Columns

The escalation of the Russia-Ukraine war may lead to the US increasing tariffs on selected countries, as President Trump’s strategy to end the war is to weaken the Russian economy by economic sanctions on countries that trade with Russia.

This US strategy poses threats to our economy.

India

The worst hit by US secondary tariffs is India, which faces tariffs of about 50 per cent on its exports to the US. This high tariff could be increased further in retaliation to India’s increasing alignment with China and Russia and to stop Indian purchases of crude oil from Russia.

India’s ties with Russia and China have been strengthened at the Shanghai Cooperation Organisation (SCO) summit. How the US would respond to this is still to unfold.

Danger

An imminent danger to Sri Lanka would be the imposition of additional tariffs on countries that trade with Russia and BRICS countries, as we trade with Russia, China and India, which are BRICS members. Hopefully, Sri Lankan trade with these countries would be considered insignificant.

Retaliation

Russia’s continuous drone attacks that kill a large number of civilians and destroy buildings in Ukraine have angered the US. Will President Trump retaliate by imposing higher secondary tariffs on countries that trade with Russia to affect the Russian economy and weaken her capacity to continue the war? Therein lies the danger for Sri Lanka.

Secondary tariffs

The US imposed secondary tariffs of nearly 50 per cent on Indian imports, as India was importing crude oil from Russia. India has pointed out that this is discriminatory, as European countries import LNG from Russia and the US buys refined petroleum from India. These arguments have been to no avail.

BRICS

The US is also threatening countries that trade with member states of BRICS, which is seen as a grouping to weaken the US economy.

As two of the BRICS members—China and India—are our most important trading partners, we must tread carefully to avoid any punitive action.

Complacency

We must not be complacent, as our external finances have fared well. In the first seven months of this year. Foreign reserves increased to US$ 6.9 billion owing to increased merchandise exports, remittances and earnings from tourism.

Imports, however, increased to widen the trade deficit. These gains could be threatened by wars and US tariff policies. The expectation of negotiated settlements in the two ongoing conflicts has diminished. Instead, President Trump has resorted to imposing tariffs and secondary tariffs to cripple Russia’s military capabilities.

Wars

The escalation of the Russia-Ukraine war and Israel’s war on Gaza could have severe impacts on our trade, remittances and tourism, on which the country is heavily dependent.

Peace prospects

With the waning of the optimism evoked by the Trump-Putin talks in Anchorage, Alaska, and with President Trump’s discussions with President Zelensky and European heads in Washington DC not resulting in the end of hostilities, the war between Russia and Ukraine is escalating.

West Asia

The escalation of Israel’s war on Gaza could affect the Sri Lankan economy adversely. Remittances from West Asian countries could decrease, and tourism could be adversely affected if the wars expand.

Two-state solution

The continuation and expansion of the war are likely, as the two-state solution that could solve the Palestinian problem, as mooted by Canada, Britain and European countries, is unacceptable to Israel. This is a threat to our economy.

Impacts

An expansion of the conflicts could have adverse impacts on Sri Lanka’s trade-, tourism- and remittance-dependent economy. This is especially so as US President Donald Trump is using tariffs and secondary tariffs as a means of crippling Russia’s warring capacity. The imposition of secondary tariffs on India is illustrative of this.

Russia and BRICS

Sri Lanka faces the threat of high tariffs for trading with Russia and BRICS member countries. Hopefully, the US will consider our trade links as less significant and not slam secondary tariffs on our exports.

New alignments

The government must also be aware of the new alignments taking place between China, India and Russia and the economic cooperation between the US and Japan. These could have significant repercussions on Sri Lanka’s exports.

New trade links

The emerging uncertainties in trade with the US underscore the need for Sri Lanka to reorient and diversify its trading partners to withstand US tariffs. Canada, Britain and EU countries are hospitable markets for Sri Lankan exports.

Recapitulation

An escalation of the Russia-Ukraine war may threaten our tourism due to risks in travel and higher costs of air travel. This impact would not be that serious, as most tourists to the island are from India and China. Nevertheless, a drop in European and North American travellers would make a dent in tourist earnings.

On the other hand, the escalation of the West Asia conflict could affect our remittances adversely. We must also hope that the worsening situation will not disrupt shipping routes, which would have serious repercussions on our imports and exports.

Conclusion

Not only for the Sri Lankan economy but also for the global economy, the best outcome would be a settlement of the conflicts and a durable peace.

Prices of essential imports, reduction of exports, decreased remittances from West Asian countries and decline in tourists from Western countries could undermine the country’s external finances. While we must hope for an end of the two wars, tariff wars and trade wars, it is vital for us to find ways of increasing exports to new markets.