Sri Lanka’s Apparel Industry Reels from 30% U.S. Tariff, Seeks Relief Through Talks

Economic

Summary:

The imposition of a 30% U.S. tariff on Sri Lankan garment exports has triggered alarm within the island nation's third-largest foreign exchange sector...

High Tariff Threatens Vital Export Sector

Sri Lanka’s apparel sector, responsible for $4.8 billion in exports in 2024 and employing around 300,000 workers (predominantly women), is facing serious disruption after President Donald Trump announced a 30% tariff on imports from Colombo, effective August 1. According to data from the Joint Apparel Associations Forum (JAAF), U.S. buyers accounted for 40% of the sector’s output, contributing $1.9 billion in earnings last year, and $747 million in just the first five months of 2025.

The tariff, part of a broader trade realignment strategy by the U.S., is significantly higher than the 20% imposed on Vietnam, one of Sri Lanka’s fiercest apparel competitors. Even Bangladesh, which also faces higher tariffs at 35%, maintains larger export volumes and stronger price advantages due to economies of scale and lower labor costs. India, another major player in South Asia’s garment trade, has yet to receive its final tariff rate, but early indicators suggest it could be lower than Sri Lanka’s.

Industry Leaders Warn of Disproportionate Impact

Yohan Lawrence, secretary general of JAAF, expressed concern that Sri Lanka would be pushed into an uncompetitive position if it fails to secure a more favorable tariff rate. He highlighted that Sri Lanka's value proposition lies not in price leadership but in ethical manufacturing and high labor standards, factors that are easily undermined when facing a double-digit tariff disadvantage.

“If this is the end number, Sri Lanka is in trouble,” Lawrence emphasized, noting that continued dialogue with U.S. trade officials is the industry's only hope. The sudden increase from an initial threatened rate of 44% in April to a finalized 30% still leaves some room for negotiation though pressure is mounting as the implementation date nears.

Government Response and Economic Context

Although Sri Lanka's government has yet to issue an official response, a press briefing involving the central bank governor Nandalal Weerasinghe and trade officials was scheduled to address the issue. The stakes are high not only for trade but for Sri Lanka's broader economic recovery, which remains fragile following a recent IMF-supported stabilization program.

The International Monetary Fund has described the country’s outlook as cautiously positive, but warns that ongoing trade disruptions such as these tariffs could pose renewed risks to macroeconomic stability, job creation, and foreign currency inflows.

Negotiation or Margin Compression

If no deal is reached, Sri Lankan exporters may face eroded profit margins, forced price cuts, or even order reallocation to competing nations. Apparel firms may also consider shifting operations partially to countries with more favorable access to the U.S. market, though such transitions are neither cheap nor immediate.

In the weeks ahead, the outcome of discussions between Colombo and Washington could determine whether Sri Lanka's apparel sector continues as a cornerstone of the national economy or faces a painful contraction. With global competition rising and political uncertainty high, both industry and government must act swiftly to protect one of the country’s most strategic export industries.

Source: Reuters

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Economic

Initial Tariff Impact Contained, But Clouds Loom Over Outlook

In a report issued Thursday, the Bank of Japan revealed that while the current fallout from U.S. tariffs on Japanese exports remains modest, growing uncertainty about the global economy and foreign demand is starting to influence corporate sentiment. According to the summary from its quarterly meeting of regional branch managers, the central bank acknowledged that businesses across Japan are increasingly anxious about the indirect effects of tariff-induced price hikes in the United States.

At present, companies across Japan’s nine regional blocs are not reporting severe disruptions. Exports and manufacturing have held up better than expected despite the early rounds of trade restrictions. However, the BOJ's summary cautioned that many firms are beginning to delay or reconsider capital investment plans, particularly in export-driven sectors that anticipate a slowdown in demand due to higher U.S. prices and weakening global consumption.

Mixed Capex Signals Reflect Uneven Sentiment

Although some companies are pulling back, others are accelerating capital spending particularly in automation and productivity-enhancing technologies to address Japan’s chronic labor shortages. This divergence in capital expenditure behavior illustrates the dual pressures Japanese firms face: the need to remain competitive while bracing for a possible global economic downturn.

The BOJ’s regional reports collectively maintained the stance that economic recovery is continuing at a “moderate” pace, in line with assessments from three months ago. This suggests that domestic fundamentals particularly services and consumer demand are still providing enough support to offset external headwinds in the short term.

Policy Implications Ahead of July Meeting

This cautious optimism will inform discussions at the BOJ’s next policy meeting on July 30-31, when policymakers will release updated quarterly forecasts on GDP growth and inflation. While inflation remains within the BOJ's target zone, any indication of softening global trade flows, especially from the United States, Europe, or China, could push the bank to delay further tightening or tapering actions, particularly if yen volatility or capital flight re-emerges.

The BOJ’s assessment strikes a balance between reassurance and prudence. Although Japan’s export sector is currently weathering the tariff storm better than many feared, the forward-looking tone reveals a deeper concern: that the real damage from U.S.-led trade protectionism may manifest more clearly in the months ahead. With Japan’s economic engine still reliant on global trade, the central bank’s July meeting will be a key moment to evaluate whether recent resilience can be sustained amid broader geopolitical and economic turbulence.

Source: Reuters

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Economic

Markets Test Highs Despite Growth Headwinds

As second-quarter earnings kick off, European markets sit near record highs, with the STOXX 600 index up 8% year-to-date outpacing the S&P 500 and marking one of the region’s strongest relative performances in two decades. Yet this rally masks deeper uncertainties. According to LSEG I/B/E/S data, earnings for STOXX 600 constituents are projected to shrink 0.2% in Q2, a stark reversal from the 2.2% growth recorded in the previous quarter.

This anticipated contraction comes as tariff reprieve from the U.S. expired, reigniting fears of retaliatory trade policies. While Europe has so far avoided direct U.S. tariff action, the broader risk environment including levies on pharmaceuticals, copper, and semiconductors has kept markets alert. Investors are now turning to forward guidance for clarity, as many companies had previously withdrawn outlooks during the 90-day uncertainty window following Trump’s initial April tariff declaration.

Guidance, Not Results, Will Drive Market Reaction

Economists and strategists suggest that guidance sentiment will outweigh headline earnings this quarter. Jefferies’ Mohit Kumar noted that Q2 data may be noisy, but future outlooks will determine whether the STOXX rally holds. Barclays analysts observed that forecast confidence has not recovered meaningfully, citing guidance sentiment at its weakest level since the pandemic.

Luke Barrs of Goldman Sachs Asset Management added that while markets grasp the conceptual impact of tariffs, the full earnings transmission mechanism has not yet been tested. If corporate outlooks deteriorate under prolonged trade strain, valuations could come under pressure.

Earnings Downgrades and Positioning Set the Stage

Analysts have been revising earnings forecasts downward for 55 consecutive weeks, reducing full-year growth expectations for European corporates from 8% to 3%. However, the slower pace of downgrades since May, coupled with light investor positioning, could provide upside surprise potential if results modestly exceed expectations.

Deutsche Bank’s Binky Chadha suggested that current investor exposure to equities is slightly below neutral, increasing the likelihood of a "beat-and-rally" scenario. This would mirror past reporting cycles where reduced expectations made even flat results appear impressive.

Valuation Optimism Faces Currency Reality

The STOXX 600 now trades at 14.2 times forward earnings, its highest multiple in three years but still considerably below the S&P 500’s 21.9. This valuation gap reflects both the defensive nature of European equities and market belief in limited downside, provided earnings stabilize.

Yet the strengthening euro is emerging as a pressure point. Up over 13% in 2025, the euro’s appreciation driven by a weaker dollar amid Trump’s aggressive tariff rhetoric poses risks to multinational revenue streams. Unlike the S&P 500, where 70% of revenue is domestic, only 40% of STOXX 600 revenue is generated within Europe, making it highly sensitive to FX shifts.

UBS analysts warn that margin compression may follow, particularly in export-heavy sectors, though GSAM’s Barrs remains optimistic that large-cap European firms are well-hedged. Nonetheless, companies with poor currency risk management may deliver unexpected earnings disappointments, especially in sectors like industrials and consumer goods.

European equities are approaching a critical juncture. The market has priced in a soft landing for earnings, supported by dovish monetary expectations and favorable capital flows from the U.S. But with earnings forecasts still being revised downward and tariff uncertainties re-emerging, investor confidence may be tested if guidance remains weak or FX pressure undermines profitability. The Q2 season will be less about EPS numbers and more about whether corporates can articulate a roadmap through rising trade and currency volatility a narrative that will define the trajectory of European equities in the second half of 2025.

Source: Reuters

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Economic

Singapore Seeks Tariff Relief for Key Export Sector

Singapore’s Deputy Prime Minister and Trade Minister Gan Kim Yong announced plans to visit Washington in July to negotiate tariff exemptions for pharmaceutical exports, aiming to shield one of the country’s most vital industries from the widening U.S.-led trade conflict. Although Singapore has not yet received a direct tariff warning letter from President Donald Trump’s administration, its exports are still subject to the 10% baseline tariff imposed under the “reciprocal” trade policy initiated in April.

Despite a free trade agreement (FTA) with the U.S. since 2004, Singapore's high-value pharmaceutical and electronics shipments remain exposed to new levies, raising concerns over the integrity of established trade pacts and the economic ripple effects on export-reliant sectors.

Tariff Escalation Poses Risk to Semiconductor and Pharma Trade

Trump’s recent announcement of a 50% copper tariff and the planned extension of tariffs to semiconductors and pharmaceuticals has raised alarms in Singapore, a nation where advanced manufacturing and biopharmaceuticals account for roughly 40% of total exports to the United States, according to the Monetary Authority of Singapore. The island’s vulnerability lies in the sector-specific nature of the current trade war, as broad industrial categories increasingly fall within Washington’s retaliatory scope.

Gan noted that while discussions on semiconductors have not yet started, they remain a priority once pharmaceutical issues are addressed. Singapore's global semiconductor supply chain integration both as a producer and logistics hub makes it a potential collateral victim of the broader technology decoupling between the U.S. and Asia.

Domestic Outlook Cautiously Revised as Front-Loading Fades

Gan also flagged slowing economic momentum in the second half of 2025, with earlier growth sustained primarily by front-loaded exports ahead of anticipated tariff hikes. The Ministry of Trade and Industry had already lowered GDP growth projections in April to a range of 0% to 2% from an earlier 1%–3% outlook. This revision reflects both the direct impact of tariffs and the expected decline in external demand as global supply chains are reshuffled.

With Singapore deeply embedded in both Western and Asian trade networks, the convergence of U.S. protectionism and Chinese countermeasures creates a particularly delicate diplomatic and economic balancing act. China’s latest warning of retaliation against countries supporting U.S. supply chain realignment underscores the geopolitical tightrope Singapore must navigate.

Trade Diplomacy Under Pressure

The urgency of Singapore’s upcoming negotiations is compounded by Trump’s letters to 22 countries this week, including close U.S. allies like Japan and South Korea, outlining tariffs of 20% to 50% set to take effect from August 1. While Singapore has not yet received such a letter, the uncertainty surrounding sector-specific enforcement means that even countries not directly named face second-order impacts through reduced global trade flows and redirected capital.

Gan’s approach first stabilizing pharmaceuticals, then addressing semiconductors reflects a prioritized strategy to limit exposure in phases while maintaining a channel for dialogue. Still, Trump’s threat of retaliatory escalation in response to any reciprocal tariffs places all trade-dependent economies in a reactive posture.

As Washington continues its aggressive trade recalibration, Singapore’s visit to negotiate pharmaceutical tariff concessions is a crucial effort to preserve one of its economic pillars. While the outcome remains uncertain, the broader risk lies in the erosion of trust in existing trade agreements and the cascading impact on global growth. With sectoral tariffs expanding and geopolitical alignment shifting, Singapore’s calibrated diplomacy will be essential in navigating the next phase of trade turbulence.

Source: Reuters

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Daniel Carter

Central Bank

Economic

The impact on Japan's output and exports from U.S. tariffs is limited for the time being but many companies are worried about the risk of tariffs weakening global demand, the Bank of Japan said on Thursday.

Some areas in Japan have seen companies delay or review capital expenditure plans, whereas others have seen companies increase spending to streamline operations and cope with labour shortages, showed a summary of the BOJ's quarterly meeting of regional branch managers.

"At present, the impact was limited overall," the bank said about how higher U.S. tariffs were affecting exports and factory output across Japan.

"As for the outlook, many regions saw companies voice concern about slumping demand from rising U.S. sales prices and a slowdown in the global economy," the bank said.

The findings, from surveys conducted by regional branch managers, highlight how companies are not able to fully grasp the potential impact of higher U.S. tariffs due to the mutability of U.S. President Donald Trump's trade policy.

They do not reflect Trump's announcement on Monday to raise tariffs on Japanese goods to 25% from 10% unless a trade deal is struck by August 1, a BOJ official told reporters.

In a separate report, the BOJ said the economies of all nine regions were recovering moderately, maintaining its assessment from three months earlier.

The summary and report will be among factors the BOJ will scrutinise at its next policy meeting on July 30-31, when the board will issue fresh quarterly growth and price forecasts.

Companies' outlook on wages and prices were mixed. Some firms hinted at cutting bonuses if U.S. tariffs hurt profit, whereas others saw the need to keep hiking wages to retain talent, the summary showed.

While many firms expected to keep hiking prices to pass on rising input and labour costs, some held back price increases as consumers became more thrifty, the summary showed.

The BOJ ended a decade-long stimulus programme last year and in January raised its policy interest rate to 0.5% on the view that inflation was on the cusp of durably meeting its 2% target.

It cut its growth forecasts at its previous meeting on May 1 and signalled a pause in rate hikes after Trump raised the prospect of higher tariffs.

The central bank has said wages must keep rising and help achieve sustained inflation before it can resume rate hikes.

Source: Reuters

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Economic

Overcapacity and Price War Erode Financial Stability

China’s auto industry is showing clear signs of financial strain, with a sustained price war and production overcapacity triggering a broad deterioration in performance metrics. According to data from LSEG covering 33 listed Chinese automakers, the average time to pay suppliers has lengthened considerably from 99 days in 2019 to 108 days in 2024. This trend underscores how manufacturers have increasingly relied on delaying payments to conserve liquidity, effectively treating suppliers as de facto lenders.

Among major automakers, BYD extended its payment period to 127 days in 2024. While the company noted a marginal improvement from 139 days in 2019, this still places it significantly above international standards, where European firms typically settle within 40–50 days. Geely Automobile’s average payment time rose sharply to 193 days, with no official comment provided. In contrast, Great Wall Motor reduced its cycle to 94 days, bucking the sector trend.

New Regulations Target Unfair Credit Practices

To address growing supplier vulnerability, China implemented a new regulation on June 1, 2025, mandating that large enterprises must settle payments for goods and services within 60 days. The rule is designed to create a fairer ecosystem and prevent dominant automakers from squeezing smaller suppliers, a practice described by Joerg Wuttke of DGA-Albright Stonebridge Group as “turning suppliers into bankers.” The shift aims to enforce accountability across the supply chain and restore liquidity at the vendor level, which is vital for production continuity and innovation investment.

Companies like Nio and Xpeng, both still operating at a net loss, recorded extreme payment cycles of 223 and 237 days, respectively. Despite their prolonged deficits, both companies pledged compliance with the new rules, highlighting rising regulatory pressure to conform.

Inventory and Debt Balloon as Profitability Deteriorates

The financial burden is also reflected in inventory and debt metrics. Combined inventory levels more than doubled to 370 billion yuan in 2024 compared to 2019, as manufacturers flooded dealers with unsold vehicles to meet inflated sales targets. This behavior exacerbates financial stress across the value chain, contributing to stagnation and operational inefficiencies.

Total sector debt jumped 56% to 959 billion yuan, while the median debt-to-equity ratio climbed to 51.3%, up 21 percentage points from 2019. These figures signal deteriorating balance sheet health, with rising leverage putting pressure on future borrowing capacity.

Profitability has also been squeezed. The sector’s median net profit margin fell to just 0.83% in 2024, compared to 2.7% five years earlier. The exception is BYD, which expanded its margin to 5.4% thanks to a successful shift in its revenue mix raising automotive contributions from 49.5% to 79.4%. This pivot helped the company remain resilient amid sector-wide stress, even as its payment timelines remain extended.

Regulatory Oversight Set to Intensify

China’s leadership is increasingly vocal about the risks of unchecked competition and excess capacity. In early July, top policymakers pledged to tighten supervision over predatory pricing and accelerate the phasing out of outdated production facilities, with an eye toward rebalancing supply and restoring industry viability. These moves reflect a coordinated policy effort to shift from short-term volume growth to long-term sustainability.

The broader concern lies in systemic risk. With automakers burdened by weak margins, elevated inventories, and overreliance on supplier credit, there’s an increased chance of supply chain disruptions or insolvency events that could ripple across the economy. The enforcement of the new payment regulation is an early step toward stabilization, but a structural recalibration possibly including consolidation is likely necessary to restore healthy market dynamics.

China’s automotive industry, long a symbol of rapid industrial expansion, is now confronting the limits of volume-driven competition. The combination of overcapacity, debt, delayed payments, and razor-thin margins has triggered a policy response aimed at reform. As regulatory oversight deepens and credit terms tighten, automakers will need to adapt by focusing on efficiency, profitability, and supply chain responsibility. Without meaningful restructuring, the sector risks deeper instability in the years ahead.

Source: Reuters

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Economic

Tariff Threat Highlights Political Undertone in Trade Talks

President Donald Trump’s recent comments targeting India’s participation in the BRICS forum have injected fresh uncertainty into what had appeared to be nearing a resolution in India-U.S. trade negotiations. Trump warned that India could face a 10% tariff, grouping it with other BRICS nations he described as “anti-American.” This follows an earlier announcement of a 50% tariff on Brazilian goods, which dramatically escalated his confrontational trade stance after the BRICS summit in Rio.

While this shift appears to be a reaction to BRICS’ growing alignment on reducing U.S. dollar dominance, Indian officials emphasized that their engagement in the bloc is rooted in pragmatic financial hedging not geopolitical antagonism. They reiterated that India does not support a unified BRICS currency and views local currency trade as a tool to mitigate transaction risk, not challenge dollar hegemony.

India Balances Geopolitical Pragmatism with Economic Stakes

Behind the scenes, Indian negotiators remain cautiously optimistic. They recognize that the August 1 tariff deadline and Trump’s rhetoric may serve more as a negotiation tactic than a firm policy shift. According to insiders, New Delhi has already presented its final offer to Washington, which includes expanded market access for American goods and services and significant concessions to lower reciprocal duties. India is now awaiting a formal U.S. response.

In return, New Delhi hopes for relief from the current 26% reciprocal tariffs and confirmation of a broader trade agreement. Analysts suggest that Trump’s latest warning may be calibrated to extract additional trade concessions, rather than outright derail talks. As Mohan Kumar, a former Indian trade envoy, explained, the U.S. likely distinguishes between India’s economic motives and those of more assertive BRICS members like China or Russia.

Strategic Alignment Still Anchors Bilateral Ties

India’s position as a regional counterbalance to China continues to underpin its importance to U.S. strategic planning. The Biden and Trump administrations alike have viewed India as an indispensable partner in Indo-Pacific security. Earlier this year, U.S. Vice President JD Vance underscored this partnership by calling the U.S.–India alliance central to the 21st century’s geopolitical balance.

This strategic value may help India avoid harsher trade penalties, especially as New Delhi takes over the BRICS chairmanship in 2026, where it will likely aim to moderate the bloc’s anti-Western leanings. India’s neutral stance on reserve currency reform and its refusal to endorse de-dollarization offers Washington a diplomatic off-ramp to differentiate its response from how it treats Brazil or Russia.

Domestic Politics and South Asia Tensions Add Complexity

Tensions have recently surfaced on other fronts. Trump’s claim that trade was used to broker a ceasefire between India and Pakistan in May has not been well received in New Delhi. Prime Minister Narendra Modi publicly distanced himself from that narrative, especially as Washington has resumed outreach to Pakistan’s military leadership. This undercurrent of mistrust may influence how Indian leaders assess the durability of any trade guarantees offered by the Trump administration.

Nonetheless, Indian officials and opposition figures, including Shashi Tharoor, remain hopeful. Tharoor emphasized that a finalized trade agreement would signal “very, very healthy” bilateral ties and could restore confidence in the partnership’s economic track, especially after months of friction.

Trump’s renewed tariff threats have placed India in a difficult diplomatic position, especially as it balances BRICS engagement with its deepening ties to the U.S. However, India’s non-aligned currency stance, strategic economic offers, and geopolitical value are likely to temper Washington’s final decision. The trade talks remain on track, and if both sides can navigate the political theater, a mutually beneficial agreement is still within reach. What unfolds between now and the extended August 1 deadline may determine whether narrative overtakes substance or whether strategic pragmatism prevails.