Why not a US trade war with Sri Lanka
View(s):One of the hot topics in the world today is the trade war between the US and China which began after they raised tariffs against each other. China is not the only country that the US wanted to fight with higher tariffs; it had already raised tariffs against the EU, Canada and Mexico. Recently, I began to wonder why the US doesn’t fight a trade war with Sri Lanka. Therefore, I want to take this question today which might sound ridiculous: “Why on earth should the US ever think of fighting a trade war against Sri Lanka?”
File picture of a garment factory. Garments is Sri Lanka's biggest export to the US.
Trade war with China
The US has so far imposed higher tariffs three times this year on its imports from China worth US$250 billion. This coverage amounts to little less than half of the total US imports from China. As of 2017, the total value of Chinese imports to the US exceeded $505 billion.
At the initial stage a 25 per cent tariff was imposed on $50 billion worth of imports. The higher tariffs were scheduled to be effective from September 24, initially with a 10 per cent tariff rate which will be raised to 25 per cent from the beginning of next year.
China retaliated with the same weapon imposing higher tariffs on $50 billion worth of imports provoking the US. In return, the US extended the coverage to $200 billion. If China retaliates, the US is planning to bring another $267 billion worth of Chinese goods under higher tariffs. This means that then all Chinese goods exported to the US will be subject to higher tariffs.
Impact of the trade war
With new tariffs, Chinese goods will be expensive in the US resulting in a lower domestic demand for Chinese goods. Consumers, who will have to pay higher prices for Chinese consumer goods, will have to look for some other alternatives. The producers who will have to pay higher prices for Chinese raw materials, accessories, parts, components, tools and machines, will have to look for some other sources to buy these producer goods.
All in all, Chinese exports to the US are bound to fall in the years to come, although many others including the US will have to share the burden of higher US tariffs on Chinese goods. The inverse is also true; if China retaliates as it has already done, the US exports to China will decline too.
If the bilateral trade dispute between the US and China continues, it would be extended beyond merchandise trade towards foreign investment, travel and tourism and, holding of assets spreading and expanding the negative repercussions all over the world.
Why a trade war?
As the US has explained, the reasons for its actions against China were stealing such things by China as US technology, US property rights, and US jobs which resulted in an “unfair” bilateral trade. Although it wasn’t clarified enough, all above and things that are even beyond all above should be ultimately reflected through bilateral trade performance.
In their bilateral trade, the US has a trade deficit and China has a trade surplus. Last year the US has imported $505 billion worth of goods from China, but exported only $130 billion worth of goods to China; for the US, this has resulted in $376 billion bilateral trade deficit with China.
Actually, the US has an overall trade deficit amounting to $807 billion last year. More than 46 per cent of this overall trade deficit is due to bilateral trade with China!
US trade with Sri Lanka
The US has even more reasons to be disappointed about its bilateral trade with Sri Lanka, but perhaps only one reason for not declaring a “trade war” against Sri Lanka.
The bilateral trade between the US and Sri Lanka has also resulted in a trade deficit for the US: The US imports $2,858 million worth of goods from Sri Lanka but exports to Sri Lanka only $336 million worth of goods. This has resulted in a bilateral trade deficit of $2,522 million ($2.5 billion) to the US.
By looking at trade statistics from a twisted angle, the US can even argue that it exports to Sri Lanka just 12 per cent of what it imports from Sri Lanka; for China, still the US exports more than 25 per cent of what it imports from China!
Prohibitive tariffs
After all, the US knows clearly why there is no “fair trade” with Sri Lanka. As the International Trade Administration of the US Department of Commerce advises the US exporters, Sri Lanka has a “prohibitive” tariff regime:
“Sri Lanka imposes a variety of import duties, which combined can result in high duty rates. US exporters should be aware that fees incurred when exporting to Sri Lanka include the customs-import tariff, Export Development Board levy, Value Added Tax (VAT), Port and Airport tax, Nation Building Tax, Port Handling charges, and agent commissions, all of which could add up to more than 100 per cent of the cost-plus-insurance-plus-freight (CIF) value for items at the higher tariff bands. The Embassy has received complaints from U.S. exporters regarding this “prohibitive” tariff regime.”[Source: https://www.export.gov/article?id=Sri-Lanka-Import-Tariffs]
A “prohibitive” tariff regime has import duties high enough effectively to prohibit imports. It is because once imported, such goods become excessively expensive in the local market so that there will be no domestic demand. In fact, I do not need to explain the excessive price of imported goods in Sri Lanka, which is mostly a result of too many and too high taxes.
Freedom for international trade
The US has an open economy with relatively lower taxes on imports. While in Sri Lanka, 21.5 per cent of government revenue is collected from taxes on international trade, in the US it is only 1.1 per cent; even in China, it is only 2.5 per cent.
According to the ranking of countries by Freedom for International Trade (Economic Freedom Index 2018), the US is a “mostly free” country, while Sri Lanka is a “mostly unfree” country. Out of 180 countries in the world, the US is in the 18th position, Sri Lanka is in the 111th position. China is also a “mostly unfree” country for international trade; with its lower scoring for Freedom for International Trade, in the 110th position – just one position above Sri Lanka.
Therefore, in respect of international trade with its “mostly free” position the US is engaged in trade with “mostly unfree” Sri Lanka and China, while Sri Lanka’s “unfree” position is worse than that of China.
Calculations of the scores of Freedom for International Trade are based on tariffs and taxes as well as the non-tariff barriers applied on international trade. The non-tariff barriers are numerous, including the “old-fashioned” quantitative restrictions. As quantitative restrictions are not common these days, there are many other barriers hindering international trade. The most important among them are the “regulatory barriers” affecting trade, foreign investment and, customs procedures as well as the government’s various forms of interventions including competition policies and immigration procedures.
Too feeble to fight
The US is one of the major markets for more than a quarter of Sri Lanka’s exports. Therefore, just one punch can possibly be a “knockout punch” to the Sri Lankan economy! In spite of “unfair” trade practices by Sri Lanka, the US has still favoured Sri Lanka by offering not only a free market access for Sri Lanka’s exports, but also a “duty-free” access under the GSP system.
Although Sri Lanka tries to pinch the US, I believe the US tolerates all that and still favours us because we are “too small” and “too weak” to hurt the US economy. From the US point of view, Sri Lankan exports are too small to impact on the US trade balance, and it has not been growing either so that there is no threat to the US economy even in the near future. If the country continues to remain “too feeble” most people will hardly notice it.
(The writer is a Professor of Economics at the University of Colombo. He can be reached at sirimal@econ.cmb.ac.lk)