Sri Lanka’s US tariff cut to 10%: Compliance costs could hit export demand, warns economist

Reduced tariff welcomed, but new challenges emerge

Sri Lanka’s export sector has secured a reduction in tariffs imposed by the United States, with exports now subject to a 10% tariff instead of the previously announced higher rate.

However, economist Professor Rohan Samarajiva has warned that the new requirement to prove exports are free from forced labour-related inputs could create additional costs for businesses and weaken demand in Sri Lanka’s largest export market.

The tariff reduction followed Washington’s introduction of a new set of trade penalties targeting 60 countries over concerns related to forced labour practices.

During bilateral trade discussions, Sri Lanka introduced a national ban on goods produced wholly or partly through forced labour, allowing the country to avoid the higher 12.5% tariff category imposed on countries that failed to introduce similar restrictions.

As a result, Sri Lanka has been placed in the 10% tariff bracket alongside countries such as India, Bangladesh, and the United Kingdom.

JAAF: Sri Lanka avoided a higher tariff category

Joint Apparel Association Forum (JAAF) Secretary General Yohan Lawrence said the latest tariff arrangement replaces a series of previous tariff measures imposed on Sri Lankan exports.

“The additional tariff from April last year varied. It was initially 44%, then reduced to 20%, and later to 10%. The 10% tariff that has been in place since February this year comes to an end either today or tomorrow. It will then be replaced by the tariff under Section 301, which is either 10% or 12.5%,” Lawrence said.

He explained that Sri Lanka was initially placed in the 12.5% category but was later moved to the 10% bracket following representations made by the Sri Lankan Government to the United States Trade Representative (USTR).

“After that representation, Sri Lanka has been classified at 10%,” he added.

Samarajiva questions claims over tariff reduction

Despite the reduction, Professor Rohan Samarajiva said the development should not be viewed as a major achievement.

The Chairman of LIRNEasia criticised claims made by Sri Lanka’s Ambassador to the US, Mahinda Samarasinghe, who described the tariff reduction from 44% to 10% as a result of coordinated government negotiations.

Professor Samarajiva argued that the reduction occurred due to several external factors rather than solely through negotiations.

Explaining the first reduction from 44% to 20%, he said:

“How did we go from 44% to 10%? We went from 44% to 20% first, and the 20% was based on negotiations. We do not know what was given as part of those negotiations. Generally speaking, if you give something significant to a foreign country, it should be known.”

He added that Sri Lanka’s decision to purchase liquefied petroleum gas (LPG) from US sources may have been one factor considered during discussions.

“We are buying LPG from US sources. That turned out very well because one problem we did not have was LPG being squeezed because of the situation around the Strait of Hormuz. But there were more things that were promised to get the 20%,” he said.

Professor Samarajiva then explained how the new 10% tariff came into effect.

“The 20% was struck down by the courts. Then, under a weak provision of US trade law, it was made 10%. That expired yesterday or the day before,” he said.

He explained that countries covered under the new forced labour-related provisions were divided into different tariff categories, with some facing 12.5% and others 10%.

“There are 60 countries covered by this forced labour provision. Within these 60, there was a category charged 12.5%, and another category charged 10%. What we are celebrating is that we moved from 12.5% to 10%,” he said.

According to Professor Samarajiva, the new requirement will place a greater burden on Sri Lankan manufacturers, who will need to ensure transparency throughout their supply chains.

Exporters may need costly verification systems

He said companies will now have to prove that imported raw materials and other inputs used in exported goods are free from forced labour.

“How does one know that a particular input used in textiles comes without any forced labour being involved? Are we supposed to send armies of inspectors into China? This is really about China, because they want to target China,” Professor Samarajiva said.

He suggested that the practical solution would be for suppliers to provide certification confirming that forced labour was not involved.

“The only practical thing you can do is ask everyone we buy from to provide a certificate saying that forced labour has not been used. Then, if we are really diligent, we may send a third-party company based in Hong Kong or elsewhere to verify those certificates randomly,” he said.

However, he warned that such measures would increase costs for exporters.

“All of this costs money. It also means demand for our products is going to be somewhat less because, from the buyer’s perspective, our products will be seen as 10% more expensive,” he added.

Calls grow for a long-term trade arrangement with US

Amid increasing uncertainty in global trade policies, questions remain over whether Sri Lanka needs a permanent trade arrangement with the United States.

JAAF Secretary General Yohan Lawrence said a long-term agreement would provide greater certainty for exporters.

“We would need some sort of permanent agreement for this to be stable in the long term. Whether it is a free trade agreement or a bilateral agreement, we need some long-term arrangement. However, that is unfortunately a long-term conversation with many other implications,” he said.

Lawrence added that continued engagement with the US would remain important.

Economist urges Sri Lanka to diversify export markets

Professor Samarajiva, however, argued that Sri Lanka should reduce its dependence on the US market by expanding trade agreements with other countries and regions.

He questioned the reliability of long-term agreements with the US, citing recent disputes involving US trade commitments.

“There is actually no point in signing agreements with the United States because they can violate those agreements unilaterally, as they have done with Canada,” he said.

Instead, he urged Sri Lanka to accelerate negotiations with India, the Regional Comprehensive Economic Partnership (RCEP), and other markets.

“The government has to negotiate with India, negotiate with RCEP, negotiate with other partners so that we diversify our risk,” Professor Samarajiva said.

He added that reducing dependence on the US market would help businesses manage future uncertainties.

“Companies can say, ‘What does it matter if 15% of our exports are affected by whatever decision the US President makes? That is manageable.’ But we cannot take that risk if more than 50% of our business depends on the US,” he said.

Professor Samarajiva stressed that opening new markets through trade agreements would be essential for protecting Sri Lankan exporters from future global trade shocks.