By Dhananath Fernando
Originally appeared on the Morning
US President Donald Trump’s administration’s wave of tariffs may have been framed as a protectionist strategy to ‘make America great again,’ but its global ripple effects are undeniable, and for countries like Sri Lanka, the consequences are quietly but steadily piling up.
To truly grasp the impact of US tariffs, we must first understand who bears the immediate burden – American consumers. When prices rise due to tariffs, it is not foreign producers footing the bill – it is American families. And when US consumers, who account for roughly 20-25% of global consumption, tighten their belts, the world feels it. Sri Lanka is no exception.
The triple blow of tariffs
At their core, tariffs are a triple blow to consumers:
Higher prices: Consumers pay more for goods, many of which cannot be easily substituted locally.
Artificial subsidies: Local industries that cannot compete globally get propped up, with the consumer footing the bill.
Corruption and rent-seeking: Tariffs empower lobbyists and politically connected businesses, leading to corruption, cronyism, and distortions in policy-making.
This is not unique to America; the theory holds true anywhere, including right here in Sri Lanka.
When US consumers are forced to spend more for less, their overall consumption drops. And because Sri Lanka’s key exports – apparel, rubber, food, and gems – rely heavily on US demand, this can shrink our export revenue and threaten local jobs.
Flawed economics, real consequences
The US Trade Representative’s rationale for reciprocal tariffs rests on a flawed understanding of trade balances. They have calculated tariffs based on the trade deficit with individual countries, assuming this reflects both tariff and non-tariff barriers. It doesn’t.
Moreover, their economic modelling assumes a price elasticity of four and an import-tariff elasticity of 0.25. Multiplied together, these yield a neutral effect, essentially arguing that price and demand perfectly balance out. But that is theoretical fantasy. In reality, trade relationships are nuanced and complex.
Sri Lanka made a similar mistake in past free trade talks with India and Singapore, obsessing over trade deficits rather than economic opportunity. Now, we find ourselves at the receiving end of the same misguided thinking.
Tariffs don’t build industries
Some argue tariffs create jobs and strengthen domestic industries. But Sri Lanka’s own experience disproves that. For decades, we have imposed tariffs of over 300% on vehicles. Has that turned us into a car manufacturing hub like Japan or South Korea? Not even close.
In fact, the sectors most protected in Sri Lanka – construction materials, footwear, and others – remain stagnant, rent-seeking, and politically captured. Consumers pay exorbitant prices, innovation is stifled, and exports are virtually nonexistent in these areas.
What should Sri Lanka do?
Given our size and economic position, retaliation is not an option. But this global shake-up gives us a golden opportunity for reform.
Here is what we can do:
Unilaterally clean up our tariff system: Eliminate para-tariffs like Ports and Airport Development Levy (PAL) and Value-Added Tax (VAT) on imports. Not because the US is forcing our hand, but because it is the right move for our own competitiveness.
Engage strategically with the US: While we may not be a major trading partner to the US, our strategic location in the Indo-Pacific could be a valuable card at the negotiation table. A peaceful, open Indian Ocean is in everyone’s interest.
Leverage regional alliances: India has used tariff adjustments as a negotiation tool, and Sri Lanka could align with Indian supply chains to access broader markets. Since much of what we export – like high-value apparel – cannot easily shift to East Asia, regional strategies are critical.
Don’t import for the sake of it: Matching trade deficits by simply importing more from the US will not work. We cannot absorb their big-ticket exports – aircraft, weapons, or energy – and doing so irrationally would only hurt us further.
Join more regional trade agreements: But most importantly, let’s not wait for others. By unilaterally reforming our trade policies, we can unlock new markets and boost exports, while reducing consumer costs and curbing corruption.
Reform, not retaliation
Tariffs are not just about economics; they are about values. When governments shield inefficient industries and empower rent-seekers, it is the people who pay the price. Let us use this moment not to imitate protectionism, but to chart our own path – one that opens doors, not closes them.
The fundamentals of a healthy economy begin with open, fair, and efficient markets. Sri Lanka has the chance to lead by example.