The recent US Supreme Court ruling significantly reduces Sri Lanka’s overall tariff from approximately 31% to 21.6%, with the apparel sector experiencing nearly a 10-point reduction. This development allows a broader range of Sri Lankan products to qualify for tariff exemptions, granting additional tariff-free access for USD 65 million worth of exports. However, the potential for further tariff reductions through framework agreements with the US remains limited, as existing agreements have only achieved minor reductions.
On February 20, 2026, the US Supreme Court invalidated tariffs enforced under the International Emergency Economic Powers Act (IEEPA), introducing uncertainty in future US tariff policies. The US has used IEEPA to impose reciprocal tariffs on its trade partners and additional trade measures related to fentanyl for Canada, China, and Mexico since 2025. At the time of the ruling, Sri Lanka’s reciprocal tariff rate stood at 20%. In response, the US administration quickly invoked Section 122 of the Trade Act of 1974 to sustain high tariffs, allowing a US president to address international payment issues.
Moving forward, Sri Lanka will contend with three different tariffs: 1) a 10% Section 122 tariff, 2) the Section 232 tariff, and 3) the Most Favored Nation (MFN) tariff. Notably, the Section 122 tariffs are valid for only 150 days, and the US has indicated plans to increase this rate to 15%. This article examines the implications of the US Supreme Court decision on tariffs faced by Sri Lanka and its comparative tariff position against competitors like Indonesia, Cambodia, and Bangladesh.
How have tariffs changed since ‘Liberation Day’?
The ‘Liberation Day’ tariffs initiated in 2025 gradually escalated Sri Lanka’s effective tariff rate in the US. By December 2025, the full implementation of IEEPA and Section 232 tariffs had increased 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 from 16.4% a year earlier. Sri Lanka’s competitors in the US market also experienced similar tariff increases, with India seeing a 49% increase following a 50% tariff imposition.
The tariff rise varied due to exemptions and section tariffs, such as those on steel and aluminum. In November 2026, the US expanded exemptions to include agricultural products, notably benefiting Sri Lanka’s coconut oil exports. The effective tariff rate for these exports dropped to the MFN level, resulting in a near-zero rate. In contrast, steel and aluminum products faced a tariff increase of nearly 40 percentage points due to the Section 232 tariff, set at 50%.
Current US tariff regime: Comparative analysis
Even after the rescission of the IEEPA tariffs, the Section 122 tariff system remains complex with ongoing exemptions and sector-specific tariffs for products such as steel, aluminum, copper, and auto parts. Although Sri Lanka’s exposure to these tariffs is limited, they do impact certain manufactured products.
The US continues to seek a sustainable legal basis for imposing higher tariffs. The proposed Turnberry System uses tariffs as a “formidable stick” to ensure compliance, lacking a formal dispute settlement mechanism. The ability to impose and maintain high tariffs is crucial for the US to sustain this proposed system. Given that Section 232 tariffs have withstood legal challenges, additional tariffs under this section are likely. The United States Trade Representative has also expressed intentions to initiate several Section 301 investigations, aimed at addressing “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 exempt from the 10% tariff include those under Section 232. Under the Section 122 tariff regime, Sri Lanka’s effective tariff rate will decrease to 21.6% from 31.0%. A similar reduction applies to Cambodia and Bangladesh, while India’s effective rate drops by 13.7 percentage points. As Section 122 and the reinstatement of the African Growth and Opportunity Act (AGOA) are likely to coincide, 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 tariff differential between Kenya and Sri Lanka will decrease from a 27% gap to about 17%. A similar differential reduction occurs against Canada and Mexico, part of the United States-Mexico-Canada (USMCA) free trade agreement. The USMCA preferential 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 these, 84 product codes were in the IEEPA exemptions, accounting for USD 262.1 million or 8.2% of total exports. 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. Consequently, the Section 122 tariff regime provides free market access to an additional USD 65.1 million worth of products. Sri Lanka gains zero additional tariffs on 80 products, including articles of vulcanised rubber, rubber bands, transformers, and engine testing equipment.
Policy options for Sri Lanka
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 mitigate uncertainty. However, the current Section 122 exemptions encompass nearly all tariff concessions offered through these agreements, providing little incentive for countries to grant large concessions to the US. Signatories are already demanding clarity on the future of these deals.
Sri Lanka could consider forming 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 would only gain zero tariffs on 60 of its exports, including precious stones and activated carbon. Therefore, any reciprocal agreement should be carefully evaluated for its costs and benefits.
Dr. Asanka Wijesinghe
Research Fellow
Institute of Policy Studies of Sri Lanka
