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

In early July, the Sri Lankan government issued a gazette banning the import of goods produced using forced labor. This directive mandates the publication of a list of high-risk goods, companies, and countries based on ILO findings, requiring importers to provide proof that goods are not made with forced labor. This measure is intended to circumvent the high tariffs announced by the United States in June for countries failing to prohibit "forced labor imports." With a quarter of its exports destined for the U.S. market, Sri Lanka cannot afford these punitive tariffs, which would significantly harm its economy. The industry, particularly the apparel sector, has welcomed the move as it secures a 10 percent tariff rate, crucial for maintaining competitiveness. However, this decision presents a complex diplomatic dilemma. While Sri Lanka claims there is no evidence of it importing goods made with forced labor, the U.S. has singled out China, citing allegations of forced labor in the production of cotton from the Xinjiang region. Data indicates that mechanization in China's cotton production, especially in Xinjiang, exceeds 90 percent, suggesting a low necessity for forced labor. Nevertheless, Sri Lanka's adoption of this measure effectively lends credibility to the U.S. narrative regarding China, posing a risk of deteriorating relations with Beijing, with whom Sri Lanka is deeply intertwined through trade, investment, and debt. While Sri Lanka performs this "theater" to maintain good relations with the U.S., it risks sending a dangerous signal to Beijing, potentially escalating diplomatic tensions with China.