Sri Lanka’s Apparel Sector Resilience Amid Global Tariff Shifts

Sri Lanka’s apparel sector, a linchpin of its export economy, is navigating a complex landscape of global tariff adjustments and strategic market diversification. Despite the imposition of a 30% U.S. tariff on Sri Lankan apparel—a reduction from an initial 44% but still a significant challenge—the sector has demonstrated resilience through expanded trade partnerships and policy reforms. For investors, this duality of risk and opportunity underscores the importance of understanding how strategic diversification and policy alignment are shaping long-term confidence in the industry.

Market Diversification: A Shield Against Tariff Volatility

The U.S. tariff, while reduced, threatens to erode Sri Lanka’s competitive edge, with estimates suggesting potential losses of $110 million to $290 million in export earnings [4]. However, the sector has mitigated this risk by accelerating diversification into the European Union (EU) and the United Kingdom. In the first six months of 2025, apparel exports to the EU surged by 16.7% to $769.89 million, while UK exports rose by 6.45% to $366.53 million [6]. This shift reflects a deliberate strategy to reduce overreliance on the U.S. market, which saw a 5.7% decline in apparel exports during the same period [6].

The growth in EU and UK markets is not accidental but a result of targeted efforts to align with regional trade agreements. Sri Lanka’s Free Trade Agreements (FTAs) with India, Pakistan, and Singapore, coupled with ongoing negotiations for an FTA with Thailand and aspirations to join the Regional Comprehensive Economic Partnership (RCEP), are expanding access to new markets [4]. These agreements are critical for offsetting the U.S. tariff’s impact and ensuring the sector’s long-term viability.

Policy Reforms: Streamlining Investment and Labor Practices

Parallel to market diversification, Sri Lanka has undertaken significant policy reforms to enhance investor confidence. The government streamlined foreign direct investment (FDI) approvals, reducing processing times from 80 days to two weeks through a digital platform [4]. This agility is crucial for attracting capital in a sector where global supply chains are rapidly shifting. Additionally, the “Inclusive Threads” initiative, supported by Better Work Sri Lanka and the Australian Department of Foreign Affairs and Trade (DFAT), is integrating persons with disabilities into the garment industry. By improving workforce diversity and ethical labor practices, the program strengthens Sri Lanka’s appeal to ethically conscious investors and brands [1].

The sector’s commitment to sustainability further bolsters its competitive position. Sri Lankan manufacturers are increasingly adopting carbon-neutral production methods, aligning with global trends toward sustainable fashion [1]. This alignment not only meets evolving consumer demands but also positions the country as a responsible player in global supply chains.

Balancing Risks and Rewards

While the sector’s resilience is evident, challenges remain. The U.S. tariff, though reduced, still places Sri Lanka at a disadvantage compared to competitors like Vietnam and India, which offer lower-cost alternatives [4]. Additionally, the potential loss of 0.6% of GDP and 11% of sector employment underscores the need for continued policy innovation [4]. However, the government’s ambitious target of boosting apparel exports to $8 billion by 2030—driven by expanded FTAs and supply chain diversification—signals a clear roadmap for recovery [4].

For investors, the key lies in assessing how Sri Lanka’s strategic adjustments can mitigate these risks. The surge in investor confidence, reflected in the All Share Price Index (ASPI), suggests optimism about the sector’s ability to adapt [3]. Yet, success will depend on maintaining a balance between rapid approvals and rigorous scrutiny of environmental and labor standards [4].

Conclusion

Sri Lanka’s apparel sector is a testament to the power of strategic diversification and policy alignment in navigating global economic turbulence. While the U.S. tariff presents a near-term hurdle, the sector’s pivot to the EU and UK, coupled with reforms to attract investment and enhance labor practices, positions it for sustained growth. For investors, the challenge is to weigh these strategic advantages against lingering risks, recognizing that Sri Lanka’s resilience may yet redefine its role in the global apparel landscape.

Source:
[1] Sri Lanka advances inclusion in the apparel industry with “Inclusive Threads” [https://betterwork.org/sri-lanka-advances-inclusion-in-the-apparel-industry-with-inclusive-threads/]
[2] Sri Lanka - Trade Agreements [https://www.trade.gov/country-commercial-guides/sri-lanka-trade-agreements]
[3] Sri Lanka investor confidence surges amidst global trade developments [https://economynext.com/sri-lanka-investor-confidence-surges-amidst-global-trade-developments-220941/]
[4] Sri Lanka: Apparel sector could face up to $290 million loss from 30% US tariff [https://www.business-humanrights.org/en/latest-news/sri-lanka-apparel-sector-could-face-up-to-290-million-loss-from-30-us-tariff-2/]