The ongoing trade war between the US and China does not pose an imminent threat to Sri Lanka’s trade performance. However, the battle between the two world’s largest economies will have positive and negative implications for Sri Lanka and the rest of the world, an economist said.
Professor in Economics, University of Colombo, Sirimal Abeyratne said the US-China trade war has little to do with Sri Lanka’s trade performance.
The US has imposed taxes on imports from China as a strategy to arrest its huge bilateral trade deficit. China has retaliated with the same imposing taxes on its imports from the US.This trade war has little to with Sri Lanka’s trade performance because it is a bilateral issue which does not have direct implications for Sri Lanka. In addition, Sri Lanka’s exports to the US are eligible for GSP concessions, while exports to China are small.
Chief Economist of the Ceylon Chamber of Commerce, Shiran Fernando said in a situation where the trade war results in a slowdown in the US economy, there could be less hikes than expected by the US Federal Reserve. This could ease concerns in most emerging and frontier markets such as Sri Lanka which has had pressure from a strengthening by the Fed.
“If the global trade slowdown results in a significant slowdown in global demand and economic growth, then this may ease the demand for commodities such as gold. As such, if oil prices ease/decline due to this reaction then it could ease concerns related to Sri Lanka’s fuel bill,” Fernando said.
However, economists cautioned that protectionist measures leading to trade wars will have global repercussions to all trading partners across the world.
“The implications of the US-China trade war may not only be important to Sri Lanka, but also for all the trading nations.
In an environment as such this, it would be better for Sri Lanka to make arrangements to secure its potential trade performance on both bilateral and multilateral basis. In this respect, I would like to emphasise on trade agreements, including bilateral ones such as the Sri Lanka-China FTA, though unilateral trade policy reforms do the best,” Prof. Abeyratne said.
He said the US and Iran tension on the nuclear agreement will have direct impact mainly due to its negative implications on world oil prices.
Global commodity prices such oil is forecast to rise stemming from a supply shortfall from Iran following the hardline followed by the US on Iran. Global banks believe Brent to rise as high as $ 90 per barrel in the second quarter of 2019.Fernando said the major macro negative is the possibility that it will derail the positive momentum in trade growth seen during the past 12 months or so due to the action already taken and the general noise surrounding potential new action. This momentum has helped countries like Sri Lanka see a notable rise in exports given the reliance on a few markets such as the US.
At a time when Sri Lanka is trying to plug into the ASEAN region trade, the indirect impact from the trade wars and protectionist measures could adversely affect the bloc given the connectivity that exists through global value chains.
“To an already volatile global financial market environment, this could prove to be another cause for concern. As such, there could be more capital flight from markets such as Sri Lanka to safe haven assets as investors become more risk averse. The risk of currency wars could increase,” Fernando said.