A TARGET ON ITS BACK: Sri Lanka, Trade and Geopolitics in the Biden Era
For decades, Sri Lanka has benefited and continues to benefit through its trade relations with the US, within the ‘neo-liberal’ free-trade model. While the EU has emerged as a lead destination for Sri Lankan exports, the USA is still Sri Lanka’s main export market.
Through explicit and overt considerations regarding the American military footprint in Sri Lanka; the SOFA and the ACSA; and that very awkward visit of then Secretary of State Mike Pompeo in October 2020, there was virulent anti-American rhetoric and sentiment expressed in the local media. Since then, the US sponsored a resolution at the UNHRC in March 2021 and in May 2021 the US House of Representatives introduced a resolution regarding the Sri Lankan national question.
In all the discussion, commentary and reporting, little is mentioned of Sri Lanka’s exports to the US. That facet is best left out of the current narrative surrounding where Sri Lanka might find friends amongst the international community.
Sri Lankan exports to the US are made up of the usual suspects: apparel, commodities and precious stones are major items. In 2019 Sri Lanka’s apparel exports to the US totaled $2.3Bn, accounting for over 70% of total exports to the US. Rubber came a distant second at $275 Mn with tea, coffee, spices earning $ 65 Mn and Fish and Seafood another significant contributor at $41 Mn. So the large majority of exports to the US are dependent on a handful of multinational garment manufacturers. These are the result of long-standing supply relationships between large-scale buyers in the US and our local garment manufacturing behemoths.
In the US, the populist economic left and right seemed to converge with their common hatred of neo-liberalism. The Progressives of the Bernie Sanders revolution found themselves agreeing with the protectionist right on trade, a critical aspect of the global economy. It seems pertinent to point out that somehow, the protectionist right has managed to paint free-trade as a policy of the left, taking advantage of modern conflation in usage of the terms liberal – classical liberal and neo-liberal. Forgotten are the heady days of Milton Friedman and Fredrick Hayek.
The eastward shift of manufacturing jobs and the resulting devastation of industrial cities in the US has led to an anti-China narrative, fueled most recently, but certainly not exclusively, by the Trump phenomenon. China lifted hundreds of millions out of poverty through a planned economy predicated on the flow of goods and capital across global markets. Populism on both sides is consumed by the rising, perfect storm of anti-globalization sentiment.
Under President Trump, the US reoriented or disengaged, sometimes completely, from multilateralism. Be it the WHO, the WTO, NATO, the TPP; President Trump was defined by anti-establishment rhetoric and by US positioning on China. The Trump phenomenon accelerated the bipolarization of the world, entrenching the US in a more overt version of the economic war with China that always existed in the background.
The Trump Effect
Sri Lanka will maintain its position of “non-alignment”, but this claim is questionable at best. The eastward shift of political focus and foreign policy gathers speed. Responding to Mr. Pompeo’s comments regarding Chinese expansion in Sri Lanka, a leading socialist politician stated that in the face of pressure from the US “even staying neutral is tacit approval” and urged Government to “take a non-aligned stance and support China”. Clearly ‘non-alignment’ has lost its meaning.
With closer Sino-Sri Lankan relations and the US-China trade war in full swing, there could well have been serious economic repercussions for Sri Lanka under President Trump. What would prevent President Trump from applying tariffs on Sri Lankan garments? Especially if the US wanted to apply ‘maximum pressure’ on a Chinese ally in the region. Pompeo’s visit and his own analysis was further evidence of this concern.
Though Biden has thus far stayed the Trump course on Trade Tariffs and China, it seems unlikely that Biden’s new economic advisors would support placing trade tariffs on a small island nation. There are few mavericks in the Administration; old hands like former Fed chief Janet Yellen and Obama alumni Brian Deese and Cecilia Rouse. Tapped to be Special Trade Advisor is an Economics Professor, Renee Bowen, formerly of JP Morgan Chase. A key position, the United States Trade Representative, has been filled by Katherine Tai, a Mandarin speaking daughter of Taiwanese immigrants. It is expected that the US will revert to a less confrontational approach to economic and trade relations under President Biden. The flipside is that the Biden Administration will utilize the multilateral institutional route to pressure Chinese allies, something that has already happened in Sri Lanka’s case.
The Trump tariffs affected goods ranging from steel and aluminum to washing machines, solar panels etc. Further tariffs targeted products originating from China such as TVs, medical devices, batteries and crucially, agricultural imports including soybeans.
There was, indeed always has been, a wide consensus amongst mainstream economists that trade tariffs are harmful to economic growth, but this did not extend to certain key economic advisors on the Trump team such as Peter Navarro and Stephen Moore.
The Initiative on Global Markets, a research centre at the University of Chicago surveyed leading economists on the steel tariffs leading to a consensus that the tariffs would not improve US job growth. Trump’s own Director of the National Economic Council, Mr. Larry Kudlow warned that the tariffs regime would have little to no benefits to the US economy. A 2019 study by the Quarterly Journal of Economics found that import tariffs would cost the US economy around 0.27% of GDP in that year. During this time the Congressional Budget Office (CBO) also estimated a reduction in real GDP due to the tariffs. The leading American Conservative economist and author, Thomas Sowell was asked about the Trump Tariffs in 2018 and stated the following:
“The very phrase “trade surpluses” gives half a story. There are countries that supply mainly goods, physical goods, and there are other things like services that other countries provide, and the United States gets a lot of money from providing services. To talk about one part of the trading and ignore the other part fails to understand that money is money no matter whether it’s from goods or services.
When you set off a trade war, like any other war, you have no idea how that’s going to end. You’re going to be blindsided by all kinds of consequences. You do not make America great again by raising the price to Americans, which is what a tariff does.”
President Xi announced Chinese willingness to work with the US in 2018 by agreeing to certain specific conditions that were high on the Trump agenda. These included eliminating laws that required global automakers and shipbuilders to work through state-owned partners, reducing foreign ownership limits on manufacturing and protecting intellectual property.
The US – China Trade Deal (Phase One) contained some basic ingredients such as increased US imports by China including from the manufacturing, agricultural and energy sectors. With the proverbial dust having settled, China does not seem to have met its commitments under the deal. For example, China was given a target of $173 Bn for imports from the US, but only achieved $100 Bn during the stipulated time frame.
Biden and a New Pivot to Asia
Now the Biden administration, having begun negotiations with China in May 2021, have indicated that there will not be an immediate removal of tariffs. Where does this leave President Biden? US Political calculations are informed in large part by the polling industry and the legacy of the Trump Administration is that the US public now more than ever sees China as an economic adversary.
To begin with, President Biden will have to accept the emergence of new realities since he was last working at the White House. As mentioned earlier, President Trump was keen to extricate the US from multilateral agencies. The pandemic saw the US accuse the WHO of being subservient to the political needs of the Chinese Communist Party (CCP). The Trump Administration also blocked the candidature of the first Nigerian candidate for the position of Director General of the WTO, a decision since reversed by the new Administration.
Significantly, the ASEAN has become even more closely integrated. ASEAN’s te n members includes Singapore, Malaysia, Indonesia, Philippines, Thailand, Vietnam and Myanmar. It combines to become the 5th largest economy in the world and the 3rd largest trading bloc after the EU and NAFTA. Today, the ASEAN is also China’s biggest trading partner.
Sri Lanka was invited to join ASEAN during its formation in the late 1960s but due to ASEAN being very much a West-aligned group, Sri Lanka felt it best to remain ‘non-aligned’.
When Sri Lanka did make overtures to join the group in the 80s, some members including Malaysia and Singapore blocked entry citing possible instability due to tensions between Sri Lanka’s two main ethnic groups.
The ASEAN becomes even more relevant with the negotiation of the Regional Comprehensive Economic Partnership (RCEP). Signed in November 2020, RCEP includes the ASEAN as well as China, Japan, South Korea, Australia and New Zealand. The 15 nations account for around 30% of the world’s population, and 30% of global GDP creating the largest trading bloc in the world. Detractors complain about various facets of the RCEP, the central theme being that the RCEP is an invention of China, for China.
Yet while China will certainly benefit from the RCEP, as it would from most trade deals, a study by the Brookings Institute rejects the notion that the agreement is a Chinese initiative. China would never have been acceptable as the lead architect of the RCEP considering Japanese involvement. Thus, the RCEP was almost a decade in the making, through painstaking negotiations that began in 2012 initiated by ASEAN nations. “ASEAN centrality” was seen as key to the formation of the RCEP.
President Biden must begin his work in the region by accepting that the US was not seen as a reliable strategic power due to the unilateralism of the Trump term. As discussed, the “tough on China” stance is popular on both sides of the aisle in US politics. President Biden cannot course correct in a hurry without losing political capital and this in turn will disrupt relations between the ASEAN and the new administration.
New Realities in the Indian Ocean
The Biden administration has mooted rejoining the TPP under the new Comprehensive and Progressive Agreement for Transpacific Partnership (CPTTP). A sign that President Biden views East Asian players as key to a future China strategy.
Japan, under Premier Shinzo Abe, has become far more aggressive and expansionist in the region. PM Abe initiated the QUAD (Quadrilateral Security Dialogue) between Japan, the US, Australia and India. As part of ‘Abenomics’, Japan expanded foreign assistance to the region and sold military and radar equipment to the Philippines, Vietnam and Indonesia. PM Abe also visited every ASEAN nation during his tenure.
Japan is the top investor in ASEAN and has specifically invested more on infrastructure in these nations than China. PM Abe responded to the Belt and Road Initiative with a 5 year $100 Bn ‘Partnership for Quality Infrastructure’ in 2015, which was expanded to $200Bn in 2016. Note that the inclusion of the word ‘Quality’ is widely considered a reference to a perceived lack of quality of Chinese Engineering.
The US-China dynamic under President Trump inevitably led to a strong rapport between Modi’s Indian Government and the US. While the optics were crucial to show an allied US and India in the face of Chinese expansion, in reality, the two nations have had some testing exchanges.
Indian defense purchases from Russia, specifically of missile defense systems, led to a threat of US sanctions in 2019. Likewise, the US made strongly worded statements regarding India’s decision to import oil from Iran. There was widespread outrage among the Indian public this past April when the US banned the export of raw materials required for the production of vaccines during a time when cases and deaths in India were surging.
For President Biden, the realities are that China is now perhaps inextricably entrenched in Southeast Asia through the BRI, the ASEAN bloc’s new found agency must be respected, and cooperation with Japan and India is critical to counteracting China in the region. President Biden will have to consider both Chinese and Indian imperatives when considering its stance on Sri Lanka.
Of course, none of these resolutions will overtly state the obvious; that the West is increasingly concerned with China’s expanding footprint in Sri Lanka. Sri Lanka’s foreign policy must work towards preserving its economic security, balancing trade-offs between Chinese investments in the country and unfettered access to US markets or being the target of multi-lateral institutions.
The Great Game
In colonial times, British, European and other imperial powers established ‘Treaty Ports’ in various cities in China and Japan. These were port cities essentially operated by force, with the first British port being established after the Opium Wars of 1842. Referring to these Treaty Ports Dr. Dayan Jayatilleka points out what he sees as the irony of Sri Lanka now having its own treaty port with China, referring to Sri Lanka having as a ‘rentier state’ blaming the current’ regimes foreign policy. “Sri Lanka has become a fellow-traveller of China because foreign policy is being viewed not through the prism of Sri Lanka’s objective national interest but through the lens of the parochial power project for political power…The unconscionable trade-off is this small island’s sovereignty and economic space in return for patronage and protection”. Will Sri Lanka eventually be seen as a Chinese satellite and protectorate, if it is not already the case?
Thus, Sri Lanka is now part of the 21st century’s version of The Great Game. Now that China is expanding its sphere of influence into the Indian Ocean through an artificial island located in India’s traditional sphere of influence, how does India respond? PM Modi has previously mentioned an Indian controlled transshipment port in the Great Nicobar Islands which would directly compete with Sri Lanka. The US and India together form a crucial axis of influence that Sri Lanka cannot ignore. Japan presents an interesting option and opportunity for a strategic counter-alliance. Given Japan’s history of friendship toward Sri Lanka and previous investments and grants, this is entirely feasible. Japan is also considered a friendly nation in the eyes of Sri Lankan nationalists.
Put simply, as Sri Lanka approaches a crucial intersection between its foreign relations, trade policy and political considerations, it must negotiate these trade-offs with no small amount of tact and diplomacy. This requires considering the global political landscape as a whole. The strategy of compartmentalizing relations with competing nations under the guise of ‘non-alignment’ is failing with Sri Lankan entrenchment in the Great Game now assured.
Written by Kusum Wijetilleke