Patriotism isn’t protectionism

By Dhananath Fernando

Originally appeared on the Morning

Ask any Sri Lankan what we should do to develop the country, and most will say we need to improve our exports. The same majority will also suggest that we must cut down imports to achieve this. While the need to grow exports is true, the belief that reducing imports is the way to do it is where things start to fall apart.

Many Sri Lankans even see boycotting imported goods and shifting to locally produced alternatives as an act of patriotism. The logic is simple: buying local helps local producers generate a surplus, which can then be reinvested to expand internationally. 

It is an emotional argument, but one that is deeply flawed when translated into policy. This sentiment often influences governments to raise import tariffs or impose outright bans on products that can be locally produced, believing that this will encourage domestic industry and, over time, boost exports.

But this approach misunderstands how exports work. Take the Donald Trump administration, for example. It also embraced this worldview, failing to recognise a basic economic truth: the ability to export doesn’t come from blocking imports, it comes from being competitive in price and quality. 

When we restrict better quality and lower-priced imports, we don’t support patriotism; we harm it. We shield local industries from global standards, stifle innovation, and force both consumers and other businesses to bear higher costs, weakening their global competitiveness in the process.

From an economic theory standpoint, protecting one sector of the economy often comes at the cost of others that are already competitive globally. 

Here is a simple example to illustrate this fact. Suppose Sri Lanka produces 100 coconuts a month. We consume 80 and have 20 left to export. But if we allow coconut substitutes or cheaper imported coconut oil for industrial use, we might reduce domestic consumption to 70, freeing up 30 coconuts for export. Better still, we could use imports for industrial purposes and reserve our highest-quality coconuts for premium export products like virgin or desiccated coconut.

All that we import is not final consumer goods. In fact, most of our imports are intermediary or investment goods. For instance, if the price of steel is high due to protectionist policies, it increases costs across all industries that rely on steel, from construction to manufacturing. The resulting job losses across those industries far outweigh the jobs ‘saved’ in the protected steel industry. 

In Sri Lanka’s case, nearly 80% of our imports are intermediary or investment goods. When we restrict these, it doesn’t help the economy – it hurts it. This is yet another reason why protectionism is not patriotism, but quite the opposite.

If we block these types of imports, domestic consumption remains high, and we are left with fewer coconuts – or fewer resources in general – to export or reinvest. This is the irony of protectionism; it reduces our export potential. 

We do a triple disservice: first, we make our exports uncompetitive, second, we increase the burden on local industries and consumers, and third, we create long-term dependency where protected industries lobby to maintain their privileges, making it politically costly to remove trade barriers even when they no longer make sense.

This is why governments find it so difficult to roll back import restrictions. Once protection is in place, it breeds cronyism. Protected industries band together, fund political campaigns, and perpetuate a cycle where economic power is concentrated in the hands of a few politically connected elites. In the name of ‘patriotism,’ we end up creating an unproductive, anti-competitive economy.

Another key misconception is the belief that a negative trade balance is caused by high imports. At face value, it seems logical since the trade balance is calculated as the difference between exports and imports. But in reality, imports and exports are not opposing forces; they are interconnected. Blocking imports hampers exports.

Let’s return to the example of coconuts. If we produce 100 coconuts, consume 80, and export 20, we might choose to invest 10 of those coconuts in planting new trees, increasing future production and export capacity. But we can only save and invest if we consume less. And we can only consume less if we have access to cheaper or more efficient alternatives, often through imports.

In economic theory, the trade balance is ultimately the difference between national savings and investment. Consumption is determined by the price of money – interest rates. This is why artificially lowering interest rates to stimulate growth can be disastrous. It increases consumption, and with it, imports, but without the productive capacity to match. 

When the situation inevitably unravels, we blame imports and turn to protectionist measures, instead of recognising that the true culprit is excessive consumption and insufficient savings.

The result? We reimpose import restrictions, raise tariffs, worsen the situation, and end up back at the International Monetary Fund (IMF) for a bailout. Then we repeat the same cycle, creating a class of politically connected cronies who thrive not by being competitive but by being protected.

And again, we tell ourselves we need to boost exports by cutting imports. It’s a tragic loop, reinforcing the very problems we claim we want to solve.

This is why protectionism is not patriotic. In fact, it is the exact opposite.

Trump’s tariffs hurt us all, including SL

By Dhananath Fernando

Originally appeared on the Morning

US President Donald Trump’s administration’s wave of tariffs may have been framed as a protectionist strategy to ‘make America great again,’ but its global ripple effects are undeniable, and for countries like Sri Lanka, the consequences are quietly but steadily piling up.

To truly grasp the impact of US tariffs, we must first understand who bears the immediate burden – American consumers. When prices rise due to tariffs, it is not foreign producers footing the bill – it is American families. And when US consumers, who account for roughly 20-25% of global consumption, tighten their belts, the world feels it. Sri Lanka is no exception.

The triple blow of tariffs

At their core, tariffs are a triple blow to consumers:

1. Higher prices: Consumers pay more for goods, many of which cannot be easily substituted locally.

2. Artificial subsidies: Local industries that cannot compete globally get propped up, with the consumer footing the bill.

3. Corruption and rent-seeking: Tariffs empower lobbyists and politically connected businesses, leading to corruption, cronyism, and distortions in policy-making.

This is not unique to America; the theory holds true anywhere, including right here in Sri Lanka.

When US consumers are forced to spend more for less, their overall consumption drops. And because Sri Lanka’s key exports – apparel, rubber, food, and gems – rely heavily on US demand, this can shrink our export revenue and threaten local jobs.

Flawed economics, real consequences

The US Trade Representative’s rationale for reciprocal tariffs rests on a flawed understanding of trade balances. They have calculated tariffs based on the trade deficit with individual countries, assuming this reflects both tariff and non-tariff barriers. It doesn’t.

Moreover, their economic modelling assumes a price elasticity of four and an import-tariff elasticity of 0.25. Multiplied together, these yield a neutral effect, essentially arguing that price and demand perfectly balance out. But that is theoretical fantasy. In reality, trade relationships are nuanced and complex.

Sri Lanka made a similar mistake in past free trade talks with India and Singapore, obsessing over trade deficits rather than economic opportunity. Now, we find ourselves at the receiving end of the same misguided thinking.

Tariffs don’t build industries 

Some argue tariffs create jobs and strengthen domestic industries. But Sri Lanka’s own experience disproves that. For decades, we have imposed tariffs of over 300% on vehicles. Has that turned us into a car manufacturing hub like Japan or South Korea? Not even close.

In fact, the sectors most protected in Sri Lanka – construction materials, footwear, and others – remain stagnant, rent-seeking, and politically captured. Consumers pay exorbitant prices, innovation is stifled, and exports are virtually nonexistent in these areas.

What should Sri Lanka do?

Given our size and economic position, retaliation is not an option. But this global shake-up gives us a golden opportunity for reform. 

Here is what we can do:

1. Unilaterally clean up our tariff system: Eliminate para-tariffs like Ports and Airport Development Levy (PAL) and Value-Added Tax (VAT) on imports. Not because the US is forcing our hand, but because it is the right move for our own competitiveness.

2. Engage strategically with the US: While we may not be a major trading partner to the US, our strategic location in the Indo-Pacific could be a valuable card at the negotiation table. A peaceful, open Indian Ocean is in everyone’s interest.

3. Leverage regional alliances: India has used tariff adjustments as a negotiation tool, and Sri Lanka could align with Indian supply chains to access broader markets. Since much of what we export – like high-value apparel – cannot easily shift to East Asia, regional strategies are critical.

4. Don’t import for the sake of it: Matching trade deficits by simply importing more from the US will not work. We cannot absorb their big-ticket exports – aircraft, weapons, or energy – and doing so irrationally would only hurt us further.

5. Join more regional trade agreements: But most importantly, let’s not wait for others. By unilaterally reforming our trade policies, we can unlock new markets and boost exports, while reducing consumer costs and curbing corruption.

Reform, not retaliation

Tariffs are not just about economics; they are about values. When governments shield inefficient industries and empower rent-seekers, it is the people who pay the price. Let us use this moment not to imitate protectionism, but to chart our own path – one that opens doors, not closes them.

The fundamentals of a healthy economy begin with open, fair, and efficient markets. Sri Lanka has the chance to lead by example.

Sri Lanka’s rice dilemma

By Dhananath Fernando

Originally appeared on the Morning

High rice prices, shortages of nadu rice, and the monthly importation of around 70,000 MT of rice have once again become key topics in national discussions.

As this column has highlighted previously, Sri Lanka’s per capita rice consumption is twice the global average. Yet, paradoxically, farmers remain poor and the market remains underdeveloped despite this significant consumption. The core issue lies in the complex and flawed economic dynamics governing the rice industry.

Low productivity and farmer incentives

One primary challenge is low paddy productivity. Farmers lack incentives to improve yields due to market dynamics. When production increases and supply exceeds demand, prices drop, negating any potential income gains for farmers.

Conversely, if yields fall, prices may rise, but the total crop volume decreases, leaving farmers with the same or even lower income. This discourages efforts to boost productivity, creating a cycle of stagnation and poverty.

Mismatch in rice varieties and market demand

Sri Lanka predominantly grows short-grain rice, while global demand favours long-grain varieties such as basmati and jasmine rice. Transitioning to long-grain cultivation presents challenges related to soil conditions and high production costs.

Moreover, the current pricing structure for rice does not reflect the true cost of production. Producing one kilogramme of rice requires approximately 2,400 litres of water, a resource for which farmers are not charged. Even accounting for a modest 20 LKR cents per litre, the true cost of rice would be significantly higher.

Market dynamics and oligopoly of millers

The paddy market is dominated by a few large-scale rice millers who have the financial capacity to purchase in bulk and maintain extensive storage facilities. Small and medium-scale millers often offer better prices but lack the scale to buy large quantities.

This oligopolistic structure limits competition and contributes to high consumer prices. While the Paddy Marketing Board has some storage capacity to intervene in the market, it is insufficient compared to the resources of large millers.

Implications of rice imports

Importing rice can benefit consumers by preventing shortages and stabilising prices. However, this strategy poses risks to small and medium-scale millers, who may struggle to secure sufficient paddy for milling if imported rice dominates the market.

The Government’s plan to import and distribute rice through State-run retailers, such as Sathosa, aims to control prices but introduces its own set of challenges.

Potential for corruption and market distortions

Government-led importation efforts create opportunities for corruption. The State must invest significant funds upfront and ensure that imported rice meets quality standards. Large-scale imports also raise the risk of mismanagement and unethical practices.

Additionally, limiting imported rice sales to Government outlets like Sathosa may inadvertently encourage private retailers to purchase and resell it at higher prices, undermining efforts to keep costs low for consumers. Imposing purchase limits at Sathosa could lead to long queues and inconvenience for shoppers.

Policy considerations and long-term solutions

There is no simple solution to Sri Lanka’s rice crisis. Addressing the issue requires long-term, multifaceted strategies.

Improving rice productivity and diversifying the buyer base beyond millers through strategic investments is essential. Establishing farmer associations with adequate storage facilities could enhance competition and stabilise the market. Allowing private sector rice imports without restrictive licensing could also promote fair competition and reduce corruption risks.

However, price controls or excessive Government intervention in the market are unlikely to resolve the underlying issues of consumer affordability or farmer poverty.

Ultimately, a sustainable solution involves balancing productivity improvements, market diversification, and transparent policies to ensure fair competition and equitable outcomes for all stakeholders in Sri Lanka’s rice industry.

Lanka’s fuel price tug of war: Who really pays the price?

By Dhananath Fernando

Originally appeared on the Morning

Fuel prices and fuel price revisions have always been a political football. Statements by various politicians on the taxes imposed on fuel and the scope for reducing fuel prices have come under renewed scrutiny with the 31 October price announcements.

Adding to the confusion, a statement by the Ceylon Petroleum Corporation (CPC) Chairman – that the CPC must compensate for the losses of other players if deviating from the price formula – has sparked fresh controversy. It’s essential to unpack these issues one at a time.

According to Central Bank data, we imported approximately $ 1.5 billion in refined petroleum and $ 0.5 billion in crude oil in the first half of the year. Assuming demand and prices remain steady, total fuel imports this year will be around $ 4 billion.

About 70% of fuel is consumed by the top 30% of high-income earners in Sri Lanka who can actually afford higher fuel prices. Naturally, energy consumption rises with income, as wealthier households use personal vehicles, high-energy appliances, and consume more overall. Only 30% of the total fuel is consumed by the remaining 70% of the population, which includes fishermen, public transport users, and service providers.

Thus, if we artificially lower fuel prices through a subsidy, it effectively subsidises the wealthiest families in Sri Lanka. While a low-tax regime might be ideal, given our fiscal situation and the International Monetary Fund (IMF) programme, Government revenue must increase to about 15% of GDP. Lowering fuel taxes would thus provide tax relief to the wealthiest 30% of households and incentivise excessive fuel consumption.

Imperative to adhere to fuel formula

Instead of being swayed by popular demands to reduce fuel prices, especially with rising tensions in the Middle East, the Government should first review its balance sheet to ensure adequate revenue with minimal market distortions to achieve debt sustainability.

If the Government aims to lower fuel prices for the public transport and fisheries sectors, the best approach would be a direct cash transfer rather than lowering all fuel prices, which would mitigate the impact of high fuel prices on essential goods and services.

It is imperative that we stick with the fuel formula and strengthen it if necessary. Unfortunately, there is limited information regarding the recent controversy over agreements between fuel suppliers on price revisions. If, as the Chairman claims, there is a clause to compensate private players for losses, this would be unreasonable if true.

In the absence of the full report, the only available information is a post on X from the former Minister of Power and Energy, who claims the CPC only pays the difference when the Government provides a subsidy or other mechanism to deviate from the price formula. In fairness to private players, if only the CPC receives a fuel subsidy, it creates an unlevel playing field, as petrol and diesel would be cheaper at CPC stations than at private ones.

Although the subsidy benefits consumers, it primarily benefits the wealthiest 30%, and rising demand could drastically increase the total subsidy cost for the Government. Therefore, a fuel subsidy is not advisable, as it essentially transfers Treasury funds to the wealthiest households in Sri Lanka.

Another issue has arisen: one supplier has reportedly requested about Rs. 82 million as compensation for deviations from the fuel price formula. It is difficult to assess this claim fully, as the original documents are not publicly available, but if true, it raises questions about whether recent price revisions adhered to the formula.

In particular, price adjustments before and after the elections require examination. Data on whether the September and October price revisions complied with the formula has also not been published; making this information available would reduce information asymmetry, essential for a functioning market economy.

Providing consumers with the best price

A further question is whether only a Government-owned CPC can reduce prices, and why prices are not decreasing with private players like Lanka IOC, Sinopec, RM Parks, and United Petroleum in the market.

The answer is not straightforward. The CPC is already heavily in debt, with high financing costs that must be covered. Moreover, prior to the latest revision, Sinopec’s diesel prices were actually lower than others, illustrating how competition can bring prices down.

However, prices depend on global crude and refined oil rates, and sometimes on the efficiency of refineries. When a price formula is in place in a small market, players often charge similar prices, but more competitors could introduce value propositions, including price variations based on global fluctuations.

For example, Lanka IOC offered an environmentally friendly fuel at a higher price, while Sinopec sold diesel at a lower price. To remain competitive, each player must offer something unique, which may not always be a lower price but can include quality or convenience.

The final point is that the new administration has requested a flat dealer margin instead of a percentage tied to global fuel prices, which is a positive move. Dealer costs are mainly influenced by inflation rather than global prices. The purpose of the price formula is to account for both variable and fixed costs to prevent losses and provide consumers with the best price.

In a market system, the consumer is at the centre. To prioritise consumer needs, we must ensure multiple players and transparency in pricing to minimise information asymmetry. Publishing the final fuel price revision calculations for the past two months and the full price revision agreement with private players would be a constructive first step.