1 week Ago By Sahan Weerasooriya
(Continued from yesterday) Wharton Budget Model Analysis The Penn Wharton Budget Model (PWBM), a nonpartisan research initiative that analyses the economic impact of public policies, has conducted a detailed assessment of Trump’s tariff plan. Their findings paint an even more concerning picture of the long-term economic consequences. According to PWBM’s analysis, Trump’s tariffs (as of April 8, 2025) are projected to reduce long-run GDP by approximately 6% and wages by 5%.
For perspective, this represents a more severe economic impact than would result from raising the corporate income tax from 21% to 36%, a change that would be considered highly distortionary by most economists. For a middle-income household, these tariffs translate to an estimated $22,000 lifetime loss in economic welfare. The PWBM analysis highlights that many existing trade and macroeconomic models fail to capture the full harm caused by tariffs.
Beyond their direct effects on prices and trade volumes, larger tariffs reduce the openness of the economy, including international capital flows. This is particularly problematic in the context of the United States’ current debt trajectory, which is increasing faster than GDP. As foreign purchases of U.
S. government debt decline due to reduced trade, American households must absorb more of this debt, diverting savings away from productive capital investment. While the Trump administration has emphasised the revenue-generating potential of these tariffs, projected at $5.
2 trillion over ten years on a conventional basis, the PWBM notes that this revenue comes at an extraordinarily high cost in terms of economic efficiency. The tariffs effectively function as a highly distortionary tax that reduces economic activity far more than alternative revenue-raising measures would. Disruption of Global Supply Chains Beyond these macroeconomic projections lies the complex reality of global supply chains that have been optimised over decades of increasing trade integration.
Modern manufacturing rarely occurs entirely within a single country; instead, components and intermediate goods often cross borders multiple times before a final product is assembled. The sudden imposition of high tariffs disrupts these carefully calibrated production networks, forcing companies to make costly adjustments or pass increased costs on to consumers. Industries particularly vulnerable to these disruptions include electronics, automobiles, pharmaceuticals, and textiles sectors, where production is highly fragmented across countries.
For example, a smartphone might include components from dozens of countries, each potentially subject to different tariff rates under Trump’s country-specific approach. This complexity makes it extremely difficult for businesses to quickly adapt to the new tariff landscape, leading to production inefficiencies, higher costs, and potential shortages of certain goods. Retaliatory Measures and Trade Policy Uncertainty The impact of Trump’s tariffs is further magnified by retaliatory measures from affected countries.
China has already responded by imposing a minimum 125% tariff on U.S. goods and restricting exports of rare earth elements critical to high-tech industries.
The European Union, Canada, Mexico, and other major trading partners have also announced or are considering countermeasures. These retaliatory tariffs create a negative feedback loop that further reduces global trade and economic activity. They also contribute to what economists call “trade policy uncertainty”, a measurable phenomenon that has been shown to depress investment, hiring, and consumption as businesses and households delay economic decisions in the face of unpredictable policy changes.
By the end of March 2025, the Economic Policy Uncertainty (EPU) Index had reached its highest point since the beginning of the COVID-19 pandemic, doubling in value from the start of January. Research suggests that this level of uncertainty alone could reduce business investment by approximately 4.4% in 2025, even before accounting for the direct effects of the tariffs themselves.
Disproportionate Impact on Developing Economies While the economic costs of Trump’s tariffs will be felt globally, they will not be distributed equally. Developing economies, particularly those that have built their development strategies around export-oriented manufacturing, face disproportionate risks. Unlike wealthy nations with diverse economies and substantial domestic markets, many developing countries rely heavily on exports to generate foreign exchange, create jobs, and drive economic growth.
The sudden imposition of high tariffs on their exports to the world’s largest consumer market represents an existential threat to this development model. Moreover, developing countries typically have fewer resources to cushion the economic shock of reduced exports. Limited fiscal space, higher borrowing costs, and often fragile social safety nets mean that job losses in export sectors can quickly translate into broader economic hardship and potential social instability.
For countries already facing debt sustainability challenges, like Sri Lanka, the reduction in export earnings can directly threaten their ability to service external debt obligations, potentially triggering new sovereign debt crises. This risk is particularly acute given the current global environment of higher interest rates and tightening financial conditions. The global economic impact of Trump’s tariffs thus represents not merely a temporary disruption to trade flows but potentially a fundamental challenge to the export-led development model that has helped lift hundreds of millions of people out of poverty over recent decades.
As we will explore in subsequent sections, Sri Lanka’s experience offers a particularly illuminating case study of these broader dynamics. SRI LANKA’S ECONOMY AND TRADE PROFILE Sri Lanka, an island nation of 22 million people in South Asia, presents a compelling case study of how President Trump’s tariff policies can impact vulnerable developing economies. To understand the full implications of the 44% tariff imposed on Sri Lankan goods, it is essential to first examine the country’s economic situation, its trade relationship with the United States, and the particular significance of its textile industry.
Overview of Sri Lanka’s Economic Situation Sri Lanka has experienced a tumultuous economic journey in recent years. In April 2022, the country became the first in the Asia-Pacific region to default on its external debt since 1999, marking the culmination of a severe economic crisis that had been building for several years. This crisis was precipitated by a perfect storm of factors, the devastating impact of the COVID-19 pandemic on tourism revenues and remittances, rising global commodity prices following supply chain disruptions and the Russia-Ukraine conflict, and questionable economic policies, including significant tax cuts that depleted government revenues.
The economic implosion led to extreme shortages of essential goods, rolling blackouts that sometimes lasted 13 hours, and long queues for fuel and cooking gas. Inflation soared to over 70% at its peak, eroding purchasing power and pushing many Sri Lankans into poverty. The crisis triggered mass protests that ultimately led to the resignation of then-President Gotabaya Rajapaksa in July 2022.
Since then, Sri Lanka has embarked on a painful process of economic stabilization under its 17th program with the International Monetary Fund (IMF). The $2.9 billion Extended Fund Facility approved in March 2023 came with stringent conditions, including significant tax increases, reductions in energy subsidies, and other austerity measures designed to reduce the fiscal deficit.
The country has also undergone a complex debt restructuring process, reaching agreements with official creditors through the Paris Club and with bondholders who own a significant portion of Sri Lanka’s external debt. By December 2024, Sri Lanka officially exited sovereign default status after completing its debt restructuring. However, the country’s economic recovery remains fragile.
While inflation has moderated and foreign exchange reserves have improved from their crisis lows, GDP growth remains subdued, and the social costs of adjustment have been severe. Poverty rates have increased substantially, and many Sri Lankans continue to struggle with the high cost of living and limited economic opportunities. Against this backdrop of recent crisis and tentative recovery, the sudden imposition of President Trump’s 44% tariff represents a significant new threat to Sri Lanka’s economic stability and growth prospects.
Sri Lanka-US Trade Relations The United States has historically been Sri Lanka’s largest export market, accounting for approximately 23% of the country’s total exports. This makes Sri Lanka particularly vulnerable to changes in U.S.
trade policy, as nearly a quarter of its foreign exchange earnings through exports depend on continued access to the American market. The composition of Sri Lanka’s exports to the United States is heavily concentrated in a few key sectors, with textiles and apparel dominating the trade relationship. Other significant export categories include rubber products, tea, spices, and increasingly, information technology services—though the latter are not directly affected by the tariffs on physical goods.
Sri Lanka has benefited from preferential access to the U.S. market through the Generalized System of Preferences (GSP), which provides duty-free treatment for thousands of products from designated developing countries.
However, this program has been subject to periodic reviews based on criteria including labor rights, intellectual property protection, and market access for U.S. goods.
Sri Lanka’s GSP benefits were temporarily suspended between 2010 and 2017 due to concerns about labour rights, highlighting the country’s vulnerability to changes in U.S. trade policy even before the current tariff shock.
The trade relationship between the two countries is highly asymmetrical. While the United States is Sri Lanka’s largest export market, Sri Lanka ranks only around 114th among U.S.
trading partners. This power imbalance means that Sri Lanka has very limited leverage in bilateral trade negotiations and is largely a price-taker in the relationship. (To be continued) (The writer served as the Minister of Justice, Finance and Foreign Affairs of Sri Lanka) Disclaimer: This article contains projections and scenario-based analysis based on current economic trends, policy statements, and historical behaviour patterns.
While every effort has been made to ensure factual accuracy using publicly available data and established economic models, certain details, particularly regarding future policy decisions and their impacts, remain hypothetical. These projections are intended to inform discussion and analysis, not to predict outcomes with certainty. by M.
U. M. Ali Sabry President’s Counsel.
