By Rajan Philips –

Rajan Philips

After some wait Sri Lanka received Trump’s tariff letter – nearly the same ‘form letter’ sent to different countries, and not really received but posted at 3:55 am on Thursday July 10, or 6:25 pm on Wednesday in Washington. The first post got our president’s first name wrong – Aruna instead of Anura, and a second post followed to correct the typo. The world is getting used to superpower sloppiness in formal missives even as it has got jolted to America’s aerial bombing reach over Iran. President Dissanayake is not the only one to be honoured with Washington typo. The letter sent to Madam Željka Cvijanović, the Chairwoman of the Presidency of Bosnia and Herzegovina, referred to as “Her Excellency,” and also addressed her as “Dear Mr President.”

A more serious political and even legal howler is in the letter sent to Brazil, the same day as Sri Lanka, but a non-form letter sent specifically to Brazilian President Luiz Inacio Lula da Silva. The letter quite blatantly singles out Brazil for a punishing 50% tariff not for security or economic reasons that Trump usually uses to justify his tariffs, but because he is not happy with Brazil’s prosecution of its former president and Trump buddy Bolsonaro for trying to overturn his defeat in 2020 presidential election. Trump tried the same thing in the US and was indicted for but escaped trial thanks to the Supreme Court’s artful majority ruling on presidential immunity. Now Trump wants to help Bolsonaro in Brazil using his tariff powers in America.

Trump’s letter to Sri Lanka indicates that Sri Lanka will be charged “only 30% on any and all Sri Lankan products sent into the United States …”, while inviting Sri Lanka “to participate in the extraordinary Economy of the United States, the Number One Market in the World, by far.” This is seriously from the President of the United States of America, no less, and by far too. The new 30% tariff level is quite lower than the 44% that was earmarked for Sri Lanka in Trump’s Rose Garden rollout of global tariffs on April 9. Among comparator and competitor countries Sri Lanka has fared better than some and worse than others.

Vietnam has got a better deal at 20% in this week’s letter, from 46% in April. Philippines and Malaysia have got 20% and 25% tariffs now, but slightly higher than the 17% and 24% levels in April. Among other ASEAN countries, Indonesia and Thailand are at the same 32% and 36% as in April, while Cambodia’s tariff has been lowered from 49% in April to 36% now. It is now a fact of geopolitical life that countries are scrambling to get a lower tariff imposition from Trump.

Other than China and the European Union, as well as Canada and Mexico to a lesser extent, hardly any country has pushed back on Trump’s tariff floats or threatened him with counter tariffs. All the other countries are jostling among themselves to get an audience in Washington and strike a favourable deal. Some have had success in lowering the April 9 tariffs, but no one is looking for a return to pre-April 9 normalcy. There would appear to be little method and more chaos in the way Trump is playing favourites among contending competitors. For instance, he has been selectively hard on America’s traditional allies while being open to making deals with others.

Trump’s distaste for Western Europe and Canada has been quite obvious. But he is also hard on countries like Japan and South Korea that have been faithful American allies for nearly 80 years after the end of the second World War. While Vietnam would seem to have obtained a relatively good deal from Trump, Japan and South Korea have not been able to get a timely audience at the White House or with US officials. Many of Trump’s moves with other countries are supposed to be indirect moves against China. Yet Trump has been indicating his willingness to reach a mutually beneficial deal with China.

The letters to Japan and Korea keep their tariff levels at 25%, same as in April, but the two countries have been trying hard to lower the tariffs against them given their volume of exports to the US. Then out of nowhere on Thursday night, Trump posted a letter for Canada threatening to impose a 35% tariff on Canadian exports to America by August 1^st. This despite officials of the two countries at the highest level working for several months to strike a comprehensive tariff agreement by July 21^st. And no world leader has taken a measured and conciliatory approach to Trump’s tariffs than Canadian Prime Minister Mark Carney. And he gets the same form-letter as others with a new 35% announcement without any clarity on the already imposed taxes on steel, aluminum, copper and auto sector.     

Sri Lanka’s Options

In this whipsaw world of Trump tariffs Sri Lanka managed to get is tariff lowered from 44% in April to 30% now. The NPP government is calling it one of the highest tariff reductions from April and an outcome of the government’s successful negotiations with the US. The Opposition, on the other hand, is calling it a failure and that the reduction could have been greater but for the government’s incompetence. According to Sajith Premadasa, “The 30% US tariff on Sri Lankan exports is the price we pay for poor negotiation.” Harsha de Silva has been more conciliatory, welcoming the reduction from 44% to 30% while pointing out that 30% tariff is still too high to be competitive with other countries vying for the US market. He has also offered opposition support to get a better deal before the new Trump deadline now set for August 1.

It turns out the US is the single largest export market practically for every country on the planet. And for countries that depend on their exports more than others, losing a share of the US market would mean significant losses in their forex earnings. The US accounts for 27% ($3 billion) of Sri Lanka’s total manufactured exports of $12.8 billion. And the garment sector accounts for nearly two-thirds of all exports to the US. With 350,000 direct jobs in the garment sector, and twice as many spinoff jobs, any impact on the garment sector would be significant, bad for the economy and worse for politics.

At the same time, there are opportunities that could be used to mitigate the potential impacts on exports to the US, especially garments. Trade diversification is an option but when every country is trying to diversify it would be tough to find new buyers in the short term. Establishing a niche market in the US for Sri Lankan garments could be a faster option than diversifying. Perhaps the government should give support to industries to achieve market consolidation in the US.

A potential mitigating factor could be that the tariffs are applied to the free-on-board (FOB) price of a product and not directly added to the retail price. With niche products, sellers could find room for adjustments in the markup between the FOB and the retail price. Sri Lanka’s otherwise devalued rupee could also add to the competitiveness of its exports vis a vis countries with higher valued currencies.

Sri Lanka’s biggest competitors in the apparel sector are India, Bangladesh, Vietnam and Cambodia, and their respective tariff levels are 26%, 35%, 20%, and 36%. India and Pakistan have not received their letters yet, and no one knows whether India’s April level of 26% will go up or down with the letter. Recently, Pakistan, with tariff set 29% in April, has since gotten closer to Washington with a very cordial White House lunch meeting between President Trump and Pakistan’s Army Chief, Field Marshal Asim Munir. Trump was quite impressed by the guest in uniform and the lunch was followed by another unscheduled hour of talks at the White House. There is talk that Trump, in his quest for the Nobel Peace Prize, may float tariffs as a bargaining inducement to force peace between India and Pakistan. Pakistan likely will play along while India may not take kindly to being treated at the same level as Pakistan. How all that will translate into Trump’s tariff letters to the two countries, even Trump wouldn’t know at this point.

With India, Pakistan and Bangladesh having their own internal problems and in-between complications, it would be futile to expect a collective SARC response to Trump’s tariffs to the South Asian region. Even bilateral understandings will not be easy. India will always be the lender of first resort to Sri Lank, but will not at all agree to anything that may impact its exports to America. Yet Sri Lanka, given the limited range of its exports, could try to achieve understanding with its neighbours in avoiding or minimizing duplication of exports to US, as well as avoid competing for the same market segments in the US. That is something the NPP government may want to look into.

The trouble with Trump’s tariffs is that they are likely to stay even after Trump is gone as president in three and a half years. The task would be to keep lowering them but eliminating them will be a long shot. In a memorable turn of phrase several weeks ago, the Canadian Prime Minister, a Cantab PhD in Macroeconomics and successful Central Bank Governor in two G7 countries (Canada and England), described President Trump’s tariff scheme as ‘monetization of US hegemony.’  Objectively, Mr. Carney is right on the mark, no matter what Trump’s subjective compulsions are. The implications will keep unfolding and quite unpredictably as well.