Matching the unmatched with reciprocal tariffs
View(s):Last week, local media reported that a Sri Lankan delegation is set to visit the US to engage in discussions with the US Trade Office regarding the proposed reciprocal tariffs. Many experts have already commented that, if applied to
Sri Lanka, these tariffs could have a detrimental impact on the country’s bilateral trade with the US and the economy.
Rather than focusing on the trade implications of reciprocal tariffs, I bring this issue to our discussion today to emphasise the deeper economic lessons we can draw from this episode.
Reciprocal tariffs
The purpose of reciprocal tariffs on foreign goods, equivalent to those imposed on US products, is to address and counteract unfair trade practices. According to the White House’s website in 2019, “…across 132 countries and more than 600,000 product lines, United States exporters face higher tariffs more than two-thirds of the time.”
For example, the average US tariff rate on agricultural goods for Most Favoured Nations (MFNs) is 5 per cent, while India’s average MFN tariff rate is significantly higher at 39 per cent. India also imposes a 100 per cent tariff on motorcycles imported from the US, whereas the US charges only 2.4 per cent on Indian motorcycles. Similarly, the European Union applies a 10 per cent tariff on US-made motor cars, compared to the 2.5 per cent tariff the US imposes on imported motor cars.
Inside a garment factory.
If the US government seeks to implement “fair trade practices,” this would require raising its tariff rates to match the bilateral tariff rates imposed by its trading partners. However, this approach would necessitate varying tariff schedules across countries, which poses practical challenges. Additionally, it would violate the MFN principle of treating all countries equally.
If the US pursues “fair trade” policies resulting in higher tariffs on imports, it raises the question: can it really be considered “unfair” to equalise trade policy measures? Nevertheless, such actions could have adverse impacts—not only on global trade but also on US consumers, who would likely face higher prices as a result.
The American problem
The US faces a significant challenge with its unresolved trade deficit, which has grown steadily over the years alongside the country’s mounting debt. As of 2023, US exports totalled US$2.1 trillion, while imports reached $3.4 trillion, resulting in a $1.3 trillion merchandise trade deficit.
To put this into perspective, 20 years ago, the trade deficit was approximately half of this amount, and 30 years ago, it stood at just $65 billion. The trade deficit has expanded at an alarming rate, creating a reliance on foreign borrowing to bridge the gap each year.
In 2023, net financial account inflows exceeded $900 billion, indicating that about 70 per cent of the trade deficit was financed through borrowings from abroad. The remaining portion is likely covered by service exports and primary income from overseas investments.
This escalating trade imbalance raises an important question for US policymakers: should they not be more concerned about finding sustainable solutions to address this issue?
Making America great
As the US trade deficit continued to widen, many American companies shifted their manufacturing operations to China and other Asian countries. Consequently, the US lost a significant portion of its manufacturing base due to outsourcing, which dampened the country’s economic growth prospects and export performance. Instead of exporting, the US now imports many of its own products from abroad, further contributing to its growing trade deficit.
The outsourcing of US manufacturing facilities left many Americans without jobs. A significant portion of these outbound investments flowed into China, prompting President Donald Trump to frequently assert that China had “stolen” American jobs, leaving American workers unemployed.
There is no doubt that the issue is a serious one requiring resolution. Among other measures, the plan for fair and reciprocal tariffs is designed to tackle this challenge. As a global leader in economic and financial affairs, the US free trade regime has historically benefited the world at large.
However, this system is more of a global arrangement than a purely domestic one, meaning its reversal could have far-reaching consequences for the global economy. Higher US tariffs would likely discourage global exports to the US, slowing worldwide economic growth. Whether increased protectionism could successfully redirect American investments back to the US and restore lost jobs remains an open question.
The Sri Lankan problem
The US government’s perspective on Sri Lanka’s trade regime is particularly revealing. According to the US Department of State’s 2023 Investment Climate Statements, importers to Sri Lanka face significant barriers, with the country’s import regime described as “…one of the most complex and protectionist in the world.”
The report further highlights that “Sri Lanka is a challenging place to do business, with high transaction costs exacerbated by an unpredictable economic policy environment, inefficient government services, and non-transparent government procurement practices.”
Notably, these challenges are not solely a result of the recent economic crisis. Concerns about
Sri Lanka’s complex trade policies and investment climate have been raised on previous occasions. For instance, as far back as 2018, the US Department of Commerce reported the following on its website:
“Sri Lanka imposes a variety of import duties, which together can lead to prohibitively high duty rates. US exporters should note that the costs of exporting to Sri Lanka include customs-import tariffs, Export Development Board levies, Value Added Tax (VAT), Port and Airport taxes, Nation Building Tax, Port Handling charges, and agent commissions. These charges could collectively exceed 100 per cent of the cost-plus-insurance-plus-freight (CIF) value for items at higher tariff bands. The US Embassy has received complaints from exporters about this ‘prohibitive’ tariff regime.”
Bilateral trade
Sri Lanka’s trade activity with the global market is relatively limited. However, within its modest trade performance, the country enjoys a bilateral trade surplus with both the US and the EU. Notably, nearly one-quarter of
Sri Lanka’s total exports are directed to the US market.
Sri Lankan exports to the US are subjected to a single tariff rate, typically ranging from zero to 10 per cent, with some exceeding 10 per cent. Unlike Sri Lanka, the US imposes no para-tariffs, or non-tariff barriers, or numerous domestic taxes on imports. Trade taxes account for only 1.7 per cent of the US government’s total tax revenue, and the country’s indirect tax revenue is less than 10 per cent.
On the other hand, Sri Lanka imports goods worth approximately half a billion dollars from the US annually, representing around 3 per cent of the country’s total imports. These imports are subjected to various levies, including import duty, value-added tax (VAT), port and aviation levy (PAL), and social security contribution levy (SSCL). In addition, specific taxes such as CESS, surcharges, and excise duty apply to certain imports. At times, licence requirements also act as non-tariff barriers.
Sri Lanka remains heavily reliant on tax revenue from import trade, which constitutes 14 per cent of total tax revenue, as highlighted in Budget 2025. Furthermore, the government depends predominantly on indirect taxes to generate revenue, as direct taxes—despite recent income tax increases—only account for 25 per cent of total tax revenue.
Fair trade
If the US government insists on maintaining “fair trade” with
Sri Lanka through reciprocal tariffs, it may require the US to raise its tariff rates to align with Sri Lanka’s complex import tax structure. However, it appears that
Sri Lanka is not in a position to bear such an adjustment, even if it is deemed a “fair” measure.
Sri Lanka may justify its stance by highlighting the country’s recent economic crisis. The economy remains in a fragile state, grappling with numerous challenges on its path to recovery and progress.
One could argue that it is the country’s complex and protectionist trade policies that have contributed to
Sri Lanka’s current fragile economic state. Ironically, we are now compelled to undertake the challenging task of persuading the US authorities to accept the same policies.
(The writer is Emeritus Professor at the University of Colombo and Executive Director of the Centre for Poverty Analysis (CEPA) and
can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
Hitad.lk has you covered with quality used or brand new cars for sale that are budget friendly yet reliable! Now is the time to sell your old ride for something more attractive to today's modern automotive market demands. Browse through our selection of affordable options now on Hitad.lk before deciding on what will work best for you!