Columns

Russia’s intrusion into the airspace of Estonia, Poland and Latvia has evoked calls for military responses from NATO countries. However, the US has not intervened militarily. Instead, President Trump’s strategy is to impose more sanctions on Russia and tariffs on countries that trade with Russia, as he believes such measures will weaken Russia’s economy and its military capability to continue the war. Therein lies the danger to the Sri Lankan economy.

Secondary tariffs

The US could impose high secondary tariffs on Sri Lanka as we buy oil from Iran and Russia. In addition, India and China, which are BRICS members, are important trading partners of ours.

Unaffected

Hitherto we have escaped higher tariffs, perhaps due to our economic insignificance. On the other hand, the US has imposed tariffs of about 50 per cent on Indian exports to the US.

UNGA

President Trump reiterated this policy in his address to the UN General Assembly on Tuesday. Therefore we cannot expect a change in US policy. What we can hope for is that it would not be applied to us.

BRICS

Sri Lanka faces the threat of high tariffs for trading with Russia and BRICS member countries. Besides our purchases of Iranian and Russian oil via third parties, India and China are two of our largest trading partners.

Insignificant

Hopefully, the US will consider our trade links as of no significance 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 co-operation 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 trading partners to withstand US tariffs.

Hospitable countries

Canada, Britain and EU countries are hospitable markets for Sri Lankan exports. We must also look to Japan, East and Southeast Asia and Australia for expanding our exports.

Repercussions

Although the Russia-Ukraine war is being fought far away from the island, it could have serious repercussions on our economy due to President Trump using secondary tariffs to weaken the Russian economy. Restrictions on our purchase of oil from Russia and Iran would increase our import costs and affect our balance of payments adversely.

Tourism

An escalation of the Russia-Ukraine war may threaten our tourism to some extent if there are risks in travel and higher costs of air travel.

Impact

This impact would, however, 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.

West Asian conflict

On the other hand, the escalation of the West Asian conflict could affect our remittances adversely. Any escalation of Israel’s Gaza war may disrupt shipping routes and have serious repercussions on our imports and exports.

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 that is heading for a recession.

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. An increase in prices of essential imports, a reduction of exports, decreased remittances from West Asian countries and a decline in tourist earnings could undermine the country’s external finances that have improved this year.

New markets

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.

Summary

Russia’s intrusion into Poland and Latvia has evoked calls for tougher responses from NATO countries. However, instead of a military response, the US is taking non-military measures such as sanctions on Russia and higher tariffs on countries that trade with Russia, while urging its European allies not to depend on Russia’s energy supplies. This strategy was aimed at weakening Russia’s economy to cripple its capacity to continue the war.

Such a policy will affect Sri Lanka. We may face higher tariffs because of the purchase of Iranian and Russian oil. Hitherto we have escaped higher tariffs, perhaps due to our economic insignificance. On the other hand, the US has imposed tariffs of about 50 per cent on Indian exports to the US.

Concluding reflection

While we hope that there would be no additional tariffs by the US on our exports, the threat of such tariffs is a challenge for the country to diversify our export products and export markets and reform our import policies as well. The global conditions compel us to strengthen our export capacity.