trade Agreement (FTA) modelling, emphasizes that removing partner tariffs could boost real GDP modestly: for instance, FTAs with China or India could yield GDP gains of 0.3 percent and 0.08 percent respectively. By contrast, the current tariff spike is reversing this trajectory, risking negative growth multipliers.

Poverty and Household Welfare

A shocking 24.5 percent of Sri Lanka’s populace lives in poverty as of 2024. Tariffs destabilize household economies by increasing import prices while depressing export incomes—thus contracting real wages within trade-linked industries. Evidence from regional trade liberalisation initiatives indicates that easing trade barriers historically lifted poor households, especially those involved in agriculture and manufacturing .

With tariffs both incomplete and scattered, SMEs in food, apparel, and raw materials sectors bear disproportionate costs. This pressure not only erodes public welfare but also heightens migration outward, draining domestic skills.

Fiscal Trade-Offs: Revenue Versus Growth

Sri Lanka has historically relied heavily on customs duties and para-tariffs to fuel government earnings. Yet analysis from Harvard’s Growth Lab and SSRN underscores that revenue-neutral rationalisation of tariffs—scrapping para-tariffs and aligning rates—would enhance exports, domestic output, employment, and GDP. Current policy, which favours high revenue at the expense of open trade, is myopic and economically stifling.

Comparative Failure: U.S. Protectionism and Global Retaliation

The U.S. precedent, where reciprocal tariffs hit Sri Lanka at 44 percent—far higher than levels imposed on most other nations—reflect clearly non-economic motives . Global market responses have been similarly punitive: stock markets dipped, access to liquidity tightened for developing economies, and debt-servicing costs rose.

Meanwhile, rival nations like India (27 percent U.S. tariff) are partially capitalizing on redirected sourcing, gaining U.S. market-share while Sri Lanka falters.

Socio-Labour Impacts

Sri Lanka’s garment sector—a female-intensive, low-wage-driven industry—faces serious danger. A 44 percent imposition is projected to shutter factories and propagate large-scale layoffs. Losing this labour-intensive export engine would reverse decades of gender-progressive employment trends and exacerbate rural unemployment, with knock-on effects for poverty and social welfare. 

Global Best Practices

Policymakers in Indonesia, among others, have responded to U.S. tariffs by diversifying exports, shifting manufacturing focus to domestic industries, and negotiating tariff waivers . Meanwhile, countries like Vietnam and Bangladesh faced similar tariffs but scaled resilience through rapid pivot to EU/UK markets, FTA activation, and enterprise-level upgrading.

Embodied within WTO and regional frameworks, proactive governments have also catalysed private sector adaptation grants, retraining schemes, and export diversification incentives.

Practical Policy Recommendations

·       Negotiated Tariff Reduction

Sri Lanka’s government must urgently pursue formal tariff negotiations and waivers with the U.S., leveraging IMF-backed reforms, human rights improvements, and governance commitments as diplomatic leverage .

·       Rationalisation: Tariff Simplification & Para-tariff Removal

Adopt phased unification of tariff and para-tariff structures, aiming to reduce protectionism-driven distortions and unlock export competitiveness. SSRN and Growth Lab modelling confirms this will simultaneously boost growth and boost revenue neutrality .

·       Export Diversification and Value Addition

Invest in value chain upgrading across apparel, rubber, spices, and tea exports, accompanied by quality-enhancing certifications (e.g. EU GSP+), strengthened SPS compliance, and strengthened SME access to global standards. Donor agencies like UNCTAD suggest synergy between standards attainment and market access.

·       Social Safety Nets for Displaced Workers

Allocate budget for labour transition support, including vocational training, income subsidies, and intermediary employment programmes. Engage with international agencies (ILO, UNDP) to design inclusive assistance frameworks.

·       Bilateral and Multilateral Reform

Fast-track FTA finalisations—particularly under RCEP, and EU-, UK- and India-negotiated arrangements—expanding Sri Lanka’s trade matrix while reducing dependence on U.S. markets .

Data-Informed Realignment

Table 1, grounded in WITS 2022 data, underscores the trade-weighted tariff regime:

Indicator	Value
Simple avg tariff (2021)	5.73%
Trade-weighted avg tariff (2021)	4.36%
Max tariff line rate	679.9%
Duty-free tariff lines (share)	58.2%
Trade (% of GDP, 2022)	46.5%
Export (% of GDP)	21.5%
Import (% of GDP)	25.0%
Poverty incidence	24.5% (2024)

These statistics illustrate a commodity-centred tariff system that generates revenue, but at the expense of structural openness and progressive inclusion.

Conclusion and Way Forward

Sri Lanka’s tariff dilemma is more than a fiscal issue—it is existential, risking the unraveling of a fragile economic recovery and undermining social cohesion. The crisis demands calibrated action:

1. Immediate diplomacy with U.S. counterparts,
2. Deep structural tariff reform,
3. Investment in diversified, higher-value exports,
4. Creation of holistic social protection frameworks,
5. Robust engagement in FTAs and regional markets,
6. Evidence-based policymaking supported by government and agency data.

As someone with extensive experience across UN systems and government policy, I conclude that Sri Lanka stands at a crossroads. It must advance towards trade sophistication, not retreat behind arbitrary tariffs. The path is clear: data-driven reform, global alignment, and inclusive growth must define Sri Lanka’s journey into a more secure, equitable future.

References (Harvard style)

CEIC. (2015) ‘Sri Lanka LK: Tariff Rate: Applied: Weighted Mean: All Products’, CEIC Database.

World Bank. (2022) ‘Sri Lanka Trade Summary’, WITS Data.

Reuters. (2025) Sri Lanka's economy to grow 3.5% in 2025 despite US tariff headwinds, World Bank says.

Reuters. (2025) Trump tariff shock stings Bangladesh, Sri Lanka garment giants, may help India.

Growth Lab, Harvard CID. (2017) Tariffs, Tea, and Trade: Research Notes from Sri Lanka.

Tennakoon, S. (2004) ‘Trade Protection Measures Implemented by Sri Lanka’, [Journal Title].

SSRN. (2020) ‘Impact of Para‑Tariffs in Sri Lanka: The Case for Improved Administration’.

Southern Voice. (2022) ‘GSP+ Withdrawal: How Would it Impact Sri Lanka’s Economy?’