Columns

The escalation of the Russia-Ukraine war, the broadening of hostilities in West Asia and the extension of US tariffs could seriously impact Sri Lanka’s trade-, remittance- and tourist-dependent economy.

The gains in stabilising the economy, the momentum of economic growth and the build-up of foreign reserves could be set back if these challenges persist.

Escalation

Both wars are poised to escalate, as has been seen in the shooting down of Russian drones by Poland and the Israeli attack on Qatar.

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

The US also threatens to impose high tariffs on countries that trade with BRICS members; such a move will be a blow to our economy.

India

One of the worst hit by US secondary tariffs is India. The US imposed a 50 per cent tariff on Indian exports, and this could increase further in retaliation for India’s increasing alignment with China and Russia and its refusal to stop crude oil purchases from Russia. The US sees these measures as necessary to vitiate the Russian economy.

Meanwhile, India is strengthening its ties with Russia and China after its participation at the recent Shanghai Cooperation 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, the threat of high US tariffs remains. Hopefully, Sri Lankan trade with these countries would be considered insignificant.

Retaliation

The latest Russian drone attacks that killed several civilians and destroyed buildings in Ukraine gave rise to reports that the US would take tough punitive measures against Russia. Will President Trump retaliate by imposing higher secondary tariffs on countries that trade with Russia to affect the Russian economy and weaken its 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 exports, 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 Russia. These arguments have proven futile.

BRICS

The US is also threatening countries that trade with member states of BRICS, a grouping that, the US thinks, works against its interest. Therein lies the danger for Sri Lanka, as two of the BRICS members—China and India—are our most important trading partners. Therefore, we must be prepared to face the possibility of the US imposing secondary tariffs on Sri Lankan exports.

Complacency

We must not be complacent, just because our external finances have fared well. In the first eight months of this year, foreign reserves increased to about US$7 billion owing to increased merchandise exports, remittances and earnings from tourism.

Imports, however, increased, widening the trade deficit. These gains could be threatened by the two wars and US tariff policies.

Wars

With the prospects of a negotiated settlement to the Ukraine war diminishing, the US president is resorting to higher tariffs and secondary tariffs to cripple Russia’s warring capacity and punish those nations having closer trade ties with Russia. Will Sri Lanka face higher US tariffs?

The escalation of the Russia-Ukraine war and the Israeli-Palestinian war could have severe impacts on our trade, remittances and tourism, on which the island is heavily dependent. The prospects for peace are at present bleak.

The escalation of the Israel-Palestine war could affect the Sri Lankan economy adversely. Remittances from West Asian countries could decrease, and tourism could be adversely affected if the war expands in the region. And this is very likely.

Two-state solution

The hostilities in the region are likely to escalate, with Israel not willing to consider the two-state solution adopted by an overwhelming majority of UN members. War in the region is a threat to our economy.

An expansion of the conflict could increase costs of essential imports, diminish remittances from West Asia and decrease travel and tourism.

Recapitulation

Although the two wars are being fought far away from Sri Lanka, they could have serious repercussions on the Sri Lankan economy, especially when President Trump uses tariffs as a weapon to weaken the Russian economy. Secondary tariffs on our trading partners, as well as restrictions due to our trade ties with Russia and Iran, would increase our import costs and affect our balance of payments adversely.

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.

Conclusion

The best outcome would be a settlement of the conflicts and a durable peace, not only for the Sri Lankan economy but also for the global economy. The continuation of the two wars, their escalation and trade restrictions could have serious consequences for the global economy, as well as the Sri Lankan economy.

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 to the two wars, tariff wars and trade wars, it is vital for us to find ways of increasing exports to new markets and enhancing our self-sufficiency, especially in food.