Unpacking Trump’s Trade Policies and Their Impact on the Colombo Stock Exchange

The presidency of Donald Trump was marked by a significant shift in global trade policy, characterized by an assertive stance on international trade and the extensive use of tariffs. These policies, often rooted in the “America First” agenda, aimed to reshape established trade dynamics and bolster domestic industries within the United States.¹ The Trump administration’s approach represented a notable departure from decades of increasing trade liberalization, introducing a new era of uncertainty and protectionist measures that reverberated across the global economic landscape.³ This analysis focuses on the potential repercussions of these trade policies, particularly the imposition of tariffs, on the Colombo Stock Exchange (CSE), the primary stock market in Sri Lanka. As an emerging economy with a substantial reliance on international trade, Sri Lanka’s economic health and the performance of its stock market are inherently linked to global trade winds and policy shifts in major economies. The interconnectedness of global trade and financial markets means that policy changes in a dominant economic power like the United States can send ripples across the world, influencing investor sentiment and market behavior even in seemingly distant locales.

Donald Trump’s trade policies involved a series of tariffs implemented across his two terms in office. During his first term (2017-2021), several key tariffs were introduced that laid the groundwork for his subsequent actions. In January 2018, tariffs were imposed on solar panels and washing machines, ranging from 30% to 50%.⁴ This was followed in March 2018 by significant tariffs on steel (25%) and aluminum (10%) from most countries, initially including some exemptions that were later lifted.⁴ The rationale behind these tariffs often cited national security concerns and the need to protect domestic industries from foreign competition.⁸ Additionally, in 2018, the Trump administration initiated tariffs on a wide range of Chinese products under Section 301 of the Trade Act, citing unfair trade practices and intellectual property theft.⁹

The second term of the Trump administration (hypothetically in 2025, based on the provided snippets) saw an even more expansive application of tariffs, marked by the announcement of a “reciprocal” trade policy.¹¹ This policy included a baseline tariff of 10% on nearly all imports entering the United States, effective from April 5, 2025.¹ Beyond this universal tariff, higher, individualized “reciprocal” tariffs were planned for countries with which the United States had significant trade deficits or that were deemed to have non-reciprocal trade practices.¹ Notably, China faced substantially elevated tariffs, reaching a total of 145% by April 10, 2025, combining the baseline tariff with additional levies.³ Sri Lanka was also included in the list of countries facing higher reciprocal tariffs, initially set at 44%.² However, these higher tariffs for most countries, including Sri Lanka, were temporarily paused for 90 days shortly after their planned implementation on April 9, 2025, with China remaining the significant exception.¹⁴ This timeline indicates a clear escalation of protectionist measures in the second term, with a broad impact across global trade, although the temporary pauses suggest a dynamic and potentially negotiable aspect to these policies.¹¹

Table 1: Key Trump Administration Tariffs Relevant to Sri Lanka and Major Trading Partners (2025)

The performance of the Colombo Stock Exchange during the period when Trump’s initial tariffs were in effect (2017-2020) reveals a complex interplay of factors. In 2017, the CSE experienced a strong upward trend, with the All Share Price Index (ASPI) increasing by 8.23% and the S&P SL 20 index, comprising the CSE’s 20 largest and most liquid stocks, rising by 11.03% in the first half of the year.¹⁶ The ASPI closed the year at 6,369.26.¹⁸ Expectations for 2018 were initially optimistic, with projected GDP growth around 4-5%.¹⁹ However, the actual economic growth for Sri Lanka in 2018 was more moderate, around 3.2%.²¹ Correspondingly, the CSE saw more subdued gains, with the ASPI increasing by approximately 3% and the S&P SL20 by 6% for the year.²³ 2019 presented significant economic challenges for Sri Lanka, including the impact of the Easter Sunday bombings, which severely affected the tourism sector, a key contributor to the economy.²⁴ Despite these headwinds, the CSE still managed to mobilize substantial foreign capital flows.²⁷ The year 2020 marked a turnaround for the Sri Lankan stock market, with the ASPI recording a notable growth of 10.5%, its highest annual increase since 2014.²⁸ This recovery occurred despite the sharp economic downturn in March 2020 due to the onset of the COVID-19 pandemic, which triggered significant market volatility.²⁹ The market’s resilience and subsequent growth were attributed to increased local investor interest and a recovery in market capitalization.²⁸ Throughout this period, the CSE’s performance was influenced by a range of domestic factors, including political developments, economic growth rates, and specific events like natural disasters and security concerns, as well as global events such as the initial impacts of Trump’s tariffs and the emergence of the COVID-19 pandemic.²⁴

Table 2: Colombo Stock Exchange Key Index Performance (2017-2020)

Assessing the direct impact of Trump’s tariffs on the Colombo Stock Exchange reveals a more immediate connection during the period of the second term tariffs in 2025. Following the announcement of the reciprocal tariffs, which included a substantial 44% levy on Sri Lankan goods, the CSE experienced a sharp decline.³⁸ Investors reacted negatively to the prospect of increased costs for Sri Lankan exports to the United States, a crucial market, leading to a sell-off in the stock market.³⁸ This initial shock wiped out billions of rupees in market capitalization.⁴⁰ Conversely, when President Trump announced a temporary 90-day pause on these higher tariffs for most countries, including Sri Lanka, the CSE saw a significant rebound, with both key indices making substantial gains.⁴¹ This immediate positive reaction underscored the market’s sensitivity to the potential negative impacts of the tariffs and the relief brought by their temporary suspension.⁴² The market’s behavior around these announcements strongly suggests a direct influence of US trade policy on investor sentiment and the performance of the Colombo Stock Exchange. Fears of reduced export competitiveness and broader economic repercussions led to market downturns, while the easing of these fears triggered market rallies.

Beyond the immediate reactions, Trump’s trade policies likely had several indirect impacts on the Colombo Stock Exchange. The global trade dynamics were significantly affected by the Trump administration’s approach, characterized by increased protectionism and trade tensions, particularly the protracted trade war with China.² This environment of uncertainty could have influenced overall investor sentiment towards emerging markets, including Sri Lanka. Heightened global trade tensions can lead investors to become more risk-averse, potentially resulting in capital outflows from emerging economies to perceived safer havens, which could put downward pressure on the CSE.⁴⁵ The US-China trade war, a central pillar of Trump’s trade policy, created a climate of economic uncertainty worldwide.⁴⁸ While some emerging markets benefited from shifts in supply chains as companies sought to avoid US tariffs on Chinese goods, the overall impact on global growth and demand could have indirectly affected Sri Lanka’s export-oriented economy and, consequently, the earnings and valuations of companies listed on the CSE.⁵⁰ If global trade slowed down due to these tensions, the demand for Sri Lankan exports in various markets might have been dampened, impacting corporate profitability and stock performance.

Several key sectors within the Sri Lankan economy would likely be particularly sensitive to changes in global trade policies. The apparel and textile industry, a major export sector for Sri Lanka and a significant contributor to its exports to the United States, stands out as highly vulnerable to US tariffs.⁵³ The proposed 44% tariff in 2025 directly threatened the competitiveness of Sri Lankan apparel in the US market, potentially leading to reduced orders, factory closures, and job losses within the industry.⁴⁰ The tea industry, another significant export for Sri Lanka, could also be affected, although the impact might be more indirect, depending on global demand shifts and whether specific tariffs were imposed on tea imports by the US or other major markets.⁵⁸ The rubber and rubber-based products sector, where Sri Lanka is a notable manufacturer of tires, might face challenges if the US imposed tariffs on these products or if changes in the global automotive industry, influenced by US trade policies, altered demand patterns.⁵⁹ Other export sectors, such as gems and jewelry, coconut products, and IT services, might experience varying degrees of impact depending on their reliance on the US market and the specific nature of the trade policies implemented.⁶⁰ The tourism sector, while a crucial part of the Sri Lankan economy, was significantly impacted by domestic events and the COVID-19 pandemic during the period of Trump’s first term, potentially overshadowing any direct effects of US trade policies on this sector’s stock performance.²⁵

Financial analysts recognize the significant influence of international trade policies on emerging stock markets like the Colombo Stock Exchange. Studies indicate that macroeconomic factors, including exchange rates, which can be influenced by trade policies, have a notable impact on the CSE’s performance.⁶¹ The susceptibility of the CSE to external shocks, with the United States identified as a source of volatility, further underscores the potential influence of US trade policies.²⁷ Analysts emphasize that macroeconomic stability is crucial for attracting foreign investment to the CSE, and trade policies that create uncertainty or negatively affect a country’s economic outlook can deter investors.⁶² The IMF’s assessment that Trump’s tariffs created uncertainty for Sri Lanka’s economic recovery aligns with this view, suggesting that such policies can have broader implications beyond just direct trade flows, affecting investor confidence and financial market stability.⁶³

The potential impacts of Trump’s tariffs on the Colombo Stock Exchange encompass both downsides and some more speculative upsides. The most immediate and significant potential downside is the reduced competitiveness of Sri Lankan exports, particularly apparel, in the US market due to higher tariffs. This could lead to decreased revenues and profitability for listed exporting companies.⁴⁰ The resulting economic uncertainty and negative investor sentiment could trigger capital outflows from the CSE, further depressing stock prices.³⁸ Moreover, the possibility of retaliatory tariffs from other countries in response to US trade actions could harm Sri Lankan exports to those markets as well. A broader slowdown in global economic growth stemming from widespread trade wars would likely diminish overall demand for Sri Lankan goods and services, negatively impacting corporate earnings across various sectors.⁴⁴

On the other hand, some potential, though more speculative, upsides could arise. Shifts in global supply chains, as US companies seek alternatives to China due to tariffs, might lead to increased demand for certain Sri Lankan products in the US or other markets.⁵² If the US imposes higher tariffs on Sri Lanka’s competitors, it could create a relative competitive advantage for Sri Lankan exporters in specific sectors, although the direct 44% tariff in 2025 makes this less probable for the US market itself. The challenges posed by global trade uncertainties might also spur Sri Lanka to intensify efforts to diversify its export markets and strengthen its domestic industries, which could have long-term benefits for the economy and the stock market.⁴⁰ However, these potential upsides appear less certain and may take longer to materialize compared to the more immediate negative consequences of direct tariffs.

Establishing a definitive causal link between Trump’s tariffs and the Colombo Stock Exchange’s performance is inherently complex due to the multitude of factors that influence stock market movements. Domestic economic policies, political stability, global economic conditions, investor sentiment, and the performance of individual companies all play significant roles in shaping market outcomes.⁶² Isolating the impact of one specific factor, such as US tariffs, from this intricate web of influences presents a considerable challenge. While correlations might be observed, for instance, the CSE’s decline following a tariff announcement, it is crucial to remember that correlation does not necessarily imply causation. Other events or underlying economic trends could be contributing to the observed market behavior. Therefore, while the evidence suggests a strong influence of Trump’s trade policies on investor sentiment and market reactions in Sri Lanka, particularly around specific tariff-related announcements, attributing precise market movements solely to these tariffs requires careful consideration of the broader economic and political context.

In conclusion, the analysis suggests that Trump’s trade policies, particularly the imposition of tariffs, had a notable impact on the Colombo Stock Exchange. The direct tariffs announced in 2025 triggered immediate negative reactions in the CSE, highlighting the vulnerability of the Sri Lankan stock market to US trade policy, especially concerning its key export sectors like apparel. While the first term tariffs’ impact was less directly discernible due to concurrent domestic and global economic events, the broader environment of global trade tensions and protectionism likely influenced investor sentiment towards emerging markets. The potential negative consequences for Sri Lankan exports due to tariffs appear more immediate and significant than speculative upsides from supply chain shifts. The interconnectedness of global trade policies and emerging stock markets like the CSE underscores the susceptibility of trade-dependent economies to protectionist measures in major economies. To build resilience against future global trade uncertainties, Sri Lanka would benefit from continued efforts to diversify its economy and export markets, thereby reducing its reliance on specific trading partners and sectors.