Trade wars

Monday, 18 June 2018 00:00 - - {{hitsCtrl.values.hits}}

As the United States doubles down on trade with China, many experts around the world are worried that it would trigger a tit for tat trade war that could hit global growth prospects. This is particularly relevant to Sri Lanka as it attempts to reform and liberalise its economy, especially through inking more free trade deals.

There are understandable fears that Sri Lanka’s efforts forge stronger trade links with the world at a time when global trade is under so much pressure could make it more vulnerable to external changes. But as was pointed out during a recent conference organised by Daily FT, Colombo MBA Alumni Association and HSBC global trade is increasingly shifting away from the United States to the global south. The US while still a significant player in world trade only accounts for about 16% of global trade with South Asian and East Asian markets emerging as potential trade options for smaller developing country focused on services and manufacturing rather than commodities.

The conference, which was addressed by many experts, considered how Sri Lanka could link with different partners including the Association of Southeast Asian Nations (ASEAN) and South Asia to offset trade ill winds triggered by the US and China. Given its vast market, growing middle class and increasing appetite for new economic segments the trade prospects closer to home are looking good, provided Sri Lanka can adapt to new procedures, products and people as required.

In its Asian Development Outlook report last week, the Asian Development Bank (ADB) forecasts developing Asia to grow by 6% in 2018, easing from last year’s 6.1%. Next year, the Manila-based lender projects the region will grow at 5.9%. Developing Asia covers 45 of the ADB’s 67 member economies, which also include countries in Europe and North America.

The ADB said the region could withstand most shocks from US President Donald Trump’s protectionist policies, but the growing trade frictions between the world’s two biggest economies could dampen Asia’s growth prospects.

Last month, the Trump administration imposed a 25% tariff on imports of steel to the US and a 10% levy on aluminium in a bid to narrow America’s $ 375 billion trade deficit with China. The latter has initiated a dispute procedure with the World Trade Organization, questioning Trump’s protectionist moves.

Earlier this month, Trump also told the U.S. Trade Representative to consider taxes on another $ 100 billion-worth of Chinese products to counter the country’s “unfair” practices of obtaining US intellectual property.

Despite the looming trade war, the ADB said last year’s trade revival had built buffers for several Asian economies, particularly commodity exporters.

India is also expected to bounce back over the next two years as businesses adjust to the economy’s new tax regime. The region’s second largest developing economy is projected to grow at 7.3% in 2018 and 7.6% in 2019. In such a situation it becomes necessary to consider the complex web of global trade and find out where Sri Lanka could best fit in. However, Sri Lanka’s best chances have to be underpinned by better economic management, faster reforms, judicious macroeconomic management and strong political will at home.

South Asia is expected to grow to 7% in 2018 and 7.2% in 2019 after two years of decline.