Trump 2.0 – What it means for Sri Lanka’s exports

by Gomi Senadhira

The second term of Donald Trump as the President of the United States will begin on January 20, 2025. He will return to the White House for his second term, or Trump 2.0, with renewed emphasis on the “America First” doctrine and reshaping the global order, and both his supporters and critics have made clear that his second term will look nothing like the first. That means, Trump 2.0 will be even more volatile and disruptive than the first, with major changes in the US economic, trade, foreign and security policies with far-reaching implications for all countries. So, it is important and timely to ask what will be the impact of Trump 2.0 on Sri Lanka and plan how to respond to challenges and opportunities that would arise from those changes.

Here, the first and foremost area Sri Lanka should immediately focus on is the impending changes to the US trade and tariff policy. Sri Lanka, which accounts for 0.1% of the total US imports will certainly not be a priority in President Trump’s trade policy agenda. But Sri Lanka should consider the ongoing changes in the trade policy of the United States as the top priority because that market accounts for nearly a quarter of Sri Lanka’s total exports. Any major changes in the US trade policy, particularly tariff increases, will have an immediate and far-reaching impact on our exports, the GDP and export related jobs.

The “Tariff Man”

While on the campaign trail, Trump called himself a “Tariff Man,” and had promised to raise tariffs to 60% for all goods imported from China and to 10% to 20% for those imported from other countries. This he argues, would strengthen the US’s international trade position and boost US job growth. Then he had also promised to, “….  as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States…. This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”

Mexico, China and Canada, with market shares of 15.1%, 14.1% and 13,6% respectively, are the three largest exporters into the United States. The European Union has a market share of 18.6%. With over 60% of the market share. In 2023 exports to the United States from Mexico were valued at $ 480 billion and from China were valued at $ 448 billion. When compared to these main exporters to the United States, Sri Lanka is a very small player. In 2023 our exports to the USA were valued at US$ 2.9 billion which amounted to 0.1% of total imports by the United States.

Right after the declaration of the election results, addressing a triumphant crowd of supporters in Florida, Trump summed up his approach to a second term as such: “I will govern by a simple motto: Promises made, promises kept.” So, will he keep these promises? And what would be the impact of these high tariffs on Sri Lanka? Though past performance is not a reliable guide to the future, the answers to some extent we may find in his previous presidency, Trump 1.0.

Trump 1.0

During his last presidential term (2017 -20) President Trump did not implement all his campaign promises. But what was implemented created uncertainty and volatility in the global markets. Most importantly in January 2018, the first Trump administration began setting higher tariffs (ranging from 7.5% to 25%) on a number of Chinese imports into the US with the objective of forcing China to change “longstanding unfair trade practices and intellectual property theft.” Prior to that, China, like all other members of the WTO, was entitled for MFN (Most Favoured Nation) tariffs in the United States. China joined the WTO in 2001, after 14 years of bilateral and multilateral negotiations, first under the auspices of GATT (General Agreement on Tariffs and Trade) and later under the WTO (World Trade Organisation). During the lengthy accession process one of the key steps was the signing of the US-China bilateral agreement which is generally considered the core of the accession agreement. The China specific higher tariffs imposed by Trump1.0 were above the prevailing MFN tariffs. In response, the Chinese government accused the US of engaging in protectionism and took retaliatory action, setting off a trade war between the two countries. After the trade war escalated through 2019, in January 2020 the two sides reached a “phase-one” agreement. During the Trump 1.0, the United States also pressured Canada and Mexico to negotiate a new trade agreement, US-Mexico-Canada Agreement (USMCA) replacing the quarter-century-old North American Free Trade Agreement (NAFTA). Under NAFTA and the USMCA Mexico and Canada get reciprocal duty-free market access into the United States.

During that period almost all Asian countries benefited significantly as the manufacturers shifted their production facilities in China into the countries in the region to avoid Trump’s tariff hikes. As a result, the region’s exports to the US had increased steadily since the beginning of the trade war. Vietnam’s exports to the US more than doubled from US$48 billion in 2017 to US$ 118 billion by 2023. Thailand’s exports increased from US$32 billion to US$ 58 billion and India’s exports increased from US$ 50 billion to US$87 billion.

Unfortunately, during Trump 1.0, Sri Lanka was the only Asian country that failed to benefit from the diversification of sourcing away from China into other Asian countries. Sri Lanka’s exports to the US declined during that period from US$ 2.978 billion in 2017 to US$ 2.976 billion by 2023.

Trump 2.0 – another trade war looms

Notwithstanding all these agreements signed with China, Mexico and Canada President Trump has now promised to introduce a 60% tariff on all imports from China and has vowed to apply higher 25% tariffs on all goods coming from Canada and Mexico! In addition, he has also promised to introduce a 10% to 20% tariff on all other countries. Will these tariff hikes be fully implemented or are these threats simply “useful negotiating tool”?

Given the unpredictable style in which President Trump operates, it is difficult to predict which of the campaign promises will really be fully implemented. But we can certainly anticipate an all new U.S. tariff regime in 2025. Most probably, it will be something less than a blanket tariff hike, with significant carve outs for FTA (free trade agreement) partners and essential goods, but still be much higher than what we have now. Higher tariffs on most Chinese goods will certainly arrive early. With higher import tariffs being imposed by the US and possible retaliatory actions by other countries, it’s really difficult to guess as to how the tit-for-tat game ends. But the year 2025, will be remembered as a year of a major trade war between the world’s largest trading nations and market instability.

Impact on Sri Lanka

When higher tariffs are introduced by the United States there will be risks and opportunities for Sri Lankan exporters. Most of our exports to the US already pay a high tariff of over 10%. Even if across the board a 10% to 20% tariff is introduced it will not have a major impact on those exports. Other exports with lower tariffs, like tea and rubber products, may face some market access issues. But, overall impact will be favourable to Sri Lanka. If we plan and strategize correctly and intervene pro-actively Sri Lanka could benefit from the anticipated changes in the US trade policy. But it is important to remember that Sri Lanka was the only Asian country that failed to benefit from the China specific tariff hikes during Trump 1.0. So, this is not the time for a “wait-and-see” approach.

As the anticipated changes, had been well signalled much in advance, relevant government agencies, Sri Lankan businesses exporting to the US and the trade associations (AmCham–Sri Lanka and the Joint Apparel Association Forum – JAAF) should do everything they can to moderate the adverse effects and to benefit from possible trade and investment diversions. This is essential as the US importers have already shifted at least some of their orders for 2025 away from China and Mexico to minimize the possible adverse impact of very high tariffs anticipated from January 20th. The recent “slow surge in orders” received by Sri Lankan apparel exporters as well as the recent investment by an American engineering technology group at Wathupitiwala, could have resulted from this discreet shift of sourcing.

Why did Sri Lanka fail to attract any noteworthy US investment relocated from China during and since the last Trump administration? Can we reverse that now and start to benefit from American customers’ demand to diversify supply chains? It is possible to find the answers to these two questions in the speech made by  the US Ambassador Julie Chung at the foundation stone laying ceremony for the new American factory at Wathupitiwala, last October, where she stated,  “SHIELD’s decision to shift its facility in China to establish a manufacturing facility here in Sri Lanka is a testament to the growing interest of US investment in Sri Lanka….Manufacturing moves like this one, driven by customer demand to diversify supply chains, represent a great opportunity for Sri Lanka. If the new government can strengthen the investment climate, implement anti-corruption measures, and strengthen business-friendly governance and transparency, there is potential for even more manufacturers to make similar moves.”

(The writer, a former public servant and a diplomat, can be reached at senadhiragomi@gmail.com)