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The unpredictability of US tariffs makes an assessment of their impacts on our trade-, tourism- and remittance-dependent economy difficult. Nevertheless, there is no doubt that the US tariffs and the likely global recession would impact adversely on our economy.

It is most likely that our trade deficit will widen; the balance of payments could be adversely affected by reduced remittances and earnings from tourism. However, there are considerable uncertainties in the international economy and developments in trade. Unpredictability The US Customs and Border Protection was expected to collect a 44 percent tariff on Sri Lanka’s exports to the US from midnight on April 9th. As it turned out, this was suspended for 90 days.

Uncertainty

The taxes on our exports to the US after 90 days are uncertain. In fact, President Trump’s tax regime and the global economic conditions are highly uncertain. Nevertheless, there is no doubt that our economy would be severely weakened.

Impacts

The imposition of a 44 percent tariff on our exports would have a serious impact, especially on our garment exports. Consequently, large numbers of workers could be unemployed. Other manufactured exports, too, would lose export earnings.

Garment exports

The price increase on Sri Lankan garments in the US market is likely to shrink demand drastically. This is especially so as our competitors in the garment trade, like Bangladesh and Vietnam, are imposed a lower rate of tariffs. About 40 percent of our garment exports are to the US, and garments are our main merchandise export.

Solid tyres

The export potential of solid tyres for heavy vehicles and aircraft is not likely to be severely affected by the price hike but could be affected by global recessionary conditions. Whether we could expand exports of solid tyres to countries like Russia, China and Europe remains to be seen. In fact, global recessionary conditions are likely to dampen demand for tyres and other rubber products.

Tea

The impact on our tea exports will be minimal, as the US is a small market for our tea, and increased prices may not reduce consumption.

Tourism

We are heavily dependent on earnings from tourism. We were expecting to earn over US$ 4 billion from tourism this year. This is likely to be adversely affected by recessionary conditions around the world. The recessionary conditions could affect our tourism and remittances.

Trade deficit

These developments would cause a further dent in our already large trade deficit. Furthermore, the likely global recession could deal a serious blow to our trade-dependent economy. Manufactured exports like solid tyres, ceramics and rubber products, too, could be adversely affected.

Oil prices

The only likely relief may be from lower oil prices. Already oil prices have fallen. Fertiliser prices too are likely to fall. However, the decrease in oil prices too could affect our economy adversely in several ways.

Recession

The world economy is undergoing an unpredictable change that is likely to leave it in a poorer state. The imposition of a massive 44 percent import duty will no doubt affect our export revenue. As much as 40 percent of our exports are to the US market. The main exports are garments, ceramics and solid tyres.

Difficulties

The global developments portend a difficult economic future for Sri Lanka. Tourist earnings and remittances, too, could make a dent in our foreign earnings and reserves. President Trump has imposed a 10 percent baseline tariff on all US imports and, in addition to this, a 44 percent tax on Sri Lankan goods. Therefore, Sri Lankan exports to the US face a massive 54 percent import tax. The impacts of this could be devastating for our trade and economy.

Exports to the US

About a fourth of our exports was to the US. Our exports to the US last year totalled US$2.8 billion. Last year’s exports of garments amounted to about US$ 1.8 billion, or 70 percent of our total exports. Therefore, a reduction in these exports would have a serious adverse impact on our export earnings, trade balance and balance of payments.

Garments

The most pervasive impact would be on our main merchandise export: garments. Apart from the loss in foreign earnings, large numbers of workers in garment factories would lose their employment.

Rubber products

Sri Lanka is the largest manufacturer of solid tyres in the world. These tyres are used in aircraft and heavy vehicles. The anticipated global recession would reduce the demand for solid tyres as well as rubber products like surgical gloves, rubber toys and rubber-based consumer items.

Foreign earnings

Tourist earnings and remittances from abroad that have been the mainstay of our balance of payments could also dip. These two sources of foreign funds could dip sharply.

Tourism

Inflation and recession in the US and other developed countries could dampen the demand for travel. The demand for travel, especially international travel, will shrink due to lower employment, wages and inflation.

Remittances

Even more important than the contribution of tourism was the inflow of remittances, mainly from workers abroad. The dip in oil prices would shrink the demand for domestic workers. Similarly, the shrinking of demand for manufactured goods in countries such as South Korea, Malaysia, Japan and other countries could result in the retrenchment of Sri Lankan factory workers, contributing to a reduction in remittances.

These specific instances do not adequately capture the widespread impact on Sri Lanka of the global recession, especially in Asia. The threat to these two sources of foreign funds that were the strengths of Sri Lanka’s balance of payments is a serious concern that must be addressed by effective policies.

Way Forward

Amid this confusion and uncertainty over a global trade war, the government has to find ways and means of reducing the impact of international trade policies on the Sri Lankan economy. This is a challenging task.

Negotiations

The government has taken two initiatives. It is attempting to negotiate a revision of the US tariffs and has appointed a committee to recommend countermeasures. Insofar as the attempt to negotiate with the US government, we can only wish it well. Its success will depend on the stars rather than on economics and common sense, which has not been seen much in the current US administration. At best it is a toss-up.

First, the way forward is to mitigate the impacts through a series of policies that could help cope with the hardships. There has to be a recognition that the very high tariffs imposed on Sri Lanka were owing to our highly protective import policies. This has been pointed out by experts in trade during the previous governments, but there has been no effective action taken by them.

Secondly, we must find new markets for our garments and other consumer items. This has been repeatedly mentioned but not implemented. These markets may not be as large as the US, but together they could be significant. Canada and Europe are two such possibilities. The government must assist this by decreasing the cost of production by reducing the electricity tariff and the enterprises finding cost-cutting ways. Exporters must be willing to accept lower profits, and suppliers of raw materials should reduce prices. These are not easy to achieve but are mandatory to regain a comparative advantage.

Concluding reflection

All these factors considered, the prospects for our export-, remittance- and tourism-dependent economy are bleak. We have to minimise the adverse impacts on our economy by adopting reforms, becoming more efficient and increasing domestic production of our food and other needs.