Trump tariff: Jolt to Sri Lanka’s dependence voracity and innate complacency

The Trump tariff is the long overdue shock which Sri Lanka badly needed to awaken it from its reverie

It is our indecisiveness, indiscipline and inaction which have got us to where we are in the first place and it is never too late to start a new journey where Sri Lanka is largely in charge of its destiny. Our slave-like obeisance to the USA for tariff reductions is disturbing and humiliating. How much longer must we continue to remain in the deep hole of subservience and ‘eternal dependence’? We must remember that the great feats of explorers and inventors started with small steps. Our country must, today, chart its own destiny even if it means starting from scratch

The ‘Trump tariff’ is a stark reminder to Sri Lanka of the dangers which lurk when it is overdependent, and over reliant, on the political and economic strategies, and at times the perceived benevolence, of its key trading partners such as India and China and export markets such as the United States of America (USA) and the European Union (EU). The days when powerful countries and trade associations showed global social responsibility by assisting developing countries such as Sri Lanka, to uplift themselves through preferential tariffs and other incentives are numbered. It is now largely a quid pro quo game with a ‘you scratch my back, and I will scratch yours’, underlining.

The United States of America (USA) was, until very recently recognised as the guardian, and champion, of the free world. It certainly is not the case now. The Trump administration has clearly indicated that it will use its economic, trade, and military might to bully countries to submission to accepting its political and trade agendas, and Sri Lanka is no exception and has no exemptions. The USA believes that trade is a path to making America great again. If such is the current USA thinking there is very little that Sri Lanka can do about it, immediately, other than to play ball and remain relevant in the USA books even if it means compromising its political and economic sovereignty. USA was Sri Lanka’s largest export destination in 2023 at $ 2.75 billion, being 23% of Sri Lanka’s total exports. 

Sri Lanka regained its rights to the EU’s Generalised Scheme of Preferences Plus (GSP+) in 2017. Under the GSP+, deep tariff reductions are made available to developing countries in the lower- and middle-income categories who subscribe to 27 core international conventions, prominent among them being policies and practices relating to human rights, labour rights, environmental protection, and good governance. Sri Lanka’s eligibility has been under continuous scrutiny because of the EU’s long-standing dissatisfaction over Sri Lanka’s compliance with United Nation’s human rights criteria and its continued use of legislation such as the Prevention of Terrorism Act (PTA). The Corporate Sustainability Due Diligence Directive (CSDDD) recently introduced by the EU re governance is a sign of things to come and may not augur well for Sri Lanka. 

No free lunch

India is Sri Lanka’s biggest trading partner, and the trade relationship is founded on historic, cultural, and economic ties. Whilst India played a crucial role in rescuing Sri Lanka during the economic crisis in 2022 by enhancing Sri Lanka’s procurement capacity through a $ 4 billion aid package comprising of credit lines for essential imports, currency swaps and deferred loan repayments, we, the citizens, must recognise that such aid to, and India’s Foreign Direct Investment (FDI) in, Sri Lanka are parts of India’s efforts to nullify China’s influence which grew significantly during the Mahinda Rajapaksa regime. There is no free lunch and there are ‘said’ and ‘unsaid’ strings attached to India’s largesse to Sri Lanka. Sri Lanka will benefit if it toes India’s line in areas such as India’s national security.

Further, the disproportionate economic influence of India arising out of the asymmetry in economic size between the two countries, the voice of the nearly 78 million Tamil speaking citizens in Tamil Nadu and Sri Lanka’s heavy dependence on the benevolence of India in many areas well beyond pure economics are the levers India can pull anytime in exerting subtle control over Sri Lanka’s domestic matters as was the case during Sri Lanka’s ethnic war.

China exerts political influence over Sri Lanka primarily through economic investments, particularly under the Belt and Road Initiative (BRI), and other strategic partnerships. However, China’s influence over Sri Lanka is not as insidious as that of India. Driven by the increasing geopolitical importance of Sri Lanka in the Indian Ocean Region, China’s interests and influence in Sri Lanka grew rapidly post the 1960s via loans, investments, and development assistance. China was a significant donor to Sri Lanka during the civil war. The Colombo Port City, Hambantota (Mattala) International Airport, Norocholai Power Station, Colombo International Container Terminal, the Southern Express Highway and other road networks are examples of how China has made Sri Lanka ultra-dependent on its financial might. 

Minimal pre-conditions and quick disbursement have made China the ‘go-to’ saviour of Sri Lanka on many occasions in the past four decades. Sri Lanka’s willing participation in China’s BRI has resulted in China’s grip on Sri Lanka becoming stronger. Thankfully, widespread criticism of China’s debt traps which the international community has described as intentionally aimed at weakening the borrowing country’s economic system as a prelude to China increasing its stranglehold over it, has resulted in China rethinking its operating model in recent times.

Beholden to several countries

Sri Lanka is beholden to several countries in many ways. You may say that Sri Lanka has Hobson’s choice and that there is no option other than to plead, kneel and beg given our present economic predicament. Whilst I accept that as reality now, I would counter by stating that it is our indecisiveness, indiscipline and inaction which have got us to where we are in the first place and that it is never too late to start a new journey where Sri Lanka is largely in charge of its destiny. Our slave-like obeisance to the USA for tariff reductions is disturbing and humiliating. How much longer must we continue to remain in the deep hole of subservience and ‘eternal dependence’? We must remember that the great feats of explorers and inventors started with small steps. Our country must, today, chart its own destiny even if it means starting from scratch!

The Trump tariff is the long overdue shock which Sri Lanka badly needed to awaken it from its reverie. While forcing it to be more aware of global realities, it has heightened the urgency to meticulously identify and strategically leverage its competitive and comparative advantages, these being its unparalleled strategic location, abundant natural resources, skilled human capital, and burgeoning tourism potential, and formulate a holistic strategy. If these advantages are coupled with a system of transparent and robust governance and a commitment to sustainable development, we will be on our way to true political and economic independence. This independence is not just about political sovereignty, freedom from debt or liberation from powerful countries who have used us as pawns in a game of political chess, but it is a vital step in the creation of a resilient, prosperous, and equitable nation where we, the citizens, can thrive with pride and dignity. A documented long-term vision, consistent policy implementation, and a collective will on the part of all citizens are essential to transforming Sri Lanka into a beacon of self-reliance and sustainable growth on the global stage.

Sri Lanka’s location in the Indian Ocean makes it a key hub for trade routes and this offers great potential for logistics and transshipment. This is our most powerful competitive advantage. Diverse natural and cultural attractions are others. They offer uniqueness to making tourism a sector which can contribute significantly to foreign exchange earnings and job creation. The apparel sector, which has expanded its footprint and moved up the value chain in the last two decades, and the information technology and light manufacturing sectors which have shown growth in competitive markets in recent times have advantages which we can exploit. 

Sri Lanka already displays strong comparative advantages in agricultural products such as cinnamon, tea and coconut and in knowledge process outsourcing because of the existence of a good supply of certified professionals in accounting, law, information technology and medicine. Studies show that Sri Lanka has revealed comparative advantages (RCA) in travel, communication and insurance at both regional and global levels. Further, it hosts valuable mineral resources like graphite, ilmenite, rutile, and zircon, which can be processed into higher-value products for export.

Innately complacent

Sri Lanka is innately complacent. There is no urgency to change. We lack a continuing holistic national trade, services and manufacturing strategy. What we have is a fragmented operating model which simply responds to external factors. The need to establish a coherent trade, industry, and tariff policy to stabilise our economy and foster sustainable growth has never been greater. The policy must, amongst others, encourage export diversification beyond traditional sectors like apparel and tea, aim at adding value to our primary products without merely trading them as commodities and promote branding. Protectionism, where strategically warranted, must be time-bound. These are the basic musts in reducing vulnerability to global shocks, enhancing domestic competitiveness, creating employment and moving the nation towards long-term prosperity and economic independence. 

Successive governments have failed to leverage the several competitive and comparative advantages of our country. They have been more occupied in retaining or regaining political power through shortsighted nationalism, outdated economic ideologies and unaffordable short-term budgetary measures. Whilst there is consensus on the need for urgent reform and a more independent economic path, the continuous jostle for political power has been the biggest roadblock to national development. 

Sri Lanka’s path to recovery and sustainable development demands a higher level of political consensus. A culture of adversarial politics, where opposition parties continue to undermine the incumbent government on a variety of national issues, even when the pursued goals are beneficial to the country, must stop. Critical reforms are essential in several areas towards boosting productivity and economic resilience. Even when approved, reform implementation inevitably transcends electoral cycles. A shared vision and bipartisan support are necessary in ensuring that policy implementation and strategy execution are not negatively affected by shifts in political power. 

As such, political parties must engage in constructive dialogue and collaborate in formulating strategies that benefit the entire country, thereby ensuring continuity and coherence in national development efforts. The National People Power (NPP) government has a clear mandate from the people. The opposition must accept this and support the government in the best interest of our country. If the opposition continues to nitpick every move by the NPP Government, we will still be holding the begging bowl a decade from now!

Enhancing national productivity

The focus must be on enhancing our national productivity. National productivity is the bedrock of a nation’s prosperity and the most critical determinant of the economy’s long-term health and a higher quality of life for its citizens. Higher productivity means more output with the same or fewer inputs, leading to increased national income, improved living standards, lower unemployment, enhanced global competitiveness and economic freedom. Sri Lanka has long been caught in a “low productivity trap,” which has hindered its economic sustenance and its ability to attract significant foreign direct investment (FDI). 

Available capital, sparse as it is, must be invested in technology, automation and digital infrastructure. Promoting innovation and research and development (R&D), establishing industrial hubs, and integrating small and medium-sized enterprises (SMEs) into larger, more productive ecosystems are vital to increasing national productivity. Public sector reforms, which have been promised over several years, must be fast-tracked. Agriculture, education and labour, the areas which permeate our total strategic fabric must be overhauled. Though they may sound overwhelming, they can be done if we, in the first instance, show determination and act selflessly in the best interests of our country. 

Agricultural reform is the quickest path to boosting Sri Lanka’s national productivity. Despite the instant benefits it can provide, this sector has been neglected and its contribution to Gross Domestic Product has steadily declined, though it still employs a substantial portion of the workforce. The low labour productivity in agriculture emanates from outdated practices, limited mechanisation, and reliance on low-value crops. A shift towards high-value export crops, adoption of smart farming techniques, investment in post-harvest management, modernisation and value addition to currently commoditised crops can unlock immense potential. Technological advancements and diversification would not only enhance food security and generate much-needed foreign exchange but will increase farm incomes and rural prosperity and thereby drive higher national productivity. Politically expedient policies have created uncertainty in the minds of farmers and investors in recent times. Smallholder farmers have been dogged by limited access to finance, complications of land ownership and tenure and a supply chain dominated by middlemen who have preyed on their helplessness. Reform is essential and urgent.

Education system must be transformed

Sri Lanka’s education system must be transformed to meet 21st century demands. The current exam-centric approach prioritises rote learning. This stifles critical thinking, creativity, and essential problem-solving skills which are crucial for a modern workforce. The mismatch between graduates’ skills and labour market needs which has resulted in high youth unemployment must be remedied. Skills which are relevant to the services and industries which feature high in our strategy must be prioritised. Significant disparities exist in access to quality education, with rural and underprivileged schools lacking adequate infrastructure, resources, and qualified teachers compared to their urban counterparts. Overcoming these deeply rooted obstacles requires broad societal consensus, sustained political will and equitable resource allocation.

Sri Lanka’s economic future hinges significantly on comprehensive labour reforms. Current labour laws, some dating back over a century, are complex, inflexible, and skewed towards employee protection. The limited leeway given to investors in managing performance and terminating employment has discouraged new capital and hindered job creation and economic growth. The rigidity of the existing framework and the bureaucratic delays associated with effecting even minor changes due to union pressure have made it difficult for businesses to adapt quickly to changing market conditions, thereby affecting productivity and competitiveness. 

Dialogue and discussion with worker segments to explain the broader economic benefits of situation-relevant labour laws have been insufficient. The lack of a clear majority in parliament and the use of labour unions as political allies have not helped. Meaningful reforms require a broad stakeholder consensus in achieving the delicate balance between worker protection and investor interests.

Sri Lanka stands at a pivotal juncture, where its future hinges on its ability to assert genuine self-reliance. For too long, the nation has navigated a complex web of international relationships, often relying on preferential treatment or aid from more powerful countries. While such assistance can offer short-term relief, it frequently comes with implicit or explicit conditions that compromise policy autonomy, stifle independent decision-making, and perpetuate cycles of dependency.

True national prosperity and resilience will only emerge when Sri Lanka decisively charts its own course. This means cultivating robust domestic industries, fostering innovation, and developing a skilled and agile workforce that reduces reliance on external expertise. It demands strategic partnerships based on mutual respect and shared interests. By prioritising its national interests, implementing sound governance, and leveraging its strategic geographical position astutely, 

Sri Lanka can move beyond being a recipient of conditional aid to become a confident, economically independent player on the global stage. The NPP Government has a golden opportunity of leaving its legacy by paving the way for an economically independent Sri Lanka by rising above ideologies, seeking the collaboration of all political parties and inspiring a shared vision among all citizens.

(The writer is currently, a Leadership Coach, Mentor and Consultant and boasts over 50+ years of experience in very senior positions in the corporate world – local and overseas. www.ronniepeiris.com.)