Trump tariffs and their effect on world trade and economy with particular reference to Sri Lanka - Part V

While Sri Lanka's relatively small domestic market (22 million people) limits the potential for inward-focused development, there may be opportunities to reduce import dependence in certain sectors and develop stronger linkages between export industries and domestic suppliers.

- BY M. U. M. ALI SaBRy

This could create more balanced growth and reduce vulnerability to external shocks.

Policies to support domestic market development might include,

Import Substitution in Strategic Sectors:

Targeted support for domestic production of essential goods and inputs to export industries, reducing dependency on imports.

Strengthening Domestic Supply Chains:

Developing stronger linkages between export-oriented firms and local suppliers to increase domestic value addition.

Addressing Income Inequality:

Policies that increase purchasing power among lower and middle-income Sri Lankans could expand the domestic market for locally produced goods and services.

Such approaches would need to avoid the pitfalls of earlier import substitution models that created inefficient, protected industries. The focus should be on developing competitive domestic capabilities rather than simply erecting barriers to imports.

Policy Recommendations

Based on the analysis of both short-term and longer-term strategies, several specific policy recommendations emerge for Sri Lanka,

Industrial Policy Reforms

Sri Lanka should develop a comprehensive industrial policy that goes beyond the current focus on export promotion to address structural vulnerabilities revealed by the tariff shock. This policy should,

Identify priority sectors for diversification based on a realistic assessment of Sri Lanka's competitive advantages and global market opportunities.

Provide targeted support for research and development, skills training, and quality infrastructure in these priority sectors.

Reform regulatory frameworks to reduce barriers to business formation, innovation, and growth.

Develop specific strategies for upgrading within existing export sectors like textiles, helping firms move into higher-value activities.

Investment in Innovation and Skills