The year 2025 began with the continuation of the trade war between the USA and China, as well as ongoing regional conflicts in the Middle East, the Russia–Ukraine front, and internal conflict in Sudan. However, the world breathed a sigh of relief when the USA intervened to facilitate a cessation of hostilities on the Ukraine front —though the peace process remains half-baked. Then, on 2nd April, the Trump Administration surprised the world by announcing a reciprocal tariff — the largest tariff hike ever imposed by the USA. This included a 10% universal tariff on imports and a country-specific, customised tariff increase. However, the USA exempted critical import components related to high-tech, housing, pharmaceuticals, energy, and other essential sectors.
Impact on Sri Lanka in Brief
Certainly, Sri Lanka’s entire export portfolio to the USA (valued at USD 3 billion) —consisting of apparel (70%), followed by rubber-related products and tea — will be subject to Trump’s reciprocal tax. Kenya, a strong contender for Ceylon Tea, is not subject to the reciprocal tariff, but only the universal 10% tax, creating a market opportunity for their tea.
At the time of writing, retaliatory taxes in response to the reciprocal tariff have been introduced by China, followed by the USA. The USA has also put a temporary hold on reciprocal tariffs for three months, except those targeting China.
Meanwhile, researchers at Yale University have predicted that the cumulative tariffs in 2025 may disproportionately impact clothing and textiles, with apparel prices rising by as much as 17%. Sharp increases in the prices of consumer goods and industrial products are also anticipated. Although President Trump initially won the propaganda war to justify these taxes on countries with significant trade surpluses, the economic consequences of such drastic actions are unlikely to bode well for the USA.
Way Forward for Sri Lanka
In the past, during crises, successive Sri Lankan governments tended to extend lifelines to start-ups and SMEs, assuming that large companies could weather the storm. However, this approach no longer holds water, as 80% of exports are conducted by large companies. Remedial action must now include all exporters, regardless of size. So, how can Sri Lanka sensibly chart a path forward? Undoubtedly, constructing a rational scenario plan — followed by collective decision-making, strategic planning, and achieving national consensus — would be Sri Lanka’s most pragmatic course of action.
(1) Building a Rational Scenario Plan
The Government should appoint a team of experts from the private sector, government, and academia to formulate two scenarios: a best-case and a worst-case scenario for Sri Lankan exports to the USA — and, subsequently, to other major markets such as the EU.
(a) Best-case scenario:
Given the Trump administration’s firm stance on discouraging imports, reverting to the pre-reciprocal tariff era is unrealistic for forecasting purposes. Therefore, calculating a reasonable all-inclusive tariff rate — e.g. 20% — would help assess the landing cost of Sri Lankan apparel in the USA, which can then be compared with that of competitors such as Vietnam, Cambodia, and Bangladesh. A similar exercise can be conducted for other Sri Lankan exports. Even for trade diversification, understanding the landing cost is essential for competitiveness.
Any unfavourable price gap must be bridged through government concessions, e.g., subsidised energy rates, reduced bank interest rates for exporters, and lower freight costs via strategic partnerships with airlines. An employment loss assessment should also be conducted, along with the introduction of a multi-skilling strategy to prepare the workforce for potential layoffs.
(b) Worst-case scenario:
Assume a tariff of 44% and repeat the same exercise to determine the competitiveness of Sri Lankan exports. The response measures required in this scenario will naturally be more intensive than those under the best-case scenario.
It is important to note that any industrial subsidies provided domestically must comply with the WTO Agreement on Subsidies and Countervailing Measures (ASCM). According to the agreement, a subsidy must involve a financial contribution from the government or a public body within the territory of the member state and must also be “specific” — i.e., company-, industry-, or region-specific — to fall under the agreement’s purview.
Ultimately, the key question is whether the Sri Lankan government is prepared to support its exporters to the USA at all costs.
Failure of the Rules-Based Global Trading System
The WTO has failed to promote a unified global trade agenda and to adequately address present-day challenges, such as China’s alleged currency manipulation and unresolved climate change issues. As a result, global trade is now being conducted under alternative frameworks. The systematic paralysis of the WTO Appellate Body has halted appeal reviews. Additionally, efforts to reform the dispute settlement system have failed due to lack of consensus among member states.
Though the power politics within the WTO have long been evident, most member states continued to regard the existing trading system as reasonably functional and progressive. However, the unilateral trade actions of the Trump administration — and the tit-for-tat responses by other powers — have pushed the global trading order into disarray. We are now witnessing a shift from rule-based to power-based trade, which is likely to shape future international relations.
Commenting on this issue, Indian Foreign Minister S. Jaishankar aptly noted that “the world will never be the same again.”
The New World Order
National security concerns, geopolitical rivalries, politically motivated disruptions to global supply chains, climate change effects, and the inequitable outcomes of globalisation have drastically reshaped the trade landscape. This is why many believe the USA’s 90-day suspension of tariffs is only a temporary measure. The Trump administration is expected to resume its strategy of tariff increases or implement other mechanisms to restrict imports. The fear-driven “Make America Great Again” narrative will likely compel many countries to seek greater trade security, resilience, and self-reliance.
Further compounding the issue is the disappointing performance of the International Monetary Fund (IMF) in achieving its founding objective. Article II of the IMF Agreement states that the institution was established to ensure “balanced growth in international trade”. While the IMF has made commendable contributions in the fields of macroeconomic and financial stability, policy advocacy, and capacity development, the world has yet to attain balanced growth in global trade.
Clearly, today’s prolonged challenges cannot be solved using outdated solutions. Fresh, innovative approaches are required.
China’s Strategy for Dealing with the USA
China began preparing for tariff escalations long before the Trump administration came to power. Its strategy combines short-term countermeasures with long-term transformation: undermining the economic and political foundations of the USA through precision countermeasures, leveraging its vast industrial capacity and market size to build resilience, and collaborating with the international community to restructure the multilateral trade system.
Though some industries may face short-term disruptions, China’s policy agility and strategic depth have afforded it considerable manoeuvrability. Currently, exports to the USA account for less than 4% of China’s GDP.
Influence of the Belt and Road Initiative
The emergence of China as an economic powerhouse and the launch of the Belt and Road Initiative (BRI) in 2013 have fundamentally altered the trade dynamics in South and East Asia. As of 2020, China’s trade with BRI countries accounted for over 30% of its total trade, reducing its reliance on the USA.
With the signing of the Regional Comprehensive Economic Partnership (RCEP) in 2020, China strengthened its regional supply chains and stimulated domestic innovation. The rise of unilateralism, the weakening of the existing global trade architecture, and the marginalisation of developing countries on the global stage have empowered China to promote a more inclusive and shared international trade order.
A Shared Global Trading System
Interestingly, on the global stage, China has proposed the following changes to the existing system:
Strengthening multilateralism as the core and promoting reforms of the WTO to enhance its authority and adaptability. This includes the reactivation of the dispute settlement mechanism.
Under special and differential treatment for developing countries, allowing agricultural subsidies and technology transfer, and avoiding a “one-size-fits-all” approach to rule-making.
Promoting a development-oriented digital agenda that emphasises a balance between data sovereignty and data sharing, and opposes forced, bundled market access.
Accepting the right of countries to formulate industrial policies based on national conditions.
Allowing developing countries to support technological catch-up through modest subsidies, and opposing technology blockades justified on the basis of “market distortions”.
Promoting open regionalism and ensuring equal participation of all countries in global value chains (GVCs).
Advancing innovation in digital trade and green economy regulations, and promoting regulatory cooperation on cross-border data flows while safeguarding cybersecurity and consumer rights.
Facilitating the transfer of low-carbon technologies through carbon tariff adjustment mechanisms, to support the green transformation of developing countries.
Establishing technical cooperation mechanisms to prevent technological monopolies, including through intellectual property sharing platforms.
Creating a crisis response mechanism by establishing a global supply chain early warning system, through multilateral coordination, to deal with unexpected shocks such as pandemics or geopolitical conflicts.
The economic power of China’s Belt and Road Initiative (BRI), together with RCEP, BRICS, and ASEAN, is poised to create a more resilient alternative to the Western-dominated global trading system. This would be achieved through gradual reforms and the development of innovative rules, while providing developing countries with new pathways to participate in global value chains.
If guided by mutual respect, the world may witness two systems working in harmony —blending pragmatism and common sense —and leading the way towards shared prosperity for humanity.
About the Writer:
The writer, Ajith D Perera is the Chair and Executive Secretary of the Asia-Pacific Trade Agreement Chamber of Commerce and Industry.
Reference Link:- https://ceylontoday.lk/2025/04/26/rules-collapse-as-trade-becomes-geopolitical-weapon/