In recent months, Colombo has faced two sharp blows from its Western partners. First was the surprise cut to USAID funding, amounting to approximately US$53 million. Then came a 44 percent tariff on apparel exports to the United States—Sri Lanka’s largest export market. Both moves came without warning and show the US not separating friends from foes, damaging the bilateral relationship and the US’s reputation.
Sri Lanka is discovering that even its most trusted partners can act unpredictably when domestic politics take precedence. Its experience with opaque Chinese loans was one kind of risk, but the recent moves by its democratic partners are another.
As Sri Lanka absorbs the shock of steep new tariffs, the US has carved out exemptions for certain Chinese electronics, highlighting how trade decisions are often shaped more by domestic cost concerns than by supporting partners. This sends a troubling message. The US urges countries, including Sri Lanka, to reduce their dependence on China but then withdraws its support and imposes trade barriers. If Washington wants alignment in the Indo-Pacific, it must act like a consistent partner, not an erratic one.
To its credit, Sri Lanka is not passively absorbing the fallout. Since the 2022 economic crisis, the government has moved to diversify partnerships and reset foreign policy. The current administration, elected in late 2024, has taken a more pragmatic and reform-oriented approach to diplomacy. For example, Sri Lanka and Thailand recently signed a free trade agreement. Colombo has also signalled its intent to join the Regional Comprehensive Economic Partnership and has deepened ties with India, Japan and the Middle East.
These moves follow a broader recalibration that began after years of dependency on China for post-war infrastructure financing, a relationship that eventually triggered a debt crisis. Colombo has since completed important debt restructuring, restored modest growth and brought inflation under control.
Crucially, it is doing this while maintaining a non-aligned posture. Sri Lankan President Anura Kumara Dissanayake has reiterated that Sri Lanka is ‘not pro-Indian or pro-Chinese’ but firmly focused on protecting its own interests. That philosophy has translated into action. Colombo has paused military visits from Chinese research vessels to ease Indian concerns while still welcoming Beijing’s investment in more commercially viable, equity-based projects. The government is now prioritising transparency and risk mitigation over opaque mega-deals.
India, meanwhile, is expanding its presence with its own strategic interests in mind. For example, Indian Prime Minister Narendra Modi’s visit to Colombo in April brought renewed momentum to the long-stalled Trincomalee energy hub.
India is also backing a 120-megawatt solar power plant in Sampur, on a site once offered to a Chinese-backed coal venture that was later shelved due to environmental and strategic pushback. This clearly shows a shift in the energy landscape that Australia should consider, given its pursuit of solar power almost entirely relies on China.
Sri Lanka-India defence ties are deepening too, through joint patrols, training and Sri Lanka’s participation in the Colombo Security Conclave.
These developments don’t mean Sri Lanka is decoupling from Beijing. China remains a key creditor and infrastructure partner, though its role is evolving. Due to its experiences with the Belt and Road Initiative and Hambantota port, Colombo realises it cannot depend only on China. And Beijing is now favouring smaller, commercially viable projects and equity-based investments over the debt-heavy megaprojects of the past, in part because of public and private criticism.
Crucially, India is a close neighbour and a bridge to other Indo-Pacific powers. The US remains relevant, but its recent unpredictability—cutting aid, raising tariffs and exempting China—is eroding trust.
What’s different this time is that Sri Lanka isn’t just reacting. It’s acting. The government is rolling out institutional reforms, including anti-corruption efforts in the customs department and pledges to repeal the Prevention of Terrorism Act. These steps are essential not just for domestic credibility but for reassuring partners that Sri Lanka is a stable, safe and reliable state. Progress is mixed, but Colombo’s intent is clearer than it has been in years.
Still, structural vulnerabilities remain. The global economy is heading into rougher waters. US President Donald Trump’s sweeping ‘reciprocal tariff’ policy could further squeeze Sri Lanka’s exports. Colombo is especially exposed as it has no free trade agreement or privileged access under the generalised system of preferences. Tourism is recovering, but any trade slowdown in the West could hit remittances and export earnings hard.
That makes diplomatic agility more important than ever. Sri Lanka must continue building economic resilience through diversification, value-added exports and deeper South-South cooperation. It should also court middle and regional powers—including Japan, South Korea and Gulf states—who offer investment without great-power entanglements.
For Washington, the message should be equally clear: if nations such as Sri Lanka are being pushed towards China, your policy settings probably aren’t right. Development aid, trade access and political consistency are not just tools of influence; they are measures of partnership. If the US wants to remain a credible actor in the region, it must demonstrate reliability and respect for countries navigating complex geopolitical terrain. For Colombo, due diligence is vital, regardless of the partner. That means holding all partners to the same standard.