(Continued from yesterday)

Domestic Market Development

While Sri Lanka’s relatively small domestic market (22 million people) limits the potential for inward-focused development, there may be opportunities to reduce import dependence in certain sectors and develop stronger linkages between export industries and domestic suppliers. This could create more balanced growth and reduce vulnerability to external shocks.

Policies to support domestic market development might include,

•  Import Substitution in Strategic Sectors: Targeted support for domestic production of essential goods and inputs to export industries, reducing dependency on imports.

•  Strengthening Domestic Supply Chains: Developing stronger linkages between export-oriented firms and local suppliers to increase domestic value addition.

•  Addressing Income Inequality: Policies that increase purchasing power among lower and middle-income Sri Lankans could expand the domestic market for locally produced goods and services.

Such approaches would need to avoid the pitfalls of earlier import substitution models that created inefficient, protected industries. The focus should be on developing competitive domestic capabilities rather than simply erecting barriers to imports.

Policy Recommendations

Based on the analysis of both short-term and longer-term strategies, several specific policy recommendations emerge for Sri Lanka,

Industrial Policy Reforms

Sri Lanka should develop a comprehensive industrial policy that goes beyond the current focus on export promotion to address structural vulnerabilities revealed by the tariff shock. This policy should,

•  Identify priority sectors for diversification based on a realistic assessment of Sri Lanka’s competitive advantages and global market opportunities.

•  Provide targeted support for research and development, skills training, and quality infrastructure in these priority sectors.

•  Reform regulatory frameworks to reduce barriers to business formation, innovation, and growth.

•  Develop specific strategies for upgrading within existing export sectors like textiles, helping firms move into higher-value activities.

Investment in Innovation and Skills

Human capital development represents a critical foundation for economic resilience and diversification. Sri Lanka should,

•  Align education and training systems more closely with emerging economic opportunities, emphasizing technical skills, digital literacy, and innovation capabilities.

•  Support university-industry collaboration to develop applied research relevant to Sri Lanka’s economic challenges.

•  Facilitate knowledge transfer through diaspora engagement, international partnerships, and strategic foreign direct investment.

•  Develop innovation hubs and incubators focused on priority sectors for diversification.

Sustainable Debt Management

The tariff shock highlights the importance of building greater resilience into Sri Lanka’s approach to external debt. Recommendations include,

•  Advocating for reforms to international debt restructuring frameworks that would explicitly link repayment obligations to export performance, similar to the London Debt Agreement model.

•  Developing contingency clauses in future debt agreements that would automatically adjust payment terms in response to external shocks beyond the country’s control.

•  Prioritizing concessional financing over commercial borrowing where possible to reduce vulnerability to market sentiment.

•  Building stronger foreign exchange reserves during periods of stability to provide buffers against future shocks.

Social Protection for Affected Workers

Finally, Sri Lanka must develop more robust systems to protect vulnerable workers during economic transitions. Recommendations include,

•  Establishing a dedicated adjustment assistance program for workers displaced by trade shocks, providing income support, retraining, and job placement services.

•  Developing community-based support initiatives in regions highly dependent on export industries.

•  Engaging international partners to support these efforts through technical and financial assistance.

•  Ensuring that economic diversification strategies explicitly address employment creation for workers with different skill profiles.

Implementing these recommendations would require significant political will, institutional capacity, and international support. However, the current crisis created by President Trump’s tariffs also presents an opportunity to address long-standing structural vulnerabilities and build a more resilient economic model for Sri Lanka’s future development, just like what Sri Lanka did post economic crisis, such as tax reforms, SOE reforms and cost reflective pricing.

CONCLUSION

The imposition of sweeping tariffs by the Trump administration represents a profound disruption to the global trading system with far-reaching consequences for economies around the world. As we have seen throughout this analysis, these tariffs are not merely technical adjustments to trade policy but potentially transformative shifts that challenge fundamental assumptions about economic development, international cooperation, and the distribution of benefits and costs in our interconnected global economy.

For Sri Lanka, the 44% tariff rate imposed on its exports to the United States threatens to undermine a fragile economic recovery and reverse hard-won progress following the devastating crisis of 2022. With the United States accounting for 23% of Sri Lanka’s exports and the textile industry, which employs 350,000 workers, particularly vulnerable to this trade shock, the human consequences could be severe. Projected losses of $300 million in annual export earnings not only threaten jobs and livelihoods but also raise serious concerns about Sri Lanka’s ability to service its external debt obligations, despite recent restructuring efforts.

Sri Lanka’s experience illuminates broader structural vulnerabilities in the global economic system. The export-led development model promoted by international financial institutions for decades has created deep dependencies on continued access to wealthy consumer markets, particularly the United States. When this access is suddenly restricted through unilateral policy decisions, developing countries bear disproportionate adjustment costs with limited capacity to cushion the impact. The international trade and financial architecture offer inadequate mechanisms to address such shocks, with debt sustainability frameworks failing to properly account for trade performance and multilateral institutions lacking effective tools to prevent or mitigate the damage.

This situation calls for both immediate crisis response and longer-term structural reforms. In the short term, Sri Lanka must pursue diplomatic engagement with the United States, provide targeted support to affected industries within its fiscal constraints, and implement emergency measures to protect vulnerable workers. Over the longer term, strategies for market and product diversification, value chain upgrading, regional integration, and domestic market development offer pathways to greater resilience, though none provides a quick or easy solution to the current challenge.

Beyond Sri Lanka’s specific circumstances, President Trump’s tariffs may accelerate broader shifts in global trade patterns. We may see increased regionalization of trade, a greater role for China as both market and investor for developing economies, production relocation to avoid tariffs, and renewed interest in South-South cooperation and domestic market development. These shifts could fundamentally reshape the global economic landscape in ways that create both risks and opportunities for developing countries.

The tariff shock also highlights the need for more fundamental reforms to the international economic system. A more equitable approach to trade and development would recognize the structural challenges facing developing economies and provide meaningful policy space for them to pursue diversification and resilience-building strategies. Debt sustainability frameworks should explicitly link repayment obligations to export performance, acknowledging the fundamental importance of trade capacity to debt service ability. And multilateral institutions should develop more effective mechanisms to prevent unilateral actions that disproportionately harm vulnerable economies.

For Sri Lanka specifically, this moment of crisis also presents an opportunity for reflection and reform. The country’s heavy dependence on a narrow range of exports to a small number of markets has created vulnerabilities that predate President Trump’s tariffs. A comprehensive strategy for economic diversification, encompassing both products and markets, could create greater resilience against future shocks while potentially opening new pathways for more inclusive and sustainable development.

Ultimately, the story of Trump’s tariffs and their impact on Sri Lanka reminds us that behind abstract economic policies and trade statistics lie real human lives and communities. The textile worker in a factory outside Colombo, the small business owner supplying packaging materials to exporters, the rural family dependent on remittances from a daughter employed in the garment industry, these are the people who will bear the true cost of these tariff policies. Their futures hang in the balance as global economic forces shaped by decisions in Washington ripple outward to distant shores.

As the international community responds to this disruption in global trade, we would do well to centre these human impacts in our analysis and policy responses. A truly equitable international economic system must not only facilitate the efficient exchange of goods and services but also ensure that the benefits of global integration and the costs of economic adjustment are distributed fairly between wealthy and developing nations. President Trump’s tariffs have exposed how far we remain from this ideal, and how urgently we need to work toward a more balanced and inclusive model of global economic cooperation.

Rethinking Trade Metrics: It’s the Current Account, Not Just the Trade Balance

While the Trump administration frames its tariff decisions around bilateral trade deficits in goods, that gives a very skewed picture. The true measure of how our economies are actually connected between nations is the current account, which includes not just the balance of goods, but also services, investment income, and transfer payments.

Take Sri Lanka, while it may appear to run a surplus in goods trade with the U.S., that surplus is more than offset by,

•  Payments for U.S.-based tech and streaming services (Google, Netflix, Apple)

•  Outbound tourism and overseas education costs

•  Interest payments on sovereign debt owed to institutions like the IMF and World Bank, whose returns flow back to major shareholders, including the U.S.

This broader deficit in the current account illustrates that Sri Lanka is not exploiting the U.S., but rather taking part in a back-and-forth economic relationship that is already tilted toward the American economy.

Basing tariff policy solely on trade deficits in goods completely misses this bigger economic picture, and risks harming the very development partners whose growth would ultimately benefit the global economy, including the United States.

(Concluded)

(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.

by M. U. M. Ali Sabry
President’s Counsel

(Continued from yesterday)

Critique of the International Trade System

President Trump’s tariffs have also highlighted fundamental inequities in the international trade and financial architecture that governs economic relations between wealthy and developing nations.

The World Trade Organization, theoretically designed to provide a rules-based trading system that benefits all members, has proven largely powerless to prevent unilateral actions by powerful economies like the United States. While China has urged the WTO to investigate President Trump’s tariffs as violations of the “most favoured nation” principle that forms the bedrock of the multilateral trading system, the organization lacks effective enforcement mechanisms against major powers.

Similarly, international financial institutions like the IMF have failed to adequately account for trade shocks in their lending programmes and debt sustainability analyses. As discussed earlier, the IMF’s approach to Sri Lanka’s debt restructuring focused primarily on fiscal consolidation while paying insufficient attention to the country’s

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structural trade deficit and vulnerability to external shocks. When Trump’s tariffs suddenly reduce Sri Lanka’s export earnings, the IMF program offers no automatic adjustment mechanisms to accommodate this changed reality.

This situation stands in stark contrast to historical examples of more equitable treatment of indebted nations. The London Debt Agreement of 1953, which restructured West Germany’s external debts, explicitly linked repayment obligations to the country’s trade performance and capped debt service at a sustainable percentage of export earnings. Such an approach recognised the fundamental importance of trade capacity to debt sustainability, a recognition largely absent from contemporary debt restructuring frameworks.

The tariff shock thus reveals not merely technical flaws in trade policy but deeper structural inequities in how the global economic system distributes risks, rewards, and adjustment costs between wealthy and developing nations. While powerful economies can unilaterally reshape trading relationships to serve their domestic political objectives, developing countries must largely accept these changes as given constraints and bear disproportionate costs of adjustment.

Potential Reshaping of Global Trade Patterns

Looking beyond the immediate disruption, President Trump’s tariffs may accelerate several longer-term shifts in global trade patterns with significant implications for developing economies.

First, we may see accelerated regionalisation of trade as countries seek to reduce vulnerability to U.S. policy shifts. Asian economies may deepen integration through mechanisms like the Regional Comprehensive Economic Partnership (RCEP), while African countries might accelerate the implementation of the African Continental Free Trade Area (AfCFTA). These regional arrangements could provide alternative markets for exports previously destined for the United States, though the transition would be neither quick nor painless.

Second, China’s role as both a market and investor for developing economies may expand further. As U.S. tariffs effectively close off portions of its market, developing countries may look more intensively toward China as an export destination and source of development finance. This shift would have significant geopolitical implications, potentially accelerating the fragmentation of the global economy into competing blocs centred around major powers.

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Third, some production may relocate to avoid tariffs, creating winners and losers among developing countries. Nations with lower tariff rates or special exemptions could see increased investment as firms restructure supply chains to minimise trade costs. This dynamic could intensify competition among developing countries for foreign investment, potentially triggering a “race to the bottom” on labour and environmental standards.

Fourth, there may be renewed interest in domestic market development and South-South trade as alternatives to excessive dependence on wealthy consumer markets. While the limited purchasing power in many developing countries constrains this option in the short term, over time it could lead to more balanced and resilient development models.

These potential shifts suggest that President Trump’s tariffs may represent not merely a temporary disruption but a catalyst for more fundamental reconfiguration of global trade patterns. For developing economies like Sri Lanka, navigating this changing landscape will require strategic foresight, policy innovation, and international cooperation to ensure that the emerging trade architecture better serves their development needs than the system currently being disrupted.

POTENTIAL MITIGATION STRATEGIES FOR SRI LANKA

Faced with the severe economic challenge posed by Trump’s 44% tariff, Sri Lanka must develop a comprehensive response strategy that addresses both immediate threats and longer-term structural vulnerabilities. This section explores potential approaches at different time horizons, from emergency measures to fundamental economic reorientation.

Short-term Responses

In the immediate term, Sri Lanka’s government and private sector must focus on crisis management to minimise damage to export industries and protect vulnerable workers. Several approaches warrant consideration.

Government Support for Affected Industries

The Sri Lankan government could implement targeted support measures for export sectors most affected by the tariffs, particularly the textile and apparel industry. These might include temporary tax relief, subsidised credit facilities, or reduced

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utility rates for export-oriented manufacturers. Such measures could help companies weather the initial shock while they develop adaptation strategies.

However, Sri Lanka’s fiscal constraints present a significant challenge to implementing such support. The country’s IMF programme imposes strict limits on government spending and deficit targets, while tax increases have been a central component of the economic stabilisation strategy. Any support measures would therefore need to be carefully designed to remain within these constraints or negotiated as exceptions with the IMF based on the external nature of the shock.

One potential approach would be to reallocate existing resources rather than expanding overall spending. For instance, funds previously earmarked for export promotion in the U.S. market, if any, could be redirected toward supporting market diversification efforts or providing temporary relief to affected companies.

Diplomatic Engagement with the United States

Sri Lanka should pursue active diplomatic engagement with the United States to seek modifications to the tariff regime. While the country’s limited economic leverage makes a complete exemption unlikely, there may be opportunities to negotiate targeted relief for specific product categories or to secure technical assistance for adjustment.

The Sri Lankan government could emphasise several arguments in these discussions, the disproportionate impact of the tariffs on a country still recovering from economic crisis, the potential humanitarian consequences of mass unemployment in the textile sector, and the strategic importance of economic stability in Sri Lanka for regional security in the Indian Ocean.

One of the most compelling arguments Sri Lanka can make is the need to move beyond narrow fixation on the trade balance and instead consider a broader current account. While Sri Lanka may show a surplus in goods trade with the U.S., that figure is only a part of the story. Our economy is deeply integrated with U.S. linked services. We pay for American banking and credit card services, subscribe to streaming platforms like Netflix and Amazon, purchase of software and apps from Apple and Google, remit interest payment on loans from international banks, bond holders and multilateral institutions, and spend on tourism and education. When all of these outflows are taken into account, the so called “imbalance” is far more nuanced if not fully offset. This is why a fair and modern economic analysist must consider the full current account, not just goods trade in isolation.

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Engagement should occur through multiple channels, including direct bilateral discussions, multilateral forums like the WTO, and coordination with other affected developing countries to amplify collective concerns. Sri Lanka might also leverage its relationships with international financial institutions like the World Bank and IMF, which could highlight the risks the tariffs pose to the country’s economic recovery program.

Emergency Economic Measures

If the full impact of the tariffs materializes, Sri Lanka may need to implement emergency economic measures to maintain macroeconomic stability. These could include temporary foreign exchange controls to prioritize essential imports, accelerated disbursement of already-committed international financial support, or emergency borrowing from friendly countries or international institutions.

The Central Bank of Sri Lanka might need to adjust monetary policy to respond to potential currency pressures resulting from reduced export earnings. However, any such adjustments would need to be balanced against inflation concerns, which remain sensitive following the recent crisis.

Social Protection for Affected Workers

Protecting workers who lose jobs or face reduced hours due to the tariff impact should be a priority. The government could expand existing social safety net programs to specifically target affected textile workers, potentially with support from international donors or development agencies.

Measures might include temporary unemployment benefits, retraining programmess for displaced workers, or community-based support initiatives in areas with high concentrations of textile employment. Given fiscal constraints, international support would likely be necessary to fund such programmes adequately.

Medium to Long-term Strategies

Beyond immediate crisis response, Sri Lanka must develop strategies to reduce vulnerability to future trade shocks and create a more resilient economic model. Several approaches deserve consideration.

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Market Diversification Beyond the United States

Reducing dependence on the U.S. market represents an obvious but challenging strategy. Potential alternative markets include,

* European Union: Already Sri Lanka’s second-largest export destination, the EU offers preferential access through its GSP+ scheme. Expanding exports to Europe would require meeting stringent standards and potentially adjusting product offerings to suit European consumer preferences.

* Regional Markets: Increasing exports to India, China, and other Asian economies could leverage geographical proximity and growing middle-class consumer bases. This would require navigating complex regional trade agreements and potentially developing new product categories better suited to these markets.

* Emerging Markets: Countries in the Middle East, Africa, and Latin America represent potential growth opportunities, though penetrating these markets would require significant market research and relationship building.

The Joint Apparel Association Forum’s statement that “We have no alternate market that we can possibly target instead of the US” reflects the difficulty of this transition. Established buyer relationships, specialized production capabilities, and compliance certifications all create path dependencies that make market diversification a multi-year project rather than an immediate solution.

Product Diversification Beyond Textiles

Sri Lanka’s heavy reliance on textile and apparel exports creates vulnerability to sector-specific shocks. Diversifying the export basket could create greater resilience, though this too represents a long-term structural challenge rather than a quick fix.

Promising sectors for export diversification include:

* Information Technology and Business Process Outsourcing: Sri Lanka has developed a growing IT/BPO sector that could be expanded with appropriate investment in education, infrastructure, and international marketing.

* High-Value Agricultural Products: Speciality tea, spices, and organic produce could command premium prices in international markets while building on Sri Lanka’s agricultural traditions.

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Sustainable Manufacturing: Leveraging Sri Lanka’s relatively strong environmental credentials to develop green manufacturing capabilities in emerging sectors like electric vehicle components or renewable energy equipment.

Tourism Services: While not directly affected by goods tariffs, expanding tourism could help diversify foreign exchange earnings. However, this sector’s vulnerability to external shocks (as demonstrated during the pandemic) suggests it should be one component of a diversification strategy rather than its centrepiece.

Successful product diversification would require coordinated public-private investment in research and development, skills training, quality infrastructure, and international marketing. It would also necessitate a supportive policy environment that reduces barriers to innovation and entrepreneurship.

Value Chain Upgrading

Even within existing export sectors like textiles, Sri Lanka could pursue strategies to capture more value and reduce vulnerability to tariffs. Moving up the value chain from basic contract manufacturing to design, product development, branding, and direct-to-consumer sales could increase margins and provide greater control over market access.

Some Sri Lankan companies have already begun this transition, developing their own brands or establishing direct relationships with consumers through e-commerce platforms. Government support for such initiatives through design education, intellectual property protection, and export promotion could accelerate this evolution.

Regional Trade Integration

Deepening integration with regional trade blocs could provide both alternative markets and opportunities for participation in regional value chains. Sri Lanka is a member of the South Asian Free Trade Area (SAFTA) and has bilateral trade agreements with India, Pakistan, and Singapore, and more recently with Thailand, though implementation challenges have limited their effectiveness.

More ambitious regional integration through mechanisms like the Regional Comprehensive Economic Partnership (RCEP) or the proposed Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Free

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Trade Area could create new opportunities. However, managing domestic concerns about increased competition from larger economies like India and China would require careful policy design and implementation. (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.

(To be concluded)

One of the well-known benefits of reading is that you can get enormous fun from what you read. Many great writers have written funny or entertaining or even stimulating pieces of great literature. But you will have to be introduced to famous works as, although you are students of English, no-one will trouble themselves to explain, show or bring these works to your attention. So read on…

Charles Dickens lived in Victorian London. He has written many amusing pieces in his “Pickwick Papers.” He describes the adventures of Mr Pickwick, and describes Mr Pecksniff and even the snuff and drinking habits of dear old Sairy Gamp who attends to the recently dead and prepares them for sending to the mortuary. These are just two of the many characters found in “Pickwick Papers” (The amazing adventures of the Pickwick Club.) These Pickwick Papers were very popular only a generation or two ago. His colourful descriptions allow our imaginations to conjure up vivid Victorian London scenes. Life in the villages of England was very difficult and everyone thought London was a paradise for work, food and good beer! Everyone eagerly bought Pickwick Papers to learn more of the Pickwick Club and events in London, that dream destination for all English villagers.

No-one will introduce you to Longfellow’s “The Pied Piper of Hamelin.” This poem is based on an old legend. It was said that a plague of rats was running wild in a small town in Germany about 800 years ago. The Pied Piper came and rid the town of rats. He did this for a fee, a good reward, but then was denied payment by the Mayor who had commissioned him to remove the rats. The revenge of the Pied Piper on the town is quite shocking. Longfellow’s powerful descriptions on the several scenes of dramatic action make this poem a charming piece of English literature.

William Wordsworth’s “Daffodils” is a most powerfully evocative poem with words carefully chosen to describe what he saw. The writing is when he viewed thousands of bright yellow daffodils dancing in the breeze (gentle wind) creating a great vista for his viewing, which remained with him and brought pleasure to him in quiet moments. This is the English language waiting for all students to explore.

There are plenty of dismal, turgid writings about historical injustice and brutality by colonisers to countless oppressed people around the world – such writers have a valid message but here we want to introduce a pleasant reading matter that elevates the reader to gain pleasant satisfaction and new good ideas from what he reads. There are many wonderful stories and great writers waiting for the reader to discover many beautiful writings that will make him or her happy.

William Henry Davis, a Welshman and vagrant wanderer, wrote a most charming, beautiful poem: “What is this Life if Full of Care?” He writes about how he regrets that we humans are always in a hurry, too busy to notice or see the delights of nature, and scenes of natural beauty, e.g., a young woman’s smile as she passes by; we have no time to make friends and even kiss her. Regrets!

This is the real English to be tasted and then swigged at lustily in pleasure and satisfaction, not some writing airing historical grievances for children to study!

Priyantha Hettige