Advocata says that with the global trade landscape evolving rapidly, Sri Lanka stands at a critical crossroads. The country must choose between continued stagnation or re-engaging with the world on more competitive, transparent, and strategic terms.

In the wake of sweeping new US trade tariffs that threaten to hit Sri Lanka’s key export sectors, the Advocata Institute, a Colombo-based economic policy think tank, has issued a strong call for urgent trade reforms in the country that is still emerging from a disastrous economic meltdown. The institute recommends eliminating complex para-tariffs, simplifying Sri Lanka’s tariff structure, and expanding regional integration – particularly with India – to enhance trade competitiveness and resilience.

The renewed push for reform comes as former US President Donald Trump’s administration reimposes protectionist tariffs, including a 44 per cent levy specifically targeting Sri Lanka, effective April 9. The new US trade measures include a blanket 10 per cent universal duty on all imports and higher “reciprocal tariffs” for countries with significant trade surpluses with the United States. With the US accounting for nearly a quarter of Sri Lanka’s exports – 70 per cent of which are apparel – the tariff escalation could deal a heavy blow to the island nation’s struggling economy.

Advocata sees this moment as a “wake-up call” that exposes longstanding vulnerabilities in Sri Lanka’s trade policies. “This should not merely be seen as a diplomatic setback, but as a strategic opportunity to reform our outdated and inefficient trade regime,” Advocata Institute said in its statement.

Protectionism Comes at a Cost

Over the past two decades, Sri Lanka has implemented increasingly protectionist policies. Para-tariffs such as the CESS and Ports and Airports Levy (PAL), combined with non-tariff barriers, import quotas, and ad hoc policy changes, have discouraged trade, increased corruption, and insulated domestic industries from global competition.

“Protectionism has come at the cost of competitiveness,” Advocata stated. “Our exporters are struggling to meet global standards, and our economy remains heavily reliant on a narrow band of exports and markets. This makes us extremely vulnerable to shocks such as the current US tariffs.”

According to the US Trade Representative’s findings, Sri Lanka’s high tariff rates – among the world’s highest by certain metrics – along with unpredictable customs procedures and non-transparent policy shifts, have contributed to strained trade relations. Many of these trade barriers fall outside of the World Trade Organization (WTO) norms, increasing the risk of Sri Lanka being marginalised in the global trading system.

Time for Structural Reform

In response, Advocata has outlined a set of urgent reforms:

• Eliminate para-tariffs like CESS and PAL to reduce costs for businesses and signal Sri Lanka’s openness to trade.
• Negotiate with the US on tariff relief and fairer access to its markets, especially for sensitive sectors like apparel.
• Simplify and unify tariff structures to facilitate trade, reduce rent-seeking and corruption, and provide predictability to importers and exporters.

The think tank emphasized that tariff rationalisation alone is not sufficient. Deeper structural reforms are needed to align Sri Lanka’s trade and industrial policies with modern global standards. These include addressing “behind-the-border” issues such as regulatory incoherence, lack of digital trade infrastructure, and limited supply chain integration.

The India Opportunity

Advocata also highlights the urgent need to deepen regional integration, especially with India. Although the Indo-Sri Lanka Free Trade Agreement (ISFTA), in force since 2000, provides preferential access to over 60 per cent of Sri Lankan exports, its benefits remain underutilised due to non-tariff barriers and complex rules of origin.

“The time has come to revive and finalise the Comprehensive Economic Partnership Agreement (CEPA) with India,” the statement said, referring to a broader trade and investment framework that was negotiated over 13 rounds before stalling in 2008. CEPA would go beyond goods, encompassing services, investment, and regulatory alignment – potentially unlocking major gains for sectors like logistics, IT, and education, the think-tank said.

With India projected to become the world’s third-largest economy by 2030 and Sri Lanka still recovering from a severe economic crisis, both countries stand to benefit from deeper economic ties. Sri Lanka could tap into India’s burgeoning middle class – expected to reach 700 million by the end of the decade – and attract investment in ports, energy, and hospitality.

“Sri Lankan firms should not aim to compete with Indian giants, but rather participate in intra-industry trade and niche supply chains. Indian investment in Sri Lanka could enable re-export to India, while transferring skills and technology locally,” Advocata said.

A Regional and Global Shift

Globally, trade alliances are undergoing rapid transformation. The European Union is forging new pacts with ASEAN and Mercosur. Canada is expanding its trade footprint across Asia. And Asia-Pacific blocs like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) are reshaping regional commerce.

“If Sri Lanka remains on the sidelines, it risks being left behind,” Advocata warned. “Our failure to integrate into global value chains is now being punished through punitive tariffs and declining investor confidence.”

The Trump administration’s tariff strategy is partly motivated by domestic political considerations and US-China rivalry. However, Advocata criticised the logic behind these tariffs as “flawed,” drawing parallels with Sri Lanka’s own inward-looking policies. “The idea that trade must be balanced bilaterally is as illogical as expecting a supermarket to buy from its customers in equal measure.”

Sri Lanka’s own import substitution policies, marketed as industrial strategy, have led to corruption, inefficiency, and misallocation of capital. “We are now paying the price for those decisions,” the institute stated.

The Cost of Inaction

The consequences of inaction are stark, Advocata says. Reduced export competitiveness, loss of investment, and job losses in key sectors such as apparel could deepen Sri Lanka’s economic woes. Other South and South East Asian nations – Vietnam, Bangladesh, Cambodia, and Myanmar – are also vulnerable to the ripple effects of US tariffs, but many of them have diversified export portfolios and better integration into global supply chains.

Sri Lanka, by contrast, remains dependent on a few sectors and markets. “This narrow strategy has run its course,” Advocata concluded.

The think tank called on the government to act decisively: “Push for CEPA with India, eliminate distortionary tariffs, and invest in trade facilitation. Only then can Sri Lanka transform this crisis into an opportunity for inclusive, export-led growth.”

Advocata says that with the global trade landscape evolving rapidly, Sri Lanka stands at a critical crossroads. The country must choose between continued stagnation or re-engaging with the world on more competitive, transparent, and strategic terms.