Shielding Sri Lanka from looming economic storm: US tariff crisis

Only through a fundamental transformation of the economic structure can Sri Lanka productively increase imports, a dynamic that could, in turn, create the conditions for a reciprocal lowering of US tariffs on Sri Lankan products 

• Following is a collective statement by trade unions and civil society organisations on the US tariff crisis and possible countermeasures the Government could take to reduce its impact

The long shadow of the US tariff war casts a pall of economic catastrophe over the third world, obscuring a crucial historical lesson at the heart of this crisis. The 1991 dissolution of the Soviet Union and the subsequent ascendance of the US dollar as the dominant global reserve currency amplified the inherent Triffin Dilemma. With the US dollar now facilitating 88% of global foreign exchange transactions, a stark increase from the 41.5% observed during the Soviet Union’s collapse, the United States has been compelled to incur escalating current account deficits to meet this demand, a trend mirrored by its expanding trade deficit since the mid-1990s. This necessary liquidity provision, paradoxically, erodes the dollar’s long-term stability.

Ignoring the prescient counsel of John Maynard Keynes, who advocated for the supranational ‘bancor’ during the Bretton Woods negotiations, the US, in its pursuit of post-World War II global hegemony, appears to have embraced this predicament. The unfolding trade conflict resonates ominously with perilous historical junctures that culminated in two world wars. These damaging US import tariffs, particularly impacting the third world, are not isolated acts but rather manifestations of a profound geopolitical transition: the decline of the US’s post-WWII political-economic dominance, coinciding with the burgeoning economic might of China, a trajectory accelerated by the 2008 US financial crisis. Furthermore, the erosion of global moral principles through complicity with the genocide in Gaza has normalised destructive and self-serving policies on the world stage.

The narrow neoliberal narrative, propagated by entities like Advocata—mere mouthpieces of economic imperialism—falsely claims that US tariffs on Sri Lanka are a direct consequence of Sri Lanka’s own trade barriers. This narrative suggests that further liberalisation and appeasement through discussions with the US administration will suffice to alleviate the tariff burden. However, the stark reality, exemplified by Vietnam’s futile offer to eliminate tariffs on US goods, unequivocally debunks this self-serving fiction. The Trump administration’s rejection of this unprecedented concession reveals their true objective: a drastic reduction in the US trade deficit, a goal entirely detached from the tariff policies of other nations on US exports. Therefore, any attempt by Sri Lanka to negotiate a reduction in these tariffs is not only likely to be unproductive but fundamentally misconstrues the underlying motivations behind the US policy. Given Sri Lanka’s inherent inability to significantly alter the trade surplus with the US within the current framework, such engagement would be an exercise in futility.

In the face of this stark and uncompromising reality, we, the coalition of trade unions representing the workforce within Sri Lanka’s Free Trade Zones, issue a resolute call to the Government. Urgent and decisive action is imperative to mitigate the devastating economic repercussions of this impending crisis.

The sharp disparity in tariff rates levied on Sri Lankan exports to the US—a punitive 44%—stands in stark contrast to the considerably lower tariffs imposed on regional competitors such as India (26%), Egypt (10%), Bangladesh (37%), Pakistan (29%), Kenya (10%), and Thailand (36%). This glaring disadvantage creates an undeniable and immediate incentive for domestic manufacturers to abandon their Sri Lankan operations and relocate production to nations enjoying more favourable tariff regimes. This stark reality is underscored by the Joint Apparel Association Forum (JAAF) General Secretary Yohan Lawrence, who warns that ‘Sri Lanka could very quickly see its share of US business move to countries with lower tariffs than Sri Lanka has’. 

Furthermore, the notion that these tariffs might translate into higher inflation for American consumers wouldn’t be entirely accurate. The US retail market, dominated by powerful monopolies, will not fully absorb these increased costs. Instead, these firms will exert relentless pressure on their suppliers to absorb the tariff burden by slashing their supply prices. This predatory practice is already well-established in the case of China, and its insidious effects are now reaching Sri Lanka. 

As the JAAF General Secretary confirms, ‘smaller garment firms that act as subcontractors for major exporters have already been asked to reduce their costs by 40% in response to the new tariff regime’. The inevitable consequence of this ruthless squeeze will be an assault on the livelihoods of Sri Lankan workers, who will be forced to bear the brunt of these tariffs through drastic wage cuts and the elimination of crucial overtime payments—a devastating blow to a workforce already reeling from the catastrophic 2022 economic collapse. 

The stark pronouncements of the JAAF General Secretary lay bare an unmistakable truth: both the domestic capitalist class and foreign investors are poised to abandon ship, their allegiance solely to their bottom lines. This self-serving exodus unequivocally demonstrates the futility of relying on these actors to navigate Sri Lanka out of its current economic abyss. Against this bleak backdrop, we implore the Government to undertake a paradigm shift, initiating and prioritising strategic investments in industries that cater to the vital needs of the domestic market. This includes, but is not limited to, the production of essential agricultural machinery, fertilisers, pesticides, and the machinery underpinning our existing strengths in rubber processing, textiles, garments, and chemical manufacturing. 

The moment demands a meticulously coordinated national plan for domestic industrialisation, fostering intricate input-output relationships across a network of interconnected industries. This strategic approach will be crucial in overcoming the challenges of indivisibility, demand deficiencies, and achieving economies of scale – a far cry from the isolated, low-skilled activities that have characterised our vulnerable export sector. Such a transformative strategy is not merely about shielding the Sri Lankan working class from the looming economic catastrophe; it is about fundamentally addressing the long-festering structural weaknesses that have plagued our economy for far too long. 

Through such a mechanism, Sri Lanka could strategically increase machinery imports, potentially including those from the US, to underpin its domestic industrial expansion rather than fuelling unsustainable consumption. Indeed, the imperative is to build the capacity to build, requiring machines to create machines. Hence, only through a fundamental transformation of the economic structure can Sri Lanka productively increase imports, a dynamic that could, in turn, create the conditions for a reciprocal lowering of US tariffs on Sri Lankan products. 

The Government’s proposed investment budget of approximately Rs. 1.4 trillion for 2025 must undergo an immediate and rigorous rationalisation. The time for vanity projects and counterproductive infrastructure like endless highways, bridges, and culverts is over. The urgent need of the hour is the prioritisation of capital formation in genuine industrialisation. 

The allocation of a staggering Rs. 80 billion for the Kadawatha-Mirigama highway, amounting to an exorbitant Rs. 2.1 billion per kilometre, is a continuation of the profligate spending that has characterised previous administrations, who squandered public funds at a comparable rate of Rs. 2.5 billion per kilometre. This blatant waste stands in shameful contrast to the average cost of a four-lane highway in India, a mere Rs. 500 million per kilometre. The Government must decisively put an end to this wasteful expenditure, which serves only to enrich a select capitalist class and those who exploit their access to political power to embezzle public funds. The nation can no longer afford to pour its precious resources into projects that primarily benefit a privileged few while the vast majority of its citizens face economic ruin. Furthermore, the government must immediately confront the crippling burden of its foreign debt. The disastrous debt restructuring deals shackled our nation to annual foreign debt liabilities amounting to approximately 4.5% of GDP, a figure projected by the IMF to reach a staggering $ 4.5 billion in payments this year alone, given a GDP nearing $ 100 billion. Without a significant reduction in these crippling payments, Sri Lanka is hurtling towards another inevitable default this year, raising the ominous spectre of a global third-world foreign debt crisis.

To avert this we demand that the Government urgently enter into renegotiations with its creditors and the IMF, casting aside the unsustainable 4.5% of GDP target for annual foreign debt payments. Instead, we propose a far more realistic and sustainable limit of 8% of total merchandise exports and net services exports. The IMF’s parameter of assessing debt repayment targets through a ratio of GDP must be unequivocally rejected in favour of a ratio based on the tangible earnings from our exports. Adopting this crucial metric will substantially alleviate the foreign debt burden and significantly diminish the perilous likelihood of another devastating default.

Beyond the immediate debt crisis, the government must demonstrate an unwavering commitment to plugging the gaping holes through which our national wealth is haemorrhaging. We urgently call for the strengthening of laws to effectively prevent illicit capital flows, particularly the insidious practice of trade misinvoicing, which, according to the Ways and Means Committee report commissioned by the Parliamentary Committee on Public Finance in August 2024, robs our economy of an estimated $ 2 to 4 billion annually, resulting in a catastrophic loss of vital tax revenue. 

Furthermore, decisive measures must be taken to actively repatriate these vast sums of funds that have been illicitly transferred out of the country. Recovering these outflows will not only bolster our depleted foreign reserves but also provide crucial capital for the proposed State-led industrialisation initiative.

The 2023 annual report of the Auditor General’s Department has revealed a shocking and utterly unacceptable reality: corporations have failed to remit over Rs. 460 billion in Value Added Taxes (VAT). This is not merely an oversight; it is a brutal crime perpetrated with impunity. VAT, a regressive tax that disproportionately burdens even the lowest income earners, is being shamelessly stolen in broad daylight by our capitalist class – a crime of the highest order. This blatant theft directly increases the Government’s reliance on debt, and the very VAT money pilfered from the public will now be lent back to the state at exorbitant interest rates, generating further capital gains for these unscrupulous entities. 

This colossal fraud must be brought to an immediate end. We demand the swift introduction of stringent laws with severe punishments, including prison sentences exceeding 20 years of rigorous imprisonment, to deter such vile and economically destructive practices by corporations.

In conclusion, the confluence of the US tariffs war, the crippling burden of foreign debt, the insidious drain of illicit capital flows, and the brazen theft of VAT by corporations presents an existential threat to Sri Lanka’s economic sovereignty and the well-being of its people. The time for timid measures and neoliberal platitudes is long past. We, the coalition of trade unions, demand bold, decisive, and transformative action from the Government. Only through a decisive shift towards domestic industrialisation, a renegotiation of unsustainable debt, a resolute crackdown on illicit financial activities, and the unwavering pursuit of justice against economic criminals can Sri Lanka hope to weather this gathering storm and forge a path towards genuine and sustainable economic resilience.

 Endorsed by:

Ceylon Teachers’ Union

Commercial and Industrial Workers’ Union

Daabindu Collective

Engineering Services Professionals’ Association (ESPA)

Federation of Media Employees’ Trade Union

Forum for a Plural Democracy

Law and Society Trust

Movement for Land and Agricultural Reform

Revolutionary Existence for Human Development Workers’ Union

Shramabhimani Centre

Sri Lanka Insurance General Employees Union

Stand up Movement Lanka

United Federation of Labour

Yukthi Collective