New study flags US$ 1.6bn export shock despite government trade talk optimism

• The report highlights the rapid rise in trade policy uncertainty has created a business environment more unpredictable
• US buyers have reacted to the tariff announcements with a mix of “wait-and-see” approaches and aggressive margin negotiations
• Govt. remains optimistic about securing a more favourable trade arrangement

By Nishel Fernando

A new study has sounded the alarm on Sri Lanka›s export prospects, revealing that the country faces a potential loss of US$ 1.62 billion in exports to the United States in 2026 due to escalating trade policy distortions.

The study, titled “Trade Policy Uncertainty and Impacts on Developing Countries’ Exporters: The Case of Sri Lanka,” was conducted by the Centre for a Smart Future (CSF) and authored by Anushka Wijesinha and Senith Abeyanayake. 

Published on ‘Southviews’ by the South Centre, the research utilises gravity model simulations to estimate that while a scenario with no tariff changes could see exports to the US rise to US$ 3.45 billion, the current volatile environment could contract this potential significantly by approximately US$ 1.62 billion.

The report highlights that the rapid rise in trade policy uncertainty, triggered by the US administration’s “Liberation Day” tariff announcements in April 2025, has created a business environment more unpredictable than even the Covid pandemic. While the specific tariff rate for Sri Lanka was eventually revised down from an initial threat of 44 percent to 20 percent in August, the months of ambiguity drove global uncertainty indices to historic highs.

According to the authors, this uncertainty has acted as a distinct barrier to trade. A survey of senior export leaders conducted for the study found that 29 out of 37 respondents reported their businesses were “moderately” or “badly” affected by the volatility.

The impact was unevenly distributed; while the apparel sector showed resilience with no respondents reporting immediate order cancellations, non-apparel sectors including tea, rubber, and spices faced immediate cancellations, postponements, or high uncertainty regarding future orders.

Buyer behaviour in the US has further complicated matters. The study noted that US buyers reacted to the tariff announcements with a mix of “wait-and-see” approaches and aggressive margin negotiations. A significant number of exporters reported that buyers expected manufacturers to absorb the full cost of the new tariffs, leading to margin shrinkage. This has forced Sri Lankan firms to adopt diverse adaptation measures, from absorbing losses to accelerating efforts to diversify into non-US markets.

Despite these grim projections, the government remains optimistic about securing a more favourable trade arrangement. Economic Development Deputy Minister Prof. Anil Jayantha Fernando stated in August 2025 that trade negotiations with the US were “95 percent complete”. The government has been pushing to expand the list of zero-rated export items, though a final agreement has yet to be signed.

More recently, on January 6, 2026, Deputy Minister of Trade and Commerce R.M. Jayawardena informed parliament that the government would present a progress report on negotiations with the US Trade Representative within two weeks. He noted that discussions were ongoing to finalise a bilateral trade agreement that could mitigate the tariff impact, particularly following the economic strain caused by Cyclone Ditwah.

The CSF report also flags a critical geopolitical risk: the US administration’s threat of additional 10 percent tariffs on countries aligning with “anti-American” policies, specifically those seeking membership in the BRICS grouping. This places Sri Lanka in a precarious position given its recent diplomatic moves.

Sri Lanka formally applied for BRICS membership in October 2024, following Cabinet approval. While the country was not accepted as a full member at the BRICS Summit in Kazan later that month, the bloc endorsed a new “Partner Country” category. As of early 2026, Sri Lanka remains an aspiring partner, with its application still pending consideration by member states.

The report warns that this pursuit of alignment with BRICS, while strategically motivated, could trigger the threatened US trade penalties, adding a complex layer of risk to an already fragile export environment.