The United States’ (US) proclamation of “reciprocal tariffs” dealt a blow to the global trade system based on the World Trade Organisation (WTO) principles. With the individualised tariff rates, the US has discarded non-discrimination in the Most-Favoured-Nation (MFN) tariff structure. The “reciprocal tariff” rate does not show any reciprocity but rather a calculation hypothesised to drive a bilateral trade deficit to zero.

Although the “reciprocal tariff” grabbed attention, US trade policy under the second Trump administration is more complex. Section 232 of the US Trade Expansion Act of 1962 is being used to target key sectors like steel, aluminium, and auto parts. In addition, investigations are ongoing to determine tariffs for copper, critical minerals, pharmaceuticals, and lumber.

For Sri Lanka, as calculated using 2024 data, 95.6% of US imports are subject to reciprocal tariffs – with the 90-day pause, standing currently as a 10% global tariff. In addition, 4.2% of imports from Sri Lanka are subject to the steel and aluminium and auto parts tariffs imposed under Section 232. However, 0.2% of Sri Lanka’s imports are exempted from the new tariff measures. These exemptions were made by issuing Annex-II of the US Executive Order on the reciprocal tariffs and a notice issued by the US Customs and Border Protection (CBP) on April 12.

Sri Lanka’s Exposure to Section 232 Tariffs:

Steel, Aluminium and Auto Components Tariffs

In 2018, under the first Trump administration, the US imposed a 25% tariff on steel and a 10% tariff on aluminium imported from all trade partners under Section 232 tariffs.

On March 12, 2025, the US expanded the 2018 Section 232, increasing the aluminium tariff to 25%, removing all existing exemptions, and adding more derivative products which use steel and aluminium as components. For example, a keg is an aluminium derivative product. When steel and aluminium imports are expensive due to tariffs, domestic producers are no longer competitive in the production of derivatives such as the keg in the earlier example. This leads to lobbying for cascading protectionist tariffs on imported derivatives. Thus, cascading protectionism means that when a raw material is subject to tariffs in the downstream, the final good becomes less competitive, forcing producers to demand tariff protection for the final goods.

Sri Lanka’s exports will be subjected to an additional 25 per cent of the value of the steel and aluminium content under the 2025-Section-232 tarrifs. The newly added aluminium derivative products account for USD 28.5 Mn in US imports from Sri Lanka, across 27 products. There are USD 80.78 Mn imports under 20 products from Sri Lanka, which are categorised as steel derivatives under the Section 232 Steel and Aluminium tariff proclamation by the US.

New challenges for exporters

One main challenge of the new US tariff structure is the additional reporting requirements to exporters. Notably, the stipulated tariffs will be calculated for the steel or aluminium value of the products, which are exempt from reciprocal tariffs. For example, machinery parts made of steel will be subject to 25% additional steel tariffs, but they are not subject to 10% or 44% reciprocal tariffs. If the machinery parts contain 60% steel value, then the 25% tariff is applied for the 60% steel value. The remaining 40% is subject to the relevant tariff line specified for machinery parts. The exporters need to report on the aluminium and steel content by value, and failure to do so will result in an additional 25% tariff on the whole product’s value.

Lack of information on the steel and aluminium content makes reporting challenging for exporters. Although tariff calculations need the aluminium or steel value, that information is not given in publicly available data; the calculation of tariff increases needs assumptions. Assuming 25% of product value, the fabricated metal sector sees a weighted average tariff increasing to 6.7% from the base tariff rate of 0.6%. The Section 232 products are not subject to reciprocal tariffs. It explains the stable weighted average tariff rate for the fabricated metal sector, even after applying a 10% global tariff and 44% reciprocal tariffs in Figure 2.

The US also announced tariffs on automobiles and parts on March 26 and enacted auto tariffs on April 03. However, the tariffs on automobile parts were delayed to a future date not later than May 03, 2025. The auto components account for 0.5% or USD 10.9 Mn exports by Sri Lanka. New pneumatic radial tyres, non-cellular vulcanised rubber articles, and electric control apparatus are among the products subject to auto component tariffs. As shown in Figure 2, the effective weighted average tariff for motor vehicle sector exports from Sri Lanka to the US will increase to 19.66% on May 03.

Exemptions from some additional tariffs have little Implications for Sri Lanka.

The US exempts certain products necessary for the US domestic industries or those that are subject to Section 232 tariffs. Ten products exported by Sri Lanka are exempted from the reciprocal tariffs, including natural rubber and natural graphite (Figure 3). Natural graphite is an essential component and critical mineral in EV battery manufacturing. On April 12, the US Customs and Border Protection (CBP) released another list of exemptions, primarily composed of electronic equipment. The exemptions exclude products from the direct effect of additional tariffs. However, there is no added advantage from this exclusion, as all countries receive the exemptions, eliminating any relative price advantage for Sri Lanka.

Note: These exemptions were made by issuing Annex-II of the US Executive Order on the reciprocal tariffs and a notice issued by the US Customs and Border Protection on April 12.

Reciprocal Tariffs: Effective Tariff Rates for Sri Lanka

As a 44% “reciprocal tariff” will not be imposed until July, the current effective tariff rate is the MFN rate plus 10%, which applies to 95.6% of Sri Lanka’s exports to the US, worth USD 2.93 Bn. Accordingly, since April 05, the apparel sector has had a 26.65% average tariff (Figure 4). The base MFN tariff average for wearing apparel was 16.65%.

Sectors such as rubber, other manufacturing products, including gems and precious stones, and food preparations experience the most significant relative tariff hikes. These sectors had tariff rates that were less than 2% before April 05. Notably, 37.7% of Sri Lanka’s apparel exports go to the US, while the US share in other manufacturing products is 67.6% (Figure 4). The high reliance on these sectors increases their vulnerability to tariff shocks and plunges in demand in the US market.

As the Section 232 steel and aluminium tariffs, 10% global tariff, and exemptions are already effective, a significant challenge exporters face is meeting reporting requirements. For example, exporters need to report the steel and aluminium content for tariff calculations, and failure will result in the automatic application of 25% to the total value of the derivative product.

In addition, the country of origin of steel and aluminium used in derivative products should be declared to avoid the 200% tariff imposed for aluminium and steel from Russia. Thus, reporting can be a technically challenging and costly task for exporters.

In addition, Sri Lanka needs to be vigilant and follow the US CBP guidance to avoid higher tariffs due to rules of origin; If a different country is identified as the country of origin, Sri Lanka must pay the tariff rate applied to that particular country. Irrespective of the outcome of negotiations on the 44% reciprocal tariffs, the Section 232 tariffs, reporting requirements, and rules of origin complexities will prevail. The necessary technical assistance should be provided to the exporters to minimise the tariff cost under the current US trade policy regime.

By Dr AsAnkA

Wijesinghe