Tuesday Apr 08, 2025
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The assumption that other countries will not retaliate is highly naive. Countries like China have already responded with retaliatory tariffs, and the European Union has expressed objections. Additionally, Trump’s belief that US industries can thrive while relying on imported raw materials—or his assumption that the US can easily replace these imports—is problematic. Higher production costs due to tariffs will lead to price increases for consumers, hurting domestic industries and possibly resulting in inflationary pressures. Moreover, replacing income taxes with tariffs on external trade poses its own set of practical and economic difficultiesThe consequences of Trump’s tariffs for Sri Lanka nd smaller economiesFor smaller economies like Sri Lanka, the impact of these new tariffs is particularly devastating. Sri Lanka’s apparel industry, which accounts for the majority of its exports to the US, is facing significant challenges. In 2024, Sri Lanka exported nearly $ 3 billion worth of goods to the US, with over 70% of these exports coming from the apparel sector. However, the 44% tariff now imposed on Sri Lankan goods will make these products increasingly uncompetitive in the US market.The new tariff would raise the cost of Sri Lankan garments, making them much more expensive for US importers and retailers. This price increase could lead to a significant drop in demand for Sri Lankan products, putting pressure on companies like MAS Holdings, Brandix, and Hirdaramani. Smaller exporters relying heavily on US markets could face factory closures, layoffs, or production cuts, further exacerbating the challenges for Sri Lanka’s economy. Additionally, this tariff could negatively impact other vital Sri Lankan exports, such as rubber products, coconut products, and tea, all of which are important to the rural economy and employment.Given the fragile state of Sri Lanka’s economy, which is emerging from a debt crisis and struggling with inflation, debt restructuring, and declining foreign reserves, the new tariff could undo recent recovery gains.The potential for Trump to reconsider his strategyDespite the aggressive nature of Trump’s tariff policies, there is a strong possibility that the US could step back from this strategy. The escalating trade war, combined with mounting internal pressures like inflation, rising interest rates, and increasing costs for imported raw materials, could force Trump to reconsider his approach.The retaliatory tariffs imposed by other countries, including major trade partners like China and the European Union, could lead to a reduction in US export sales. As these countries increase tariffs on US goods, American exporters may see a sharp decline in demand for their products, further exacerbating the US trade deficit. Moreover, countries with large US dollar reserves might choose to diversify their holdings, potentially weakening the US dollar.In such a scenario, the US may be compelled to reconsider its tariff strategy to stabilise its economy and restore global trade relations. The political and economic consequences of these tariffs could push the US to renegotiate or reduce the tariffs as mounting external and internal pressures increase.What Sri Lanka can do moving forwardShort-term solutions for Sri Lanka
- Regaining GSP+ status: In the immediate term, Sri Lanka should work to negotiate with the US to regain GSP+ status, which would allow its apparel exports to continue benefiting from preferential treatment. However, this would require Sri Lanka to make significant concessions, such as reducing para-tariffs, special commodity levies, and VAT on US products.
- Regional cooperation: Another short-term strategy involves engaging in regional cooperation. Sri Lanka could work with other countries affected by the tariffs, such as Bangladesh, Myanmar, and Thailand, to form a collective bargaining front. Although these nations are competitors in the US market, joining forces could strengthen their negotiating position with the US and create a more powerful voice for fair treatment in international trade talks.
- Strengthening trade relations with regional partners: Sri Lanka should also work to strengthen trade relations with regional partners such as India and countries in East Asia and Africa. These markets are seeing increased demand for Sri Lankan products, and pursuing Free Trade Agreements (FTAs) with these countries could help offset the negative effects of the US tariffs.
Long-term solutions for Sri Lanka
- Diversifying export portfolio: In the longer term, Sri Lanka must focus on diversifying its export portfolio to reduce its dependence on the apparel sector. Expanding into high-value sectors such as technology, services, and agriculture could offer greater stability and growth opportunities. However, this shift will require substantial investment in skills development, infrastructure, and innovation.
- Expanding global market reach: Sri Lanka should work to expand its global market reach beyond traditional trade partners. This could involve exploring new emerging markets in Asia, Africa, and Latin America, where demand for Sri Lankan products is growing. By diversifying its export destinations, Sri Lanka can reduce its vulnerability to shifts in US trade policies and global market dynamics.
- Improving domestic competitiveness: Sri Lanka must improve its domestic competitiveness through economic reforms and enhancing its industrial capabilities. This could involve fostering greater productivity, improving labour skills, and investing in innovation across various sectors. By strengthening its competitive edge, Sri Lanka can become a more attractive trading partner and improve its resilience to external trade pressures.
Conclusion: Strategic approaches for Sri Lanka’s futureSri Lanka’s immediate challenges due to Trump’s tariffs require tactical short-term solutions, such as negotiating GSP+ status, forming regional coalitions, and strengthening trade with nearby countries. However, for long-term economic stability, Sri Lanka must focus on diversifying exports, seeking new global markets, and investing in structural reforms to bolster its competitiveness. By taking both short-term and long-term actions, Sri Lanka can navigate the turbulent trade environment and build a more resilient and sustainable economy.(The writer is Senior Lecturer in Economics, Department of Economics, University of Ruhuna.)Recent columns
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