Beyond Turmeric: How import controls are impacting Sri Lanka’s economy

By Dr. Asanka Wijesinghe

Raw turmeric roots on the shelves of roadside vendors is a frequent sight nowadays. Thanks to the import controls, turmeric now fetches a higher price domestically; prices having soared by as much as 275% from Rs. 80 per kilo to Rs. 300 per kilo. The turmeric shortage, reports of adulterated turmeric powder, the ceiling price, black-market sales, and sensational stories of busting smuggling attempts are the manifestations of the impact of import controls.

The recent waves of import restrictions imposed by the Sri Lankan government have different justifications such as boosting domestic production and avoiding re-exporting substandard products and foreign exchange leakage. However, protectionism has costs. The significant costs are: 1) possibility of tariff retaliation by the trading partners; 2) impact on domestic manufacturing for exporting; and 3) resource misallocation.

These costs will have a severe impact on the recovery of the COVID-19 affected economy. In this article, the costs of protectionist trade policies and opportunities available for a faster post-COVID economic recovery are discussed.

The economic literature documents the political and economic cost of the China-US trade war thoroughly. China’s targeted agricultural tariffs, which were in retaliation to Trump’s unilateral tariffs, cost the Republican party the 2018 House election. From a mercantilist point of view, countries like to export but are reluctant to import. But trade is no longer a one-way street. The EU, in a statement on Sri Lanka’s new import controls, points out that “a prolonged import ban is not in line with World Trade Organization regulations.”

Returning to the turmeric story, Sri Lanka’s primary turmeric import source was India. In 2017, 97% (USD7 million) of Sri Lanka’s turmeric imports came from India. Media reports show that Indian farmers and merchants have raised concerns over Sri Lanka’s turmeric ban. While these concerns have no immediate damage on the country’s exports, Sri Lanka should still be cautious to avoid the Trump administration’s blunder of getting into a series of tariff battles with crucial trade partners.

Nowadays, the vertically linked manufacturing process through global value chains (GVCs) is the norm. Manufacturing in Sri Lanka is no exception. Around 49% of Sri Lanka’s imports are intermediate goods, and 14% are capital goods (Figure 1). Import controls disrupt the input supply and may harm the export performance of industries that use foreign raw materials. One significant China-US trade war harm was on the US manufacturing sector. Comparably, Sri Lanka’s import controls in April 2020 seriously hurt the sectors which used imported raw materials. It is, however, commendable that the government relaxed some of the import controls in June to ensure an uninterrupted supply of raw materials.