Implications of trade war for Sri Lanka’s exports to the US

One of the positive impacts of the trade war is that countries like Sri Lanka have been presented with an opportunity to increase exports to the US and China, particularly to the former due to trade diversion.

It is worth noting here that Sri Lanka has two mechanisms to support this: the US Generalised System of Preferences (GSP) programme and the Trade and Investment Framework Agreement (TIFA). Nearly 3,500 export products from Sri Lanka are eligible to enter under the GSP programme, including most manufactured items and inputs used in manufacturing, except most textiles and apparel. Meanwhile, the US-Sri Lanka bilateral TIFA provides a framework for the two governments to discuss and resolve trade and investment issues and economic cooperation opportunities on an ongoing basis. The most recent TIFA discussions took place in Washington, DC, in June 2019, with high-level ministerial participation from the Sri Lanka side. The US market is Sri Lanka’s largest single export destination, and Sri Lankan exports to the US totalled US$2.8 billion (of which US$193.4 million were under the GSP scheme).

In order to examine whether Sri Lanka has an opportunity in the US market, one can examine the similarity in the exports of China and Sri Lanka in a particular commodity to the US to find out the potential for substitutability.

Finger–Kreinin Index (FKI) and Relative Export Competitive Pressure Index (RECPI)

One widely used measure of the similarity of export structures of countries is the Finger-Kreinin Index (FKI), which facilitates an analysis of the pattern of Chinese exports to the US and how similar these are to Sri Lanka’s exports to the US. This indicator varies between 0 and 1. In the case where FKI is equal to 1, it implies that a pair of countries (Sri Lanka and China) export exactly the same goods in exactly the same proportions to a market (US). When the indicator is equal to zero, it implies that the exports of these countries do not share any similarities. For instance, if FKI is 0.50, then this may be interpreted as representing a 50% overlap in the export structures of the two countries.

The similarity index is low (0.123) in the case of exports of Sri Lanka and China to the US, implying dissimilarity in the composition of exports to the US. In other words, about 12% of goods exported by Sri Lanka and China to the US are similar in kind. This is not surprising given that the exports of China to the US are more diverse compared to that of Sri Lanka, which exports mainly of textiles and clothing (75%), and plastics and rubber (10%); see Figures 8.A3 and 8.A4. It is noteworthy that the figure is much lower between the US and Sri Lanka in relation to exports to China (0.062); indicating that there will be little or no trade diversion in the Chinese market for Sri Lanka due to retaliatory tariffs against US goods by China, because of highly dissimilar exports of Sri Lanka and US to the Chinese market.

Sri Lanka nonetheless does face some competition from China in the US market as indicated by the Relative Export Competitive Pressure Index (RECPI) of 10.899. RECPI provides a summary measure of the degree of competition one country faces from another country in a particular market. It is, therefore, useful for consideration along with FKI for trade similarity. However, these indices provide only an aggregate view regarding the potential benefits which might accrue to Sri Lanka due to the trade war. A more disaggregated analysis would provide further insights as to whether Sri Lanka might gain from the tariffs imposed on China by the US.

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