The Pulse | Economy | South Asia

Sri Lanka’s Tariff Concession May Carry a Diplomatic Cost With China

To avoid higher US tariffs, Sri Lanka is having to act as if allegations of forced labor against China, a country with a high level of mechanization, are credible.

An aerial view of Sri Lanka’s Colombo port as seen from the Lotus Tower.

Imagine that you have two powerful friends you cannot afford to lose. One of them often threatens to punish you unless you publicly denounce the other for something you know the other didn’t do. But you comply because you depend on that friend. But now the other friend is watching, and you’re left hoping they will still take your calls.

This is the position Sri Lanka often finds itself in with regard to the United States and China.

In early July, Sri Lanka issued a gazette to ban the import of goods produced using forced labor. The gazette says that the government has imposed a blanket ban on importing any goods that were made, mined, or produced, wholly or even partially, using forced labor.

The government will also publish a list of high-risk goods, companies, and countries, as per findings of the International Labor Organization (ILO). If an importer brings in products from one of those flagged sources, they have to provide evidence that the goods were not made using forced labor. The Director General of Customs will enforce this directive.

On paper, this looks like a worthy initiative; no one supports forced labor. But in practice, this was the United States making Sri Lanka take part in a game it doesn’t want to play. In June, Washington announced that countries that fail to prohibit “forced labor imports” would face heavy tariffs. Sri Lanka sends a quarter of its exports to the American market, and could not afford to be placed in the punishment bracket.

By adopting the ban, Sri Lanka secured the lower 10 percent tariff rate. Sri Lanka is among 17 economies (also including Canada, India, Mexico, and the U.K.) that were taxed 10 percent because they have “made commitments to adopt, and effectively enforce, forced labor import prohibitions.” A 12.5 percent rate was applied to countries that have, according to Washington, failed to adopt a formal forced-labor import prohibition.

Sri Lankan businesses and politicians have reacted positively to the 10 percent tariff as they believe it puts them in an equal or better position than their key competitors. The Joint Apparel Association Forum (JAAF), which represents the apparel industry in the country, said that the industry is competitive and even a narrow percentage point difference in tariffs could mean the “difference between winning and losing an order to a rival sourcing destination.” This was a sentiment shared by the Exporters Association of Sri Lanka (EASL) and former minister of finance, as well as foreign affairs, Ravi Karunanayake.

While Sri Lanka was only subjected to an additional duty of 10 percent, there was uncertainty between the announcement of possible tariffs in early June and the date that tariffs were announced — a period of almost two months. Sources from the apparel sector told The Diplomat that there were serious concerns about lost orders and job losses during those two months.

As Karunanayake pointed........

© The Diplomat