Since it would be impossible for the government to comply with the recommendations of the recent US sponsored UNHRC resolution against Sri Lanka, this country will now have to prepare for sanctions in the not so distant future. International sanctions against Sri Lanka will need the concurrence of the UN Security Council and since China and Russia will never allow that to happen, the US and EU will have to settle for the second best—unilateral sanctions which have been one of their favourite foreign policy tools. The US has in the past imposed sanctions on both Pakistan and India and there is no reason why it would not do so with regard to Sri Lanka. Experts who have studied the sanctions imposed by the West on other countries in the past have concluded that sanctions will have a better chance of succeeding if a) The goals are limited and clearly defined b) the target is small and vulnerable c) sanctions are imposed quickly and decisively to maximize impact, and d) used against friendly countries because adversaries are less vulnerable.
Sanctions against Sri Lanka would have all those attributes. The goal would be just to get the Rajapaksas out of power. Sri Lanka is both small and vulnerable. Even though Sri Lanka’s relations with the West are strained and the links between SL and the West are like those which exist between friendly countries. Sanctions imposed by a national enemy will not work and you have to be close to the targeted country. If the US imposes sanctions on North Korea, the latter will not be swayed. However, if China imposes sanctions on North Korea that will certainly have an impact. The US and the EU do have close trade ties with SL and that makes us very vulnerable. It is essential to have an understanding of what exactly may come about as a result of a decision by the EU and the US to impose unilateral sanctions on SL. A sanctions regime may include a few or all of the following.
2. Reduction in foreign aid,
3. Tariff increases on imports from the target country
4. Restrictions on trade with the targeted country
5. The freezing of assets
6. Negative votes in international financial institutions,
7. Visa denials to targeted individuals
8. Complete travel ban
9. Prohibitions on investing in the targeted country
10. Cancellation of air links
11. Prohibition on the use of Dollars and Euros in international transactions
12. Severance of diplomatic relations.
Nothing new
Comprehensive sanctions would involve all of the above. Very often what we see is a combination of several of the above being imposed on a target country. It should also be noted that measures such as the above have already been experienced in Sri Lanka, even though the word ‘sanctions’ has never been used in the past. An arms embargo by Western countries has been in place since at least 1984, from the time of President J. R. Jayewardene. The Western nations refused not only to sell new weapons to Sri Lanka but also to supply ammunition for the weapons they had sold to Sri Lanka in the past. This was despite Jayewardene being the most overtly pro-Western leader we have had since independence. If not for China, Russia, Israel and Pakistan, JRJ would have had to capitulate to the LTTE in the 1980s. During the last phase of the war, the Western powers used the Beijing Olympics to twist the arm of the Chinese government and tried (unsuccessfully) to prevent it from selling arms to Sri Lanka. So arms embargos by the West have been experienced by SL earlier.
Sri Lanka has faced other measures much further up the scale as well. One of the last ditch measures in a comprehensive sanctions regime would be depriving a target country of credit from international lending institutions. During the last phase of the war, after Feb. 2009, the USA deprived Sri Lanka of a stand-by facility from the IMF, which SL was fully entitled to. Votes in the IMF depend on the economic strength of a country and Western nations control most of the votes. That was at the height of the global economic crisis of 2009. If SL had not received money at that stage, the war would have come to a grinding halt. It was a promise of US$ 500 million from Libyan leader Muammar Gaddafi that helped tide this country over during that crucial period. Thus we see that Sri Lanka has already experienced Western sanctions in all but name. We have even experienced aid cut offs by Western nations.
However, the difference at that time was that those sanctions were isolated and ad hoc measures. This time around, what we could expect are systematically implemented sanctions with the ultimate objective of regime change in view. Before the Rajapaksa regime assumed office, the West had complete control over Sri Lanka with both the UNP and the SLFP toeing the line of the West. But because of the Rajapaksas the West is now powerless in Sri Lanka and the China/Russia bloc is gaining influence.
Cutting off trade
Since an arms embargo has been in place and aid too has been cut off, the next step would be to cut off trade. Sri Lanka exports something like two billion worth of goods – (mainly garments) to the US but imports only something like 250 million worth of goods (mainly wheat) from the US. The EU buys something like 3.2 billion USD worth of goods from SL, which buys goods in excess of USD 2 billion from the EU. So if the USA and EU do impose sanctions on Sri Lanka, we will be hit hard. There’s no doubt about that. However, there are some other points that need to be considered.
Everyone knows that the import content in exports of ready-made garments is 70% or more. Even though we export two billion worth of goods to the USA, seventy five percent of that is garments. (Because the import content in the garment industry is so high, we can count only 30% of it as real income to the country.) So the net benefit to Sri Lanka from the US market would be something like 450-600 million USD depending on the import content of the other 25% of our exports to the US. Similarly, something like two thirds of our exports to the EU are garments and so the net benefit from exports to the EU will be something like 633-800 million USD depending on the import content of the other one third of our exports to the EU. So if the West imposes a trade embargo on SL, we will be short of around 1.5 billion USD in actual export income.
If garment exports are curtailed, our import bill will also come down drastically as many industrial inputs will no longer be imported. Even the fuel bill which is our single biggest import item will come down as electricity consumption comes down with factories being closed down. If the cost of producing a unit of electricity is Rs 18, we householders pay on average Rs. 14 while industries pay around Rs 9. The loss in the CEB will also come down.
The biggest real advantage offered by the garment export sector is employment. If we assume that this sector employs around 350,000 people, the biggest headache for the government will be to find alternative employment for those losing their jobs in the event of an embargo. The answer will of course be foreign employment. There are much cheaper locations to produce goods than Sri Lanka. The reason why manufacturers have continued to remain in this country despite the rising cost of production is because there are certain skills among the workforce which are needed by the manufacturers. Some of the same workers can follow the factories when they are relocated elsewhere.
In any case, there is a huge labour shortage in this country. The tea, rubber and coconut sectors and even the paddy sector are in a crisis because of the lack of labour. Even though paddy harvesting is done by machine, there aren’t enough people to operate the machinery. The paddy sector and latterly the garment sector have been asking for labour to be imported from India to meet the shortfall. The only benefit to this country from the garment sector is the wage bill, and if a part of that too is going to go overseas, there’ll be no point in having that industry here. Then the very idea of foreigners harvesting the rice we eat is ridiculous. Obviously, one major industry will have to go, to meet the labour shortfall in this country. If not for the up-country Tamil population, this country would have already come to a grinding halt. Fortunately for Sri Lanka, the up country Tamil people do not go to the Middle East or other countries in significant numbers so many of them are available to do what has to be done here. Even with them here, there is still a huge labour shortfall. Obviously, a section of the population needs to be redirected to the agriculture sector. The Americans and the Europeans may actually help us to do something that is sorely needed!
If any industry is going to be sacrificed, let it be the garments industry because in any case the cost of production in Sri Lanka is high and will continue to increase with each passing year. Garment factories will have to look for cheaper locations. Besides, the systemic economic crisis in the US and the EU will make it suicidal for any country to depend in the long term on exports to the West for survival. The economic crisis in the West will ensure that garment imports by those countries be reduced and the quality of the garments sought will also go down. Whether we like it or not we will have to look for new export markets and learn to export new things. The garment industry has always been a foot loose industry moving from one country to the next as production costs increase. One does not sacrifice one’s sovereignty for an industry that one knows will move out anyway sooner rather than later.
Import substitution
Exports of garments to the US and the EU do bring in a net benefit in excess of 1 billion USD every year and that’s not peanuts. That would be equal or more than the entire net income from the tea industry. If the US and the EU imposes a trade embargo on SL, we may be able to recover a part of that money by sending people out for foreign employment. A few agreements with friendly countries to help us out will be in order. But even in the best of circumstances, we may have to take a reduction in net income to the tune of at least several hundred million USD yearly if sanctions are imposed. This will create problems in servicing foreign debt. So ways and means of saving foreign exchange will have to be devised. In any case, this country spends far too much foreign exchange on luxury goods like cars and SUVs. A trade embargo by the USA and the EU will bring much needed reforms in this country. All imports of luxury vehicles and luxury goods will have to stop. It may be politic for the government to impose a complete ban on the import of luxury vehicles and SUVs right now to show the world that we are preparing for sanctions and we intend meeting the challenge head on.
A Western trade embargo will also make this government take a long hard look at what we import. The Americans will stop selling wheat to us. That’s a direct saving of at least a quarter of a billion USD in a situation where the net benefit of exports to the USA is only around 450 to 600 million USD. In the 1980s, the UNP government had in combination with the market economy, a policy of targeted import substitution especially if that was considered necessary to improve the income levels in certain selected districts. One example that immediately comes to mind is the Moneragala district which was earmarked for sugar production. The tariff on imported sugar was increased to make the sugar produced in Moneragala viable in the local market. Even though people in this country were consuming sugar at slightly higher prices than the world market price still that made sense because a section of our own population was making a living off it and the country’s foreign exchange requirements were reduced.
Sri Lanka should go in for a concerted programme of import substitution to improve income generation here and also to reduce the need for foreign exchange. Import substitution has a bad name here because the SLFP government of 1970-77 botched it. This is why we referred to the UNP’s import substitution policy which existed side by side with what was otherwise an open economic policy. Even during the SLFP government of 1970-77, import substitution did enable many people in the provinces to make money – one good example being the farmers of Jaffna. The SLFP government of 1970-77 was not brought down because of its import substitution policy – it was poor management of other sectors of the economy, and the gross abuse of power.
A travel ban?
If a trade embargo fails to produce the result anticipated by the West, sanctions may be taken a notch higher and a complete travel ban to Sri Lanka may be imposed in order to bring down the tourism industry. This however may run into some snags as Sri Lankans domiciled in the West will also not be able to visit Sri Lanka. A travel ban will certainly hurt. But then again, it may help us to stabilize the tourism industry in the long term. Hotels in this country are already overpriced with some hotels charging rates like Rs. 40,000 a day. For that kind of money, you can get a return ticket to Bangkok and a stay in a star class hotel for two or three days. A travel ban by the West may help bring our tourism industry back to earth and actually improve its long term sustainability. Then again, the biggest markets for luxury goods in the world is now not the US or Europe but China and Japan and the other well to do countries in the Middle East and Asia. A travel ban by the West may help to wrench our Euro centric tourism industry from its slothful stupor and make them seek new markets. One thing that we know through experience is that unless some external compulsion manifests itself, this country has the tendency to keep running in the same old groove year after year with little inclination for change. Western sanctions will be the stimulus that pulls us out of this rut.
Comprehensive economic sanctions by the West will also stop Sri Lankan students from seeking education in Western countries – another criminal drain on resources. It will hasten the setting up of private universities offering all subjects in this country.
If the US and the EU take the step of prohibiting Sri Lanka from effecting transactions in the USD and the Euro, that’s going to hurt. But then there are other currencies that are used for international transactions like the Yen and the Chinese now encourage the use of the Yuan too. Brazil and China recently entered into an agreement to have a back-up plan to trade in their local currencies and Brazil is the biggest Latin American country. So the trend is spreading. If USD transactions are blocked, we too will have to turn to the Yuan and other currencies.
Consequences for the West
Possible Western sanctions against SL will not be without consequences for the West as well. Contrary to popular belief, sanctions don’t hurt just the target country; it hurts the countries imposing the sanctions as well. We pointed out that because of the high import content of our exports to the US and the EU, the net benefit we drive from exports to the US is only around 450 to 600 million USD and the net benefit from the EU would be around 633-800 million USD. In contrast to this, the EU sells goods worth USD 2 billion to Sri Lanka and the import content of those goods would be almost negligible as the EU sources many things from among its own members. Someone may argue that 2 billion USD is peanuts to the EU – perhaps so, but in the present economic climate in Europe, who is the economic manager who will ll treat 2 billion USD with disdain? Will the disruption in Europe be worth it, especially if sanctions are not going to make SL do what they want it to do?
Then if we take the US, the net benefit of our exports to that country is only around 450- 600 USD because of the import content of the goods we sell. But the US sells us a quarter of a billion worth of American wheat which has no import content worth talking about. All that money goes to American farmers. In 2010 wheat imports from the US was as high as 325 million USD. There was a recent news report that air control towers in 149 US air strips had been closed down because of budget cuts amounting to 625 million USD. In such circumstances, is the US really in a position to disdain a quarter of a billion USD in good money? US farmers have long been aware of the effects that US sanctions have on their own agricultural sector. The National Association of Wheat Growers has said on their website that the Cuban embargo costs the US wheat industry $40 million in lost sales each year and they want the embargo lifted. Just imagine what they are going to say when they learn that they are going to lose over a quarter of a billion USD in sales if the US imposes sanctions on Sri Lanka!
Interestingly, in 1997 there was an attempt by the US to introduce a Sanctions Reform Act to provide a framework for Congress and the US president to follow when imposing unilateral sanctions against a country. Even though this Act was never passed, it gives us an insight into the thinking in the US. One of the stated objectives of this Act was to "maintain the reputation of United States businesses and farmers as reliable suppliers to international customers" (When the US imposes sanctions and refuses to sell, buyers lose confidence in the US as a reliable source of supply and look elsewhere for supplies.) Another objective was "to avoid the use of restrictions on exports of agricultural commodities as a foreign policy weapon". (This is because farmers lose markets when the US imposes sanctions. If the USA imposes sanctions on SL, the US farmers are going to make Obama buy all the wheat that they cannot sell to SL. So in a situation where the US is short of 625 million USD to pay air traffic controllers, the US government will be forced to cough up another quarter of a billion USD to pay farmers for what they are unable to sell to SL.) The aborted Sanctions Reform Act specifically stated that in the event where US agricultural exports are endangered as a result of unilateral sanctions, the US government has to step in and provide subsidies.
Even though we import only a quarter of a million USD worth of goods from the USA, we import billions of USD worth of goods from India, which is a key ally of the US in Asia. SL imports from India were well over 4.3 billion in 2011 and over 3.5 billion USD in 2012. If the US tries to bring SL to its knees, Indian exports to SL will suffer and India will become what they call a ‘third party casualty’ of the US sanctions regime. India is already the main casualty of the resolution that the US brought against Sri Lanka in the UNHRC. If the US tries to impose sanctions against Sri Lanka, that will once again affect India as well. The US is now a cowboy who can’t shoot straight. They fire at SL and hit India.
Perhaps, India should talk the US out of any plans to impose sanctions on SL. Be that as it may, Sri Lanka should never be lulled into a sense of complacency by any undertakings given by the US. Remember the undertakings given by the UN Secretary General to Sri Lanka vis-a-vis his advisory panel report? Sri Lanka should start preparing right now for comprehensive, unilateral sanctions by the US and the EU. As we argued in this article, comprehensive sanctions against Sri Lanka by the US and EU will have a salutary effect on Sri Lanka even though we may take a hit in net forex earnings. Preparing for possible unilateral sanctions will bring in reforms long overdue in this country and the government should perhaps appoint a special task force of ministers and officials and start preparing for sanctions.
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