By P M Amza –

The recently announced India–United States trade deal marks one of the most consequential shifts in global commerce in recent years. It resets a strained relationship after the tariff escalation of 2025 while redrawing competitive lines for South Asian exporters. For Sri Lanka—where more than two-thirds of exports to the United States originate from the garment sector—the agreement presents both risks and strategic openings.

Compounding this development, Bangladesh has now secured its own reciprocal trade arrangement with Washington, including a 19 percent tariff rate and a pathway toward zero tariffs on selected apparel manufactured with U.S.-sourced inputs. This creates a new three-cornered competitive dynamic—India, Bangladesh, and Sri Lanka—under a U.S. tariff regime that is increasingly transactional and supply-chain specific.

A Reset in the U.S.–India Trade Relations

The tariff dispute between India and the United States escalated throughout 2025 as Washington imposed successive punitive measures on Indian exports. These were partly linked to India’s continued purchase of discounted Russian oil, pushing the effective tariff burden on certain goods to as high as 50 percent.

In early February 2026, that structure shifted dramatically. The United States announced an interim trade framework reducing tariffs on Indian goods to an effective 18 percent while rescinding the Russia-linked surcharge. In return, India committed to adjustments in its energy procurement patterns and expanded market access for U.S. exports.

The political sensitivity of this arrangement became evident in mid-February 2026, when nationwide protests and strikes, as reported in the media ,  erupted across India, reflecting domestic concerns over market access concessions and strategic alignment. Nevertheless, the agreement marks a decisive recalibration in U.S.–India economic relations.

Bangladesh’s Reciprocal Framework

Parallel to the India arrangement, Bangladesh concluded its own reciprocal trade framework with the United States. Under the announced structure, Bangladeshi exports will face a 19 percent reciprocal tariff rate. Crucially, selected textile and apparel categories may qualify for zero-tariff treatment if produced using defined U.S.-sourced inputs.

This is particularly significant because Bangladesh is the world’s second-largest apparel exporter. Even marginal tariff differentials in basic garment categories can redirect substantial sourcing volumes.

The framework signals a broader evolution in U.S. trade policy: tariff relief is increasingly tied to reciprocity and supply-chain alignment rather than traditional comprehensive free trade agreements.

Why This Matters for Sri Lanka

Sri Lanka’s exposure to the U.S. market is deep and structural. Garments remain the country’s largest export sector, and the United States is its single most important apparel destination. When U.S. retailers adjust sourcing strategies, the impact is felt immediately across Sri Lankan factories, industrial zones, logistics networks, and employment levels.

During the height of the U.S.–India tariff escalation, Sri Lanka benefited from limited trade diversion as buyers shifted orders away from India. That temporary breathing space is now narrowing. With tariffs reduced to an effective 18 percent, India regains competitiveness in high-volume segments.

Simultaneously, Bangladesh’s negotiated carve-outs—particularly in basic apparel—intensify pressure on price-sensitive categories where Sri Lanka cannot easily compete on scale alone.

The GSP+ Asymmetry

Sri Lanka continues to benefit from the European Union’s GSP+ scheme, which provides reduced or zero tariffs across thousands of product lines, including most apparel categories. This remains a meaningful competitive advantage in the European market.

The United States, however, offers no comparable preferential scheme to Sri Lanka. Instead, tariff outcomes in the U.S. market are increasingly determined through bilateral reciprocal frameworks—the path now pursued by both India and Bangladesh.

This asymmetry explains why developments in Washington carry disproportionate weight for Sri Lanka’s apparel sector.

Intensifying Competition in Key Segments

India’s apparel industry benefits from extensive vertical integration—cotton cultivation, spinning, weaving, finishing, and garment manufacturing. When tariffs were punitive, these advantages were constrained. With duties reduced, they re-emerge forcefully in price-sensitive segments such as T-shirts, knitwear, sweaters, and mid-range sportswear.

Bangladesh’s strength lies in scale-driven basic apparel manufacturing. Its new framework—including potential zero-tariff pathways tied to U.S. inputs—enhances its ability to defend or expand market share in mass retail categories.

Sri Lanka, by contrast, is strongest in premium segments: intimate apparel, technical wear, and ethically certified production. Yet sourcing decisions are influenced not only by quality, but also by margin considerations and supply-chain risk. If India regains tariff competitiveness and Bangladesh secures targeted tariff-free channels, Sri Lanka risks being confined to a narrowing niche unless it adapts strategically.

Supply Chains and Rules of Origin

The Bangladesh arrangement highlights the growing importance of input-linked concessions. If tariff relief is conditioned on the use of U.S. cotton or man-made fibres, sourcing decisions will increasingly integrate upstream supply chains into trade diplomacy.

India, through reciprocal concessions and energy-linked adjustments, may similarly deepen integration with U.S. inputs and technology flows.

Sri Lanka’s relatively limited domestic textile base leaves it dependent on imported fabrics and accessories, compressing margins in tariff-sensitive environments. The strategic lesson is clear: future competitiveness will depend as much on supply-chain alignment and rules-of-origin strategy as on labour efficiency.

Strategic Pathways for Sri Lanka

Sri Lanka’s comparative strengths remain substantial—craftsmanship, ethical labour compliance, sustainability credentials, and technical expertise in higher-end segments. These must be leveraged more assertively through partnerships based on traceability, ESG compliance, and co-creation rather than pure contract manufacturing.

Market diversification is equally critical. The European Union and the United Kingdom offer continued tariff advantages under GSP+ structures, while Gulf markets align well with Sri Lanka’s premium positioning.

Economic diplomacy can again play a catalytic role. The coordinated engagement between Sri Lanka’s Ministry of Foreign Affairs, the Export Development Board (EDB), the Board of Investment (BOI), and the Joint Apparel Association Forum (JAAF) during the COVID-19 crisis demonstrated how diplomatic networks can deliver tangible economic outcomes. A similar model—focused on clean supply chains and premium branding—should now be activated in Washington, Brussels, London, Dubai, and Singapore.

Domestically, improvements in industrial electricity pricing, logistics efficiency, customs facilitation, and policy predictability will help narrow the cost differential. In a tariff-constrained environment, incremental efficiency gains can preserve buyer confidence and programme continuity.

Conclusion

The India–U.S. trade deal reshapes the competitive landscape for Sri Lanka’s garment industry in the American market. More significantly, Bangladesh’s reciprocal framework—including a 19 percent tariff rate and conditional zero-tariff treatment for selected apparel categories—intensifies regional competition.

Sri Lanka now faces pressure from two directions: India’s restored tariff competitiveness and Bangladesh’s conditional tariff advantages. The appropriate response cannot rely solely on price competition.

Sri Lanka’s resilience lies in credibility—trust, compliance, innovation, sustainability, and premium positioning—reinforced by EU preferences, market diversification, economic diplomacy, and domestic reform. If pursued with strategic clarity, these strengths can reposition Sri Lanka not as the lowest-cost producer in South Asia, but as its most reliable premium apparel partner.

References

1. Reuters, “Bangladesh Secures 19% U.S. Tariff Rate, Zero on Some Apparel Made with U.S. Inputs,” February 9, 2026.

2. Reuters, “Trump Rescinds Punitive Tariff on India Over Purchases of Russian Oil,” February 6, 2026.

3. Associated Press, “Nationwide Strike in India Protests New U.S.–India Trade Framework,” February 12, 2026.

4. The White House, “Joint Statement on Framework for United States–Bangladesh Agreement on Reciprocal Trade,” February 2026.

5. Financial Times, “Bangladesh Trade Framework Signals Shift in U.S. Apparel Sourcing Strategy,” February 2026.

*Author is former Sri Lanka’s Ambassador to EU, Belgium, Turkey and Saudi Arabia and former Additional Secretary (Economic Affairs), Ministry of Foreign Affairs