Negotiation of reciprocal tariff to competitive level critical for Sri Lanka's exports survival

THE US is making revisions to its reciprocal tariff regime, which was initially presented in early April this year, and subsequently deferred for a three-month period to be ended on 9 July 2025. The US President has since then revised the tariffs applicable to certain countries after negotiation with the counterparts. Sri Lanka also engaged with US trade officials (USTR) expecting a revision to the tariff applicable to Sri Lanka; which was initially one of the highest rates in the world at 44%.

- By Lasantha Somaratne, CFA, FRM

The US publicly announced that the reciprocal tariff applicable to Sri Lanka will be reduced to 30% from the previous 44% tariff rate. This tariff rate, despite a notable reduction, is still amongst the highest, while competing countries such Vietnam have been able to markedly reduce the tariff rate applicable them to a competitive level of 20%. Originally, the reciprocal tariff applicable to Vietnam at 46% was even higher than Sri Lanka. Vietnam has a huge trade deficit many times higher than Sri Lanka, since bilateral trade between the US and Vietnam is very significant to the US.

Sri Lanka depends heavily on the US market for key exports, especially for apparel, which is the largest export product from Sri Lanka. A country with very limited export diversification, and an over reliance on non-tradable goods for growth over the previous 2-3 decades could be severely impacted by the proposed tariff rates.

Understanding the importance of the US market as the single largest market in the world, most countries engaged with the President and trade officials to seek a reduction of their trade deficit and tariff by agreeing on a mutually beneficial framework. Vietnam being a strategic partner of the US in the Asia Pacific region engaged extensively with the US and negotiated a significant reduction to 20%; a very competitive position. Unlike Sri Lanka, Vietnam has a huge export based industrial sector and very high contribution of exports to GDP. The country exports computers, electrical products, spare-parts and components, and machinery, equipment, tools and instruments worth nearly $50 billion.