By Hema Senanayake –

Hema Senanayake

According to President Trump, the trade deficit of the United States in the last year (2024) was a staggering figure of $1.2 trillion dollars. The trade deficit of this magnitude is considered as being ripped of America by other nations – friends and foes alike. To make the United States rich and wealthy again, President Trump believes that this “ripping off” got to be stopped by eliminating trade deficit by imposing tariffs on all goods imported to the United States.

Two methods are used to impose tariffs. The first method is the imposition of 10% tariff on all goods imported by all countries ignoring the trade deficit. This means that even though there is a trade surplus in favor of United States with any country that country is subject to 10% tariff. For example, The United States has a trade surplus against Australia but under this tariff rule Australin imports are levied 10% of tariff.

The second method is very curious. It is called “discounted reciprocal tariff. The discount percentage is 50%. Under this method of calculation Sri Lanka will be imposed 88% of tariff but with the discount it comes to 44%. As far as I know Sri Lanka never charged (except for vehicles) 88% of tariff on American goods. Then how the U.S. reciprocal tariff is determined to be 88%.

The US reciprocal tariff is not what you and me understand by the regular definition of reciprocal tariff. The “discounted reciprocal tariff” is based on a mathematical calculation. The equation to calculate President Trump’s discounted reciprocal tariff is as follows;

This definition of discounted reciprocal tariff has sealed off our options. This means that no country has the option to increase tariffs in a move to retaliate. If they do it then the U.S. imports could be reduced resulting to increase trade deficit, hence reciprocal tariff determined by the above equation could go up not down.

The whole world is furious with this kind of tariff imposition. People of Canada and Europe have already launched Facebook campaigns to boycott American goods. This will make trade deficits widen in those countries with the U.S. and as a result people’s action will lead to increase the discounted reciprocal tariff for those countries.

Therefore, the only option left with Sri Lanka is to reduce tariff on U.S. goods so that imports from the U.S. will increase reducing trade deficit in the equation resulting to reduce the discounted reciprocal tariff.

Our problem in this method is that Sri Lanka is required to apply such reduction to all trading partners according to the WTO rule. However, there should be an exception if a major economy violates the most favored nation status rule of WTO under a peculiar definition of discounted reciprocal tariff.

However, if Sri Lankan negotiators want to open a new window for a useful discussion President Anura Dissanayake needs to bring down the import tariff on all U.S. goods (perhaps except vehicles) to a level equal to the reciprocal tariff under the common definition of the word reciprocal. Additionally, Sri Lankan team should be prepared to request an additional balance of payment support under the “Foreign Exchange Stability Fund” of the treasury department as Sri Lanka does not manipulate its currency.

However, we need to bring the true problem that is faced by all nations friends and foes alike.  President trump acknowledged that the public debt crisis with increasing budget deficits is the direct result of the huge trade deficit. Therefore, the solution is to eliminate the trade deficit by tariff and in turn collected tariff will finance the budget deficit without borrowing and having to increase taxes. Further tariff will stop offshoring and bring back factories to the U.S. creating more jobs making America rich and wealthy again.

It is true that international trade imbalances will create job losses for importing countries if exporting countries peg their currency, preventing natural appreciation of the currency. However, we have seen that even exporting countries which post trade surpluses experience the debt crisis problem. An example is Japan.

We all want to be rich. President trump admitted it and suggested for all countries to pursue on that path. But the problem lies in the method of practicing the macroeconomic theories as we do it now. Ours is not a big economy but we can think big bringing such ideas to the negotiating table. We can all win.