How to Hedge Against US Tariffs: Sri Lankan Export Corporates Guide 2026

If you're running an export-focused business in Sri Lanka, the 20% US tariff implemented in August 2025 isn't just a headline—it's a direct threat to your bottom line. With the apparel sector facing effective tariff rates of 36.8% and regional competitors like Bangladesh securing better deals at 19%, many Sri Lankan corporates are asking the same question: how do we survive this? The good news is that hedging strategies exist, and understanding them now could be the difference between thriving and struggling through 2026.

Understanding the Current Tariff Landscape

The US imposed a 20% reciprocal tariff on Sri Lankan exports effective August 7, 2025, applied on top of existing levies that vary from 0 to 25%.^[1] This came after President Trump's initial announcement of a 30% tariff in July, which was later reduced through negotiation.^[1] However, the relief was short-lived—our regional competitors have since secured better terms. Bangladesh concluded a formal trade agreement in February 2026 with tariffs capped at 19%, whilst India is negotiating an interim arrangement at 18%.^[4] That seemingly small 1-2 percentage point gap matters enormously in an industry built on tight margins.

The impact on Sri Lanka's export revenue is substantial. Global trade database estimates project that Sri Lanka's annual exports to the US will fall from $2.97 billion in 2023 to $1.82 billion in 2026 due to the new tariffs.^[1] The apparel sector, which accounted for almost 40% of our total merchandise exports in 2024, will bear the brunt of this decision.^[2] Industry bodies warn that up to 50,000 jobs could be lost as the competitive gap with India and Vietnam widens.^[2]

Why Hedging Matters Right Now

The International Monetary Fund previously warned that high US tariffs could reduce Sri Lanka's exports and shrink GDP by up to 1.5% below baseline projections, predicting a rise in unemployment.^[1] For export corporates, this isn't theoretical—it's happening now. Your buyers are evaluating whether to stay with Sri Lankan suppliers or migrate to lower-tariff countries like Bangladesh or Vietnam.

A finalised trade agreement with the US would allow buyers to price contracts with confidence and reduce speculation about future shifts.^[4] Until that happens, your business needs protection. Hedging isn't about gambling on currency movements or commodity prices—it's about making strategic decisions to protect revenue, maintain market share, and position your company for stability.

Practical Hedging Strategies for Sri Lankan Exporters

1. Diversify Your Export Markets

The US currently accounts for 25% of all manufactured exports, with the European Union taking about 24%.^[2] Whilst the EU's GSP+ scheme provides preferential access, don't put all your eggs in one basket. Consider expanding into emerging markets in South Asia, Southeast Asia, and the Middle East where tariff barriers may be lower or non-existent. This requires upfront investment in market research and regulatory compliance, but it reduces your vulnerability to sudden US policy shifts.

2. Shift Product Mix Towards Higher-Value Manufacturing

Sri Lankan apparel isn't competitive without tariff exemptions from the US and EU.^[2] The tariff shock is forcing a necessary reckoning: low-margin, commodity-style production won't survive. Consider investing in higher-value products—premium fabrics, technical textiles, sustainable apparel, or vertically integrated designs. These command better margins and are less tariff-sensitive because the value-added justifies the cost.

3. Explore Tariff Exemptions and Preferential Arrangements

The current 20% tariff arrangement has yet to be finalised into a permanent agreement.^[4] The Export Development Board (EDB) is actively pushing for further negotiations to narrow the tariff gap and secure clarity.^[4] Stay engaged with the EDB and monitor developments through official channels. If exemptions or preferential rates become available for specific product categories or sourcing arrangements, you need to be positioned to take advantage immediately.

4. Use US-Origin Raw Materials Strategically

Bangladesh's deal includes a clause allowing zero tariffs on specified volumes of garments made using US-origin cotton and man-made fibres.^[4] Whilst Sri Lanka hasn't secured an identical arrangement yet, this demonstrates a negotiating pathway. If your business can source raw materials from the US, it may become eligible for preferential treatment in future agreements. This also strengthens your positioning as a reliable US supply chain partner.

5. Implement Financial Hedging for Currency and Commodity Risk

Tariffs compound currency risk. If the Sri Lankan rupee weakens against the US dollar (a common occurrence during trade uncertainty), your export revenues decline further. Work with your bank to implement forward contracts or currency options to lock in exchange rates on major contracts. Similarly, if your business relies on imported raw materials, hedge commodity prices through futures or options to protect margins.

6. Strengthen Buyer Relationships and Pricing Strategy

Your long-term buyers are facing their own margin pressures. Rather than absorbing the tariff cost yourself, work with buyers on transparent cost-sharing models. Some may accept modest price increases if you demonstrate reliability and quality. Others may be willing to shift to higher-value products where tariff impact is smaller. This requires honest conversations, but it's better than losing the contract entirely.

Monitoring Central Bank Guidance

The Central Bank of Sri Lanka (CBSL) is monitoring tariff impacts on the economy and export competitiveness. Keep an eye on CBSL communications regarding foreign exchange management, interest rates, and trade policy responses. The CBSL may introduce measures to support exporters—such as refinancing schemes or temporary forex relief—so stay informed through official CBSL channels and industry associations like the Free Trade Zone Manufacturers' Association.

Government and Industry Support Mechanisms

The government has indicated it will continue discussions with US officials for further concessions.^[1] Business lobbies have urged the government to secure more favourable terms.^[1] As an exporter, you should:

• Join or engage with industry associations (JAAF, FTZMA) to amplify your voice in negotiations
• Participate in export development programmes offered by the EDB
• Monitor announcements from the Ministry of Trade, Commerce and Food Security regarding tariff relief or support schemes
• Consider applying for export credit insurance to protect against buyer defaults during uncertain periods

FAQ: Hedging Against US Tariffs

Q: Should I stop exporting to the US altogether?

No. The US remains the largest export market for Sri Lanka, accounting for 27% of total manufactured exports.^[3] Even with 20% tariffs, many buyers will continue sourcing from Sri Lanka if you offer reliability, quality, and competitive pricing. Abandoning the market entirely removes your largest revenue source. Instead, focus on optimising your position within it.

Q: What's the difference between the 20% tariff and what Bangladesh got?

Bangladesh secured a formal trade agreement in February 2026 capping tariffs at 19%, with zero tariffs on garments made using US-origin materials.^[4] Sri Lanka's 20% arrangement hasn't been formalised yet, creating uncertainty about whether it's permanent. That 1% gap, combined with Bangladesh's certainty and material sourcing benefits, gives Bangladesh a competitive edge. Sri Lanka's EDB is pushing for a similar formalised deal.

Q: How long will these tariffs last?

That depends on US trade policy and ongoing negotiations. The current arrangement came into effect August 7, 2025, and is subject to review. The government is actively engaging with US officials, so changes are possible. Plan for at least 12-24 months of tariff exposure, but maintain flexibility if the situation improves.

Q: Can I pass the tariff cost to my buyers?

Partially. Buyers facing their own margin pressures will resist full cost pass-through. You'll likely need to absorb some cost, but transparent communication helps. Emphasise your reliability, quality, and willingness to innovate. Some buyers may accept price increases if you move to higher-value products or guarantee supply certainty.

Q: What should I prioritise first—market diversification or product upgrading?

Start with product upgrading. Moving to higher-value manufacturing protects your margins regardless of tariff levels and makes you less price-sensitive. Market diversification takes longer but provides long-term resilience. Ideally, pursue both simultaneously—upgrade products whilst exploring new markets.

Q: Where can I get support from the government or industry bodies?

Contact the Export Development Board (EDB) for export development programmes and market information. Join industry associations like the Apparel Industry Association Forum (JAAF) or the Free Trade Zone Manufacturers' Association (FTZMA) for collective advocacy and support. Monitor CBSL announcements for forex or credit schemes. Your bank can also advise on hedging instruments and export financing.

Next Steps: Building Your Hedging Plan

Hedging against US tariffs isn't a one-time decision—it's an ongoing strategy that requires monitoring, adjustment, and action. Start by auditing your current export portfolio: which products are most exposed to tariff risk? Which buyers are most vulnerable? Which markets offer growth potential?

Then prioritise. If your margins are tight, focus first on financial hedging (currency and commodity protection) to stabilise cash flow. If you have capital available, invest in product upgrading to move towards higher-value manufacturing. Simultaneously, begin exploring new markets and strengthening buyer relationships with transparent communication about the tariff environment.

Finally, stay connected to policy developments. The tariff landscape is evolving—Bangladesh's deal in February 2026 shows that better terms are possible, and Sri Lanka's government is actively negotiating. By staying informed and proactive, you'll be positioned to capitalise on improvements when they come, rather than being caught off guard by further shocks.

The 20% US tariff is a real challenge, but it's not insurmountable. Corporates that diversify, upgrade, hedge, and adapt will emerge stronger. Those that wait and hope will struggle. The time to act is now.

Sources & References

1. US imposes 20 percent tariff on Sri Lanka - World Socialist Web Site
2. Sri Lanka's Tariff Shock - The Diplomat
3. Sri Lanka: Apparel sector expresses concern over 30% US tariff - Business & Human Rights Resource Centre
4. Apparel industry: B'desh, India move ahead as SL waits on US tariffs - The Morning
5. US tariffs bite into SL growth, says ADB - Daily FT