Potential Impact of US Tariffs on Sri Lanka's Technology and IT Sectors

1. Executive Summary

The reinstatement of US tariffs on Sri Lanka presents a complex challenge with potential ramifications for various sectors of the island nation’s economy. This report examines the potential impact of these tariffs, particularly focusing on the technology and IT sectors following the 90-day pause on the implementation of higher “reciprocal” rates for most countries. While the primary focus of the US tariff policy appears to be on goods imports, especially apparel, the broader economic consequences and the baseline 10% tariff on nearly all imports warrant a detailed analysis of the potential effects on Sri Lanka’s burgeoning technology and IT services export sector. This sector has emerged as a significant contributor to Sri Lanka’s foreign exchange earnings and employment, making its resilience to external trade policy shifts a crucial factor in the nation’s economic trajectory. A 44% tariff, initially slated for Sri Lankan goods, raises concerns about the competitiveness of Sri Lankan companies in the US market and the potential consequences for employment, investment, and growth within the technology and IT sectors. Although a temporary 90-day pause has been implemented for most countries excluding China, the long-term implications remain uncertain, necessitating a thorough understanding of potential mitigation strategies and the perspectives of Sri Lankan authorities and industry stakeholders. This report outlines key findings, analyzes potential impacts, and concludes with policy recommendations aimed at enhancing the resilience of Sri Lanka’s technology and IT sectors in the face of evolving US trade policies.

2. The Landscape of US Tariffs on Sri Lanka

2.1. Analysis of the Specific Tariff Policies and Their Applicability to the Technology and IT Sectors

The United States has recently reinstated a series of tariffs on imports, signaling a shift towards a more protectionist trade policy.¹ Among these measures is a baseline 10% tariff imposed on imports from nearly all countries, which took effect on April 5, 2025. In addition to this broad tariff, the US announced “reciprocal tariffs” with higher rates specifically targeting countries with which the US has significant trade deficits. Sri Lanka faces a substantial 44% tariff under this “reciprocal” structure, ranking it among the countries with the highest rates. This high tariff rate suggests a strong US perception of a trade imbalance or unfair trade practices with Sri Lanka.²

The tariffs are primarily directed at goods imports, with a significant emphasis on apparel, which constitutes a major portion of Sri Lanka’s exports to the United States. Some reports indicate that the US determined the “reciprocal tariff” based on an estimated 88% trade barrier imposed by Sri Lanka, encompassing tariffs, VAT, non-tariff barriers (NTBs), and other factors.³ This suggests the US rationale for the high tariff rate, although the direct applicability to IT services remains to be clarified. Notably, a 90-day pause on the reciprocal tariffs, excluding China, was announced shortly after their initial implementation on April 9, 2025. This decision followed numerous requests from countries seeking negotiations with the US.²³ This pause presents a critical window of opportunity for Sri Lanka to engage in discussions with the US regarding the tariffs.

While the primary impact of the tariffs appears to be on goods, the broad scope of “technology” in the user’s query necessitates an examination of whether specific technology goods, such as electronics and components, are subject to the 44% tariff or the baseline 10% tariff. Notably, some electronics, including phones and computers, were reportedly exempted from the “reciprocal tariffs” but remain subject to the baseline 10% tariff.

2.2. Examination of the 44% Tariff and Its Intended Scope

The 44% tariff imposed on Sri Lanka is a component of a broader US strategy involving “reciprocal tariffs” that are based on bilateral trade deficits and perceived unfair trade practices.³² This rate was calculated based on the US’s assessment of Sri Lanka’s trade barriers, which were estimated to be around 88%.³ The primary intention of this tariff is to target goods, with the apparel sector being the most significantly affected due to its substantial export volume to the US. The US justification for the high tariff rate on Sri Lanka, relying on a composite measure of trade barriers, lacks transparency regarding its specific methodology.³ However, the temporary pause on these higher tariffs for most countries indicates that the US is open to negotiations, which presents a crucial opportunity for Sri Lanka to advocate for its unique economic circumstances.²³

3. The Sri Lankan Technology and IT Services Sector

3.1. Overview of the Sector’s Size, Importance to the National Economy, and Growth Trends

The Information and Communication Technology (ICT) sector is an increasingly vital component of Sri Lanka’s national economy, demonstrating significant growth potential. Projections indicate that the sector aims to achieve a revenue of $3 billion by 2024.³⁶ In 2022, the ICT sector generated $1.5 billion in foreign exchange earnings and provided employment to approximately 175,000 skilled professionals.³⁶ Notably, ICT service exports have risen to become the fourth-largest export category for Sri Lanka.³⁷ The sector encompasses a wide range of activities, broadly categorized as Information Technology (IT) and Information Technology-Enabled Services (ITES).³⁶ This indicates that the IT services sector is a substantial and expanding contributor to Sri Lanka’s export revenues and job creation, making its potential vulnerability to US trade policies a matter of considerable importance.³⁹ Sri Lanka has also gained recognition as a prominent global outsourcing destination, further highlighting the sector’s international competitiveness.³⁶

3.2. Identification of Key Export Markets, with a Specific Focus on the United States

The United States stands as the largest single-country export market for Sri Lanka. In 2024, the US imported an estimated $3 billion worth of goods from Sri Lanka. While the majority of these exports consist of apparel, the technology and IT services sector also contributes to the overall export value to the US.⁴⁴ This significant reliance on the US market makes Sri Lanka’s technology sector particularly vulnerable to shifts in US trade policies, underscoring the importance of market diversification as a strategic imperative. It is also noteworthy that Sri Lanka has demonstrated an openness to adopting US technology, as evidenced by being the first country in the region to grant approval for Starlink services ⁶⁶, a factor that could potentially be leveraged in trade negotiations.

4. Impact Assessment of the 44% Tariff

4.1. Analyzing the Potential Effects on the Competitiveness of Sri Lankan Technology and IT Companies in the US Market

If the 44% tariff were to be applied to technology goods exported from Sri Lanka to the US, it would substantially increase their cost within the US market. This would significantly diminish the competitiveness of Sri Lankan technology companies against both domestic US producers and imports from other countries that face lower tariff rates. Even if IT services are not directly subject to the 44% tariff, the broader economic downturn in Sri Lanka resulting from tariffs on other major sectors, such as apparel, could indirectly impede the growth and investment within the IT sector.⁶ Furthermore, the 10% baseline tariff on nearly all imports, even if the higher 44% rate does not apply to specific technology goods, will still lead to increased costs for Sri Lankan tech companies that import components or export certain categories of technology products.

4.2. Investigating the Likely Consequences for Employment within the Sector

A potential decline in the exports of technology goods from Sri Lanka to the US due to the imposition of tariffs could result in reduced production levels and, consequently, possible job losses within the manufacturing or assembly segments of the sector in Sri Lanka. Additionally, the broader negative economic repercussions of tariffs on major industries like apparel could indirectly diminish the domestic demand for IT services within Sri Lanka, potentially affecting local employment opportunities within the IT sector. While direct job losses in IT services attributable solely to US tariffs might be limited, the overall economic disruption and uncertainty could lead to a slowdown in hiring and the overall growth rate of employment within the sector.⁶

4.3. Evaluating the Potential Impact on Foreign and Domestic Investment

The climate of uncertainty generated by the reinstatement of US tariffs could act as a deterrent to foreign direct investment (FDI) in Sri Lanka’s technology sector, particularly for companies that are primarily focused on exporting their products or services to the United States market. Similarly, domestic investment within the Sri Lankan technology and IT sectors might also be negatively affected as companies adopt a more cautious approach to expansion plans and capital expenditure in response to the prevailing trade uncertainty and the potential for a broader economic slowdown. The overall unstable trade environment can erode investor confidence in the long-term prospects of Sri Lanka’s technology sector.

4.4. Projecting the Effects on the Overall Growth Trajectory of the Sri Lankan Technology and IT Sectors

The imposition of US tariffs has the potential to decelerate the growth trajectory of Sri Lanka’s technology and IT sectors, especially if these trade barriers impede exports or discourage both foreign and domestic investment. However, if IT services remain largely unaffected by the direct tariffs, the sector might still identify and capitalize on growth opportunities in alternative international markets or by intensifying its focus on the domestic market’s needs.¹ The ultimate long-term impact will be largely contingent on the duration and specific scope of the tariffs, as well as Sri Lanka’s proactive measures in adapting to the evolving global trade landscape and diversifying its economic partnerships.

5. Tariff Exemptions and Special Considerations

A thorough examination of the official US tariff policies and related announcements is crucial to ascertain if any specific exemptions or special considerations exist for the technology or IT sectors in Sri Lanka. While the primary focus of the reinstated tariffs is on goods, certain categories have been identified for exemptions. The White House fact sheets and executive orders pertaining to the tariffs ¹⁰⁹ provide details on goods and sectors that are exempt from these measures. Notably, certain electronics, such as smartphones and computers, were reportedly exempted from the “reciprocal tariffs,” although they remain subject to the baseline 10% tariff applicable to nearly all imports. This exemption is a significant consideration for Sri Lanka’s technology sector. Furthermore, Annex II of the Executive Order on tariffs outlines a list of products that are exempt from both the global 10% tariff and the higher reciprocal tariffs. This list includes items such as copper, pharmaceuticals, most semiconductors, and lumber.⁷⁰ It is important to note that while semiconductors are included, other categories of IT-related goods might not necessarily fall under these exemptions, requiring Sri Lankan technology exporters to carefully review the specific Harmonized Tariff Schedule (HTS) codes to determine the exact tariff rates applicable to their products.

6. Strategic Responses for Sri Lankan Companies

6.1. Exploring Potential Strategies for Mitigation, Such as Market Diversification Beyond the US

Given the potential challenges posed by the US tariffs, Sri Lankan technology and IT companies should proactively explore and prioritize strategies to mitigate their impact. A key strategy involves diversifying export markets beyond the United States. This includes actively targeting and expanding presence in regions such as India, the Association of Southeast Asian Nations (ASEAN), Africa, and the European Union (EU), leveraging trade arrangements like the EU’s Generalized System of Preferences Plus (GSP+).³⁴ Strengthening existing trade relationships with current partners and exploring opportunities in new and emerging markets will be crucial for building resilience and reducing over-reliance on the US market.³⁴ Market diversification represents a fundamental long-term strategy for Sri Lankan companies to navigate the evolving global trade landscape and ensure sustainable growth.³⁴

6.2. Analyzing the Feasibility of Focusing on Higher-Value IT Services

Another potential strategy for Sri Lankan technology and IT companies to mitigate the impact of US tariffs involves a strategic shift towards focusing on higher-value IT services. This includes moving beyond traditional low-margin manufacturing and increasingly specializing in areas such as software development, data analytics, cloud computing, cybersecurity, and research and development.³⁴ Developing expertise in emerging and advanced technologies like Artificial Intelligence (AI), blockchain, and cloud computing will be essential for Sri Lankan companies to offer sophisticated solutions and maintain a competitive edge in the global market.³⁷ By emphasizing higher-value services, Sri Lankan IT companies can potentially offset any indirect negative impacts resulting from tariffs on other sectors and capitalize on the growing global demand for advanced digital solutions.³⁴

6.3. Considering Other Adaptive Measures That Companies Might Adopt

In addition to market diversification and focusing on higher-value services, Sri Lankan technology and IT companies can consider adopting other adaptive measures to navigate the challenges posed by the US tariffs. These measures include optimizing their cost structures through efficient resource management and streamlining operational processes.¹⁸ Investing in research and development (R&D) and fostering product innovation will be crucial for enhancing the competitiveness and value proposition of their offerings.⁹ Exploring strategic partnerships and collaborations with technology companies in other countries can provide access to new markets, technologies, and expertise.⁹ Furthermore, for companies that export directly to consumers in the US, leveraging e-commerce channels might offer a way to bypass traditional markups and potentially mitigate some of the tariff-related cost increases.⁸⁵

7. Stakeholder Perspectives

The potential impact of US tariffs on Sri Lanka’s technology and IT sectors has garnered attention from various stakeholders, including government bodies and industry associations. Sri Lankan government entities, such as the Export Development Board (EDB) and the Ministry of Finance, Planning and Economic Development, are actively reviewing the implications of these tariffs and exploring potential responses.¹¹² Industry associations, including the Joint Apparel Association Forum (JAAF) and the National Chamber of Exporters, have also voiced their concerns and are collaborating with the government to assess the impact and formulate mitigation strategies.¹⁵ The Sri Lankan government has reportedly formed expert committees to specifically study the repercussions of the tariff hike and propose viable solutions.⁶ Furthermore, diplomatic efforts are underway, with Sri Lankan officials engaging in virtual discussions with representatives from the US Trade Representative (USTR) office to explore potential options and strategies to address the trade deficit and the imposed tariffs.⁶ These concerted efforts by the Sri Lankan government and industry stakeholders demonstrate a proactive approach to understanding and responding to the challenges presented by the US tariff policies.

8. Economic Context and Recovery

Sri Lanka’s economy has been navigating a period of recovery following a recent economic crisis and debt default. The reinstatement of tariffs by the US on key sectors, including the potential impact on the technology sector, poses a significant challenge to this ongoing recovery process.⁶ The tariffs could potentially exacerbate Sri Lanka’s existing debt crisis by reducing the nation’s foreign exchange earnings, which are crucial for servicing its external debt obligations. The timing of these tariffs is particularly unfavorable as Sri Lanka strives to regain economic stability and investor confidence. The potential for reduced exports and decreased investment in key sectors could slow down the overall economic growth trajectory and make the recovery more protracted.

9. Conclusion and Policy Recommendations

In conclusion, the reinstatement of US tariffs on Sri Lanka presents a considerable challenge, primarily impacting the goods export sector, with apparel being the most significantly affected. While the direct application of the 44% tariff to the technology and IT services sectors remains unclear, the baseline 10% tariff on nearly all imports and the potential for indirect economic consequences necessitate a proactive and strategic response. The 90-day pause on the higher tariffs offers a critical window for Sri Lanka to engage in negotiations with the US.

For Sri Lankan technology companies, the following recommendations are put forth:

Actively explore and prioritize the diversification of export markets to reduce reliance on the United States.
Strategically focus on developing and promoting higher-value IT services and niche technology products that can command better margins.
Continuously strive to enhance operational efficiency and explore cost optimization measures to maintain competitiveness.
Remain closely informed about any further changes in US tariff policies and actively engage with industry associations to collectively address challenges.

The Sri Lankan government should consider the following policy recommendations:

Intensify diplomatic efforts to negotiate a reduction or exemption from the tariffs for key export sectors, including technology goods if they fall under the tariff scope.
Expedite the implementation of the National Tariff Policy to foster greater transparency and predictability in Sri Lanka’s trade relations.
Enhance support for the technology and IT sectors through targeted investments in infrastructure, skills development initiatives, and the promotion of innovation.
Actively pursue and finalize free trade agreements with other significant markets to create alternative export destinations and reduce vulnerability to specific trade policies.
Maintain an open and continuous dialogue with the US Trade Representative to address concerns, highlight mutual benefits of trade, and work towards a more balanced and equitable trade relationship.

Key Tables:

Table: Sri Lanka’s Key Exports to the United States (2024)

Export Category	Value (USD Million)
Articles of apparel, knit or crocheted	1100
Articles of apparel, not knit	754.72
Rubbers	327.31
Coffee, tea, mate and spices	77.92
Machinery, nuclear reactors, boilers	66.94
Electrical, electronic equipment	21.66
Pearls, precious stones, metals	29.62
Furniture, lighting signs	13.55
Printed books, newspapers, pictures	3.08
Aircraft, spacecraft	1.63

Source: Trading Economics ⁴⁸

Table: Potential Increase in Cost of Key Sri Lankan Exports to the US due to 44% Tariff

Export Category	Estimated Export Value to US (USD Million)	Potential Cost Increase at 44% Tariff (USD Million)
Articles of apparel, knit or crocheted	1100	484
Articles of apparel, not knit	754.72	332.08
Rubbers	327.31	144.02
Coffee, tea, mate and spices	77.92	34.29
Machinery, nuclear reactors, boilers	66.94	29.45
Electrical, electronic equipment	21.66	9.53

Note: This table assumes the 44% tariff applies to all listed categories, including electrical and electronic equipment. The actual impact on specific technology goods may vary based on exemptions.