Sri Lanka limited to negotiating US tariffs with trade reforms on backburner

• Economist Prof. Priyanga Dunusinghe warns without competitiveness and diversification, economy will remain vulnerable
• Says business environment remains weak, productivity not improved
• Notes unless SL acts, will remain vulnerable to every tariff change or market shift dictated by larger powers

University of Colombo Professor in Economics Prof. Priyanga Dunusinghe  – Pic by Shehan Gunasekara

University of Colombo Professor in Economics and Department of Information Technology Head Prof. Priyanga Dunusinghe last week said that Sri Lanka’s response to global trade tensions has so far been limited to negotiating for better tariff terms with the US, while flawed trade policies that contributed to the 2022 economic crisis remain largely unchanged. 

He said that despite some stabilisation, the economy continues to face the same weaknesses in competitiveness, productivity, and diversification that left it vulnerable in the first place. According to Prof. Dunusinghe, who is also a member of the Central Bank’s Monetary Policy Board, this lack of reform leaves the country exposed to the protectionist trade policies now being pursued by major economies.

He said Sri Lanka had failed to act quickly enough on the causes of the 2022 economic collapse.

“Export diversification has not progressed, the business environment remains weak, and productivity has not improved, leaving Sri Lanka exposed to external shocks like the recent US tariff hike. A recent Institute of Policy Studies (IPS) study already shows losses of around $ 634 million in export revenue under the current US tariffs,” he told the ‘CEO Forum 2025: Economic Impact on New US Tariffs’ organised by the Open University of Sri Lanka’s Faculty of Management Studies CEMBA/CEMPA Alumni Association.

Meanwhile, Washington’s trade policy has turned protectionist. By focusing on trade in goods, particularly manufacturing, the US highlights deficits with partner countries to justify fresh tariffs. However, Prof. Dunusinghe argues that the deficit could be narrower if trade in services were factored in with Sri Lanka depending on US-based technology services. The emphasis is on goods, where deficits are more visible and politically persuasive, he noted.

This approach is also a response to the long-term rise of Asia. Forecasts suggest that China and India will rank among the top three global economies by 2030, with Indonesia also advancing. Developed countries see this as growth at their expense. China’s rapid expansion after joining the World Trade Organisation (WTO) in 2001, contrary to US expectations, has reinforced these fears.

The result has been a move away from multilateral trade rules towards unilateral tariffs and exclusive blocs. Earlier regimes gave developing countries equal treatment regardless of size, but that protection is fading. For smaller economies like Sri Lanka, which lack geopolitical or economic leverage, the new environment poses a serious disadvantage, Prof. Dunusinghe observed.

He pointed to Singapore as an example of how small States can respond. Within days of the US tariff announcement on 2 April, Singapore established a task force to prepare for the fallout. Its strategy was built on five pillars: improving competitiveness and productivity, fostering entrepreneurship and innovation, upgrading human capital through reskilling and up-skilling, supporting firms and workers in adjusting to structural changes, and cooperating with countries that remain committed to open trade.

This comprehensive approach is designed to make Singapore attractive to investors regardless of external disruptions and to sustain growth even as larger economies close their markets.

“Sri Lanka, by contrast, has not moved beyond limited talks on tariff concessions. Heavy dependence on apparel exports to the US continues, and no systematic reforms have been implemented to expand products or markets,” Prof. Dunusinghe warned, adding that without addressing competitiveness and diversification, the economy will remain exposed to both domestic shocks and global policy shifts.

The lesson, he argued, is that Sri Lanka cannot rely on external negotiations alone. Lasting resilience requires broad-based reforms to improve productivity, strengthen the business climate, and diversify exports. Investment in human capital and innovation is also critical if the country is to withstand protectionist pressures.

“The 2022 crisis showed how quickly external shocks can destabilise an economy with weak fundamentals. The current global retreat from multilateralism makes the need for reform more urgent. Unless Sri Lanka acts, it will remain vulnerable to every tariff change or market shift dictated by larger powers,” Prof. Dunusinghe said.