My View issues 750th piece when Trump enforces unilaterally 30% tariff on Sri Lanka

Trump’s tariff policy had created disorder in a world which had been functioning smoothly

Trade takes place between individuals, both personal and corporate, and not between countries. If Sri Lankan producers have been willing to supply those 87 odd items at the prevailing competitive prices, and American consumers have been willing to buy them at those prices, it is a mutually agreed personal exchange and does not qualify to be called plundering or looting. Hence, Trump’s argument of plundering and looting does not sit well with trading practices, though it may be appealing to average Americans who cheered him at every word he uttered while announcing the new tariff structure

My View completing fourteen and half years

With this 750th piece, My View completes fourteen and a half years of unbeaten record. First appearing in January 2011,1 it has been published as an opinion column on every Monday, and if Monday is a holiday, the next working day. It is meant for those who are not conversant with economics and not for professional economists, though there are some belonging to this latter category being its regular readers. 

The tagline, Economics Matters, refers to the fact that everything – political, cultural, social, family, or artworks – can be analysed in terms of economics. That is the reason for the column to review movies and books of fictions. But the analysis has always been to dig out the economic principles underlying them. The readership has been diverse comprising lawyers, engineers, scientists, businessmen, bureaucrats, managers, and students.

It was an experiment conducted by the writer to present complex economic issues to ordinary people in simple language. It has so far survived four presidential regimes in Sri Lanka though the articles being critical of some of their policies. Following the same critical approach, it will analyse the policies of the present presidential regime too for the benefit of the readers.

Trump’s attempt to Make America Great Again through tariffs

An important global development which My View has critiqued in the recent past had been the ex parte tariff revision which the US President Donald Trump had introduced to USA’s trading partners, big or small. It had hit by the unexpecting global community like a tsunami that had destroyed property and lives in a moment. According to some analysts, his policy had led to the creation of a new world order which had been based on free trade, globalisation, and free movement of capital. But in my view, Trump’s tariff policy had created disorder in a world which had been functioning smoothly. Hence, I coined the term Trump(dis)order to describe the new tariff and economic policy being promoted by Trump administration.2 

His policy had been contrary to the medicine which IMF and the World Bank had been prescribing to member countries which had sought their support to rescue the ailing economies. That policy package which had been endorsed by the US administration along with IMF and World Bank had been known as the Washington consensus because all the three institutions that had endorsed it had been in Washington DC in USA. Trump had dismissed the underlying economic philosophy and policy prescriptions – known as the Ten Commandments of the Washington Consensus – on the ground that the free movement of US companies to poor countries in search of production processes based on cheap labour had immiserated Americans by robbing them of their jobs. 

Hence, Trump wanted those companies to return to USA and to force them to do so, chose to impose high tariffs on their exports moving away from the free trade policy to which USA had subscribed throughout. His promise to US voters was that he wanted to make America great again, abbreviated as MAGA. What he had forgotten was that USA had been a beneficiary of the free flow of such investments.

USA, largest recipient of FDIs

I, therefore, argued as follows: “According to data published by the US Department of Commerce in September 2024, USA had been the largest recipient of FDI: up to 2023, its cumulative receipt of FDIs at historical costs had been $ 5.5 trillion, while at market value, it had been $ 13.5 trillion.3 The historical cost had amounted to 20% of GDP. In contrast, its outbound FDI up to 2023 had been at historical cost $ 6.9 trillion or 25% of its GDP. What this means is that USA had been the largest supplier as well as the guarantor of FDI flows.

The average rate of return on inward FDIs during 2023-22 had amounted to 5%, while that on outbound FDIs had been a little higher at about 8%.4 These are very attractive rates of return since the risk-free 10-year US Treasury rates during this period had ranged between 3.83% and 3.48%.5 Hence, the US government cannot claim that it has been unfairly treated through the FDI activities.

The US has also been the promoter of global free trade with a very low tariff rate that had averaged between 1.7% and 1.5% during 2010-2022 excepting the COVID years when it had spiked to 13.8% in 2019.6 The US economy was also a free supplier of global liquidity by running a massive trade deficit that had amounted to $ 1.2 trillion in 2024.7 Any decline in the trade deficit will be counter to the supply of global liquidity displacing the USA’s current role of unofficial world’s central banker nation. It will also promote the other competing currencies to take the position of dollar’s role in this regard.

Hence, the current policy of Trump administration will amount to a voluntary withdrawal from being the guarantor of the old-world order”.

Wrong conception of trade balances

Trump(dis)order was based on a wrong conception that the trade surpluses which other countries were running against USA was an instance of those country people robbing from Americans. Therefore, the new tariffs which USA was imposing on them was to get that money back. Therefore, it was an eye-for-eye proposition. If other countries also reciprocated by the same policy reaction, it would lead to an undesired global trade war cutting economic growth globally. A country like Sri Lanka which is wholly dependent on the good measures of the powerful nations in the world cannot impose reciprocal tariffs on USA. Hence, I argued in an article in this series that Sri Lanka should not wait till September 2025 but start negotiations with US administration immediately to solicit relief for the country.8 

Meanwhile, Trump announced reciprocal tariffs on all the countries which he claimed ‘culprits’ in the game of robbing from Americans on 2 April 2025 calling that day as the Liberation Day of the United States. Sri Lanka which had been imposed a tariff of 44% based on its latest trade surplus was very badly hit leaving only limited options available.9

Sri Lanka’s exports

Sri Lanka has been exporting basically garments (about $ 2 billion), rubber products (about $ 300 million), and 85 odd other products.10 According to Trump, with these high exports over imports leading to a trade surplus, Sri Lanka has been plundering and looting from Americans. If this is applied to individual workers, these plunderers cum looters have been poorly paid garment workers, plantation workers, and factory workers in Sri Lanka. Since low-priced output produced by them have been enjoyed by relatively rich American consumers, ethically speaking, it is the US consumers who have been exploiting this low paid labour in Sri Lanka.

But trade takes place between individuals, both personal and corporate, and not between countries. If Sri Lankan producers have been willing to supply those 87 odd items at the prevailing competitive prices, and American consumers have been willing to buy them at those prices, it is a mutually agreed personal exchange and does not qualify to be called plundering or looting. Hence, Trump’s argument of plundering and looting does not sit well with trading practices, though it may be appealing to average Americans who cheered him at every word he uttered while announcing the new tariff structure.

As I had argued in this series, I had two issues with Trump’s tariff policy.11 One relates to his wrong interpretation of the trade deficit which USA is having with most of its trading partners. The other is the irrelevant and misleading formula he has used to calculate the magnitude of the amount alleged to have been robbed from US citizens by countries which have a trade surplus with USA.

Wrong reading of trade deficits

Trump has claimed that the trade surplus which many countries have with USA is an indicator of the extent of plundering of US citizens by those countries through higher tariff rates. As I have pointed out earlier,12USA being the unofficial central banker nation to the world since 1971 has been able to command real goods from the rest of the world by exchanging a worthless piece of paper called the dollar. If that dollar returns to USA, the holder is promised that he could get a basket of real goods and services worth one dollar. If it is circulated as a reserve or exchange currency through the globe, the holder can command a dollar’s worth of real goods and services from the rest of the world.

Falling value of dollar

But these two promises are broken if the domestic value of the dollar falls due to domestic inflation in USA, on one side, and the fall in the international value of dollar due to loss of trust about the issuer of the dollar, namely, the US government, on the other side. USA’s Consumer Price Index or CPI which stood at 100 in 1982-4 has increased to 321 in May 202513 meaning that a dollar in 1982 is worth only 31 US cents today. The international value of the dollar should be gauged by reference to the price of gold since gold is the best substitute asset for the dollar. 

In 1982, a fine ounce of gold was traded at $ 376 in the world markets. The price of same gold has sharply increased to $ 3324 in May 202514, implying that a dollar’s value in the international markets in 1982 has fallen to 11 US cents. Hence, a foreigner who has acquired a dollar in 1982 by sacrificing a dollar’s worth of a real good or service has been condemned to hold a worthless piece of paper today. Therefore, by having a trade deficit with other countries, it is the US citizens who have got an unfair advantage from the citizens of those countries. Hence, there is a case for USA to compensate those dollar holders, instead of punishing them.

Use of irrelevant formula

The formula used by Trump’s policy advisors to calculate the extent of the amount plundered by the countries with a trade surplus with USA is irrelevant for the purpose. It simply says that the percent of the amount so plundered is equal to the trade deficit which USA has with those countries is proportionate to the amount which USA has imported from them assuming that the import elasticity of US demand times the price adjustment in US market is equal to 1. To arrive at this result, Trump’s policy advisors have used a general import elasticity of 4 and a price adjustment factor of 0.25. These are two strange numbers since the same have been used for both consumer items like apparels, essential items like chips and pharmaceuticals, and discretionary items like components for producing military items or aircraft. 

Naturally, this formula fails when it is applied to countries with a trade deficit with USA. Since the trade deficit is a negative number, and it is divided by a negative import elasticity, the outcome is a positive number for countries which have a trade surplus with USA, the ones which are being punished by the Trump administration. However, when it is applied to countries with which USA has a trade surplus like UK, Singapore, Australia, or the Netherlands, the outcome is a negative number meaning that USA should compensate them for the amount it has taken out from them.

Dispute of formula by a co-author

The formula used by Trump’s policy advisors has been disputed by its co-author, Brent Neiman, Edward Eagle Brown Professor of Economics at the Booth School of Business of the University of Chicago in a recent interview with Erin Burnett of CNN.15 Neiman says that the policy advisors have taken the purpose and meaning of the formula out of context. The purpose of the formula was to identify how a country could determine the appropriate tariff rate to balance a trade gap when there is a difference in tariff rates by about 3 to 4%. It is not a formula to be used on a mass scale for countries. For instance, to a query by Burnett, he confirmed that it is not a formula to be used for a country like Sri Lanka which exports a lot of apparels but does not buy sufficient turbines from USA. 

According to him, the application is totally wrong because even if Sri Lanka goes for zero tariff for the imports from USA, the trade gap cannot be eliminated. He also confirmed that the actual price adjustment factor should have been not 0.25 used by Trump’s policy advisors, but 0.95. When that factor is applied, the US’s imports from the respective country should by multiplied by 3.8 and not by 1 as had been done by Trump’s policy advisors. In that scenario, all the calculations made by Trump’s policy advisors to impose the reciprocal tariff on trade surplus countries collapse on themselves. For instance, Sri Lanka’s alleged plundering of Americans is reduced from 88% to 23%. And a half of that is 12% and not 44% which USA has imposed on Sri Lanka.

New tariff rates on Sri Lanka

Trump later deferred the implementation of the tariffs announced in April 2025 for 90 days imposing a base tariff of 10% on each country. During that period, each affected country was expected to negotiate with US trade authorities for relief. The implication was that countries could negotiate for a rate around that base rate. Sri Lanka too did negotiate with US trade authorities to bring the original tariff of 44% close to 10%. However, what was announced for Sri Lanka was a 30% tariff rate payable from 1 August 2025. On top of this, there is another tariff of about 12% based on the rate applicable to most-favoured nations or MFNs. This is killing Sri Lankan exporters because there is no space for the country to conduct further negotiations to have the rate reduced. Sri Lanka’s choice is to divert its trade away from USA to other potential countries in the region. But this is a medium to long-term measure.

Thus, Sri Lanka is now back to square one needing it to have a complete overhaul of its trade policy.

Footnotes:

1https://www.ft.lk/columns/asiae28099s-return-to-world-leadership-not-a-cakewalk-at-all/4-14273 

2https://www.ft.lk/columns/Emerging-Trumporder-or-Trump-dis-order-IMF-WB-advocated-policy-package-at-risk/4-774314 

3Department of Commerce, Sep 2024, Foreign Direct Investment in the United States, p 4. 

4Ibid, p 9.

5https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart 

6https://data.worldbank.org/indicator/TM.TAX.MRCH.WM.AR.ZS?locations=US 

7https://www.bloomberg.com/graphics/2025-us-trump-tariffs-trade-deficit/ 

8https://www.ft.lk/columns/GSP-Trump-dis-order-and-Sri-Lanka-s-choice-in-an-eye-for-eye-tariff-regime-in-USA/4-774625 

9https://www.ft.lk/columns/Trump-dis-order-is-to-hit-Sri-Lanka-very-badly-with-limited-options-available/4-775230

10https://tradingeconomics.com/sri-lanka/exports/united-states 

11https://www.ft.lk/columns/Trump-dis-order-Harsh-tariffs-rates-based-on-wrong-philosophy-and-wrong-formula/4-775603 

12https://www.ft.lk/columns/Trump-dis-order-is-to-hit-Sri-Lanka-very-badly-with-limited-options-available/4-775230

13https://www.bls.gov/news.release/pdf/cpi.pdf 

14https://tradingeconomics.com/commodity/gold 

15https://youtu.be/XTwNUl-v57s?si=BQ3PX014mrwXiNJQ

(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)