By Harsha Gunasena –

Harsha Gunasena

Donald Trump long before becoming the President in 2017 was of the view that  the friendly nations were benefitting out of the trade with the US. When he became the President, he weaponized tariffs against China, and China in return imposed reciprocal tariffs on US imports targeting mainly the farmer community in the US which was his one of the voter bases. It has become eventually a trade war.

The US was accusing China that they undervalue their currency so that China was getting undue advantage when exporting to the US. When Barack Obama was the President, he entered into Trans-Pacific Partnership with the Pacific Rim Economies except China. One of the intentions may be to reduce the Chinese imports to the USA. During the election campaign in 2016 both Hilary Clinton and Donald Trump spoke against the agreement and when Trump became the President, the USA withdrew from the agreement.

When Joe Biden became the President, he did not remove the tariff imposed by Trump on China. Instead, he took on both Russia by Ukraine war and China by trade barriers.

President Trump’s intention basically was to reduce the budget deficit and the trade deficit of the US. For a long time, the US has been having these deficits and was not affected due to the fact the US Dollar is a reserve currency. When the US was having a trade deficit, the countries which had favorable trade balances, invested those dollars in US Treasuries. One reason was that the US Dollar was stable, and the other reason was that those countries did not use those dollars in their own economies since their competitiveness will go down. The main countries which hold US government debt are Japan (USD 1.1 trillion), China(USD 749 billion)  and the UK (USD 690 billion).

Therefore, even though the US current account was negative, there was a positive balance of the US capital account. In addition to that the US could print Dollars without facing domestic inflation since the Dollar is a global currency.

In 2024 the US federal budget deficit was USD 1.83 trillion, and the national debt was USD 35.5 trillion. The current account deficit in 2024 was USD 1.13 trillion. These balances have been going up in recent years and the stability of the currency was questioned.

Trump has taken several moves to reduce the budget deficit. Government is also a big employer in the US and Trump plans to reduce the size of the government. Peace negotiations with Russia were to avoid the massive expenses on the Ukraine war. USAID was introduced during the cold war at the time of President Kennedy in order to have a soft power  in the recipient countries. Stopping that would save money for the government coffers but at the same time the US government would lose the soft power. Withdrawing from the Paris convention is a move towards excavating   oil deposits in the US.

Over the years the Americans moved to consumerism from production and exports. In 1970 the largest companies in the US based on market capitalization, revenue and employment were General Motors, Exxon Mobil and Ford Motor. Now the largest companies in the US based on employment are Walmart, Amazon and Home Depot; based on revenue are Walmart, Amazon and Apple and based on market capitalization are Apple, Microsoft and Nvidia.

Production was moving out of the US mainly since the cost of production in the other countries is lower and the standard of living in the US was higher compared to those countries. Artificial lowering of cost of production in the US by increasing tariff of the imported goods goes against the basic economic theory and it is moving economies backwards in time. What the US has to do is to increase exports through innovation which is being carried out and that is to be accelerated. This move by the Trump administration is a lose- lose situation rather than a win-win situation. If Trump thinks that he could convert the US economy to a manufacturing hub once again, it is wishful thinking.

There are early signs of protests throughout the world and slowing down of the stock markets. The consumers in the US will be paying additional costs. Trump administration aiming to cut the income taxes which would be compensated by the additional tariff. This means increasing indirect taxes and reducing direct taxes and taxes will be paid by every one rather than those who can pay.

The formula imposed by Trump for tariff is a funny one. In his speech he said he imposes reciprocal tariff, but the formula was different to that, and the simplified version is as follows.

This is the percentage of tariff imposed by the US for that country. This has nothing to do with the import tariff of the other country for the American goods so that it is not reciprocal.

There are quite a number of countries where they maintain a trade deficit with the US which means it is a trade surplus for the US. Some of the countries are Netherlands which is an EU member (USD 55 billion), Hong Kong (USD 21.9 billion), Australia (USD 17.9 billion) and the UK (USD 11.9 billion). Interestingly Trump charged 10% tariff for all the countries and the UK and Australia were subject to that and  EU was charged 20% and the Netherlands also will have to pay this. Thus, there is no logic at all in this formula. Trump may either withdraw the whole operation or he may adjust it to ease the situation. Probably the situation could be eased to reciprocal tariff rates imposed by the trading partners.

In this light we have to look into the consequences that  Sri Lanka faces. Our apparel industry would be affected most. In this industry all our competitors are affected  but Sri Lanka is the most affected country. Sri Lanka cannot impose reciprocal tariffs to the US like other powerful countries does. One step Sri Lanka can take is to reduce the tariff to the US imports and then go for the negotiations. This would mean that Sri Lanka may have to reduce the tariff for the other countries as well.

At this point the country will face the situation where vehicle imports were allowed by this government with very high tariffs with the aim of increasing the revenue to the government and  the corresponding expenditure was already committed. Many, including the writer, has cautioned that this should not be done with the sole intention of increasing the government revenue.

Unlike bigger countries Sri Lanka will be benefited if the country can lower the tariffs and get the reciprocal reductions from the trading partners since Sri Lankan market is smaller and the markets of other countries would be bigger. For that Sri Lanka should have an aggressive set of entrepreneurs.

Sri Lanka is having an uphill task for which all should get together. During the time of financial crisis, the then President appealed to all opposition parties, but none supported him for different reasons. Now the opposition says that they will support the government in this endevour, but it seems to be that the government is not interested.