1 day Ago By Sahan Weerasooriya
(Continued from yesterday) Textile Industry Significance The textile and apparel sector holds outsised importance in Sri Lanka’s economy. It accounts for approximately 40% of the country’s total exports and directly employs around 350,000 workers, predominantly women from rural areas, for whom these jobs represent a crucial pathway out of poverty. When indirect employment in supporting industries is included, the sector supports the livelihoods of over one million Sri Lankans.
The industry’s development was initially facilitated through quotas assigned by the Multi-Fiber Agreement (1974-1994), which allocated specific export volumes to developing countries. When this agreement expired, Sri Lanka managed to maintain its position in global apparel supply chains by focusing on higher-value products, ethical manufacturing practices, and reliability. The country has positioned itself as a producer of quality garments, particularly lingerie, activewear, and swimwear for major global brands.
However, this success has created a structural dependency on continued access to markets in wealthy countries, particularly the United States. As the Secretary General of the Joint Apparel Association Forum, the main representative body for Sri Lanka’s apparel and textile exporters, bluntly stated following the tariff announcement, “We have no alternate market that we can possibly target instead of the US.” This dependency is reinforced by the industry’s integration into global supply chains dominated by U.
S. brands and retailers. Many Sri Lankan factories operate on thin margins as contract manufacturers for these international companies, with limited ability to quickly pivot to new markets or product categories.
The industry has also made significant investments in compliance with U.S. buyer requirements and sustainability certifications, creating path dependencies that make rapid adaptation to new market conditions extremely challenging.
The textile and apparel sector’s significance extends beyond its direct economic contributions. It has been a crucial source of foreign exchange earnings for a country that has consistently run trade deficits and struggled with external debt sustainability. In the ten years leading up to Sri Lanka’s default on external debt (2012-2021), debt repayments amounted to an average of 41% of export earnings, highlighting how vital steady export revenues are to the country’s ability to service its international obligations.
The sector has also played an important role in Sri Lanka’s social development, providing formal employment opportunities for women and contributing to poverty reduction in rural areas. Many of the industry’s workers are the primary breadwinners for their families, and their wages support extended family networks in economically disadvantaged regions of the country. Given this context, the imposition of a 44% tariff on Sri Lankan goods, with the textile and apparel sector likely to bear the brunt of the impact, represents not merely an economic challenge but a potential social crisis for hundreds of thousands of vulnerable workers and their dependents.
SPECIFIC IMPACT OF TRUMP TARIFFS ON SRI LANKA The imposition of a 44% tariff on Sri Lankan exports to the United States represents a seismic shock to an economy still recovering from its worst crisis in decades. This section examines the immediate economic consequences, the implications for Sri Lanka’s debt sustainability, and the broader social and political ramifications of this dramatic policy shift. Immediate Economic Consequences The most immediate impact of President Trump’s tariffs will be a severe erosion of Sri Lankan goods’ competitiveness in the U.
S. market. A 44% price increase effectively prices many Sri Lankan products out of reach for American consumers and businesses, particularly in price-sensitive categories like apparel, where margins are already thin and competition from other producing countries is intense.
Economic analysts project significant declines in export volumes as a result. The PublicFinance.lk think tank estimates that the new tariff rates will lead to a 20% fall in exports to America and an annual loss of approximately $300 million in foreign exchange earnings.
Given that Sri Lanka’s total merchandise exports in 2024 were around $13 billion, this represents a substantial blow to the country’s trade balance and economic growth prospects. The textile and apparel sector will bear the brunt of this impact. Industry representatives have warned that numerous factories may be forced to reduce production or close entirely if they cannot quickly find alternative markets for their products.
The Joint Apparel Association Forum has indicated that smaller manufacturers with less diversified customer bases and limited financial reserves will be particularly vulnerable to closure. These production cutbacks and potential closures would translate directly into job losses. Conservative estimates suggest that tens of thousands of workers in the textile sector could lose their livelihoods if the tariffs remain in place for an extended period.
Given that many of these workers are women from rural areas with limited alternative employment opportunities, the social impact of these job losses would be particularly severe. Beyond the direct effects on textile exports, the tariffs will have ripple effects throughout Sri Lanka’s economy. Supporting industries such as packaging, logistics, and input suppliers will face reduced demand.
The loss of foreign exchange earnings will put pressure on the Sri Lankan rupee, potentially leading to currency depreciation that would increase the cost of essential imports including fuel, food, and medicine. The timing of these tariffs is especially problematic given Sri Lanka’s fragile economic recovery. After experiencing a GDP contraction of 7.
8% in 2022 during the height of the economic crisis, the country had only recently returned to modest growth. The IMF had projected GDP growth of 3.1% for 2025, but this forecast now appears overly optimistic in light of the tariff shock.
Some economists are already revising their growth projections downward, with some suggesting growth could fall below 2% if the full impact of the tariffs materializes. We must hope they will be proven wrong. Impact on Sri Lanka’s Debt Sustainability Perhaps the most concerning aspect of Trump’s tariffs is their potential to undermine Sri Lanka’s hard-won progress on debt sustainability.
After defaulting on its external debt in April 2022, the country has undergone a painful restructuring process that concluded only in December 2024. This restructuring was predicated on assumptions about Sri Lanka’s future ability to generate foreign exchange to service its remaining debt obligations. The IMF’s debt sustainability analysis, which formed the basis for the restructuring agreement, focused almost exclusively on debt as a share of GDP while making insufficient distinction between domestic and foreign debt.
This approach has been criticized for ignoring the structural trade deficit and the critical importance of foreign currency earnings to Sri Lanka’s ability to meet its external obligations. The $300 million annual reduction in export earnings projected as a result of the tariffs directly threatens these calculations. Sri Lanka’s external debt stood at approximately $55 billion in 2023 (about 65% of its GDP), and even after restructuring, debt service payments will consume a significant portion of the country’s foreign exchange earnings in coming years.
In the decade preceding Sri Lanka’s default (2012-2021), debt repayments consumed an average of 41% of export earnings, an unsustainably high ratio that contributed directly to the eventual crisis. The loss of export revenues due to President Trump’s tariffs risks pushing this ratio back toward dangerous levels, potentially setting the stage for renewed debt distress despite the recent restructuring. This situation highlights a fundamental flaw in the approach taken by international financial institutions to debt sustainability in developing countries.
Unlike the treatment afforded to West Germany through the London Debt Agreement of 1953, where future debt repayments were explicitly linked to the country’s trade surplus and capped at 3% of export earnings—Sri Lanka and similar countries are expected to meet rigid repayment schedules regardless of their trade performance or external shocks beyond their control. The tariffs thus expose the precariousness of Sri Lanka’s economic recovery and the fragility of the international debt architecture that underpins it. Without significant adjustments to account for this external shock, the country could find itself sliding back toward debt distress despite all the sacrifices made by its people during the recent adjustment period.
Social and Political Implications The economic consequences of Trump’s tariffs will inevitably translate into social and political challenges for Sri Lanka. The country has already experienced significant social strain due to the austerity measures implemented under the IMF program, including tax increases, subsidy reductions, and public sector wage restraint. The additional economic pain caused by export losses and job cuts risks exacerbating social tensions and potentially triggering renewed protests.
The textile industry’s workforce is predominantly female, with many workers supporting extended family networks. Job losses in this sector would therefore have disproportionate impacts on women’s economic empowerment and household welfare, potentially reversing progress on gender equality and poverty reduction. Many of these workers come from rural areas where alternative formal employment opportunities are scarce, raising the spectre of increased rural poverty and potential migration pressures.
Politically, the tariff shock presents a significant challenge for President Anura Kumara Dissanayake’s government, which came to power promising economic revival and relief from the hardships of the crisis period. The administration has appointed an advisory committee consisting of government officials and private sector representatives to study the impact of the tariffs and develop response strategies, but its options are constrained by limited fiscal space and the conditions of the IMF programme. The situation also raises questions about Sri Lanka’s foreign policy orientation.
The country has traditionally maintained balanced relationships with major powers, including the United States, China, and India. However, the unilateral imposition of punitive tariffs by the United States may prompt some policymakers to reconsider this balance and potentially look more favourably on economic engagement with China, which has been a major infrastructure investor in Sri Lanka through its Belt and Road Initiative. Such a reorientation would have significant geopolitical implications in the Indian Ocean region, where great power competition has intensified in recent years.
It could potentially accelerate the fragmentation of the global economy into competing blocs, a trend that President Trump’s broader tariff policy seems designed to encourage despite its economic costs. The social and political fallout from the tariffs thus extends far beyond immediate economic indicators, potentially reshaping Sri Lanka’s development trajectory and its place in the regional and global order. For a country still recovering from political instability triggered by economic crisis, these additional pressures come at a particularly vulnerable moment.
BROADER IMPLICATIONS FOR DEVELOPING ECONOMIES Sri Lanka’s experience with Trump’s tariffs is not unique. The sweeping nature of these trade measures has created similar challenges for developing economies across the Global South, revealing structural vulnerabilities in the international economic system and raising fundamental questions about the sustainability of export-led development models in an era of rising protectionism. Comparative Analysis with Other Affected Developing Countries While Sri Lanka faces a punishing 44% tariff rate, it is not alone in confronting severe trade barriers.
Bangladesh, another South Asian country heavily dependent on textile exports, has been hit with a 37% tariff. Like Sri Lanka, Bangladesh has built its development strategy around its garment industry, which accounts for more than 80% of its export earnings and employs approximately 4 million workers, mostly women. Other significantly affected developing economies include Vietnam (46% tariff), Cambodia (49%), Pakistan (29%), and several African nations that had previously benefited from preferential access to the U.
S. market through programs like the African Growth and Opportunity Act (AGOA). Many of these countries share common characteristics, relatively low per capita incomes, heavy reliance on a narrow range of export products, and limited domestic markets that make export-oriented growth their primary development pathway.
The pattern of tariff rates reveals a troubling dynamic, some of the highest tariffs have been imposed on countries that can least afford the economic shock. While wealthy nations like Japan or Germany certainly face challenges from these trade barriers, they possess diversified economies, substantial domestic markets, and financial resources to cushion the impact. By contrast, countries like Sri Lanka or Bangladesh have far fewer economic buffers and face potentially devastating consequences from similar or higher tariff rates.
This disparity highlights how President Trump’s “reciprocal tariff” formula, ostensibly designed to create a level playing field, actually reinforces existing power imbalances in the global economy. By treating trade deficits as the primary metric for determining tariff rates, the policy ignores the vast differences in economic development, productive capacity, and financial resilience between countries at different stages of development. Structural Vulnerabilities of Export-Dependent Economies The tariff shock has exposed fundamental vulnerabilities in the export-led development model that has dominated economic thinking about the Global South for decades.
Since the 1980s, international financial institutions have consistently advised developing countries to orient their economies toward export markets, specialize according to comparative advantage, and integrate into global value chains as a path to economic growth and poverty reduction. This model has delivered significant benefits in many cases. Countries like Vietnam, Bangladesh, and, to some extent, Sri Lanka have achieved impressive poverty reduction and economic growth by expanding their manufacturing exports.
However, President Trump’s tariffs reveal the precariousness of development strategies built on continued access to wealthy consumer markets, particularly the United States. Several structural vulnerabilities have become apparent, 1. First, export concentration creates acute dependency on a small number of markets and products.
When Sri Lanka sends 23% of its exports to the United States and concentrates 40% of its total exports in textiles and apparel, it becomes extraordinarily vulnerable to policy changes affecting that specific market-product combination. Diversification, both of export markets and products, has often been acknowledged as desirable in theory but has proven difficult to implement in practice due to established trade patterns, buyer relationships, and specialized production capabilities. 2.
Second, participation in global value chains often traps developing countries in lower-value segments of production with limited opportunities for upgrading. Sri Lanka’s textile industry, while more advanced than some of its regional competitors, still primarily engages in contract manufacturing rather than controlling higher-value activities like design, branding, or retail. This position in the value chain yields lower returns and creates dependency on decisions made by lead firms in wealthy countries.
3. Third, the mobility of capital relative to labour creates a fundamental power imbalance. If tariffs make production in Sri Lanka uneconomical, global brands can relatively quickly shift their sourcing to other countries with lower tariffs or costs.
However, Sri Lankan workers cannot similarly relocate, leaving them bearing the brunt of adjustment costs through unemployment and wage depression. 4. Fourth, developing countries typically lack the fiscal space to provide adequate social protection during economic shocks.
Unlike wealthy nations that can deploy extensive safety nets during trade disruptions, countries like Sri Lanka, already implementing austerity measures under IMF programmes, have limited capacity to support displaced workers or affected industries. This exacerbates the social costs of trade shocks and can trigger political instability. (To be continued) (The writer served as the Minister of Justice, Finance and Foreign Affairs of Sri Lanka) Disclaimer: This article contains projections and scenario-based analysis based on current economic trends, policy statements, and historical behaviour patterns.
While every effort has been made to ensure factual accuracy, using publicly available data and established economic models, certain details, particularly regarding future policy decisions and their impacts, remain hypothetical. These projections are intended to inform discussion and analysis, not to predict outcomes with certainty..
