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The uncertainties in global trade and tariffs and the escalation of wars in West Asia and hostilities between Russia and Ukraine pose severe uncertainties, threats, and challenges to our trade-dependent economy.

External shocks

These external shocks could wipe out the recent economic gains and cause severe hardships to the people. The threats to our exports, higher import costs, and setbacks to tourism are severe economic reversals. We have to find new markets for our merchandise exports.

Tariff reduction

The US tariff reduction on July 9, though an improvement, continues to be a threat, as our competitors, Vietnam, the Philippines, and perhaps Bangladesh and India, may attract lower US tariffs. The only certainty in global trade and tariffs is their uncertainty.

Increasing exports

We have to expand and diversify our export products, increase export volumes, and diversify our export markets. This is no easy task in the growing turbulence in international trade. Yet, it is imperative for our economy. We must export or diminish.

US tariffs

US tariffs are still a severe threat to our garment exports, as the reduction of US tariffs on our exports to the US was reduced to 30 per cent. It is a threat to our exports, especially of garments, for several reasons. The US import tariff is effectively 40 per cent as it is in addition to an existing tariff of 10 per cent.

Some of our main competitors, such as Vietnam and the Philippines, are subject to a lower tariff, and other countries, such as Bangladesh and India, may obtain a lower tariff.

The government must find ways of reducing our production costs, such as by reducing the electricity tariff for industries.

Impact

The imposition of a tariff of 40 per cent on our exports to the US is a severe threat to our exports, especially of garments. This is especially so as the tariffs imposed on our competitors were lower.

Importance of garments

Garments are our main merchandise exports, accounting for about 40 per cent of our merchandise exports in 2024.

Strategies

It is imperative to develop countervailing strategies to face the threats to our manufactured exports. These include the diversification of export markets, developing new export products that are in demand, and increasing export volumes of commodities that have an international demand. These may seem difficult but are essential. We cannot rely on tariff concessions from the US. We must find new markets.

Import substitution

Enhancing domestic production of import substitutes to reduce import demand improves the trade balance, as a dollar saved is a dollar earned.

Months ahead

The months ahead of economic uncertainties and wars pose severe threats to our economy. If the tariff wars continue, and even more significantly, the wars in West Asia and the Russia-Ukraine war escalate, the country’s external finances could face severe economic difficulties. New markets must be found for our exports of garments and other merchandise exports. Besides the threat to our exports, there could be threats to our tourist earnings as well as inward remittances that are vital for our external finances.

Exports

Our exports can be seriously jeopardised by both the high tariffs in our main markets as well as disruptions in transport and higher costs. On the other hand, our essential imports could cost much more owing to the war. Petroleum prices could rise sharply. This would also imply that fertiliser, food, and other import prices could also rise. The Sri Lankan economy, which is heavily dependent on remittances from abroad, could have a severe setback that would weaken our external finances significantly.

BRICS

Another threat to our economy arises from President Trump’s decision to impose an additional 10 per cent tariff on countries that align with the anti-American policies of BRICS. China and India, both BRICS members, are two of our largest trading partners, and Russia, another BRICS member, is a source for our oil.

Transport

This, as well as disruptions in transport due to wars, could be a severe external shock to the economy.

Tourism

Tourism, which is currently booming, could be severely disrupted if international travel is disrupted. Increased costs in airfares and travel risks could hamper our tourist boom seriously.

The country’s economic achievements of curtailing inflation and initial growth could be hampered. The external reserves of US$ 7.1 could be eroded.

Way forward

In this inhospitable climate for trade, we must increase our exports to the European Union countries by addressing the EU’s human rights concerns expeditiously. The UK’s gesture to reduce tariffs on Sri Lanka’s exports, as well as the prospects of increased exports to Canada, are opportunities that must be exploited.

Eastwards

We must also increase our exports to East Asian countries. We must export rubber goods, ceramics, and other manufactured goods to China and Vietnam, which have already expressed their willingness to expand their trade with us.

Similarly, we must seek markets for our manufactures in Japan and Southeast Asian countries. We must export to Indonesia and Malaysia and expand exports to Australia and New Zealand, which have been neglected owing to our westward focus.

Conclusion

The months ahead are fraught with unpredictable economic difficulties over which the country has no control. The current popular discontent with the pace of trade reforms and improvement in livelihoods could be a serious threat to the country’s politics.

The months ahead are ones of economic uncertainty and possible severe threats to our economy. If the tariff wars continue and, even more significantly, the war in West Asia escalates, the country’s external finances would face an unprecedented crisis.

Our exports can be seriously jeopardised by both the high tariffs in our main markets and disruptions in transport and higher costs. On the other hand, our essential imports could cost much more owing to the war. Petroleum prices could rise sharply, causing fertiliser, food, and other imports to increase too. The Sri Lankan economy, which is heavily dependent on remittances from abroad, could have a severe setback that would weaken our external finances significantly.

Tourism, which is booming, could be severely disrupted if international travel is disrupted, increased in cost, and considered dangerous. But these difficulties are not understood by people at large, and the country’s commendable economic achievements of curtailing inflation and initial growth could be hampered.