Trump(dis)order is to hit Sri Lanka very badly with limited options available

By seeking to reduce this trade deficit to a zero level through tariffs, Trump is simply punishing his own people for high consumption level they had enjoyed without labouring from the same

Since USA has run a trade surplus with them, according to Trump’s terminology, it is USA which has plundered or looted from these countries. Instead of compensating them for that alleged sin, Trump’s advisors have got Trump to punish them. Hence, if these countries choose to impose retaliatory tariffs, USA cannot make objection to the same

Donald Trump: the bad economist

In 1850, the French economist and statesman, Frédéric Bastiat, distinguished a bad economist from a good economist by looking at how he will consider the consequences of an economic policy. He said that a bad economist will consider only the consequences that can be seen immediately, and a good economist will consider both the immediate consequences and those that can be foreseen.1 It seems that President Donald Trump and his economic advisors fall into this first category since they have been concerned only about the immediate consequences of their tariff policy. Trump has unilaterally increased the tariff rates to make America wealthy again.

He has targeted the countries which have been running a trade surplus with USA by adopting a higher tariff rate than that imposed by USA on them. According to him, these countries have plundered the wealth of Americans, and it is now his duty to correct it. Previously, he announced tariff increases on imports from Canada, Mexico, EU, and China. When these countries countered his measure by introducing retaliatory tariff rates, he went for a general revision of all tariff rates on 2 April 2025 effective later in the month.

That revision has two components: a baseline tariff rate of 10% on all imports and a reciprocal tariff based on 50% of the ratio of the trade surplus to total exports to USA which his officials have reckoned as a proxy for their tariff and non-tariff rates imposed by them on imports from USA.2 He called this general tariff revision event as the Liberation Day for USA making it economically independent.

Bizarre way of calculating rate of plundering cum looting

According to Trump’s advisors, Sri Lanka is a country which should be penalised on this ground. As I pointed out in my previous article in this series, Sri Lanka has been running a trade surplus with USA, on average about $ 2.5 billion per annum, and it has a host of tariff and non-tariff restrictions on imports such as normal tariffs, tariff surcharges, value added taxes, excise duties, special commodity levies, and so on.3 But the calculation of the average tariff has not been made on this basis.

According to what his advisors have revealed, it is an arbitrary method by dividing the trade surplus by the total exports and raising the decimal figure to 100 units, assuming that import elasticity into passthrough of tariff to import prices remains equal to 1 or unity.4 In layman’s language, it is the trade surplus as a percentage of the total exports of the country to USA.

Since Sri Lanka had a trade surplus with USA amounting to $ 2,647 million as against its exports to that country amounting to $ 3,016 million, the ratio is calculated to be at 87.7% or 88%. Thus, in Trump’s parlance, Sri Lanka’s looting of Americans through trade has been fixed at 88%, a wrong connotation as I have explained below.

A bad job done hastily

The result so arrived does not represent the average tariff rate imposed by the foreign country concerned on imports from USA which should be the accurate assessment of the alleged penalisation of USA by foreign countries. In the case of Sri Lanka, this calculation has yielded 88% which Trump’s advisors have used as the base for imposing reciprocal tariff rates. Trump has implied that he has been merciful to those alleged plunderers cum looters because he has taken only half of that as the reciprocal tariff rate.5

The countries which have a low trade surplus so that a half of the calculated percentage is less than 10% or a deficit with USA (a trade surplus from the point of USA) have been subject to the minimum baseline tariff rate of 10%. For instance, USA had trade surpluses with countries like the Netherlands ($ 37 billion in 2022), Brazil ($ 12 billion), Singapore ($ 14 billion), Australia ($ 14 billion), and the UK ($ 12 billion).6 Thus, the applicable reciprocal tariff rate on these countries has been 10%.

This is an instance where Trump’s advisors have erred: since USA has run a trade surplus with them, according to Trump’s terminology, it is USA which has plundered or looted from these countries. Instead of compensating them for that alleged sin, Trump’s advisors have got Trump to punish them. Hence, if these countries choose to impose retaliatory tariffs, USA cannot make objection to the same.

Sri Lanka’s exports to USA

Sri Lanka has been exporting basically garments (about $ 2 billion), rubber products (about $ 300 million), and 85 odd other products.7 According to Trump, with these high exports over imports leading to a trade surplus, Sri Lanka has been plundering and looting from Americans. If this is applied to individual workers, these plunderers cum looters have been poorly paid garment workers, plantation workers, and factory workers in Sri Lanka. Since low-priced output produced by them have been enjoyed by relatively rich American consumers, ethically speaking, it is the US consumers who have been exploiting this low paid labour in Sri Lanka.

But trade takes place between individuals, both personal and corporate, and not between countries. If Sri Lankan producers have been willing to supply those 87 odd items at the prevailing competitive prices, and American consumers have been willing to buy them at those prices, it is a mutually agreed personal exchange and does not qualify to be called plundering or looting. Hence, Trump’s argument of plundering and looting does not sit well with trading practices, though it may be appealing to average Americans who cheered him at every word he uttered while announcing the new tariff structure.

Trade takes place between individuals, both personal and corporate, and not between countries. If Sri Lankan producers have been willing to supply those 87 odd items at the prevailing competitive prices, and American consumers have been willing to buy them at those prices, it is a mutually agreed personal exchange and does not qualify to be called plundering or looting. Hence, Trump’s argument of plundering and looting does not sit well with trading practices, though it may be appealing to average Americans who cheered him at every word he uttered while announcing the new tariff structure

Elusive goal of making wealthy America wealthy again

The objective of the tariff revision, according to Trump and his advisors, has been to make USA wealthy again. It connotes that USA has been wealthy in the past, poor now, and it is necessary to regain that old status for the future. But data on total size of the economy measured by the Gross Domestic Product or GDP and average income per American, called per capita income, do not support this claim. Both these figures show a continuous increase over time. 

For instance, if we take more recent numbers, in 2013, nominal GDP of USA stood at $ 16.9 trillion providing an average income of $ 54,800. In 2024, the total GDP has been estimated at $ 28 trillion with an average income per American amounting to $ 66,400. Hence, USA is still wealthy and the reason for the tariff revision is not to make it wealthy again. It may be that USA which has a deficit in its merchandise goods trade with the rest of the world wants to eliminate that deficit, if not converting it to a surplus.

Eliminating trade deficit: punishment of Americans

From 1895 till 1970, there was a trade surplus in USA. However, after USA withdrew from the Bretton Woods agreement, the surplus was converted to a deficit because USA ceased to function as the official central banker nation from that year. USA still supplies global liquidity, but it does so by running a trade deficit. Accordingly, the share of US $ in global reserve currency in 2024 had amounted to 57%, export invoicing to 54%, and foreign exchange transactions to 88% making it the dominant currency in the world.8 USA has been able to do this miracle by running a deficit in the trade account by supplying dollars for the goods it had purchased.

This deficit had remained on average around 3% of GDP since 1970. A deficit while functioning as the unofficial central banker nation means US citizens can command over real goods produced by people in the rest of the world by exchanging a piece of money paper called the dollar. Since that dollar goes around from hand to hand without returning to USA, it amounts to consuming real goods produced by others without paying for them using real goods. As a result, the trade deficit, though has been cursed by Trump, has been a mean of consuming more than what the country produces annually. Now by seeking to reduce this trade deficit to a zero level through tariffs, Trump is simply punishing his own people for high consumption level they had enjoyed without labouring from the same.

Hence, tariffs are not a punishment imposed on foreigners. It is a method of punishing Americans for consuming more than they sell to others. They are subject to penalisation on two grounds: paying higher prices for imports on one side and losing the benefit of enjoying real goods produced by the rest of the world without making a real sacrifice. Nobel Laureate Milton Friedman also held a similar view. He said that calling a trade surplus a favourable balance is erroneous since it means that citizens are allowing foreigners to enjoy a bigger quantity of real goods; a deficit on the other hand is not unfavourable because it allows citizens to enjoy a bigger quantity of real goods.9

Policy-induced global recession

The sudden policy induced increase in tariffs applicable to imports to USA from Sri Lanka to 44% from around 12.6% will affect a significant portion of the country’s exports. In 2024, according to data released by the Office of the United States Trade Representative had amounted to $ 3 billion10, a share of about 24% out of a total merchandise export of $ 12.7 billion.11 The new tariffs will increase the cost of these goods by about 44% at the port level. It will force all consumers to cut their consumption, and its effects will be felt by mostly the country’s apparels sector, rubber sector, and other miscellaneous sectors. 

Since imports from Sri Lanka’s competitor countries will also fall due to the upward revision of tariffs by an equivalent rate, it will ultimately result in an acceleration of inflation rate reducing real consumption and a corresponding fall in the aggregate demand. The recession in USA will have a domino effect causing recession in the rest of the world as well. This is an external shock and countries which are prepared to face such shocks like Singapore12 could absorb the shock without suffering from an undue pain. But Sri Lanka which has no proactive strategy in advance will find it difficult to wade through the shock unhurt.

I have argued that Sri Lanka cannot wait till September 2025 as pronounced by the Minister of Trade in Parliament to begin negotiations with USA about a relief for the shock in a previous article in this series.13 The President has appointed a high-level committee to advise him on the possible course of action.14 It seems that the choices available to this Committee are limited after the shock has been delivered.

Sri Lanka, as well as other nations, have been very badly hit by the onset of Trump(dis)order. The options to get out of them are limited because Sri Lanka’s traditional friends like India and China also have been badly hit by this policy induced disorder. But the solution involves getting together with affected parties and coming out with a joint action program. Indian Prime Minister Narendra Modi’s visit to Sri Lanka may provide a golden opportunity for the country to fix those permanent bonds to the mutual advantage of the two countries

Creating a tariff war

Countries in the global south like Sri Lanka, Bangladesh, Myanmar, Cambodia, or Vietnam and even India have no strength to challenge Trump openly. Their only available option is to plead with mighty US administration for redress. But countries with strength will impose retaliatory tariffs against USA creating a tariff war which will not serve any purpose. Trump imposed a reciprocal tariff of 34% on Chinese products based on his wrong calculation. China imposed a real tariff of 34% on all US products immediately.15 If Trump reacts with a further tariff increase against China as he has threatened, it will sow seeds for an unproductive tariff war.

Problem of giving up trade surplus

The new tariffs are based on the country’s trade surplus with USA and not on the complex tariff structure applicable to imports from that country. Hence, to get USA to reduce the tariff rate of 44%, all that is necessary is to give up the trade surplus which cannot be done overnight. The elimination of this trade surplus has other costs on the country because it has historically enabled Sri Lanka to part-finance its trade deficits with countries like China, India, and Japan. This will certainly drive the country to a foreign exchange crisis. Accepting the outcome of a foreign exchange crisis, pressure on the exchange rate, destabilisation of vital sectors, and an economic recession driven by a global domino-effect-induced recession will force the country to go for short-term internal adjustments. 

Any reduction of the duties for USA cannot be done in isolation because Sri Lanka will have to observe the Most Favoured Nation or MFN principle in trade transactions. Under this principle, Sri Lanka cannot give a tariff concession to one country (a most favoured nation) without giving the same facility to others.16 This hurdle can be passed if Sri Lanka enters a free trade agreement with USA which will determine the terms of trade with that country without discriminating others. This is a must for Sri Lanka.

Birds of a feather should flock together

Sri Lanka, as well as other nations, have been very badly hit by the onset of Trump(dis)order. The options to get out of them are limited because Sri Lanka’s traditional friends like India and China also have been badly hit by this policy induced disorder. But the solution involves getting together with affected parties and coming out with a joint action program. Indian Prime Minister Narendra Modi’s visit to Sri Lanka may provide a golden opportunity for the country to fix those permanent bonds to the mutual advantage of the two countries.

I hope that the high-level committee will advise the President on these lines.

Footnotes:

1https://mises.org/articles-interest/which-seen-and-which-not-seen

2https://www.youtube.com/watch?v=S4d1agnsTW8

3https://www.ft.lk/columns/GSP-Trump-dis-order-and-Sri-Lanka-s-choice-in-an-eye-for-eye-tariff-regime-in-USA/4-774625

4https://ustr.gov/issue-areas/reciprocal-tariff-calculations

5https://www.facebook.com/share/v/1Xk4z8SA5A/

6https://wits.worldbank.org/CountryProfile/en/Country/USA/Year/LTST/TradeFlow/EXPIMP/Partner/by-country

7https://tradingeconomics.com/sri-lanka/exports/united-states

8https://www.bestbrokers.com/forex-trading/us-dollar-share-of-global-currency-reserves/

9https://youtu.be/zv5SiQpG6sg?si=3112H-KuCCmexmmc

10https://ustr.gov/countries-regions/south-central-asia/sri-lanka#:~:text=Sri%20Lanka%20Trade%20Summary,(%24173.5%20million)%20from%202023.

11https://www.srilankabusiness.com/news/sri-lanka-s-export-performance-in-december-2024.html

12https://www.ft.lk/columns/Emerging-Trumporder-or-Trump-dis-order-IMF-WB-advocated-policy-package-at-risk/4-774314

13https://www.ft.lk/columns/GSP-Trump-dis-order-and-Sri-Lanka-s-choice-in-an-eye-for-eye-tariff-regime-in-USA/4-774625

14https://pmd.gov.lk/news/committee-appointed-to-provide-recommendations-on-the-new-us-tariff-system-meets-president/

15https://www.aljazeera.com/news/2025/4/4/china-hits-back-at-trump-tariffs-with-34-tax-on-us-goods-export-curbs

16WTO, Principles of Trading System at https://www.wto.org/index.htm

(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)