Trump’s new forced-labor tariffs strike Sri Lanka’s fragile export recovery

The global trade environment has entered a period of major uncertainty as the United States under President Donald Trump continues to reshape its tariff policies and economic relationships with trading partners. Among the countries facing increased attention is Sri Lanka, a developing economy that depends heavily on exports, particularly the apparel industry. A proposed 12.5% tariff linked to forced labor concerns has created anxiety among Sri Lankan exporters, policymakers, and international brands that rely on the country’s manufacturing sector.

The US Trade Representative (USTR) announced on June 2 that it was now pursuing Section 301 of the Trade Act of 1974 to once again impose tariffs on so-called “60 economies”. The list includes the European Union, so in effect, more than 80 countries are affected.

Fifteen economies; including Canada, Mexico, the United Kingdom, Pakistan, Indonesia, and the European Union; were placed in a lower tariff tier. These nations either possessed partial forced labor import bans, actively participated in intense bilateral consultations, or formally committed to executing strict enforcement frameworks.

The remaining 45 economies, including major Asian exporters like China, India, Japan, Vietnam, and Sri Lanka, were slapped with the maximum proposed 12.5% additional duty. The USTR determined that these nations completely lacked domestic laws prohibiting the entry of forced labor goods, rendering their trade policies "unreasonable" barriers to American commerce.

The proposed measure introduces a broader approach to trade enforcement. In the past, trade policies have mainly addressed concerns such as market access, subsidies, currency practices, and trade imbalances. Under the new framework, greater importance is placed on supply-chain oversight, with countries expected to uphold labor standards and help ensure that products associated with forced labor are not part of international trade.

For Sri Lanka, the challenge is complex. The country has long promoted itself as an ethical manufacturing destination, especially through its globally recognized apparel industry. Sri Lankan factories have built their reputation around responsible production, worker protections, and compliance with international labor standards. Yet the U.S. argument focuses on a broader issue: whether Sri Lanka has sufficient legal systems to monitor and block goods that may involve forced labor anywhere within the supply chain.

Trump’s trade strategy

Donald Trump’s trade policies have consistently emphasized the idea that the United States should use tariffs as a tool to protect domestic industries and pressure foreign governments into changing their policies. During his first presidency, his administration introduced major tariffs on several trading partners, including China, under a more aggressive interpretation of U.S. trade laws.

The second Trump administration has continued this approach, expanding the use of trade investigations and tariff threats as negotiating tools. One important mechanism in U.S. trade policy is Section 301 of the Trade Act of 1974, which allows the U.S. government to investigate foreign practices that it considers unfair or harmful to American economic interests.

A Section 301 investigation can lead to additional tariffs if Washington determines that another country’s policies create an unfair disadvantage for U.S. businesses or workers. In the case of forced labor concerns, the argument is that imported goods produced through exploitative labor practices create unfair competition because companies using cheaper labor systems can reduce production costs.

The issue of forced labor has become increasingly important in international commerce. Governments, companies, and consumers have placed greater pressure on manufacturers to ensure that products are produced ethically. International organizations, including the International Labour Organization, have promoted efforts to eliminate forced labor and strengthen worker protections.

The United States has also strengthened its own enforcement mechanisms, including restrictions on imports linked to forced labor concerns. The main issue for many developing countries is that modern supply chains are highly interconnected.

A shirt sold in the United States may involve cotton from one country, fabric production in another, manufacturing in a third country, and shipping through several international networks. Because of this complexity, Washington increasingly expects exporting nations to develop systems capable of tracing the origin of materials and proving that products entering the U.S. market are not connected to forced labor.

Sri Lanka argues that its own factories generally maintain strong labor standards. The country’s apparel sector has promoted initiatives such as ethical manufacturing and responsible sourcing. However, the U.S. concern is not necessarily about direct factory conditions in Sri Lanka. Instead, it focuses on whether Sri Lanka has enough legal authority and customs monitoring systems to identify and prevent problematic materials from entering its export supply chain.

Why Sri Lanka’s apparel industry is vulnerable

Sri Lanka’s economy is closely connected to the garment industry. Apparel exports represent one of the country’s largest sources of foreign exchange, supporting hundreds of thousands of jobs directly and indirectly.

Major global brands source clothing from Sri Lankan manufacturers because of the country’s reputation for quality production and ethical standards. The industry has worked for decades to differentiate itself from lower-cost competitors by emphasizing reliability, skilled workers, and responsible business practices.

However, a tariff increase in the U.S. market could create serious pressure. American buyers are highly sensitive to cost changes, and even small increases in import duties can influence sourcing decisions. If Sri Lankan products become significantly more expensive compared with competitors such as Bangladesh, Vietnam, Cambodia, or other manufacturing centers, companies may reconsider future orders.

The impact would not only affect exporters. Workers, transport companies, suppliers, and small businesses connected to the apparel sector could also experience economic consequences.

The main difficulty facing Sri Lanka is that modern manufacturing depends on imported materials. Sri Lankan garment producers often import textiles, fabrics, synthetic materials, and accessories from international suppliers.

A country may maintain strong labor conditions inside its own factories but still face questions about materials coming from overseas suppliers. This creates a major regulatory challenge.

A 12.5% tariff would likely increase costs for Sri Lankan exporters entering the U.S. market. The final impact would depend on how the tariff interacts with existing import duties and future trade arrangements.

For companies operating on tight profit margins, additional costs can create major problems. Exporters may have to reduce prices, accept lower profits, or pass increased costs to buyers. In some cases, international brands may shift production to countries facing lower tariff barriers.

New US tariff could erode Sri Lanka’s export competitiveness

The timing of the tariff proposal could not be worse for Sri Lanka's fragile, IMF-supported economic recovery. The United States remains the island's largest single export destination, particularly for garments.

The Ceylon Chamber of Commerce (CCC), the country’s premier private-sector business body, has issued an urgent warning to Colombo. The chamber stressed that an additional 12.5% levy would fatally erode the competitiveness of local manufacturers, especially when key regional rivals sit in the more favorable 10% tariff band.

“The imposition of an additional tariff on Sri Lankan exports risks undermining the competitiveness of key export sectors compared to other countries, which are subject to a lower rate of 10 percent,” the Chamber warned.

“At a time when Sri Lanka is working to accelerate export growth, attract investment and create employment opportunities, any increase in trade barriers presents a significant challenge.”

The macro data underscores the vulnerability of the island's primary foreign exchange earners. According to the CCC, key merchandise exports are already showing distinct signs of strain, with apparel exports down 7% and tea exports contracting by 6% over the first four months of 2026. Because international fashion brands operate on razor-thin margins and are highly sensitive to sudden duty hikes, even minor price distortions could trigger an immediate reallocation of sourcing orders toward lower-tariff alternatives like Bangladesh or Cambodia. Uncertainty over market access threatens to weigh heavily on investor confidence, complicating recovery efforts at a time when global trade conditions remain intensely challenging.

Sri Lanka hopeful of removing new tariff

Faced with severe industrial disruption, Sri Lankan state officials are moving quickly to demonstrate regulatory compliance and negotiate a downgrade into the lower tariff tier.

Deputy Minister of Finance Anil Jayantha expressed confidence that Sri Lanka will successfully avert the proposed 12.5% duty, emphasizing that proactive measures are already underway to purge forced labor from the export supply chain.

According to Jayantha, a specialized committee led by the Trade Ministry Secretary was appointed months ago to audit the issue, having already completed several rounds of internal reviews.

"Two more critical strategy discussions are scheduled for this coming Monday and Tuesday," Jayantha said.

The Deputy Minister clarified that U.S. authorities proposed the maximum tariff tier after initial investigations revealed that Sri Lankan manufacturers utilize raw materials imported from third-party nations flagged for exploitative labor practices. Reaffirming Sri Lanka's strict stance against forced labor, Jayantha vowed that domestic laws will be swiftly amended to block these problematic inputs, paving the way for Washington to fully rescind the additional duties once supply chain integrity is guaranteed.

Parallel to the forced labor crisis, Colombo is continuing separate, sensitive talks regarding reciprocal tariff structures, hoping to secure a more stable, predictable, and preferential long-term trade agreement with the United States.

For Sri Lanka, the immediate challenge is no longer just maintaining clean factories at home, but proving it can police the murky global pipelines feeding them. The outcome of these urgent negotiations will dictate whether the island can successfully safeguard its vital industrial backbone or watch its competitive edge dissolve under Washington's new trade paradigm.