Will Sri Lanka Be Impacted by the Trade War Between China and the USA?

The escalating trade tensions between the United States and China have raised concerns globally, with countries like Sri Lanka potentially...

The escalating trade tensions between the United States and China have raised concerns globally, with countries like Sri Lanka potentially facing indirect consequences. Given Sri Lanka's significant trade relationships with both nations, shifts in global trade policies could impact its economy.

Sri Lanka’s Trade Relationship with the U.S.

In 2023, Sri Lanka exported goods worth $2.79 billion to the United States, accounting for 23% of its total exports. The U.S. stands as Sri Lanka’s largest single-country export market, with key exports including:

• Garments: Subject to a 12.2% customs duty
• Rubber and plastic products: 2.5% duty
• Food products: 4.1% duty
• Chemical products: 4.3% duty
• Spices: 0.3% duty

Garments are the largest contributor to Sri Lankan exports. If the U.S. implements higher tariffs, duties on garments could rise from 12.2% to 20% or more, increasing prices and reducing competitiveness in the U.S. market.

Sri Lanka’s Trade Relationship with China

China is a crucial trade partner for Sri Lanka, serving as its 10th largest export destination and the 2nd largest source of imports. In 2023, Sri Lanka's exports to China were valued at $268.57 million, while imports from China stood at $3,089.55 million. This trade dynamic highlights Sri Lanka's reliance on Chinese goods and the importance of China as an export market.

Potential Impacts of U.S.-China Trade Tensions on Sri Lanka

While Sri Lanka is not directly involved in the U.S.-China trade dispute, it could experience indirect effects:

1. Global Economic Slowdown: Escalating tariffs between the U.S. and China may slow global economic growth, reducing demand for Sri Lankan exports.
2. Supply Chain Disruptions: Sri Lanka imports a significant volume of goods from China. Trade disruptions could affect the availability and cost of these imports, impacting local industries.
3. Market Diversion: Chinese goods facing higher tariffs in the U.S. might be redirected to other markets, increasing competition for Sri Lankan products in those regions.
4. Investment Flows: Uncertainty in global trade could affect foreign direct investment in Sri Lanka, particularly from U.S. and Chinese investors.

Strategic Considerations for Sri Lanka

To mitigate potential adverse effects, Sri Lanka could consider:

• Diversifying Export Markets: Reducing dependence on the U.S. and China by exploring new markets.
• Enhancing Competitiveness: Improving product quality and cost-efficiency to maintain a competitive edge.
• Strengthening Regional Ties: Engaging in regional trade agreements to secure stable trade relationships.

Conclusion

The trade tensions between the U.S. and China present challenges for Sri Lanka due to its economic ties with both nations. By proactively adapting its trade strategies and diversifying its economic partnerships, Sri Lanka can navigate the uncertainties of the evolving global trade landscape.