Sri Lanka risks repeating a decade-old policy failure unless its next trade adjustment mechanism is built with real institutional teeth, the Centre for a Smart Future (CSF) has warned, urging the Government to lock in the right structure now rather than wait for industry pushback to force the issue.
The independent public policy think tank welcomed indications that a trade adjustment mechanism is being considered alongside the Government’s renewed tariff rationalisation drive and the possible resumption of Free Trade Agreement (FTA) negotiations. In a new Policy Note titled ‘Designing a Credible Trade Adjustment Program for Sri Lanka’s Renewed Tariff Rationalisation Plans,’ the CSF said the mechanism will only work if anchored by an independent, analytically capable institution, not a consultative body that merely receives industry submissions and forwards them for ministerial decision.
The Note was authored by CSF Director Anushka Wijesinha, who previously served as Adviser to the Development Strategies and International Trade Minister and helped formulate the 2018-2019 Trade Adjustment Program it draws on.
The CSF said the National Tariff Policy, issued by the Department of Trade and Investment Policy in February 2026, commits Sri Lanka to a simplified four-band Customs Import Duty structure, a scheduled phase-down of the CESS levy running through 2029, and a rejection of open-ended tariff exemptions as a tool of industry facilitation. The Policy’s own diagnosis, the CSF noted, characterises the existing regime as an ‘Anti-Export Bias Duty Regime’ that has diverted investment towards protected, domestic-market-oriented sectors at a cost the World Bank has estimated at $ 10 billion in unrealised annual export potential.
Correcting that distortion is a well-founded long-term objective, the CSF said, but it is not without near-term costs to firms and workers, particularly in labour-intensive sectors organised around high protection, where rigid labour market regulations slow adjustment. Small and medium enterprises (SMEs), less productive firms, workers in poorer and rural districts, women, and less-skilled workers typically face the greatest difficulty adjusting, it said.
Without a deliberate accompanying mechanism, the CSF warned, three outcomes become more likely: affected firms and workers absorb adjustment costs unsupported, industries seek exceptions through direct lobbying rather than a transparent process, and political pressure builds to slow or reverse the reform, a dynamic it said was broadly consistent with what followed Sri Lanka’s last liberalisation attempt.
The CSF recalled that between 2017 and 2019, as an earlier tariff rationalisation effort and a parallel round of FTA negotiations got underway, a Trade Adjustment Program was jointly developed by the Development Strategies and International Trade Ministry, the Industry and Commerce Ministry, and the Finance Ministry, and approved by the Cabinet of Ministers in early 2019. That liberalisation round did not proceed to full implementation, and the program was never operationalised.
‘The templates and reference material for technical design already exist,’ the Policy Note states. ‘What is required now is the institutional will to implement them firmly and credibly.’
The CSF’s central recommendation is the establishment of an independent Trade and Productivity Commission (TPC), interlocked with, but distinct from, the National Tariff Policy Committee (NTPC) already proposed under the 2026 policy and chaired by the Secretary to the Treasury. It said the NTPC is designed to process tariff-change proposals generally on a quarterly cycle, but is not resourced or staffed to conduct the sector- and firm-level vulnerability analysis, structured industry hearings, and adjustment-plan evaluation an adjustment mechanism requires.
‘A body that merely convenes stakeholders for consultation, receives submissions, and forwards them for ministerial decision will not function as an effective adjustment mechanism,’ the Policy Note cautions, adding that a TPC-equivalent body set up as a nominal add-on rather than a standing institution should be expected to fail the same way unstructured industry consultation has failed before, defaulting either to inaction or case-by-case political accommodation.
The earlier framework proposed a seven-member commission, with two members nominated by the Finance Ministry and the rest by the ministry responsible for trade, all appointed by Cabinet for four-year terms. Its first members were in fact appointed in 2019, with strong composition including independent economists and recently retired industry professionals, but work stalled after a change of Government later that year. A later proposal considered elevating the commission to be appointed and governed by the Constitutional Council to strengthen its durability across administrations, though this would require its own Act of Parliament.
The CSF said the Commission’s effectiveness depends on a dedicated secretariat responsible for processing industry submissions, conducting or commissioning vulnerability analysis, preparing case files for Commission deliberation, and maintaining a public record of submissions, recommendations, and decisions. It noted that an Operations Manual and Implementation Guide developed earlier remains available as a reference document.
On identifying which firms and workers need support, the CSF pointed to two analytical tools developed under the earlier framework: an industry-level tool building an import-sensitivity index from tariff and CESS protection levels, cross-referenced against workforce size, gender composition, education, and informality; and a product-level tool filtering products by import exposure and associated employment characteristics, including job numbers, district concentration, and female employment share. It said these tools, updated with current data, should form the evidentiary basis for assessing vulnerability rather than ad hoc committee discussion.
The CSF also called for all industry submissions, Commission recommendations, and NTPC decisions, along with their justification, to be published online, replicating the transparency the Central Bank of Sri Lanka (CBSL) has established for monetary policy decisions. This, it said, would constrain arbitrary tariff-setting and build confidence that the process is evidence-based rather than a vehicle for selective favouritism.
Beyond the Commission, the CSF’s toolbox includes Industry Competitiveness Councils (ICCs), modelled on international examples such as Peru’s ‘Mesas Ejecutivas,’ to resolve sector-specific regulatory, administrative, or infrastructure constraints within agreed timelines. It stressed ICCs are not vehicles for subsidy or special treatment and should be temporary, dissolving once the specific issues they were formed to address are resolved.
On labour, the CSF recommended a working group across the trade, industry, and labour ministries to identify targeted severance waivers for firms in formally affected sectors whose workers have secured retraining access, to prevent firms being locked into declining activities by high severance costs, without requiring comprehensive labour law reform as a precondition. It also called for a network of Technical and Vocational Education and Training (TVET) providers offering conversion and retraining courses, citing earlier analysis that found wage premiums of 10% to 25% a year of vocational training, alongside dedicated service counters within existing regional job-placement infrastructure such as the former JobsNet centres.
Since adjustment assistance alone does not create new jobs, CSF recommended a time-bound, roughly 12-month investment promotion effort targeted at export-oriented sectors identified under the National Export Development Plan, run concurrently with the tariff transition rather than after it.
The CSF said the National Tariff Policy already provides a usable anchor for a reconstituted mechanism, including a defined four-band tariff destination, a scheduled CESS and Port and Airport Development Levy (PAL) phase-down through 2029, a requirement for economic impact analysis ahead of Cabinet decisions, a minimum 30-to-45-day notice period before tariff changes take legal effect, and a commitment to independent impact assessment after two years of implementation. It said an adjustment mechanism should feed structured recommendations into the NTPC’s existing process rather than operate as a competing structure.
Two risks from the earlier work remain directly relevant, the CSF said: the mechanism must avoid becoming a vehicle for ‘picking winners’ based on political weight or lobbying capacity rather than transparent, evidence-based criteria, and its design must stay flexible enough to adapt as liberalisation’s effects unfold while remaining formalised enough to resist industry capture.
The think tank argued the present moment offers a clearer opportunity than 2017 to 2019, pointing to a Government it described as one that firmly believes in worker-friendly policies as well as transparent engagement with the private sector without corrosive lobbying. It said the technical groundwork, including vulnerability tools, institutional design, and international comparators, has been substantially completed before and need not be redeveloped from scratch, leaving only the political decision to establish the right institutional mechanisms in step with the tariff rationalisation process now, rather than in response to the industry pressures liberalisation will predictably generate.