Sri Lanka’s Tariff Concession May Carry a Diplomatic Cost With China

Imagine that you have two powerful friends you cannot afford to lose. One of them often threatens to punish you unless you publicly denounce the other for something you know the other didn’t do. But you comply because you depend on that friend. But now the other friend is watching, and you’re left hoping they will still take your calls.

This is the position Sri Lanka often finds itself in with regard to the United States and China.

In early July, Sri Lanka issued a gazette to ban the import of goods produced using forced labor. The gazette says that the government has imposed a blanket ban on importing any goods that were made, mined, or produced, wholly or even partially, using forced labor.

The government will also publish a list of high-risk goods, companies, and countries, as per findings of the International Labor Organization (ILO). If an importer brings in products from one of those flagged sources, they have to provide evidence that the goods were not made using forced labor. The Director General of Customs will enforce this directive.

On paper, this looks like a worthy initiative; no one supports forced labor. But in practice, this was the United States making Sri Lanka take part in a game it doesn’t want to play. In June, Washington announced that countries that fail to prohibit “forced labor imports” would face heavy tariffs. Sri Lanka sends a quarter of its exports to the American market, and could not afford to be placed in the punishment bracket.

By adopting the ban, Sri Lanka secured the lower 10 percent tariff rate. Sri Lanka is among 17 economies (also including Canada, India, Mexico, and the U.K.) that were taxed 10 percent because they have “made commitments to adopt, and effectively enforce, forced labor import prohibitions.” A 12.5 percent rate was applied to countries that have, according to Washington, failed to adopt a formal forced-labor import prohibition.

Sri Lankan businesses and politicians have reacted positively to the 10 percent tariff as they believe it puts them in an equal or better position than their key competitors. The Joint Apparel Association Forum (JAAF), which represents the apparel industry in the country, said that the industry is competitive and even a narrow percentage point difference in tariffs could mean the “difference between winning and losing an order to a rival sourcing destination.” This was a sentiment shared by the Exporters Association of Sri Lanka (EASL) and former minister of finance, as well as foreign affairs, Ravi Karunanayake.

While Sri Lanka was only subjected to an additional duty of 10 percent, there was uncertainty between the announcement of possible tariffs in early June and the date that tariffs were announced — a period of almost two months. Sources from the apparel sector told The Diplomat that there were serious concerns about lost orders and job losses during those two months.

As Karunanayake pointed out, there is no evidence to suggest that Sri Lanka imports anything from destinations that use forced labor. Trump has used tariffs as a cornerstone of his foreign policy and uses them to negotiate trade deals around the globe. Countries like Sri Lanka that depend heavily on exports to the United States are especially vulnerable to such moves.

The U.S. consumes almost 25 percent of Sri Lankan exports. The apparel and textile sector, which is Sri Lanka’s top merchandise export, depends heavily on the U.S. market and, to a lesser degree, the EU. In 2025, the revenue from apparel and textiles was $4.9 billion. Exports to the U.S., the EU, and the U.K. were $1.96 billion, $1.6 billion, and $688 million, respectively. Therefore, Sri Lanka has to adopt an attitude of deference to the U.S. and carries out performative actions, such as issuing gazettes banning the import of goods produced using forced labor.

But what does the U.S. mean by goods made using forced labor? In the past few decades, China has become the leading trade partner of almost all countries and the U.S. has been using tariffs to dissuade the world from trading with China. Its not surprising that Washington has singled out China as a country that uses forced labor, which it alleges gives China an unfair advantage over the United States.

The Sri Lankan apparel sector imports many inputs from China. The United States Trade Representative (USTR) insists that cotton grown in Xinjiang is picked using coerced minority labor. A few years ago, the BBC stated that close to half a million workers were coerced into picking cotton in Xinjiang. This often-repeated cotton-picking headline is at odds with the data.

In the 1980s and the 1990s, China relied heavily on its vast and educated workforce to produce goods cheaply. But that has not been the case for at least 10-15 years. Chinese labor is no longer cheap. It is also a highly mechanized country. In 2024, 542,000 industrial robots were installed worldwide, with China deploying 54 percent of them. A 2023 United Nations Food and Agriculture Organization (FAO) report said that even in 2019, the “overall mechanization level of crop production and harvesting in China exceeded 70 percent.”

Xinjiang is no exception to mechanization. Data from China shows that over 90 percent of Xinjiang’s cotton was machine-picked, up from 5 percent in 1990. The overall mechanization in cotton farming has exceeded 97 percent in 2025. Given these trends, it’s highly unlikely that it is China’s “forced labor” that makes the U.S. uncompetitive.

To avoid higher U.S. tariffs, Sri Lanka is having to act as if allegations of forced labor against China are credible, even though the data shows that China’s cotton fields are now overwhelmingly worked by machines, not hands.

The theater Sri Lanka needs to do to stay in Washington’s good graces, however, can signal to Beijing that Colombo is willing to lend legitimacy to a contested narrative. For a country deeply tied to China through trade, investment, and debt, that is a dangerous signal to send.