We have heard the slogan “trade, not aid” which suggests that it is trade that can develop a country, not monetary largesse from foreign countries. Total world trade amounted to US$ 33 trillion last year, according to the World Trade Organization (WTO).
But trade is not a one-way street. A country cannot export thousands of products and refrain from buying anything at all from other countries. In this globalised world, that would in any case be impossible. Sri Lanka learned this lesson the hard way from 1970-77 when most imports were banned and to a lesser extent from 2020-2023, although the circumstances were different.
Today, if you walk into a supermarket you can buy canned fish from Chile, pet food from India, butter from Denmark, olive oil from Spain and cheese from Australia, among other things. This shows the diverse nature of world trade and the sheer scale of supply chains and logistics involved. There are nearly 120,000 merchant vessels on the high seas at any given time, which indicates the massive scale of world trade and commerce. And trade is not only about the exchange of tangible goods – there is a robust trade in services too – if you download a paid e-book from Amazon, that is also part of world trade.
But many countries, developed and developing, are somewhat loathe to open their markets fully to foreign products without any control per se. There are several reasons for this – the main one is to protect local products and industries from being “swamped” by foreign products. The second one is the need to prevent an excessive outflow of foreign exchange – this was indeed the case with Sri Lanka in 1970-77 and 2020-2023. The third one and perhaps the most contentious – is a misplaced sense of patriotism to show that a given country can “go it alone”.
We are penning these words in the context of President Donald Trump’s decision to impose “beautiful” tariffs ranging from 10 percent to 25 percent on neighbouring Canada (which he wants to annex as the 51st State) and Mexico as well as China and the European Union (EU). He has paused the tariffs on Canada and Mexico for one month after they too vowed to retaliate with equivalent tariffs on US-made products and agreed to some of Trump’s demands on the respective borders. Most US products have already been removed from supermarket shelves in Canada and Mexico to protest against Trump’s moves.
But are tariffs as “beautiful” as President Trump claims them to be? Trump harks back to the days of Wlliam McKinley (US President from 1897 to 1901) who also championed tariffs. The Tariff Act of 1890, commonly called the McKinley Tariff, was an act of the United States Congress, framed by then Representative William McKinley, that became law on October 1, 1890. The tariff raised the average duty on imports to almost 50 percent, an increase designed to protect domestic industries and workers from foreign competition, as promised in the Republican platform. It represented protectionism, a policy supported by Republicans at that time. But higher tariffs were not well received by Americans who suffered a steep increase in prices of everyday items. Incidentally, just a day before he was fatally shot in 1901, McKinley himself argued against them.
But tariffs would be even more impractical today, when most products are manufactured piece by piece in several countries. For example, Apple sources components for the iPhone from companies in nearly 50 countries. If all these were subject to tariffs, an iPhone would cost well over US$ 5,000 instead of US$ 1,000. If the US were to impose higher duties and taxes on imported steel and aluminum, US car manufacturers will have to add several thousands more dollars to the retail price tag of their cars, which will not be a desirable outcome from the consumer’s point of view.
Despite the WTO’s somewhat impractical call for a totally tariff-free trade regimen, especially the developing countries need some sort of revenue to offset the outflow of foreign exchange for imported goods. But there is an even better way – Free Trade Agreements (FTAs) with individual countries and trading blocs. Sri Lanka has signed FTAs with a number of countries and some more FTAs are on the way. FTAs benefit both sides because whatever loss incurred due to the lack of taxes can be recouped from exports to the given country or bloc. The South Asian Association for Regional Cooperation (SAARC), which is dormant for all intents and purposes, must, however, reactivate the South Asia Free Trade Area (SAFTA), since intra-SAARC trade is just three percent of the eight SAARC countries’ total global trade. Sri Lanka should also try to gain membership of the Regional Comprehensive Economic Partnership (RCEP), which brings 15 countries together in a free trade bloc.
Higher taxes and duties almost always hurt the consumer, because importers usually pass on the additional burden to the final buyer of goods at the point of sale. These costs have been exacerbated by shipping and supply chain constraints caused by the two major wars in Ukraine and Gaza (though there is a fragile ceasefire between Israel and Hamas there).
Tariffs generally increase inflation, slow economic growth and hurt consumers in several ways as they have to foot the final bill. If all countries engage in “trade wars” with higher taxes on imports, all economies will shrink and investors will lose faith. Trade is a vital lifeline for the Global South and any attempts by the rich countries to deny trade opportunities for them will further stagnate their fragile economies. The WTO must play a bigger, more assertive role to ensure that this does not happen.
