Abstract
This article discusses the economic and geopolitical implications of the US Indo-Pacific Economic Framework (IPEF) from Sri Lanka’s perspective as an Indian Ocean littoral state. By examining the strategy behind the framework, evaluating its perceived economic benefits, and outlining the challenges facing prospective members navigating the geopolitical rivalry in the Indian Ocean, this article provides a holistic analysis of Sri Lanka’s potential engagement with the IPEF. The analysis reveals that while the IPEF has the potential to boost Sri Lanka’s regional economic engagement, the framework offers very few tangible economic incentives in its current form. These limited incentives are further complicated by the geopolitical challenges Sri Lanka faces in considering potential participation in the IPEF, such as maintaining nonaligned principles and developing a more robust foreign policy to withstand tensions in the Indian Ocean. The IPEF holds significant promise for Sri Lanka and other littoral states in the Indian Ocean region, but the United States must address key challenges to incentivize prospective partners to fully engage with the economic components of the framework.
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The Indo-Pacific Economic Framework for Prosperity (IPEF) is a US economic initiative designed to foster economic cooperation and growth among its signatory countries in the Indo-Pacific. Centered on the principles of “resiliency, sustainability, inclusivity, economic growth, fairness, and competitiveness,” the framework stands on four pillars: (1) trade, (2) supply chains, (3) clean economy , and (4) fair economy.[1] Alongside the United States, the IPEF currently includes 14 partner countries in the region, collectively accounting for more than 40 percent of global gross domestic product (GDP) and 28 percent of global trade in the Indo-Pacific region.[2] The United States and its partners emphasize the importance of the IPEF for generating tangible economic activity, promoting sustainable development and investment, and ensuring worker-centered benefits, with increased participation and regional inclusivity at the heart of the US Indo-Pacific strategy.
Sri Lanka, a strategically located Indian Ocean littoral state, is currently reshaping its economic and foreign policy outlook. Recovering from economic and political crises, the government is recalibrating its domestic and international policy objectives. Short-term economic policies have prioritized stabilization and mitigation, but longer-term structural reforms are required to address underlying economic issues. Global economic shocks such as COVID-19 and the Russian invasion of Ukraine exacerbated the challenges of an already fragile economic situation, highlighting the need for Colombo to develop a more robust and resilient economy. Sri Lanka has indicated a more outward-looking economic policy to diversify crucial sectors and mitigate the risk of future economic shocks. This shift includes greater trade facilitation and the development of a stronger Indian Ocean identity, highlighting the importance of smaller states in the region.[3] In practice, these economic policies have manifested in free-trade negotiations with regional partners like Thailand and the intention to join larger regional agreements such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
Although domestic policy makers in Sri Lanka and the Indian Ocean littoral region are aware of the IPEF, the discourse surrounding potential engagement remains limited. This gap stems from a lack of literature on the prospects for prospective member countries to join the framework and scant analysis of the IPEF’s economic implications. This article aims to evaluate the current state of the IPEF and assess its economic attractiveness for Sri Lanka, a smaller littoral state in the Indian Ocean. Concurrently, the article explores the geopolitical and strategic nuances of the framework and how these complexities influence economic decision-making and affect the economic prospects of the IPEF.
The article is structured as follows: Section 2 outlines the IPEF as a component of the US Indo-Pacific Strategy; Section 3 conceptually analyses the potential economic benefits of the IPEF for Sri Lanka; Section 4 highlights the geopolitical implications of participating in the IPEF; and Section 5 evaluates the effectiveness of the IPEF, emphasizing the challenges that must be addressed for it to serve as an effective agreement for Sri Lanka and other prospective members.
The US Strategy behind the IPEF
The IPEF embodies a multilateral economic mechanism that promotes the US Indo-Pacific Strategy, centered around a “free, open, connected, prosperous, and resilient” Indo-Pacific Region.[4] Emerging from the US withdrawal from the Trans-Pacific Partnership (TPP) and the failure to join the CPTPP, the IPEF signifies a commitment to more robust regional trade and economic integration. The United States has emphasized the IPEF’s role in shaping the economic rules of engagement and promoting connectivity among US partners and allies in the Indo-Pacific, aiming to secure a strategic foothold in the region, harness economic opportunities, and counter China’s regional influence.
Unlike traditional free trade agreements (FTA) that prioritize concessional market access, the IPEF concentrates on non-tariff barriers and emerging issues such as supply-chain resilience and clean energy. US Trade Representative Katherine Tai has remarked that previous FTAs were “20th century tools” overly focused on market access and tariffs, neglecting critical sectors and creating global supply-chain vulnerabilities. She further stated that the IPEF represents an opportunity to address “21st century issues” and advance “worker-centered” policies for global economic resilience.[5]
The IPEF’s trade pillar aims to facilitate trade through enhanced transparency measures, regulatory practices, and access to goods at competitive prices. The emphasis on technology underscores the US commitment to digital economic transformation within the Indo-Pacific. By focusing on high-standard provisions for competition, environment, labor, and regulations, the United States aims to ensure fair practices in the Indo-Pacific, facilitating trade between the United States and its partner countries. The supply chains pillar seeks to mitigate future economic shocks and build resilience in the global economy. This pillar identifies crucial sectors and goods, emphasizing the need for investment, supply chain diversification, and increased transparency.[6] Implementing these provisions will strengthen access to essential imports for the United States and its partner countries by addressing chokepoints in regional supply chains.
The third pillar emphasizes the need for a clean economy. The framework promotes energy security, greenhouse gas reduction, international commitments to climate change mitigation and adaptation, and the green transition.[7] The IPEF places significant emphasis on policies, standards, and infrastructure investments to support partners in their pursuit of net-zero targets, a crucial component of sustainable economic development. The fair economy pillar aims to bolster collective support and enhance anticorruption measures, tax administration, capacity building, and transparency among all stakeholders. This pillar underscores the need for capacity-building efforts to help countries develop better institutions and compliance.
However, questions regarding the inclusivity of the IPEF and the broader US Indo-Pacific Strategy remain unaddressed, particularly for smaller states in the Indian Ocean. Critics have described the execution of the strategy as “inconsistent,” noting that “the focus hadn’t translated to the Indian Ocean” and its small littoral states.[8] The Indo-Pacific Strategy highlights Southeast Asia as “central to the regional architecture,” while the Indian Ocean and its littoral states, aside from India, receive scant mention. Despite these states facing growing vulnerabilities and emerging opportunities, the US Indo-Pacific Strategy lacks deeper engagement with the Indian Ocean’s littoral states.
The IPEF mainly consists of upper- and upper middle-income countries in Southeast Asia and the South Pacific. While supporting India's role as a regional power remains a top priority for US policy, a broader top-down approach hinders deeper US engagement and integration within the Indian Ocean’s regional architecture. Including Brunei and Fiji in the IPEF is an important step in linking smaller littoral states with the United States, but extending the framework to other Indian Ocean states such as Sri Lanka, Mauritius, and the Seychelles has yet to be seriously considered. For US strategy, the IPEF must not only strengthen but also deepen engagement with smaller littoral states, empowering them to shape the dynamics of the ever-changing Indo-Pacific region. An independent assessment of smaller Indo-Pacific states and their roles in US regional engagements is a gap in both scholarship and policy that must be addressed.
The Economics of the IPEF for Sri Lanka
The United States faces an economic crossroads, seeking to protect and empower domestic industries while promoting a free and open Indo-Pacific and gaining a strategic advantage in the region. Meanwhile, Sri Lanka’s ongoing economic restructuring has set a precedent for outward-looking policies and better integration into the regional architecture. The IPEF presents an opportunity for Sri Lanka to engage economically with the United States and its regional partners. This section unpacks the four pillars of the IPEF and their implications for Sri Lanka, explaining the economic rationale behind the framework and examining its potential benefits and constraints.
Pillar 1: Trade
The IPEF diverges from traditional trade agreements. Unlike its regional predecessors, it does not assure access to US markets or promote trade liberalization. Instead, it aims to unlock benefits by harmonizing product standards with a heightened focus on technical assistance and capacity building. Given that global tariff levels are historically low, the IPEF addresses non-tariff barriers to trade, which disproportionately impact developing countries. Economic theory and literature suggest that reducing such barriers, such as by standardizing technical regulations and enhancing trade transparency, could facilitate trade between IPEF member countries and the United States. Robert E. Baldwin metaphorically describes the reduction of tariffs as “draining the swamp,” revealing the “snags and stumps” of non-tariff barriers that hinder trade potential and must be eliminated to enhance bilateral trade relationships.[9] Products failing to meet US standards are denied entry into the market, with Robert Grundke and Christoph Moser demonstrating that import refusals disproportionately harm developing countries.[10] For exporters from developing countries like Sri Lanka, establishing clear product standards and transparency reduces the risk of costly import refusals and provides greater assurance of selling Sri Lankan goods in the US market.
While aggressive liberalization and tariff elimination resulted in an overreliance on China for critical materials and low-cost imports in the United States, the IPEF’s focus on nontraditional costs of trade—regulatory, labor, environmental, and digital economy costs—signals a more strategic regional trade approach. However, without reduced tariffs improving access to US markets, prospective member countries lack incentives to participate and impose reform costs on their industries.[11] Overcoming such costs and implementing regulatory, environmental, and labor reforms is a costly process that could be substituted for other investments directly reducing production costs and enhancing goods’ competitiveness in alternative markets.
Sri Lanka’s strong access to US markets, particularly in the apparel sector, underscores the lack of incentive to implement costly reforms through the IPEF. Of the USD 5.5-billion worth of apparel and clothing accessories exported by Sri Lanka in 2022, USD 2.3 billion (42 percent) went to the United States. Despite facing relatively high tariffs—14 percent on knitted and 11 percent on nonknitted apparel—Sri Lankan products perform well in the US market.[12] Existing trade patterns and preferences suggest that Sri Lanka does not necessarily need tariff liberalization to compete in the US market, as demand for Sri Lankan apparel remains high. Consequently, participation in the IPEF offers no tangible benefits to trade. The main challenge, however, lies in the lack of diversified exports to the United States and the potential competition from emerging markets like Vietnam and Indonesia, which are rapidly expanding their apparel sectors.
Previous regional agreements, such as the South Asian Free Trade Area (SAFTA) and the Asia Pacific Trade Agreement (APTA), focused on reducing trade costs, creating strong mutual incentives to negotiate deals that improved market access in preferred sectors for all parties. When Vietnam sought lower tariffs on apparel and footwear in the TPP, it implemented significant and costly domestic reforms.[13] Much like Sri Lanka, Vietnam heavily relies on the United States as a destination market for its apparel exports, as does Indonesia, another IPEF member. Table 1 shows the composition of apparel exports from Indonesia, Sri Lanka, and Vietnam to the United States.
Table 1. Apparel Exports to the United States (Source: International Trade Corporation (ITC). “Trade Map - Trade Statistics for International Business Development”. ITC, https://www.trademap.org/Index.aspx, 2022.)
|
Product Group
|
Ad Valorem Tariff
|
Exporter
|
Total Value (USD,
to 2 d.p)
|
Share of Product Exports
|
Average Annual Growth (2018–2022)
|
|
Articles of apparel and clothing accessories, knitted or crocheted
|
14%
|
Indonesia
|
USD 2.9 Bn
|
61%
|
8%
|
|
Sri Lanka
|
USD 1.3 Bn
|
40%
|
2%
|
|
Vietnam
|
USD 9.8 Bn
|
57%
|
6%
|
|
Articles of apparel and clothing accessories, not knitted or crocheted
|
11%
|
Indonesia
|
USD 2.6 Bn
|
53%
|
2%
|
|
Sri Lanka
|
USD 1 Bn
|
46%
|
1%
|
|
Vietnam
|
USD 6.2 Bn
|
48%
|
2%
|
With larger labor forces and better access to technology and manufacturing capital, Indonesia and Vietnam have unsurprisingly experienced faster average growth in their apparel exports to the United States compared to Sri Lanka. Howard and Bram Nicholas compare Sri Lanka and Vietnam, highlighting the success of Vietnam’s export-oriented manufacturing industries, driven largely by technological transformation and diversification.[14] This success has left Sri Lanka’s apparel sector internationally uncompetitive, lagging other regional exporters. Given that Indonesia and Vietnam export a similar range of manufactured apparel goods to the United States, their participation in the IPEF raises significant concerns. By aligning their product standards with the United States, improving transparency, and promoting good regulatory practices, Indonesian and Vietnamese apparel exports gain a competitive edge through non-price factors. If Indonesia and Vietnam can offer lower-cost apparel goods that meet US product standards, there is limited incentive for the United States to continue importing from Sri Lanka when it can satisfy demand with more attractive exporters.
If Sri Lanka intends to grow its apparel exports without being crowded out by other emerging markets, engaging with the IPEF may be a prudent strategy to ensure their exports continue to meet US demands. Thus, Sri Lanka’s participation in this pillar would serve as an insurance policy to maintain a competitive tariff structure alongside other emerging economies in the face of US domestic protectionism. However, prospective members should not feel compelled to engage with the United States merely to hedge their bets. The IPEF’s trade pillar must offer more tangible economic benefits that incentivize member countries to strengthen their economic ties with the United States and support their own domestic industries. These incentives currently do not exist, and the benefits to trade remain unclear, as evidenced by the challenges faced during negotiations when the trade pillar failed to reach its intended agreement.[15]
Pillar 2: Supply Chains
Recent economic shocks underscore the risks posed by globalized supply chains. In response, US industrial policy has sought to rebuild the American manufacturing sector by promoting domestic industries and “friend-shoring” production. In an increasingly globalized world, undiversified supply chains pose significant risks to long-term economic productivity, as exogenous shocks—and policy-induced economic shocks by rivals—can severely disrupt production and create a fragile global economy.
The IPEF’s focus on diversifying supply chains and building resilience reflects US concerns about China’s influence over imports and production, which could be manipulated to gain an economic advantage. Although the United States is aware of Asian countries engaging with both US- and China-led initiatives such as the RCEP, China’s omission from the IPEF and the agreement’s non-tariff emphasis indicate US intentions to promote global sourcing from trusted economic partners in the region. Economic literature underscores the importance of diversifying global supply chains to mitigate the effects of exogenous economic shocks. Daron Acemoglu and Alireza Tahbaz-Salehi develop a framework to understand how negative economic shocks—and the resulting fall in productivity or higher costs—can push production firms into failure through disruptions to production technology and supply chain disruptions, which can spread contagiously throughout the supply chain.[16]
Supply shocks hit Sri Lanka particularly hard, affecting imports of pharmaceuticals, fuel, and fertilizer, leading to foreign exchange reserve depletion and disrupting essential domestic industries. Sri Lanka’s economic crisis was fundamentally a supply-chain crisis, exacerbated by a historical failure to diversify away from price-volatile imports and build domestic capacity. The disruptions caused by COVID-19 and the Russian invasion of Ukraine worsened the situation. Without sufficient alternative suppliers of essential goods, Sri Lanka and its domestic firms were forced to maintain their supply under severe economic constraints, leading to failures in domestic industry and insufficient foreign exchange reserves to meet debt obligations.
Increasing tensions between China and Taiwan also influence the US decision to build supply-chain resilience and “onshore” production. Concerns about potential economic blockades restricting access to Chinese inputs in Taiwan could have serious implications for global industries, particularly the semiconductor market, which is crucial for technological innovation and security. Taiwan dominates the global semiconductor market, essential for US manufacturing and technology. It is estimated that losing access to Taiwan-produced semiconductor chips could lead to a 5- to 10-percent reduction in US gross domestic product, erasing up to USD 1 trillion per year from the global economy in the initial years.[17]
From an economic perspective, a US economic slowdown would significantly impact Sri Lanka, given the importance of the US as an export destination. Aligning with the United States’ economic goals of diversifying semiconductor supply chains away from Taiwan is in Sri Lanka’s economic interests as it builds resilience against future economic shocks. However, this remains a relatively weak incentive for Sri Lanka to engage with the IPEF, as this shift is a US priority regardless of Sri Lanka’s involvement. By supporting the United States' transition away from China, Sri Lanka's participation in the IPEF would primarily serve as an “insurance” policy to preserve US economic stability and demand, rather than capitalizing on tangible economic benefits.
Sri Lanka could capitalize on pillar 2 by participating in the trade of intermediate goods. Ganeshan Wignaraja describes South Asia as a relatively minor player in global supply chains, with India accounting for less than 2 percent of global supply-chain trade and the rest of South Asia, including Sri Lanka, only 0.13 percent.[18] Southeast Asian economies have historically benefited from supply chain spillover from China due to slower growth and rising wages. Sri Lanka must seek to benefit from similar transitions as the United States aims to diversify its supply chains. By leveraging India’s engagement with the IPEF, Sri Lanka can promote intermediate goods trade, integrate into global supply chains, and attract FDI.
Participating in the IPEF and collaborating with the United States on supply-chain resilience would signal to firms and prospective investors that Sri Lanka adheres to high standards of supply-chain trade and aligns with the world’s largest destination market. Combining these non-price factors with low wages, a highly educated labor force, and a strategically advantageous geographic location, Sri Lanka could offer significant benefits to firms aiming to diversify their supply chains and outsource intermediate production stages. As South Asia’s most open economy, low tariffs and limited barriers to trade could provide compelling incentives for firms to incorporate Sri Lanka into their supply chains.
If the IPEF advances and significantly impacts South Asia, it could bolster Sri Lanka’s efforts to build supply-chain resilience and develop policies beneficial to domestic industries producing intermediate goods. While the agreement emphasizes reducing non-tariff barriers, engaging with IPEF partners would enhance supply-chain logistics, connectivity, and efficiency through knowledge transfer. This engagement could attract further investment to improve infrastructure, security, and connectivity, thereby increasing Sri Lanka’s competitiveness in global supply chains.
Pillar 3: Clean Economy
Sri Lanka faces significant challenges in meeting its ambitious climate targets amidst fiscal constraints exacerbated by the recent economic crisis. One of Sri Lanka’s flagship Nationally determined contributions (NDC) is to generate 70 percent of its domestic electricity supply from renewable energy sources by 2030, reaching 100 percent by 2050.[19] Although Sri Lanka has historically relied on hydroelectric infrastructure to supply electricity to the national grid, the share of renewable energy in total energy consumption dropped from 77 percent to 49 percent between 1990 and 2020. During the same period, net energy imports as a percentage of total energy consumption rose from 25 percent to 50 percent, indicating a structural shift toward imported fossil fuels.[20] Underinvestment in hydroelectric infrastructure has exacerbated this imbalance, leading to inefficiency and maintenance issues. Even in times of economic stability, investment in domestic energy infrastructure has been limited.
This lack of domestic investment is driven by policy missteps and financial constraints. Indebtedness and limited capacity to establish or upgrade energy infrastructure have increased reliance on imported fossil fuels to meet national demand. This dependence necessitated maintaining a sustainable stock of foreign exchange reserves to support the domestic energy supply, cultivating a highly vulnerable energy sector influenced by external economic factors. When COVID-19 and the Russian invasion of Ukraine caused falling global incomes and soaring fuel prices, Sri Lanka was forced to exhaust its foreign exchange reserves, making fuel imports unaffordable.
Sri Lanka’s economic crisis underscored the urgent need for energy sector diversification. However, domestic financial constraints limit Sri Lanka’s ability to mobilize resources for these investments. The IPEF presents an opportunity to support developing countries' green transitions both directly—by financing renewable energy infrastructure projects—and indirectly—by enabling concessional, accessible, and sustainable finance. The United States must play a key role in enhancing cooperation and providing a blueprint for infrastructure investments that overcome challenges associated with bureaucracy, instability, and lack of transparency. By investing directly in renewable energy infrastructure through the IPEF, the United States could support economic development, energy security, and climate change mitigation in partner countries, while also fulfilling its own climate commitments through the implementation of Article 6.
Given the challenges of mobilizing investment in renewable energy infrastructure and the multifaceted benefits this would bring to Sri Lanka’s economy, the IPEF can provide a robust framework to attract investment into this critical sector. Sri Lanka’s energy sector boasts significant potential, with the World Bank estimating a 56-GW capacity for offshore wind and recent discussions signaling the integration of Sri Lanka and India’s energy sectors, which could facilitate renewable energy exports.[21] Sri Lanka’s renewable energy sector has potential far beyond its own domestic green transition. India’s strong relationship with the United States and its participation in the IPEF could leverage further US support in this regard.
By providing financial and technical assistance, the IPEF can bridge the capacity gap for Sri Lanka to fulfill its NDCs and facilitate a crucial green transition in the energy sector. Given the bureaucratic hurdles and administrative challenges that Sri Lanka’s public enterprises face amid the constraints imposed by the economic crisis, private sector initiatives must also play a central role in the green transition. The IPEF’s commitment to renewable energy infrastructure in Sri Lanka could transform the landscape, attract investors, and empower locally-led investments in clean energy.
Pillar 4: Fair Economy
The relationship between strong institutions and economic development is well-documented in the economic literature, with the prevailing view that institutions are the primary determinant of economic performance.[22] Many economists argue that corruption is one of the most significant barriers to economic development and that institutional reforms are crucial for successful anticorruption campaigns.[23] However, Ha-Joon Chang suggests a stronger reverse causality, positing that economic development drives institutional reform.[24] Diverse economic literature underscores the complexities of this relationship, but Stefan Dercon effectively summarizes the need for a “unique development bargain” to incentivize public officials to act in the national interest while also serving their individual interests.[25]
The IPEF places institutional development at the core of economic capacity building in the Indo-Pacific. The United States aims to increase transparency in the region to counter illicit engagements with China through its BRI projects. A study by AidData found that 35 percent of BRI projects have been challenged by corruption, excessive debt, or labor exploitation, enabled by weak institutions and a lack of transparency in policy development.[26] This could be perceived as a strategy to counter China’s economic influence in the region by increasing bureaucratic hurdles that Chinese FDI projects have typically overcome.
By emphasizing transparency and anticorruption, the IPEF signals to its regional partners that continuing economic engagement with the United States requires addressing structural issues that enable corruption. Capacity-building efforts and technical assistance through the IPEF could help mitigate corruption vulnerabilities, develop robust legal frameworks, and promote further economic engagements. The IMF Governance Diagnostic Assessment (GDA) identified governance weaknesses in public financial management (PFM), tax policy, and revenue administration in Sri Lanka, highlighting the need for institutional reforms.[27] Participation in the IPEF’s fair economy pillar presents an opportunity for Sri Lanka to partner with the United States and implement these necessary economic reforms.
The IMF agreement’s conditionalities require the Sri Lankan government to raise tax revenue to 14 percent of GDP by 2026, an ambitious target given the current economic climate. Frequent changes in tax design, lacking political and technical scrutiny, have exacerbated existing compliance and administrative issues within the system. Between 1990 and 2022, Sri Lanka’s tax revenue as a proportion of GDP declined from 19 percent to 7.3 percent; national income increased but was not matched by a rise in tax collection.[28] In 2022, 69.5 percent of tax revenue was generated through indirect taxes, such as value-added tax, which disproportionately affect low-income households.[29] As of January 2024, the government raised value-added tax from 15 percent to 18 percent, facing backlash due to its inherently regressive nature. With presidential elections approaching, it is challenging to see how the government will be incentivized to implement difficult and unpopular taxation reforms to meet the IMF targets and address structural challenges in the Sri Lankan economy.
The IPEF holds promise for supporting structural reforms and capacity-building initiatives through financial and technical assistance. The fair economy pillar provides a robust framework for implementation and accountability, potentially benefiting both political leadership and Sri Lanka’s broader economy. However, a significant challenge lies in enforcing standards within the anticorruption pillar. Currently, the IPEF lacks a clear enforcement mechanism that operates across international borders and fails to articulate the direct benefits of participation.[30]
The IPEF has not established Dercon’s “development bargain” for its partner countries, whereby there are incentives to eradicate corruption, making it difficult to gauge the effectiveness of this component of the framework. This also highlights the potential drawbacks of a decentralized approach. It fails to explain why prospective partners would voluntarily opt into the pillar unless key stakeholders stand to gain more from the economic benefits of the IPEF than from maintaining corruption. If prospective members can opt out of the fair economy pillar, it creates a selection bias that hinders the framework's effectiveness and inclusivity.[31]
Summary
Upon examining the potential economic benefits of Sri Lanka’s participation in the IPEF, it becomes evident why discourse has remained minimal. While the IPEF’s conceptual framework signifies a strong commitment to regional economic involvement, its incentive structures fail to attract prospective economic partners. The lack of concessional market access and clarity on immediate economic benefits explains why Sri Lanka’s outward-looking economic recovery has not included prospective membership in the IPEF. Although substantial long-term economic gains such as international supply chain integration, decarbonization, and enhanced product standards are crucial for sustained economic development, Sri Lanka’s ongoing IMF program and current focus on revenue-generating economic opportunities have shifted attention away from these longer-term prospects.
The responsibility of communicating the economic benefits of the IPEF falls on US policy makers. Critical issues such as supply chain resilience, clean energy transition, and anticorruption efforts remain inadequately addressed in the Indo-Pacific region, presenting an opportunity for Washington to contribute significantly to the region’s economic transformation. However, engagement with the United States requires more attractive incentive structures to complement their ambitions and clearer communication of the IPEF’s role as an economic framework rather than a regional trade agreement. Misconceptions surrounding the function of the IPEF could complicate bilateral relationships and leave countries disappointed by US engagement in the region. This economic analysis of Sri Lanka’s potential membership in the IPEF demonstrates that while economic opportunities exist, their realization depends on more effective engagement from the United States to influence an economic recalibration in Sri Lanka.
Economic Ripple Effects: Navigating Non-Alignment and the Geopolitics of the IPEF
Deeper economic engagement alone does not capture the full complexity of the IPEF’s expansion to potential states like Sri Lanka. Policy makers must also recognize the intricate connections between these decisions and the Indo-Pacific geopolitical landscape, particularly the dynamics among the United States, China, and India, and Sri Lanka’s relationships with each. As the global economy increasingly pivots toward the Indo-Pacific region, Sri Lanka finds itself on a geopolitical battleground, acutely aware of the regional tensions between the United States and China, as well as Washington’s growing partnership with New Delhi. This presents a formidable challenge for Sri Lankan foreign policy, which requires a contemporary and outward-looking approach to manage its relationships with the region's major powers. This section of the article analyzes each aspect of Sri Lanka’s geopolitical dilemma and demonstrates that prospective engagement with the IPEF involves complexities beyond mere economics.
Sri Lanka and the Inevitable Tension between the United States and China
Tensions between the United States and China loom large over the Indo-Pacific region, significantly shaping Sri Lanka’s foreign policy decisions. As a small littoral state, Sri Lanka faces challenges in navigating economic, security, and political concerns amid the competing interests of these two economic powerhouses. Issues such as tariff impositions, diplomatic fluctuations, and US wariness over China’s escalating tensions with Taiwan contribute to regional imbalances and influence the foreign policies of smaller states.
The geopolitics between the United States and China have spilled over into their bilateral relationships with Sri Lanka. The United States remains Sri Lanka’s top export partner, while China is its number two import partner. This dependency on both superpowers significantly influences Sri Lanka’s international trade dynamics, as it constantly oscillates between the two.[32] Furthermore, Chinese investments in infrastructure and development projects in Sri Lanka, such as the Hambantota and Port City initiatives, highlight the growing Sino-Lanka relationship. Although their efficacy has been challenged, China has filled a void left by the United States and its perceived lack of economic initiatives and infrastructure investments. However, the United States was quick to criticize China’s slow response to the Sri Lankan debt crisis and provided immediate assistance in its debt restructuring efforts.[33] This tit-for-tat engagement between the United States and China in Sri Lanka underscores the inherent burden on Sri Lanka’s foreign policy, which it must navigate carefully when considering agreements such as the IPEF.
Beijing has acknowledged the US attempt to supplant China’s role as a regional economic power through the IPEF. Soon after the framework was announced, Chinese Foreign Ministry Spokesman Wang Wenbin expressed concerns that Beijing, along with other countries in the region, was worried about the potential drastic effects of the framework and the economic “decoupling with China.”[34] However, the US Treasury Secretary Janet Yellen countered this by stating that a full decoupling of the two economies would “simply not be practical” and that “a full separation of our economies, or an approach in which countries including those in the Indo-Pacific are forced to take sides, would have significant negative global repercussions.”[35] These concerns highlight both powers’ awareness of the consequences of overextending economic engagement in the region and implicitly recognize that the IPEF cannot exclude potential partners due to their deep economic ties with China.
The awareness of this rhetoric and the risk of overextending policy is not necessarily a challenge for US policy makers and was likely a critical consideration when formulating the regional strategy. By allowing partners to engage with both the IPEF and China-led regional agreements, such as the RCEP, the United States can indirectly influence engagements with China by upholding its own standards. If Washington can enforce certain standards and regulations on crucial industries in partner countries, these mechanisms will positively spill over into the economic relationships between their partner countries and China. By employing nonmarket mechanisms to influence industries and domestic policies across the region, the IPEF can coexist with China’s endeavors in the Indo-Pacific. This approach enables Washington to expand US influence in the region by indirectly shaping its partners’ engagements with China. Such economic influence, while not exclusionary, may concern Chinese policy makers when assessing their economic partners’ engagements with the United States through the “softer” economic mechanisms of the IPEF.
Rather than seeking to rival China’s economic engagement with regional partners, the IPEF aims to shape the context in which it occurs. From the US perspective, Colombo’s interest in joining the China-led RCEP reflects Sri Lanka’s desire to integrate with regional partners, not to supplant US influence in the country. Consequently, Washington should not view this with disdain. Instead, the IPEF’s expansions in trade and infrastructure offer the United States an opportunity to strengthen economic ties with Sri Lanka and address past criticisms of weak economic engagement.
For Sri Lanka, this dual engagement presents a strategic opportunity to benefit from its relationship with the United States while maintaining its ties with China. The key for Colombo is to emphasize to Washington the conditions of Sri Lanka’s participation in the IPEF and to articulate to Beijing that joining the framework does not constitute an abandonment of its significant economic and developmental relations with China.
Caught in this soft battle for economic influence, Sri Lanka must tread carefully with both bilateral partners. Engaging with the IPEF without straining its economic relationship with China will require a nuanced and balanced approach, ensuring that Sri Lanka maximizes benefits from both US and Chinese engagements.
The “Indo” in the IPEF and Implications for Sri Lanka
Fully understanding Sri Lanka’s potential engagement with the IPEF requires acknowledging India’s pivotal role in Sri Lankan foreign policy. Despite periods of turbulence, Indo-Lanka relations have featured prominently in Sri Lankan foreign policy, a notion that will persist as both countries’ roles in the region expand. In its trade relationship, India accounts for 27 percent of Sri Lanka’s total annual imports, making it Sri Lanka’s top import partner and its third-largest export partner, holding the distinction as the only country in the top three for both.[36] Additionally, India is one of the largest contributors of FDI to Sri Lanka, with total investments exceeding USD 2.2 billion.[37]
Like the United States, India’s increasingly complex relationship with China has greatly shaped its emergence as a regional power and influenced its bilateral relationships with Sri Lanka. Direct security concerns, such as the India–China border issues, China’s increased naval presence in the Indian Ocean, and infrastructure financing projects through the BRI, have made India increasingly wary of China’s growing hegemonic influence in the region’s economic and security architecture. These apprehensions have directly affected Sri Lanka, where India and China continually compete in port and infrastructure investments, and engage in cyclical diplomatic and security tensions, especially when Chinese vessels dock at Hambantota Port.[38] Furthermore, while China responded slowly to Sri Lanka’s IMF debt crisis, India provided more than USD 4 billion in emergency humanitarian and financial assistance.[39] This dynamic between India and China’s respective engagements in Sri Lanka will continue to complicate Sri Lanka’s strategic dilemma. Balancing these relationships while considering potential IPEF engagement is crucial for Sri Lanka’s foreign policy strategy.
By its very name, the “Indo”-Pacific Economic Framework places India at the heart of its strategy, making New Delhi’s involvement crucial for the framework’s success and inclusivity for regional partners like Sri Lanka. For India, the IPEF offers an opportunity to strengthen ties with the United States and counter China’s regional economic and strategic dominance. Set to become the world’s third-largest economy by 2030, India prioritizes domestic growth and outward economic strategies as part of its Neighbourhood First policy.[40] The IPEF promises benefits to India and its regional partners, particularly through supply chain development, which India hopes to lead in South Asia, building resilience on the principles of “trust, transparency, and timeliness” in the wake of COVID-19 and the Russia’s invasion of Ukraine.[41] The visit from Sri Lankan President Ranil Wickremesinghe to India also signified Colombo’s desire to integrate further into India’s rapidly growing supply chains, especially in the southern part of the country.[42]
New Delhi’s interest in developing clean energy initiatives, as addressed in pillar 3, can also provide tremendous benefits for India and the surrounding economies of the region. The United States and India Strategic Clean Energy Partnership (SCEP) seeks to increase energy investments to drive decarbonization through technological capacity-building in India, with potential extensions to other integrated states within the region.[43] Sri Lanka, which stands to benefit from the extension of this clean energy infrastructure, has begun discussions with India regarding energy-sector integration through an oil pipeline and power grid connections.[44] Engaging with the IPEF’s clean energy pillar could catalyze Sri Lanka’s growing connection to India and promote standards for long-term economic improvements.
India’s participation in the IPEF and its broader regional strategy directly impact Sri Lanka, irrespective of whether Sri Lanka itself joins the framework. Although New Delhi has historically maintained a nonalignment policy, India’s growing relationship with the United States and active role in the IPEF indicate a significant shift in its foreign policy approach. For Sri Lanka, engaging with the IPEF and partnering with India, a country increasingly wary of China, could strain Colombo’s own bilateral relationship with Beijing. However, the potential economic benefits from partnering with India through the IPEF could be highly advantageous for Sri Lanka’s debt-laden and recovering economy. Given these complex dynamics, Sri Lankan policy makers must carefully analyze the evolving geopolitical landscape before establishing a concrete policy for IPEF engagement moving forward.
Navigating the IPEF’s Geopolitics within Sri Lanka’s Foreign Policy
Understanding the context of Sri Lanka’s foreign policy is essential to grasp how it can navigate the geopolitics of the IPEF. Rooted in the Non-Aligned Movement (NAM), of which it was a founding member, Sri Lanka’s foreign policy has traditionally aimed to balance global tensions while exercising sovereignty and avoiding polarization. Described by Sri Lankan President J.R. Jayawardena as “the golden thread that runs through Sri Lanka’s foreign policy,” this principle of nonalignment has historically shaped Colombo’s approach to international relations and its management of relationships with major regional powers.[45] Policy makers and experts in Sri Lanka recognize the importance of hedging between great powers in adherence to the nonalignment principle.
However, Sri Lanka's current economic and political crises, coupled with the evolving geopolitics of the Indian Ocean, challenge the extent to which it can maintain a non-aligned stance. Former Foreign Secretary H.M.G.S. Palihakkara articulated that Sri Lanka’s foreign policy challenge is to secure “tangible economic benefits” while avoiding “geopolitical mischief” in the Indian Ocean.[46] Other experts argue that in an era of economics-driven foreign policy, Sri Lanka must partner with countries that offer the greatest economic benefits, rather than adhering strictly to nonalignment, which is more nuanced today than during its NAM formation.[47] Sri Lanka’s prospective engagement with the IPEF would certainly test this historical approach.
Economic analysis reveals that Sri Lanka stands to gain significant benefits from engaging with the IPEF. The geopolitical question for Colombo, however, is not whether IPEF engagement constitutes an alignment with the United States and India, thereby threatening its relationship with China. Rather, it is whether Sri Lanka can pursue a foreign policy rooted in economic self-interest and forge a multi-aligned approach that maximizes tangible economic benefits while maintaining relations with all states. In a forum on nonalignment, Sri Lanka’s Foreign Minister Ali Sabry stated: “Across party lines, Sri Lanka is yearning to continue its greatest legacy of an independent and sovereign foreign policy. That is there to stay. But the modalities as to how we progress with that in a pragmatic manner in an ever-increasing polarised world is what we need to learn.”[48] If Colombo were to engage with the IPEF, it must recognize that while the “trilemma” between the United States, India, and China persists within the Indo-Pacific and within Sri Lanka itself, it should not hesitate to make decisions that benefit it as a sovereign and independent nation.[49]
Colombo’s current foreign policy, while grounded in historic principles of nonalignment and mindful of Sri Lanka’s position amid geopolitical tensions, lacks the robustness to turn awareness of its challenges into coherent policy that benefits all sides. While countries like the United States, Japan, and India have outlined their respective Indo-Pacific strategies, Sri Lanka has yet to develop a comprehensive engagement strategy.[50] Experts and scholars have identified areas in Sri Lanka’s foreign policy that can work within the changing nature of nonalignment, yet this has not been articulated as a coherent and concrete strategy for economic engagement.[51] To effectively engage with the IPEF amid geopolitical complexities, Sri Lanka first requires an evaluation of how Colombo can maximize the economic benefits of its bilateral relationships with the United States, India, and China. Furthermore, recent discussions on the future of Sri Lanka’s foreign policy emphasize that policy formulation should not be solely through the lens of great-power competition but also consider how Colombo can build relationships with other states in the Indo-Pacific and globally. If Sri Lanka undergoes this remodeling of its foreign policy strategy, it will be better suited to navigate the geopolitical challenges that lie ahead.
Evaluation and Conclusion
This article aimed to assess Sri Lanka's potential engagement with the IPEF and analyze the economic and geopolitical implications of enhanced economic ties between the United States and Sri Lanka. Several overarching factors influence the role of the IPEF, including ongoing negotiations with current partners, the establishment of clear economic incentives, and Sri Lanka’s evolving foreign policy. Political uncertainty due to upcoming presidential elections in both the United States and Sri Lanka in 2024 adds complexity to the situation.
Sri Lanka’s current president, Ranil Wickremesinghe, has historically favored open relationships with the United States and the West, contrasting with his protectionist, pro-China predecessors. However, his recent “pro-Sri Lankan” interview highlights his desire to assert Sri Lanka’s sovereignty and engage with all partners in pursuit of the country’s progress.[52] Furthermore, other electoral candidates, including opposition leader Sajith Premadasa and National People’s Party (NPP) candidate Anura Kumara Dissanayake, have expressed both skepticism and openness toward the United States.
As the results of the 2024 presidential election hang in the balance, so too does Sri Lanka’s prospective engagement with the IPEF. Given Sri Lanka’s recovery period from its economic crisis and the political consequences stemming from these policies, the outcomes of the first elections post-crisis will be particularly telling as to whether Sri Lanka is ready and receptive to sustainable economic changes. These changes could transform its domestic political landscape and align with the outward-looking, economically focused foreign policy that the IPEF seeks to promote.
However, Sri Lanka’s engagement with the IPEF faces hurdles beyond its political turbulence. Progress in trade negotiations as part of pillar 1 of the IPEF has stalled due to US domestic concerns linked to the Indo-Pacific Strategy. Political candidates remain cautious about fully supporting the IPEF due to sensitivities among the electorate, particularly those favoring protectionist measures to empower domestic industries. Former President Donald Trump has clearly stated that if he wins in the fall, the IPEF—dismissively referred to as “TPP Two”—would be eliminated immediately.[53] This electoral uncertainty in the United States poses a significant barrier to not only the IPEF’s strengthening and expansion but also its very existence.
Sri Lanka’s successful engagement with the IPEF ultimately hinges on both economic and geopolitical factors. Given the geopolitical complications of engaging with regional economic agreements, clear and immediate economic benefits are necessary to incentivize prospective partners. However, the United States has not yet demonstrated the immediate economic benefits of IPEF participation, making it unsurprising that the framework has failed to attract Sri Lankan policy makers as part of their economic strategy. While longer-term economic benefits exist conceptually—such as international supply-chain participation, a clean energy transition, and anticorruption measures—Sri Lanka’s current economic situation requires more immediate solutions.
Sri Lanka is pursuing economic self-interest as part of its foreign policy approach, and the IPEF currently fails to support this position. Without clear economic benefits, Colombo is constrained by the geopolitical complications that could arise without gaining a sufficient economic advantage to justify Sri Lanka’s engagement. This lack of incentive is further exacerbated by the weakness of enforcement mechanisms, which limits the ability of the United States to secure its economic and strategic interests through the IPEF and raises questions about the tangible impact of participating in the IPEF altogether.
The IPEF epitomizes the geopolitical implications of economic policy making. Economic decisions are profoundly impacted by the shifting dynamics of the Indo-Pacific, compelling smaller, open economies like Sri Lanka to exercise caution when building mutually beneficial relationships with major powers. Given the confrontational nature of the IPEF and the economic uncertainty surrounding engagement, Sri Lankan policy makers are justified in withholding prospective membership until the proposed economic advantages outweigh the potential geopolitical consequences. As Sri Lanka emerges from its worst economic crisis in history, its economic policy will likely remain short-sighted, prioritizing stability over potential turbulence. ♦
Michael Iveson
Mr. Iveson is an ODI Fellow (Economist) based in Colombo, Sri Lanka.
Keerthi Martyn
Mr. Martyn is a recent US Fulbright Scholar based in Sri Lanka and an independent researcher.
Acknowledgements
The authors would like to thank Dulanaka Jayasinghe, researcher at Lakshman Kadirgamar Institute of International Relations and Strategic Studies, for his support in developing the structure of this article and his timely feedback on the early drafts.