Turning crisis into catalyst: Building Sri Lanka’s resilience amid global trade war

Technology and human capital will be the twin engines of our future economy 

By Chula Goonasekera, Bernard Fernando, Gratian Peiris, and Shehan Malaka Gamage on behalf of the LEADS forum

As the world spirals into deeper trade conflicts, with tariff battles and geopolitical rifts widening, Sri Lanka finds itself at a perilous crossroads. Small, import-reliant, and economically fragile, we are especially exposed to the tremors of global instability. In a storm whipped up by superpowers, our modest vessel risks capsizing—unless we act, and act fast.

Our vulnerability is not new. Years of debt accumulation, a narrow export base, and limited domestic production have left us dangerously dependent on foreign exchange. With looming loan repayments by 2028 and fresh memories of market scandals, complacency is no longer an option. Resilience must become a national mission, not a slogan.

The sharp rise in global tariffs is at the heart of today’s crisis. The United States, a key trading partner absorbing 23% of our exports, has imposed a 34% reciprocal tariff, citing alleged unfair trade practices, alongside a sweeping 10% ad valorem tariff on all imports. Although the harsher penalties are temporarily suspended, the warning is clear: our economy stands in the firing line. The stakes are enormous. In 2024, trade between Sri Lanka and the US totalled $ 3.4 billion. Our prized apparel industry, respected worldwide for ethical manufacturing, faces new hurdles. Key exports—from rubber goods to coconut products—are equally imperilled. Should the full force of tariffs hit, we risk job losses, declining industrial output, and severe revenue shocks. The US market is too vital to lose, but our current vulnerabilities leave us few defences.

Rare opportunity

Yet within this crisis lies a rare opportunity. Tariffs are not just threats but urgent reminders to reform, diversify, and fortify. Sri Lanka must move from reactive firefighting to a proactive strategy, turning these challenges into catalysts for long-overdue transformation.

First, aggressive diplomatic engagement is essential. We must make a clear, compelling case to Washington—highlighting the humanitarian costs of tariffs on small nations like ours, our commitment to reform under the IMF, and our willingness to lower barriers sensibly. We should also seek to formalise trade partnerships that provide long-term security.

Second, internal reforms are non-negotiable. Reducing dependence on a few markets, revitalising neglected sectors like renewable energy, agriculture, and manufacturing, and empowering SMEs must become top priorities. Pursuing Free Trade Agreements (FTAs) with the US, ASEAN, and African nations, while leveraging programs like the EU’s GSP+, can expand our trade footprint.

Third, targeted domestic policies can help absorb immediate shocks. Tax deferrals, tariff-offsetting subsidies for exporters, and strategic incentives for industries sourcing US materials could soften the blow. Market rerouting toward Europe, Canada, Japan, and Australia should begin earnestly.

Moreover, Sri Lanka’s embassies must transform into proactive trade hubs, forging real business-to-business links rather than merely performing ceremonial roles. Exporters must also be educated to fully exploit tariff exemptions, such as the US content waiver in apparel.

Economic diversification

Long-term, the need for economic diversification is existential. Renewable energy holds vast untapped potential. A national effort to localise energy production—solar, hydro, bioenergy—would reduce oil import dependency and boost foreign exchange reserves. Likewise, reviving domestic industries like ceramics, cement, and steel, through public-private partnerships, can rebuild our manufacturing base without adding to fiscal burdens.

The economic oligarchy that has long siphoned off national resources must also be dismantled. Corruption and market manipulation, which have crippled trust and drained public wealth, cannot be tolerated if we are to build a fairer, more resilient economy.

Strategic non-alignment must guide our foreign policy. In an era of US–China rivalry, we must resist being pulled into a single orbit. Flexibility and neutrality are vital to keeping trade routes open and opportunities diversified. “China +1” supply chain shifts offer real chances for Sri Lanka to emerge as a regional manufacturing and logistics hub—but only if we move decisively.

Technology and human capital will be the twin engines of our future economy. A digitally transformed Sri Lanka—with robust e-commerce platforms, booming BPOs (Business Process Outsourcing), and vibrant tech startups—can claim a growing slice of the global market. Investments in vocational training, IT, and AI adoption are essential to staying competitive in a fast-changing world.

Infrastructure must also keep pace. Upgrading ports, logistics hubs, and digital networks will unlock the full potential of our strategic location. In parallel, the Central Bank must manage currency volatility with caution and foresight, ensuring that market corrections are orderly and that exporters remain competitive. 

At its core, this crisis demands a collective shift: from survival mode to strategic ambition.

Regulatory reform, investment in renewable energy, support for SMEs, aggressive market expansion, trade system digitalisation, and a clean break from oligarchic exploitation must work together to reposition Sri Lanka as a resilient, dynamic economy. If we succeed, we will not only withstand today’s storms but also chart a bold new course for generations to come.

The moment is now. Let us turn today’s crisis into tomorrow’s catalyst.