Donald Trump’s proposed tariff hikes have sparked concerns among Sri Lanka’s exporters. This report from Sri Lanka’s Institute of Policy Studies says that the country must adapt swiftly to mitigate fallout from the looming US tariff hikes.

The re-election of Donald Trump as President of the United States raises critical questions about the future of US trade policy and its global implications. A recent report by the Sri Lanka’ Institute of Policy Studies (IPS), titled US Election Outcomes and Trade Policy Changes: What It Means for Sri Lanka, sheds light on how potential changes in US tariffs could affect Sri Lanka’s export-dependent economy.

As Sri Lanka’s largest individual export destination, accounting for 23.6 per cent of its total exports, any US trade policy shifts will significantly influence the nation’s economy. The report from the influential think tank warns of potential adverse effects, particularly from proposed tariff hikes under President Trump’s administration. IPS released the report today (Tuesday 19 November).

The US, Sri Lanka’s largest individual export destination, accounts for 23.6 per cent of its exports. Key proposals, including a 20 per cent additional tariff and heightened tariffs of 60 percent to 100 per cent on Chinese imports, could drastically impact Sri Lankan exports, particularly apparel, rubber, and chemical products.

The report says that higher tariffs will suppress US demand for imports, including Sri Lankan goods. Apparel, Sri Lanka’s top export to the US, faces an estimated 8.1 per cent contraction, amounting to a $187.9 million loss. Meanwhile, retaliation from US trading partners and subsequent economic ripples could erode EU GDP by 1.5 per cent, further reducing demand for Sri Lankan exports.

The US Trade Policy Landscape

The report highlights President Trump’s campaign promise to impose an additional 10 per cent tariff on all U.S. imports – a figure later floated as high as 20 per cent. This would be on top of existing tariffs, which already average 12.6 per cent in sectors like wearing apparel, Sri Lanka’s largest export to the U.S. Such policies could lead to drastic changes in trade dynamics.

“Tariff hikes under a Trump presidency would be a significant blow to Sri Lanka’s key export sectors,” the report states, emphasizing the disproportionate impact on wearing apparel, rubber and plastic products, and other manufactured goods. A potential trade war involving major economies like China could exacerbate these challenges, dampening global demand for Sri Lankan goods.

Potential Economic Fallout for Sri Lanka

Sri Lanka’s export industries are particularly vulnerable to any additional tariffs imposed by the U.S. The IPS report estimates that a 20 per cent tariff hike could cause an 8.1 per cent contraction in apparel exports, equating to a loss of USD 187.9 million. This would have ripple effects across the economy, as apparel manufacturing is a critical source of employment and foreign exchange earnings.

Other sectors, including rubber and plastic products, could see even sharper declines. The report notes that Sri Lanka’s exports of chemical products, which include activated carbon and essential oils, may experience a staggering 90 per cent loss under heightened tariffs. “These impacts underscore the heavy reliance of Sri Lanka’s export industries on stable US market access,” it warns.

Global Trade War and Its Broader Consequences

The report says that if the US were to impose tariffs as high as 100 per cent on Chinese imports, there could be limited opportunities for trade diversion, benefiting countries like Sri Lanka in the short term. However, the IPS report cautions that overall demand for imports in the US is likely to decline due to higher prices, negating these potential gains.

The ripple effects of a trade war would not stop at the U.S. borders. The report estimates that retaliatory tariffs by U.S. trade partners could slow global economic growth, particularly in the European Union (EU), Sri Lanka’s second-largest export market. A projected 1.5 per cent contraction in EU GDP could further curtail demand for Sri Lankan goods, compounding the challenges posed by US tariffs.

“The spillover effects of a trade war would significantly dampen global demand for exports from small economies like Sri Lanka,” the report explains. It emphasizes that these projections represent only the initial round of economic effects, with longer-term repercussions potentially being even more severe.

Policy Recommendations for Sri Lanka

Suggesting strategies for mitigation, the report says that Sri Lanka’s options include maintaining preferential tariffs in the EU, exploring regional trade blocs like RCEP, and providing subsidies to bolster domestic industries. Protecting export diversification and ensuring long-term policy alignment will be key to weathering these global economic shifts.

Faced with these daunting prospects, the IPS report suggests several policy measures to mitigate the impact of potential US tariff hikes. These include:

• Short-term Adjustments:
  Offering import tariff relief on raw materials and providing subsidies, such as for electricity, to help domestic producers remain competitive.
• Maintaining Preferential Access:
  Preserving the EU’s GSP+ trade preference and advocating for increased utilization of this scheme. This would help diversify export markets and reduce reliance on the U.S.
• Joining Regional Trade Blocs:
  Advancing trade reforms to join regional agreements like the Regional Comprehensive Economic Partnership (RCEP), which could open new avenues for Sri Lankan exports.
• Fostering Export Diversification:
  Encouraging the development of non-traditional export sectors, such as technologically sophisticated manufactured goods, which may be less susceptible to tariff shocks.

The report also advises close consultation with industry stakeholders to identify the most effective policy interventions.

A Mixed Outlook

The report suggests that for Sri Lanka, navigating the complexities of global trade under a renewed Trump presidency will require adaptability and foresight. By proactively addressing potential risks and pursuing diversification, the country can mitigate some of the adverse impacts and secure a more resilient economic future.

While the exact trajectory of US trade policy under President Trump remains uncertain, the IPS report underscores the risks posed by protectionist measures. It also highlights the limited bargaining power of smaller economies like Sri Lanka, which depend heavily on external market access.

“A blanket tariff increase by the US could have devastating consequences for Sri Lanka’s export sector,” the report concludes. “Yet, strategic policy responses and international trade partnerships could provide a buffer against these challenges.”