Trump's new 30% tariff against Sri Lanka. 2nd Sri Lankan default? Who will rescue now?

 

Article's purpose

This short article highlights the failure of the Sri Lankan government to agree on a comprehensive trade deal with the US to benefit from the US economy and the new world trade order being laid by the US under its new trade and economic policy (Read the policy article here). 

The short background of the article is as follows.

  • The US President Donald Trump through his letter dated 9 July 2025 addressed to the Sri Lankan President has communicated the final reciprocal tariff rate of 30% on imports from Sri Lanka. This is a downward revision on the 44% reciprocal tariff imposed on Sri Lanka on 2 April 2025 to be effective from 9 April 2025 which was later suspended for 90 days.

  • The formular for the initial 44% tariff was the half of the percentage of the US trade deficit with Sri Lanka in the total value of the US imports from Sri Lanka in the year 2024.

  • Sri Lanka is one country out of almost all countries in the world who confronted such reciprocal tariffs of different rates based on same trade deficit formula and temporary suspension for 90 days. However, the universal or baseline tariff of 10% imposed additionally on all countries was effective from 9 April 2025 as imposed.

  • This suspension of reciprocal tariffs was intended to allow a sufficient time for country governments to negotiate for a comprehensive trade deal with the US government if they wished to evade the reciprocal tariffs.

  • The ground for trade negotiations was set for design of a deal to reduce the US trade deficit towards zero with each country. Accordingly, trade deals will include lower tariffs overall or sectoral, elimination of non-tariff trade barriers and promotion of investments targeted for a zero trade deficit for the US. Therefore, Trump's letter is a formal communication of the new reciprocal tariff rate to be effective from 1 August 2025 unless a trade deal is agreed for zero trade deficit as initially proposed and now set out in Trump's letter.

  • Accordingly to the President Trump's response to a media query on the formula for the new round of reciprocal tariffs, the formular is based on common sense, trade deficit, how the US has been treated over the years, numbers, substantial facts and past history (watch the media interview here). Therefore, a country looking for a trade deal with the US has to resolve issues and numbers in the said formula. The alternative is to accept whatever tariff numbers the President Trump determines from time to time.

Why Trump's letter reveals the 2nd Sri Lankan default?

Trump's letter stated above is a formal piece of evidence for the default of Sri Lankan government on negotiation for a trade deal to avoid high reciprocal tariffs as required by the US government on 2nd April 2025. Therefore, the failure to strike a trade deal within 90 days is nothing but the second Sri Lankan default, given its political, social and macroeconomic effects expected on the Sri Lankan economy and living standards. 

The first default was the default of foreign debt on 12 April 2022 to look for an IMF economic bailout to rescue the mismanaged economy. Similarly, the second default may have been caused by a begging mindset, seeking trade facilitation and mercy from the US government akin to the IMF bailout. 

However, the present US government is only interested in its own economic prosperity at this time unlike its humanitarian aids offered to poor and troubled economies in the past. The President Donald Trump is an extreme capitalist businessman by profession and has already closed down the USAID, the US humanitarian arm for the world.

In the foreign debt default, relevant government officials felicitated the event as a brave victory. Similarly, this second default is also seen highly felicitated based on tariff number crunching. The official felicitation attempts to paint the success of relevant Sri Lankan officials in getting a reduced reciprocal tariff as compared to higher reciprocal tariffs imposed on some countries in the region. Therefore, countries offered with lower tariffs are not compared.

However, the US official sources show that reciprocal tariffs have been scaled down in general from the initial levels and Sri Lanka has not received any special favouration as different tariff numbers are interpreted. The Sri Lankan government also now talks about continued negotiations for getting the reciprocal tariff number further down. However, the fact of the matter is that Sri Lankan government has failed to sign a trade deal in the long term interest of the trade with the US and, therefore, is still interested only in getting the tariff rate further reduced by the US authorities on mercy.

Does Sri Lanka have a rescue from Trump's reciprocal tariff trap?

The first default followed with an IMF-sponsored rescue package. However, the second default has put Sri Lanka back to the square with a slightly lower reciprocal tariff rate without any external rescue package.

However, Trump's letter has offered another opportunity for Sri Lankan government to negotiate for a trade deal to avoid the reciprocal tariff if the government wishes to rescue itself from the 2nd default. The specific lines clearly spelled out in Trump's letter for negotiation are reproduced as follows.

  • We have had years to discuss our trading relationship with Sri Lanka and we have concluded that we must move away from these long-term, and very persistent, trade deficits engendered by Sri Lanka's tariff, and non-tariff, policies and trade barriers. Our relationship has been, unfortunately, far from reciprocal.

  • Starting on August 1, 2025, we will charge Sri Lanka a tariff of only 30% on any and all Sri Lankan products sent to the United States, separate from all sectoral tariffs. Goods transshipped to evade a higher tariff will be subject to that higher tariff.

  • Please understand that 30% number is far less than what is needed to eliminate the trade deficit disparity we have with your country.

  • As you are aware, there will be no tariff if Sri Lanka or companies within your country, decide to build or manufacture product within the United States and, in fact, we will do everything possible to get approvals quickly, professionally, and routinely - In other words, in a matter of weeks.

  • If for any reason you decide to raise your tariffs, then, what ever the number you chose to raise them by, will be added onto 30% that we charge.

  • Please understand that these tariffs are necessary to correct the many years of Sri Lanka's tariff, and non-tariff, policies and trade barriers causing these unsustainable trade deficits against the United States. This deficit is the major threat to our economy and, in deed, our the national security.

  • If you wish to open your heretofore closed trading markets to the United States, eliminate your tariff, and non-tariff, policies and trade barriers, we will, perhaps, consider an adjustment to this letter. These tariffs may be modified, upward or downward, depending on our relationship with your country.

The above trade concerns were the same position that the US set out for trade negotiations with all countries at the very outset. However, Sri Lankan government has miserably failed to resolve above concerns through a comprehensive trade deal which has ended up in 30% reciprocal tariff plus other common tariffs.

Further, media reports show that relevant government officials are still interested in getting the reciprocal tariff 30% further down only. Nothing is mentioned about any attempt for a comprehensive trade deal to use the trade with the US being the world's largest and strongest economy for the growth of Sri Lankan economy and living standards. Further, any attempt to get the reciprocal tariff rate reduced without addressing the concerns surrounding the US trade deficit through a comprehensive trade deal could be a non-compliance with the contents of Trump's letter.

Trump's letter does not cover the existing 10% universal or baseline tariff and other standard tariffs imposed as a part of the Trump's tariff policy announced on 2nd April 2025. The news is now available that the President Trump is considering the universal tariff to be raised to 15%-20%. If Sri Lankan exports confront such universal tariff and other tariffs, the overall tariff against Sri Lanka will further increase beyond 30%.

Cross-border trade and tariffs are purely geopolitical decisions made by contemporary political leaders of sovereign nations. They have got no economic principles whatsoever. However, it appears that Sri Lankan political leaders are not directly involved in current trade negotiations with the US political leadership as it has been let to the bureaucratic layer. Therefore, present political leaders will confront allegations relating to any unfavourable outcomes of the US reciprocal tariff policy. It is strange that some leaders even note Trump's letter as a courtesy letter to the Sri Lankan President although it is a letter of determination with underlying facts by the US President who has uncontested executive powers in the US and political power over the world.

Therefore, if the Sri Lankan government still looks only for a lower reciprocal tariff rate to continue with its existing trade flow of around US$ 3.4 billion with the US by keeping the trade policy for imports from the US unchanged (i.e., around 80%-90% tariffs and non-tariff barriers) without a trade deal while promoting the trade with few selected countries in the region, the recovery of the Sri Lankan economy and living standards from the first default will delay several decades to come upon adverse effects of this second default.

Concluding remarks

  • Trump's letter dated 9th July 2025 is the formal evidence for the failure of the Sri Lankan government to strike a comprehensive trade deal with the US to benefit from the US economy being the world's largest and strongest economy.

  • According to the media, Sri Lankan delegates have met the US delegates twice. There is no information to establish that the Sri Lankan government submitted a factual proposal for a trade deal to address the concerns raised by the US President over the trade between Sri Lanka and the US.

  • In view of possible unfavourable outcomes of this failure to Sri Lankan economy and living standards, the failure can be treated as the second national default, the first being the default of foreign debt on 12 April 2022.

  • Trump's letter also offers another opportunity for Sri Lanka to strike a comprehensive trade deal. However, it appears that the government is only interested in getting the 30% reciprocal tariff further down which is against the contents in Trump's offer for a trade deal. Trump's letter is also discounted as a courtesy letter despite it being a letter of determination signed by the US President.

  • Cross-border trade policy is purely geopolitics played by national leaders of sovereign nations. The present US President Donald Trump is also playing same geopolitics through his new trade and domestic policy. His geopolitical motive is to create a new world economic order centered around and directly controlled by the US as the highly protected, major exporting and manufacturing economy in the world. Therefore, the non-interest shown by Sri Lankan leaders to drive direct trade negotiations with the US by letting the bureaucratic layer to decide on related national interests is a significant lapse in Sri Lankan geopolitics on trade. Therefore, Sri Lankan leaders will be found fault with any adverse outcomes of the trade policy unilaterally imposed by the US against Sri Lanka.

  • This is a question whether new country leaders are able to carry on national policies that have been implemented by past leaders. This garment and industrial export sector was created by national leader in 80s and early 90s with immense fiscal support as part of the country's inclusive development. The 200 garment factory project pushed by the President R Premadasa was a significant milestone. However, the present government whose fiscal and monetary hands are tightly tied to corners by the IMF does not have the policy space and teeth to keep such export industries competitive, other than support-begging from foreign country leaders.

  • If the Sri Lankan government wishes to save the excising US market for Sri Lankan exports, it must be able to open the Sri Lankan market for US exports and expand the US market for Sri Lankan exports in a manner that products are cheaper and cost-competitive, largely free from tariff and non-tariff barriers agreed through a comprehensive trade deal. This will help Sri Lankan entrepreneurs to mobilize untapped resources for trade. This is none other than the play on contemporary geopolitics which requires serious work efforts. This momentum cannot be expected from the bureaucratic layer that handles trade negotiations at present as bureaucratic agents are only existing office file movers. Otherwise, exporters will soon decide the fate of Sri Lankan exports to the US and the underlying dollar income inflow in the absence of the fiscal and political leadership. 

(This article is released in the interest of participating in the professional dialogue to find out solutions to economic issues affecting living standards. All are personal views of the author based on his research and knowledge on the subject and, therefore, the author has no intension to personally or maliciously discredit views and characters of any individuals or institutions.)

P Samarasiri

(BA (Hons) in Economics and MA in Economics)

(Former Deputy Governor, Central Bank of Sri Lanka)

(Former  Deputy Governor, Assistant Governor, Secretary to the Monetary Board, Compliance Officer and Director of Bank Supervision of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 13 Economics and Banking Books and a large number of articles published.)



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