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In the grand chessboard of global trade, it is often the small and vulnerable economies that become collateral damage. Sri Lanka, still reeling from the most severe economic crisis in its post-independence history, has now found itself ensnared in a geopolitical and economic showdown it neither caused nor can control. The recent decision by the Trump administration to impose reciprocal tariffs on its trading partners may have been aimed at economic heavyweights like China and the European Union, but it is Sri Lanka that is paying the steepest price.

This is a classic illustration of the proverb: When elephants fight, it is the grass that suffers. And right now, Sri Lanka is that grass—crushed underfoot by a battle between giants.

A Double blow to a fragile recovery

The imposition of these punitive tariffs is a devastating blow to a country that only recently began the painful process of economic recovery. Having defaulted on its external debt in 2022, Sri Lanka was forced to seek a $2.9 billion bailout from the International Monetary Fund (IMF). This rescue package was based on the premise of an export-led recovery—an economic roadmap that assumed relatively favorable access to global markets. The U.S. tariff directly undermines this strategy, jeopardising the very foundation of the IMF programme.

In response the Sri Lankan government has started negotiations with Washington for a reconsideration of the tariffs. The United States is Sri Lanka’s largest single export market, absorbing nearly a quarter of its $12 billion in merchandise exports. The garment industry, in particular, is heavily reliant on American buyers. A 44% tariff not only erodes price competitiveness but also threatens tens of thousands of jobs, especially among rural women who form the backbone of this sector.

Tariffs as an External Shock

On April 6, 2025, this Column argued that IMF assistance was essential for Sri Lanka in its engagement with the US regarding the Reciprocal Tariffs not just as a financial lifeline, but as a strategic shield against external shocks like the one now emanating from the United States. The rationale remains unchanged and, if anything, has only grown stronger.

First, the IMF’s export-led recovery framework assumes a level playing field in global trade. The unilateral imposition of a 44% tariff on Sri Lankan goods effectively destroys this assumption. Second, one of the primary goals of IMF engagement is to help countries build resilience against external shocks. The U.S. action is precisely such a shock, one that has the potential to unravel hard-earned, fragile gains.

Third, the IMF is, by design, a champion of fair and open trade. The blanket nature of the U.S. tariff—applied without distinction to a struggling, low-income economy like Sri Lanka—runs counter to the institution’s own ethos of equitable treatment and targeted support. Finally, there is the issue of geopolitical stability. Sri Lanka occupies a strategic position in the Indian Ocean and has long been courted by major powers including China, India, and the U.S. If the current Western-aligned recovery plan falters, it could open the door to increased Chinese influence—an outcome that Washington presumably wishes to avoid.

A glimmer of hope

Amid growing uncertainty, there was a glimmer of hope last week when the IMF indicated a willingness to revisit the terms of its loan agreement if the tariffs are reinstated after their temporary 90-day suspension. IMF mission chief Evan Papageorgiou stated that “global trade policy uncertainties triggered by Trump’s tariffs posed a major risk for Sri Lanka,” and confirmed that the Fund would work with the government to assess the impact and formulate policy responses if necessary.

This assurance, while welcome, comes with a sobering undertone. It highlights the volatility of Sri Lanka’s recovery trajectory and the vulnerability of its economic rebound to factors well beyond its control. The entire IMF programme may need reconfiguration if the external trade environment deteriorates further—a troubling prospect for a nation that is still grappling with inflation, debt, and high levels of unemployment.

The risks of over-reliance

The current crisis has also underscored a deeper structural vulnerability in Sri Lanka’s economic model: the over-reliance on a narrow range of exports and limited markets. The lion’s share of foreign earnings comes from tourism, garment exports, and foreign employment remittances—all sectors highly sensitive to global events, from pandemics to geopolitical tensions.

Diversification, both in terms of products and markets, has become a pressing necessity. While this is easier said than done, it is a conversation that is gaining traction within policy circles. There is now a growing consensus that Sri Lanka must expand its export base and seek out new markets, to cushion itself from future shocks.

The human cost

Behind the statistics and policy jargon lies a very real human cost—one that risks being overlooked in macroeconomic discussions. A recent seminar organised by the National Movement for Social Justice headed by former Speaker Karu Jayasuriya and the think tank Advocata International highlighted this issue. Trade unionists and civil society representatives expressed concern that the focus on fiscal metrics and trade balances often ignored the plight of vulnerable populations.

The garment industry, for example, employs over 350,000 workers—many of them women from marginalised or rural backgrounds. For them, the consequences of a sharp drop in export orders are immediate and severe: job losses, wage cuts, and a deepening of poverty. These are not abstract risks. They are real threats that could translate into social unrest and long-term economic scarring.

The path forward

So, what should Sri Lanka do? At the governmental level, continued diplomatic engagement with Washington remains essential. The argument must be made that Sri Lanka is not a trade offender but a recovering partner that deserves nuanced treatment—not blanket punishment. There is a case to be made for an exemption or a more measured application of reciprocal tariffs, one that considers the country’s unique vulnerabilities.

Simultaneously, the government must work with the IMF not just on renegotiating the terms of its current package but on embedding more flexible mechanisms to absorb such shocks. There must be a greater focus on inclusive growth strategies—ones that take into account the impact on the poor and the marginalised.

Finally, structural reforms aimed at export and market diversification must move from rhetoric to action. This means investing in new sectors like IT services, agro-processing, and green energy; improving infrastructure. The crisis sparked by Trump’s tariffs could, in hindsight, serve as the catalyst for a much-needed economic transformation—if policymakers rise to the challenge.

Conclusion

The U.S. reciprocal tariffs were never about Sri Lanka. But their unintended consequences are dangerously real for a nation trying to rebuild itself brick by brick. If the international community truly believes in fair trade and sustainable development, it must not allow Sri Lanka to become an unintended casualty in a war it did not wage. The elephants may be fighting far away, but it is here, in places like Katunayake and Gampaha, that the grass is getting trampled.

(javidyusuf@gmail.com)