Despair from Trump tariffs

Bolstering his image as the Disruptor-in-chief, last week, the eccentric US President Donald Trump imposed additional tariff rates on a plethora of States that run trade surpluses with the US apart from imposing a 10% baseline tax on imports from all countries in response to what Trump called an economic emergency. Since Trump’s unprecedented announcement, global stock markets have lost trillions in value, causing shockwaves across the world. Perhaps, in view of the turmoil in global markets, he was forced to postpone the planned reciprocal tariffs by 90 days. 

Trump has often remarked that tariff is the most beautiful word in the dictionary. His fascination with tariffs is nothing new. The former reality TV host draws inspiration for tariffs from the 25th US President William McKinley, who was in office from 1897 until his assassination in 1901. As chair of the House Ways and Means Committee, McKinley championed the Tariff Act of 1890, which set the then-highest import tax in US history, raising taxes to 49.5% on 1,500-plus items. Some of Trump’s backers opine that income generated from import duties could replace the Federal Income Tax altogether – a scenario which would be cherished by Trump’s core support base. 

The septuagenarian’s fondness towards trade protectionism originates from the deeply held conviction that a tariff regime has the potential to bring back manufacturing jobs to the US. Economists have doubted whether America could become a manufacturing powerhouse like in the past given the labour and other dynamics that determine economic structures. At present, almost 75% of the US GDP is represented by the service sector.

In the event reciprocal tariffs come into effect within 90 days from now, all Sri Lankan products entering the US market will be imposed with a reciprocal tariff rate of 44%, threatening the South Asian island’s steady economic recovery besides posing risks to the livelihoods associated with key export industries in the country. Prior to the recent hike in import duties, Sri Lankan exports to the US were subject to an average tariff rate of approximately 12.2%. 

There is a degree of ambiguity with regard to how this 44% figure was arrived at. Some claim that authorities in the US have determined that American goods entering the island are applied tariffs to the extent of 88% (including currency manipulation and trade barriers) and 44% has been calculated by the division of the above percentage by 2. Nevertheless, Flexport, a US-based supply chain consultancy, which has reverse engineered the reciprocal tax, has found that in many countries tariffs said to be charged on the US appears to be the trade deficit, divided by exports to the US.

The US Commander-in-chief, being an economic illiterate, fails to recognise that it is not possible for a country to have a trade surplus with every nation in the world. Also, he has completely ignored cross-border trade of services, a flourishing component in the modern international trade regime. A number of Sri Lankan students pursue higher education in the US universities. Furthermore, many islanders subscribe to online services offered by US firms such as Netflix and Linkedln.

As per the latest 2024 Annual Economic Review, Sri Lanka’s merchandise exports to the US during last year was $ 2,911 million, compared to $ 2,769 million in 2023, while the imports from the US in 2024 was $ 443 million, compared to $ 504.4 million during 2023. The US is Sri Lanka’s largest export market and importantly it is the prime foreign market of the apparel industry – the sector which generates the highest number of jobs to the economy.

Although some have suggested diversification of export markets, such initiatives take a considerable time to produce results. The most pragmatic course of action is to explore the possibility of signing a bilateral FTA with the richest economy in the world to ensure favourable market access for Sri Lankan exports.