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The Weight of the Tariff:
Contextualizing the Blow
Sri Lanka's designation
among the first countries targeted by the US underlines its perceived
significance in the specific trade flows triggering the tariff action, likely
under Section 232 (national security) or Section 301 (unfair trade practices)
authorities – instruments heavily utilized during the Trump administration and
maintained, albeit more selectively, under Biden (Lincicome, 2023). While the
specific rationale for targeting Sri Lanka remains officially tied to broader
US trade deficit concerns, as referenced in the article regarding Trump's
actions, the impact is measurable and severe. Apparel and
rubber products are linchpins of Sri Lanka's export economy. In 2023, textiles
and apparel constituted approximately 41% of total merchandise exports, valued
at around $5.3 billion USD (Central Bank of Sri Lanka [CBSL], 2024 Annual
Report). The United States is consistently the single largest market for Sri
Lankan garments, absorbing roughly 44% of these exports (Joint Apparel
Association Forum Sri Lanka [JAAFSL], 2023 Report). A sustained 44% tariff,
applied differentially against competitors, would be catastrophic.
Table 1: Sri Lanka's
Apparel Export Dependence (Key Markets, 2023)
|
Market |
Share of Total Apparel Exports (%) |
Estimated Value (USD Billion) |
|
USA |
44% |
~2.33 |
|
EU |
32% |
~1.70 |
|
UK |
8% |
~0.42 |
|
Other |
16% |
~0.85 |
|
Total |
100% |
~5.30 |
|
(Source:
Compiled from CBSL, 2024; JAAFSL, 2023) |
||
The temporary reduction
to 10% offers a reprieve, but even this rate significantly erodes
competitiveness against regional rivals. As Minister Suriyapperuma correctly
highlights, competitors in South Asia (notably Bangladesh and India) and East
Asia (Vietnam, Cambodia) face substantially lower US tariffs. Bangladesh,
leveraging its Least Developed Country (LDC) status, benefits from duty-free
access to the US market under the Generalized System of Preferences (GSP),
although its apparel exports primarily utilize regular tariff lines as GSP
coverage for textiles is limited (USTR, 2024 GSP Guidebook). Vietnam, while
facing some Section 301 tariffs on unrelated goods, generally enjoys Most
Favored Nation (MFN) rates for apparel, averaging around 11.5% but critically
varying by specific item (United States International Trade Commission [USITC]
DataWeb, 2023). Sri Lanka's current disadvantage is stark: a 10% tariff applied
atop existing costs makes its high-value, quality-focused garments
significantly more expensive than Bangladeshi or Vietnamese alternatives in the
crucial US market.
Beyond Tariffs: The
Shadow of the IMF Program
Minister Suriyapperuma’s
statement that Sri Lanka seeks "input and assistance" from the US,
"particularly given the situation... within the IMF program," is a
crucial admission. Sri Lanka's negotiations are not occurring in a vacuum but
under the intense scrutiny and conditionalities of a 48-month Extended Fund
Facility (EFF) arrangement approved in March 2023, worth approximately $3 billion
USD (IMF, 2023). The program's success hinges critically on achieving
export-led growth, improving the balance of payments, and rebuilding foreign
reserves. A collapse in apparel exports to the US – potentially triggering
factory closures, job losses (the sector employs over 350,000 directly,
predominantly women - JAAFSL, 2023), and a sharp decline in vital foreign
exchange earnings – would jeopardize the entire program. The US, as the IMF's
largest shareholder, holds significant influence over the Fund's policies and
Sri Lanka's program reviews. This dynamic inherently shapes the negotiation
table, placing Sri Lanka in a position of structural weakness where it must
simultaneously satisfy IMF fiscal and monetary targets while pleading for
tariff relief from a major shareholder. The "acknowledgement" of Sri
Lanka's situation by the US team, while diplomatically positive, does not
equate to a commitment for leniency.
The Legal Quagmire:
Presidential Power vs. Congressional Authority
The article rightly draws
attention to the contentious legal foundation of the US tariffs imposed under
President Trump, noting ongoing court challenges asserting their illegality due
to bypassing Congressional approval. This is not merely historical context but
a vital lens through which to view Sri Lanka's current predicament. The
fundamental issue revolves around the scope of presidential authority under
statutes like Section 232 of the Trade Expansion Act of 1962 and Section 301 of
the Trade Act of 1974. Lower courts have indeed ruled against the Trump
administration's expansive use of these powers (e.g., American
Institute for International Steel, Inc. v. United States initially
challenging Section 232 steel tariffs, though aspects were later upheld on
different grounds; numerous Section 301 cases are ongoing) (Bolle, 2023
Congressional Research Service Report). The Biden administration has moderated
their use but has not relinquished the underlying authority, creating
persistent uncertainty for trading partners. Sri Lanka's vulnerability stems
partly from this unresolved tension in US trade law, where executive actions
can disrupt established trade flows based on contested interpretations of
national security or unfair trade, often with limited transparent economic
analysis justifying specific country impacts.
Mirror Image: Sri Lanka's
Own Governance Challenge
Perhaps the most profound
point raised in the ECONOMYNEXT article is the parallel drawn between the US
executive's use of tariffs and Sri Lanka's practice of "taxing by midnight
gazette." The invocation of the Magna Carta principle – that taxation
requires the consent of the governed, typically through their elected
representatives in parliament – cuts to the core of sound economic governance.
In Sri Lanka, the frequent resort to extraordinary gazettes, often late at
night, to impose taxes or significant economic measures has been widely
criticized by legal experts, economists, and business chambers (Verité
Research, 2024; Advocata Institute, 2023). This practice circumvents
parliamentary debate, scrutiny, and the crucial committee process designed to
assess impacts and ensure fairness. It undermines predictability, a cornerstone
of a healthy investment climate, and erodes trust in institutions.
The principle is clear:
just as the Magna Carta curtailed the arbitrary "Royal Prerogative"
of taxation, modern democracies require that significant fiscal measures,
including tariffs and major taxes, receive proper legislative sanction. This is
not merely procedural; it ensures transparency, allows for stakeholder
consultation, and subjects policy to rigorous debate, ultimately leading to
more robust and sustainable outcomes. Sri Lanka's current struggle against
externally imposed tariffs imposed via contested executive authority is ironically
mirrored by its own internal governance shortcomings regarding fiscal
legitimacy. Addressing this internal democratic deficit is not just a matter of
principle; it is intrinsically linked to long-term economic stability and
resilience.
Practical Solutions and
the Path Forward: A View from Experience
Navigating this complex
scenario requires more than ad hoc negotiations. Sri Lanka needs a strategic,
multi-pronged approach grounded in realism and best practices:
1. Leverage the IMF Program
Credibly: Sri
Lanka must double down on meeting its IMF program targets demonstrably and
transparently. Consistent performance builds credibility not just with the IMF
but also with major shareholders like the US. This strengthens the argument
that punitive tariffs would actively undermine a fragile,
internationally-supported recovery. Presenting detailed economic impact
assessments to the USTR, co-developed with the IMF mission team, quantifying
potential job losses, export revenue decline, and setbacks to program goals,
can provide concrete evidence beyond diplomatic appeals.
2. Diversification is
Non-Negotiable (But Takes Time): Over-reliance on the US apparel
market is a strategic vulnerability exposed by this crisis. While defending
current market share is imperative, aggressive diversification is crucial. This
includes:
o Deepening EU/UK Markets: Leveraging GSP+
status in the EU (contingent on human rights compliance) and pursuing a robust
bilateral trade agreement with the UK post-Brexit.
o Exploring New Frontiers: Targeted marketing
in growing Asian markets (Japan, South Korea, China) and regions like the
Middle East, potentially leveraging Free Trade Agreements (FTAs).
o Product & Market
Upgrading: Moving
further up the value chain into high-tech, specialized fabrics, and niche
products less susceptible to pure price competition and tariff shocks. This
requires significant investment in skills, technology, and R&D – areas
where targeted US "input and assistance" could be constructively
sought.
3. Transparent, Rules-Based
Domestic Governance: Sri
Lanka must urgently reform its own fiscal governance practices. Ending the use
of midnight gazettes for significant tax measures is paramount. All major
fiscal actions, including tariff adjustments, should follow a transparent
process:
o Pre-Legislative Scrutiny: White papers,
impact assessments, and open stakeholder consultations (including industry and
consumer groups) before finalizing tax/tariff proposals.
o Full Parliamentary
Debate: Adequate
time for parliamentary committees and the full legislature to examine, amend,
and approve significant measures.
o Predictable Timelines: Establishing clear
calendars for tax policy reviews, avoiding ad hoc, disruptive changes. This
internal reform strengthens Sri Lanka's moral standing in international
negotiations and directly improves the domestic investment climate.
4. Strengthen Regional
Solidarity (Cautiously): While South Asian competitors are part of the
problem in the US market due to lower tariffs, exploring areas of common
interest within SAARC or BIMSTEC regarding fair trade practices and resisting
arbitrary unilateral tariffs could be beneficial, though geopolitical tensions
often limit this avenue. Engaging with ASEAN nations facing similar pressures
could offer broader coalition-building opportunities.
5. Prepare Contingencies: Hope is not a
strategy. The government and apparel sector must jointly develop contingency
plans for a worst-case scenario (return to 44% tariffs). This includes
exploring temporary wage support mechanisms (linked to retraining), enhanced
access to credit for exporters facing cash flow crises, and accelerated support
for diversification efforts.
Conclusion
The ongoing US-Sri Lanka
tariff negotiations are a symptom of deeper challenges. They expose Sri Lanka's
acute export vulnerability, its constrained agency under an IMF program, the
lingering controversies of US trade unilateralism, and, most critically, the
island's own struggle with foundational principles of democratic economic
governance. Deputy Minister Suriyapperuma’s hope for a "good outcome"
is understandable, but achieving it requires far more than cordial talks in
Washington.
Sri Lanka's path forward
demands rigorous adherence to its IMF commitments, a relentless pursuit of
export market and product diversification, and, fundamentally, a domestic
governance revolution that embraces the Magna Carta principle it rightly cites:
no taxation (or significant economic imposition) without genuine parliamentary
consent and transparent process. Addressing this internal deficit is not just
ethically correct; it is an economic imperative. Only by strengthening its own
institutional resilience and credibility can Sri Lanka hope to better weather
the storms of external economic pressures, whether they manifest as tariffs
from Washington or shocks from global markets. The outcome of the current
tariff talks is vital for short-term stability, but the long-term health of Sri
Lanka's economy depends on confronting these deeper structural and governance
issues head-on.
References
·
Advocata Institute. (2023). The State of
State Enterprises in Sri Lanka 2023. Colombo: Advocata Institute. [Reports on
governance challenges, including fiscal transparency]
·
Bolle, M. J. (2023). Section 232
Investigations: Overview and Issues for Congress (CRS Report R45249).
Washington DC: Congressional Research Service. https://crsreports.congress.gov/product/pdf/R/R45249 [Details
legal controversies around presidential tariff authority]
·
Central Bank of Sri Lanka (CBSL). (2024). Annual
Report 2023. Colombo: Central Bank of Sri Lanka. https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/annual-reports/annual-report-2023 [Official
export data, including apparel sector]
·
International Monetary Fund (IMF). (2023). IMF
Executive Board Approves US$3 Billion Extended Fund Facility for Sri Lanka [Press
Release No. 23/98]. https://www.imf.org/en/News/Articles/2023/03/20/pr2398-sri-lanka-imf-executive-board-approves-us-3-billion-extended-fund-facility [Details
on the EFF program]
·
Joint Apparel Association Forum Sri Lanka (JAAFSL).
(2023). Annual Report 2023. Colombo: JAAFSL. [Industry-specific data on
exports, employment, markets]
·
Lincicome, S. (2023). The High Cost of
Reviving “Industrial Policy”: Biden’s Embrace of Protectionism Undercuts His
Domestic Agenda. Cato Institute Policy Analysis No. 957. https://www.cato.org/policy-analysis/high-cost-reviving-industrial-policy [Analysis
of continuity/change in US trade policy post-Trump]
·
United States International Trade Commission
(USITC). (2023). DataWeb - US Import and Export Data. https://dataweb.usitc.gov/ [Source
for US tariff rates by HTS code]
·
Office of the United States Trade Representative
(USTR). (2024). 2024 Guide to the U.S. Generalized System of Preferences
(GSP). https://ustr.gov/issue-areas/trade-development/preference-programs/generalized-system-preference-gsp [Details
GSP eligibility and limitations]
·
Verité Research. (2024). The State of the
Parliament 2023: Performance of the Legislature. Colombo: Verité Research.
[Analysis of parliamentary oversight, including fiscal matters]
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