The recent ruling by the US Supreme Court has significantly reduced Sri Lanka’s overall tariff from approximately 31% to 21.6%, with the apparel sector experiencing nearly a 10-point decrease. Additionally, more Sri Lankan products now qualify for tariff exemptions, providing an additional USD 65 million worth of exports with tariff-free access.
The potential for further tariff reductions through framework agreements with the US remains limited, as existing agreements have only resulted in minor reductions. The Supreme Court’s decision on February 20, 2026, which struck down tariffs imposed under the International Emergency Economic Powers Act (IEEPA), has introduced uncertainty regarding future US tariff policies. Since 2025, the US has utilized IEEPA to impose reciprocal tariffs on trade partners and implement additional fentanyl-related trade measures for countries like Canada, China, and Mexico. At the time of the ruling, Sri Lanka faced a reciprocal tariff rate of 20%.
In response, the US administration swiftly invoked Section 122 of the Trade Act of 1974 to maintain high tariffs. This section allows a US president to address international payment issues. Moving forward, Sri Lanka will face three different tariffs: the 10% Section 122 tariff, the Section 232 tariff, and the Most Favored Nation (MFN) tariff. Notably, the Section 122 tariffs are valid for only 150 days, and the US has indicated an increase to a 15% rate.
Amid these developments, this article examines the impact of the US Supreme Court decision on tariffs faced by Sri Lanka and its relative tariff position compared to competitors like Indonesia, Cambodia, and Bangladesh. The ‘Liberation Day’ tariffs introduced in 2025 gradually raised Sri Lanka’s effective tariff rate in the US. By the end of December 2025, the IEEPA and Section 232 tariffs were fully implemented, increasing the US effective tariff rate on Sri Lanka by 21%.
The effective tariff rate on wearing apparel products rose to 37.4% in December 2025 for Sri Lanka, up from 16.4% a year earlier. Sri Lanka’s competitors in the US market also experienced similar tariff increases. For instance, India saw a 49% increase following the imposition of a 50% tariff.
The tariff increase was uneven due to exemptions and section-specific tariffs, such as those on steel and aluminum. In November 2026, the US expanded these exemptions to include agricultural products, benefiting Sri Lanka’s coconut oil exports as the effective tariff rate dropped to the MFN level, resulting in an almost zero rate. Conversely, tariffs on steel- and aluminum-related products increased by nearly 40 percentage points due to the Section 232 tariff, set at 50%.
Despite the rescission of the IEEPA tariffs, the Section 122 tariff system remains complex, with ongoing exemptions and sector-specific tariffs for products like steel, aluminum, copper, and auto parts. However, Sri Lanka’s exposure to these tariffs is limited, though they do affect certain manufactured products. The US continues to seek a sustainable legal basis for imposing higher tariffs, as indicated by various communications. The proposed Turnberry System uses tariffs as a “formidable stick” to encourage compliance, lacking a formal dispute settlement mechanism. The ability to impose and maintain high tariffs is crucial for sustaining the proposed system.
Given that Section 232 tariffs have withstood legal challenges, additional tariffs are likely to follow under this section. The United States Trade Representative has also indicated intentions to initiate several Section 301 investigations, designed to address “unfair” trade practices, a tool previously used in the China-US trade war in 2018.
Using the December 2025 export basket, the impact of the current US tariff regime can be estimated. The current Section 122 rate is 10%, applied on top of the base MFN rate. Products are exempt from the 10% tariff when Section 232 is applied. Under the Section 122 tariff regime, Sri Lanka’s effective tariff rate will decrease to 21.6% from 31.0%, with a similar reduction for Cambodia and Bangladesh. India’s effective rate will decline by 13.7 percentage points. As Section 122 and the reinstatement of the African Growth and Opportunity Act (AGOA) are likely to take effect simultaneously, Kenya’s effective rate will fall to 9.2%, largely because MFN rates would no longer apply. If Section 122 rises to 15%, Kenya will experience a tariff increase compared to the IEEPA and AGOA tariff regime.
The Section 122 tariff regime is less detrimental to Sri Lanka for several reasons. Firstly, it reduces tariff rates from higher levels under IEEPA. Secondly, it narrows the tariff gap between Sri Lanka and countries with favorable tariff arrangements under the IEEPA regime. For instance, the effective tariff rate for wearing apparel exported by Kenya was about 10% under the IEEPA and AGOA tariff regime, while Sri Lanka faced a 37% rate, creating a 27% tariff gap between the two countries. Under Section 122, the differential will be about 17%. A similar reduction occurs against Canada and Mexico, which are part of the United States-Mexico-Canada (USMCA) free trade agreement. When other countries faced higher reciprocal tariffs, the USMCA preferential premium for Canada and Mexico was higher. The USMCA premium reduction may benefit countries like Sri Lanka, which export rubber products.
Thirdly, exemptions under Section 122 tariffs cover 546 additional products at the eight-digit level compared to IEEPA exemptions. In 2025, Sri Lanka exported 1,233 unique eight-digit products to the US, valued at USD 3,211.6 million. Among them, 84 product codes were in the IEEPA exemptions. Sri Lanka exported USD 262.1 million, or 8.2% of its total exports, under these exemptions in 2025. However, if the same basket is exported under Section 122, 162 products will be exempt from the Section 122 tariff. In 2025 values, these products were worth USD 327.2 million, or 10.2% of Sri Lanka’s exports. Accordingly, the Section 122 tariff regime grants free market access to additional USD 65.1 million worth of products. Sri Lanka gains zero additional tariffs on 80 products, including articles of vulcanized rubber, rubber bands, transformers, and engine testing equipment.
Rapid shifts in US trade policy have left Sri Lanka with limited feasible responses. Sri Lanka’s competitors have adopted ‘framework agreements’ with the US to eliminate uncertainty. However, the current Section 122 exemptions cover almost all tariff concessions offered through these agreements. Thus, countries have little incentive to grant large concessions to the US, and signatories already demand clarity on the future of these deals. Sri Lanka can similarly form a framework agreement with the US to secure tariff concessions. Even if such an agreement offers zero tariff concessions on all products listed in “Potential Tariff Adjustment for Aligned Partners,” Sri Lanka will only gain zero tariffs on 60 of its exports, including precious stones and activated carbon. Therefore, any reciprocal agreement should be carefully assessed for its costs and benefits.
