Opinion
Turning Trade Disruptions into Opportunities
The silver lining of US tariffs for emerging economies:
The very disruptions caused by U.S. tariffs can open up pathways for growth, innovation, and strategic realignment. Rather than being passive victims of global trade tensions, countries like Sri Lanka can leverage these moments of upheaval as catalysts for economic renewal, stronger international partnerships, and greater resilience in the face of future global shifts. The silver lining of U.S. tariffs, therefore, lies in how emerging economies can transform these challenges into lasting opportunities for economic development and regional integration.
Traditionally seen as a blunt economic tool, tariffs have made a comeback, especially during and after the Trump administration. While much attention has focused on the negative impacts of tariffs—such as trade slowdowns, retaliatory tariffs, and market volatility—this view overlooks some of the potential positive outcomes, especially in the longer term. This article will explore the opportunities created by U.S. tariffs, particularly for emerging economies like Sri Lanka.
What Are Tariffs and Why Are They Imposed?
Tariffs are taxes placed on imported goods, making them more expensive for consumers. The United States has used tariffs as a way to address trade imbalances, protect domestic industries, and assert its influence on the global stage. For example, tariffs on steel and aluminum were meant to safeguard American manufacturing jobs, while tariffs on Chinese goods were part of broader efforts to correct trade deficits with China and challenge unfair trade practices.
The Immediate Consequences
of U.S. Tariffs
When tariffs are imposed, the immediate effects are usually negative for global trade. Countries that rely on exporting to the U.S. face reduced demand for their goods, which can lead to financial losses. Markets may experience increased volatility, stock prices may drop, and inflation could rise, especially in countries dependent on global supply chains.
For instance, countries like China have retaliated with their own tariffs, leading to a “trade war” that has disrupted global supply chains. As a result, businesses face higher costs and reduced profits, which can also affect consumers who pay more for goods.
The Longer-Term Effects: Economic Reshaping
Although tariffs create challenges, they also lead to changes that could benefit certain economies in the long run. For example, trade wars often force countries to rethink their supply chains. In response to U.S. tariffs, many multinational companies started seeking alternatives to China for manufacturing. This shift, known as the “China +1” strategy, has led to countries like Sri Lanka, Vietnam, and India seeing a rise in foreign investment and a growing role in the global supply chain.
Sri Lanka, with its strategic location and competitive labor costs, has become an attractive destination for businesses looking to diversify their production outside of China. Sri Lanka’s exports, such as tea and apparel, have seen increased demand as companies move their operations to places less affected by tariffs. This shift creates opportunities for countries like Sri Lanka to boost their industrial sectors, attract foreign capital, and integrate into regional trade networks.
The Role of Financial Volatility
One of the immediate reactions to tariffs is financial volatility, as global markets try to adjust to the uncertainty caused by trade conflicts. While this often results in market instability, financial volatility can also serve as a catalyst for broader economic reforms. In times of crisis, countries may be forced to improve their fiscal policies, strengthen their institutions, and diversify their economies.
For example, countries in the emerging world may use the pressure from tariffs to undertake structural reforms that make their economies more resilient. They may improve fiscal governance, attract more investment, and create a more diversified and stable economy. Over time, this can reduce their dependence on any single trading partner and help them weather future economic shocks.
Opportunities for Emerging Economies
Although U.S. tariffs present challenges for emerging economies, especially those that depend on exports to the U.S., they also provide opportunities for strategic realignment. With companies looking for alternatives to China, emerging economies can reposition themselves as attractive investment destinations.
Sri Lanka, for instance, has benefited from this shift in the global supply chain. As businesses look for stable alternatives to Chinese manufacturing, Sri Lanka has seen an increase in demand for its exports, such as textiles and tea. Additionally, foreign direct investment (FDI) in Sri Lanka has been growing, with companies looking to set up production facilities in countries that are less affected by tariff measures.
This shift is not just about attracting investment but also about repositioning a country within regional supply chains. Sri Lanka has the potential to become a key player in the Indian Ocean region, connecting Asia with Europe and Africa. By improving infrastructure, such as ports and digital networks, Sri Lanka can better integrate into global value chains and increase its export capacity.
Sri Lanka’s Response
to Global Shifts
For Sri Lanka, the global effects of U.S. tariffs present both a challenge and an opportunity. The country is currently dealing with debt restructuring, fiscal deficits, and economic instability. However, these global disruptions can be leveraged as a platform for domestic renewal.
Sri Lanka’s response to these shifts includes diversifying its export markets. By increasing trade with other regions, such as Southeast Asia, India, and the EU, Sri Lanka can reduce its reliance on any one country or market. Regional trade agreements like the South Asian Free Trade Area (SAFTA) can help strengthen Sri Lanka’s position in the global market and protect it from the volatility of global trade wars.
Additionally, Sri Lanka has used these global shifts as an opportunity to undertake important fiscal reforms. These reforms, including improving fiscal governance and enhancing investor confidence, can help the country become more resilient in the long term. By addressing internal structural issues, Sri Lanka can better navigate global economic shifts and position itself for sustainable growth.
The Role of Technology and Digitalisation
Technology plays an essential role in Sri Lanka’s strategy to capitalise on global economic changes. The digital transformation of industries, driven in part by U.S. tariffs and trade disruptions, opens new avenues for economic development. For example, Sri Lanka’s growing IT sector, combined with advancements in e-commerce and digital infrastructure, allows the country to offer a variety of services to global markets, including financial services, software development, and education.
By investing in digital infrastructure and embracing new technologies like artificial intelligence and automation, Sri Lanka can position itself as a leader in the regional digital economy. This technological upgrade can help Sri Lanka integrate more deeply into global value chains, boosting exports and creating new economic opportunities. Possible benefits from US tariffs include,
Short-Term Benefits
* Diversified Exports: Emerging economies gain market share by offering alternatives to Chinese products.
* Increased Demand: Tariffs on China boost demand for products from other regions.
* Boost in FDI: Countries attract more foreign investments as supply chains shift.
* Lower Competition: Protectionist measures reduce competition for domestic industries.
Medium-Term Benefits
* Industrial Upgrading: Local industries modernise, innovate, and become more productive.
* Policy Reforms: Financial instability prompts improvements in governance and policies.
* Supply Chain Integration: Economies join more resilient and diversified global supply chains.
* Regional Trade: Strengthened trade partnerships with neighbouring countries and regional organisations.
Long-Term Benefits
* Structural Growth: Policy changes create a more resilient and diversified economy.
* Technological Advancements: Focus on innovation positions economies as leaders in new industries.
* Geopolitical Influence: Adaptation to global changes boosts regional and international influence.
* Better Positioning in Global Value Chains: Emerging economies align with evolving global demands, securing a stronger role in global trade.
A Turning Point for Emerging Economies
While U.S. tariffs initially cause economic disruption, they can also serve as a wake-up call for emerging economies like Sri Lanka. By diversifying trade relationships, investing in technology, and undertaking necessary structural reforms, countries can turn these challenges into long-term growth opportunities. The global shifts triggered by U.S. tariffs provide a unique opportunity for countries like Sri Lanka to reinvent their economic models, enhance their resilience, and position themselves as key players in the evolving global economy.
In this era of trade wars and economic realignments, smaller nations no longer need to simply weather the storm. With the right policies, proactive strategies, and a focus on innovation, countries like Sri Lanka can not only survive the disruptions caused by U.S. tariffs but thrive in the new economic landscape.
(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT University, Malabe. He is also the author of the “Doing Social Research and Publishing Results”, a Springer publication (Singapore), and “Samaja Gaveshakaya (in Sinhala). The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for. He can be contacted at saliya.a@slit.lk and www.researcher.com)