Sri Lanka has weathered a relentless succession of economic shocks in recent years. The turmoil began with the constitutional crisis in 2018, followed by the tragic Easter Sunday attacks in 2019. As the country began charting a path to recovery, the COVID-19 pandemic in 2020 dealt a severe blow, compounding existing vulnerabilities and ultimately contributing to a sovereign debt crisis driven by both external shocks and domestic policy missteps. The years 2023 and 2024 were marked by difficult but determined efforts toward stabilisation and recovery, laying the groundwork for a potential economic resurgence in 2025. With economic growth now returning back to track, a new external threat of tariff related trade disruption has emerged.
The Rationale Behind Reciprocal Tariffs
President Trump has consistently prioritised addressing the United States’ trade imbalances, a cornerstone of his first-term agenda. While initial efforts focused on China, recent rhetoric, particularly in the run-up to the next election and early in his second term has broadened to include other countries with which the US runs significant trade deficits. This policy shift is driven by the US’s combined trade and services deficit, which now exceeds USD 1 trillion, or approximately 3–4% of GDP. Under the existing framework, the US trade deficit effectively finances itself through capital inflows by way of investments in US equities, debt instruments, and other assets.
Sri Lanka, which recorded a trade surplus of around USD 2.6 billion in 2024 with the US, was among the countries flagged. On April 2nd, the US announced a 44% reciprocal tariff on Sri Lankan exports, calculated based on the scale of the bilateral trade imbalance. Though labeled a “reciprocal tax,” the measure functions as a proportional import tariff, directly linked to the size of the surplus Sri Lanka holds in its trade with the US.
Uncertainty results in global economic growth slowdown
With the uncertainty over the future of US tariffs, it results in overall uncertainty for the global economy which is not a positive driver for growth. This was visible in the IMF April 2025 update where they cut global growth by 0.5% with steep reduction in country forecasts for Sri Lanka’s key exports like the UK, Europe and US. South Asia has not been spared with reduction in growth forecasts by World Bank in its April 2025 projection relative to October 2024.
Ensuring continuity of GSP+
Sri Lanka also has to ensure continuation of schemes like the EU GSP+ which provides competitiveness for Sri Lanka’s exports and is the second largest export market. In 2024, total trade between Sri Lanka and the European Union reached Euro 3.7 billion with Sri Lanka enjoying a positive trade balance of Euro 1.7 billion.
Turning Crisis into Opportunity: Advancing Sri Lanka’s Second-Generation Reforms
Sri Lanka’s first wave of structural reforms since 2022 spurred by the debt crisis and the IMF programme led to landmark legislation such as the Central Bank Act, Public Financial Management Act, Anti-Corruption Act, Electricity Act, and the Economic Transformation Act. Today, the external tariff shock presents a new, urgent opportunity to build on that momentum and advance a second generation of reforms essential for long-term stability and growth.
Priority areas include phasing out para-tariffs, creating a transparent and rules-based tariff regime, addressing non-tariff barriers, and accelerating trade facilitation measures such as modernising the outdated Customs Ordinance and fully operationalising the National Single Window.
At the same time, Sri Lanka must seize this moment to diversify export markets and expand its product base. While the path ahead will be challenging, history shows that moments of crisis often offer the clearest mandate and the greatest opportunity for transformative change.
The Role of the Ceylon Chamber in Navigating Trade Shifts
The Ceylon Chamber of Commerce has taken a proactive role in preparing both industry and policymakers to respond to the evolving global trade landscape. In March 2025, the Ceylon Chamber contributed a policy paper to the roundtable series hosted by the Lakshman Kadirgamar Institute, helping shape the Government’s deliberations. It also had representation on the Presidential Committee formed to guide Sri Lanka’s strategic response following the April 2 tariff announcement.
Looking ahead, the Ceylon Chamber will host a high-level seminar on June 11 titled “Navigating Global Trade Shifts: Positioning Sri Lanka’s Exports for the Future.” The event will feature a keynote address by Mr. K.A. Vimalenthirarajah, Secretary, Ministry of Trade, Commerce, Food Security and Cooperative Development, and a presentation by Dr. Asanka Wijesinghe, Research Fellow at the Institute of Policy Studies. A dynamic panel discussion will follow, exploring key themes such as the new anti-dumping regulation and sectoral insights from industries including apparel and seafood.
(The author is Chief Economic Policy Advisor at The Ceylon Chamber of Commerce)
