Being prompt to respond to Trump

By diversifying its export base, Sri Lanka can cushion the impact of tariffs and create new, long-term economic opportunities

Sri Lanka has to think strategically, going beyond mere arithmetic solutions proposed by those who believe in economic theory and principles and are far from ground reality. Trump has stated, if an imported product contains US-origin content by value, the reciprocal tariff will apply only to the non-US portion. This is an invitation to induce US investments. I am sure BOI has missed this point. What BOI can immediately do is not fly abroad to organise colourful, wasteful promotional programs or set up haunted investment zones. It can consult regional network and identify, potential projects attractive to US investors

Introduction

April is an important, happy, festive, and holy month for Sri Lankans. Bak Full Moon Poya Day, falling in April, is significant for Buddhists in Sri Lanka as it commemorates the Buddha’s second visit to the island. Tamil and Sinhala New Year, and Easter Sunday fall in April. Is April becoming an unlucky month for Sri Lanka? Sri Lanka was rocked by a series of deadly blasts in April 2019. Sri Lanka was named the 16th highest-risk country for contracting the COVID-19 virus in April 2020. Sri Lanka was declared as the first South Asian bankrupt nation by our Central Bank Governor in April 2022. A reciprocal tariff of 44% on Sri Lankan exports was declared by US President Trump in April 2025.

Neo liberal economists who are confused and lost between trade, growth and development and the IMF guided Sri Lankan Government were dumbstruck by Trump’s reciprocal tariff. Trump pledged to make America great during his election campaign. Unlike our political masters he kept his word and thundered “Made in America” is not just a tagline—it’s an economic and national security priority of this Administration. Increasing domestic manufacturing is critical to US national security. It needs to have a large upstream manufacturing and goods-producing ecosystem. Trade deficits have led to the hollowing out of our manufacturing base; resulted in a lack of incentive to increase advanced domestic manufacturing capacity; …”

When Prof. W.D. Lakshman, former Governor of the Central Bank, argued for a domestic economy-based economic strategy, neo liberal economic lovers ridiculed him as a follower of ‘Modern Monetary Theory’. They argued that he was ignoring the need for integrating Sri Lanka into the global economy and promoting old rhetoric, import substitution tried and failed. Trump has kicked off the so-called global economy.

Kristalina Georgieva, of the IMF, who called our President ‘Bravo’, is “still assessing the macroeconomic implications of the announced tariff measures” and appeals to the United States. While the IMF is still assessing and appealing, China has already introduced a tariff of 84% on US exports.

The US was the bedrock, championing free trade. The US tariff rates have been among the lowest globally. Trump says its trading partners’ higher tariffs are unfair barriers. By reciprocating, Trump aims to pressure its trading partners to be fair with their own trade barriers. President Trump has declared 2 April 2025 (coincidentally, my son’s birthday falls on that day) as “Liberation Day” for US industry. His intention is to level the playing field, to address the growing US trade deficit, to boost US manufacturing, to compel other nations to abandon harmful practices on imports, to strengthen the international economic position of the US, and to protect American workers. Is it wrong?

Making America great

Donald Trump was elected by US citizens to look after the interests of 349.8 million US population not 8.216 billion global population. He is fulfilling his election pledge to make ‘America Great’, unlike our politicians who pledged to make ‘Sri Lanka Great’ and are making India great.

Trump uses a formula to determine the tariff rate for each country. This formula is well explained by Michael Jayawardana in his article to the Daily FT on 10 April. (https://www.ft.lk/columns/Decoding-tariff-wars-key-takeaways-from-Trump-s-2018-US-China-conflict-Part-3/4-775408).

There have been several columns written up, criticising Trump for being unreasonable, opposing free trade, and destabilising the international system. Concerns have been raised about the appropriateness of the formula used or the factors taken into the formula. Some have stated that Trump’s tariff calculation methodology appears flawed and problematic; it is based on misguided thinking and wrong philosophy; it disregards established economic principles and global trade dynamics. Whether these concerns hold water or not, whether we agree or not, they have only an academic value as Trump has already declared that each country would pay half of what is being taken away from the US. He is charitable by not being asked for the whole pound of flesh.

Options proposed

Several discussions at different levels have erupted in Sri Lanka to propose and discuss the options available. Some options proposed are retaliatory moves similar to China’s response. China is the second-largest economy in the world and a strong player in international trade. China can afford to retaliate against Trump’s reciprocal tariffs. For Sri Lanka, the US is a major export market accounting for nearly 30% of its total exports. But, for the US, Sri Lankan exports represent only 3% of its total imports. Thus, the retaliation option is way off for Sri Lanka.

Another option proposed is negotiations with the US. It was announced that a high-powered team would visit the US to negotiate. Whether the team is high-powered or not, it must consist of members equipped with strategic thinking, diplomatic maturity, and negotiation skills. It is essential that the team do their homework and is well prepared before the departure to avoid a similar rebuke meted out to Zelenzky at the White House. It is true that the US move has hurt plantation workers, rural farmers, smallholders, garment factory workers, and would widen the trade deficit, put pressure on Sri Lanka’s balance of payments. Exports are crucial for Sri Lanka which is recovering from bankruptcy and debt restructuring. I pray that the high-powered team would not refer to these factors during the negotiations. The team has to be careful to avoid Trump shouting ‘for being disrespectful and raising your own domestic issues that should be sorted out by your Government’. These concerns are our own and no reason for Trump to be getting worried.

Diversification of markets is another option suggested. If this option were available, why did Sri Lanka depend on the US market for 30% of its exports? Trump’s reciprocal tariff would affect all countries in different proportions. It is not realistic to assume that the rest of the world needs to worry and show some mercy towards Sri Lanka forgetting, their woes. They are busy putting their houses to respond to Trump’s tariff blow. Trump has put countries against each other, and each one is looking for survival. It is doubtful we have much scope for diversification of markets. 

Trump is not alone in imposing trade barriers. There are tariff and nontariff barriers imposed by other countries, unlike Sri Lanka, which is a dumping yard for anything foreign. For instance EU has a humanitarian concern-based GSP+ facility and European Union Deforestation Regulations (EUDR). Some countries raise concerns on health, environment, safety, child labour, etc. The new situation would invite tightening these concerns rather than loosening them.

Augmenting Government Revenue or GDP?

There are many trade and investment barriers as tariffs, para-tariffs, customs duties, VAT, income tax, wealth tax, and port charges imposed in Sri Lanka. The Government places more emphasis on increasing Government Revenue through the tax regime than on augmenting the country’s GDP. IMF is interested in taming the Government rather than addressing the causes of the crisis. The Central Bank is misguided by the demand-pull inflation and tightens the funds available for investment. None of them anticipated Trump’s bombshell. These lopsided short-sighted interventions are not punishing only the US citizens but also the Sri Lankan citizens. 

Under the circumstances, the immediate option available for Sri Lanka is to focus on the gradual removal of tariff, para-tariff, and non-tariff barriers. This will pave the way for a mutually beneficial US–Sri Lanka trade relationship and build trust among international partners.

Government as a facilitator

The Government has to play a facilitating role to support and relieve local producers and exporters. There are many support measures available to the Government. Concessions on freight charges, interest, and electricity; providing incentives; removal of excessive tariff and non-tariff barriers for investment and trade; expediting processes, procedures, approvals and clearance; simplification of documentation; improving efficiency, commitment, and transparency; relaxing tedious burdensome time consuming costly regulatory regime would make the life of investors and exporters easier and cut down unnecessary fat in the cost structure. What is needed is collective action, a clear vision, and determined leadership.

Production of the three main exports i.e., tea, rubber, and coconut is largely in the hands of smallholders. They contribute around 70% to the total production. They are vulnerable to changes in weather and prices. They don’t adopt the recommended agro-management practices. Availability, volume, and quality of their produce are not guaranteed. Production, productivity, and acreage of all three crops have declined continuously. The best aromatic high-quality tea is produced in Sri Lanka. The Tea Hub is in Dubai. Sri Lanka exported coconut and coconut-related products in the past. At present, it depends on palm oil imports. Sri Lanka boasts of having the world’s oldest Rubber Research Institute, but its position in world rubber production has come down from 4th to 13th place. Rather than pointing the finger at Trump, it’s time to turn the torch on a soul search. By assuring availability, regularity, and the quality and diversifying vertically and horizontally, these products would stand against Trump’s tariff.

Apparel industry in late Premadasa’s eye

The number 1 export of the country is apparel. Many have stated that Trump’s move is a devastating blow to the already fragile apparel sector. So, we admit that the sector is fragile. Then we have to make it non-fragile and strong, enabling it to stand against Trump’s move. We all know that the value addition of the apparel sector is very low as it depends largely on imports. The apparel industry was introduced by the late President Premadasa. Once he told us at a meeting that this country cannot be developed with the apparel industry. 

“I introduced this to decentralise the industry, which was largely concentrated in the Western Province. You all get together with the factory owners and convert these factories into centres of activity. Initially, they can start teaching subjects such as IT and English. Then, they can take the leadership for growth in the area (a growth hub). They can promote outgrower systems, transfer knowledge, technology, provide facilities, and buy back the produce in the area.” 

This is what is called visionary leadership. It is not too late to initiate such a dynamic process. Sri Lanka can use the 90-day grace period granted by Trump to initiate such a strategic move rather than relaxing and boasting that our prompt response resulted in getting the extension.

Waiting for the disaster to strike

Sri Lanka is a country that waits for the disaster to strike to get into action. Trump has been going around the country during the election period pledging to make America Great. His intentions were clear. Our citizens, policy makers, and the private sector have thought Trump is another politician and similar to ours who beautifully explain and pledge to make Sri Lanka great.

So, they were not ready until the disaster struck. Everyone got jolted after Trump’s electric shock. The Government, its Ministers, Deputy Ministers, and officials of EDB, BOI, and other agencies have started independent consultative sessions and are making empty and contradictory statements to confuse the public. It’s time to make a full stop for such independent empty moves and initiate a well-coordinated national effort to first to put our house in order and then to commence a program to improve production, productivity, quality, regularity, climate sensitivity and to facilitate low cost, innovative, technologically advanced, and high value added products. 

Some might say yes, but they are not for the short run and take time. True, but what US tariffs underscore is the absence of a long-recognised but long-neglected priority for Sri Lanka to diversify products as well as markets for its exports. As the problem is a long-term one, there is no quick fix.

Opportunity in the challenge

There is a phrase familiar to many, i.e. “opportunity in a challenge”. This suggests that while a difficult situation or obstacle may initially appear negative, it also presents a chance for growth, learning, or advancement. This perspective encourages viewing challenges not as roadblocks, but as stepping stones to something positive. Sri Lanka is more willing to miss opportunities than seize them. While the Trump tariffs present a painful immediate challenge, they also create the opportunity for Sri Lanka to seize this moment of opportunity to implement a long-delayed restructuring process to lay the foundation for a strong, dynamic, resilient, competitive economy standing on strong (instead of fragile) pillars. 

Some say that the country counts on exports, plus tourism and remittances, to rebuild reserves; one of these pillars is now weakened. Speaking, not one all these pillars are weak. An economy cannot be built on weak pillars. Many solutions have been proposed to sit within the existing framework and do tinkering work. The need is to reconsider and re-strategise our economic base.

Sri Lanka has to think strategically, going beyond mere arithmetic solutions proposed by those who believe in economic theory and principles and are far from ground reality.

Trump has stated, if an imported product contains US-origin content by value, the reciprocal tariff will apply only to the non-US portion. This is an invitation to induce US investments. I am sure BOI has missed this point. What BOI can immediately do is not fly abroad to organise colourful, wasteful promotional programs or set up haunted investment zones. It can consult regional network and identify, potential projects attractive to US investors.

Neglected traditional industry

“Lankadeepa FT” is the online business news section. It regularly highlights the plight of our domestic traditional cottage and craft industries such as handloom textiles, pottery, basket weaving, wood carving, batik, lime, dehydration of plant leaves, fruits, vegetables, coir mats, activated carbon, etc. (https://www.lankadeepa.lk/ft). These industries have become nobody’s babies. They have immense potential to generate employment in the periphery, to take up local entrepreneurship, to attract tourists, to turn out low-cost attractive, high-value export products. 

Rather than blaming Trump for hitting the apparel exports, the Ministry of Industries, with its array of institutions such as IDB, EDB, ITI, NEDA, and Design Center can study these and draw up a program to boost them to upgrade to international standards. These would build a foundation for partnerships and diversification with multiple benefits. Sri Lanka can build up its traditionally neglected industry reducing, its dependence on fragile traditional products.

By diversifying its export base, Sri Lanka can cushion the impact of tariffs and create new, long-term economic opportunities to realise what the President repeatedly stated but not heard by his Ministers: “People are not mere onlookers of development; they must be participants and beneficiaries of the development.” 

This sector can provide strategic economic benefits, including investments and technology transfers, which are essential for diversifying Sri Lanka’s economy and enhancing its global competitiveness. As Sri Lanka charts its course through the tariff storm, the neglected traditional industry would contribute immensely to resilience, innovation, and cooperation to ensure a brighter economic future.

Eye opener

It is high time to recall the saying “A door is larger than a lock, and the lock is larger than a key. Yet, the key, smallest of all, has the power to open the entire house. Thus, small but thoughtful solutions can solve major problems.”

I will end this piece with what Dinesh Weerakkody beautifully summarised in his article in Daily FT on “Responding to Trump’s tariffs: Start with The Art of the Deal”: “Trump’s tariff moves were rarely ends in themselves. They were opening bids, intended to create leverage and sow uncertainty. Countries and companies that took them at face value often overreacted. Those that paused, analysed, and responded in kind—strategically, not emotionally—often fared better.” (https://www.ft.lk/dinesh-weerakkody/Responding-to-Trump-s-tariffs-Start-with-The-Art-of-the-Deal/5-775406).

(The writer is former Secretary to the Ministry of Plan Implementation. He is a Vice President of Sri Lanka Economic Association. He can be reached on [email protected].)