ECONOMYNEXT – Sri Lanka’s apparel makers are in discussions with the government to raise a para tariff on finished clothes by 300 to 400 to block access to foreign goods to local customers, an apparel official said.
Yashotharan Paramanantham, former Chairman of Sri Lanka Apparel Brand Association said they had fired the ‘first shot’ (wedi moo-ray) to stop online platforms from selling ‘cheap’ clothes to Sri Lankan customers and he was thankful for Customs to stop an earlier practice of charging by weight.
The domestic producers were supported by the Industries Ministry, he said.
Gunning for Tax Paid Imports
The next step was to turn the guns on large importers who paid import taxes and VAT, by raising the cess.
Asked by reporters how much the 300 to 400 percent increase in the para tariff sought by apparel brands was in rupee items, he said, the current import tax depended on HS code and it ranged from 75 rupees to 300 rupees per piece.
As a result 400 percent increase represented a tax of 300 to 1,200 rupees per item on the general public of Sri Lanka, giving apparel makers similar profits.
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The threat to increase the tax was made at a Sri Lanka Shippers Council media briefing where representatives of Sri Lanka Free Trade Manufacturers Association, the Joint Apparel Association Forum, and Sri Lanka Association of Exporters were present and watching.
Before this press conference, the Sri Lanka Shippers’ Council was not known for protectionism but for promoting freer and frictionless trade.
Contradictions
Sri Lanka’s exporters complained against a Trump tariff of only 44 percent, (US charges taxes on FOB prices at point of first export) as colleagues wanted para taxes slammed on the public. Also mentioned was that Sri Lanka had asked for a higher export quota from India.
Reporters pointed out that there was no logic in the argument of local apparel makers who demanded higher taxes on relatively poor customers in Sri Lanka who wanted ‘cheap’ clothes, while asking for tax reductions in the US or quota expansions in India.
Paramanantham, said the average global tax on apparel was higher than Sri Lanka. Local industries also faced a cess tax on the import of raw materials and fabric, he said.
It was pointed out that instead of demanding taxes on AliExpress customers and other Sri Lankans who used imported apparels at current para tariffs, the manufacturers should lobby to remove all para tariffs on imports so that they become export competitive.
Misleading information was also given at the Shippers Council press conference that the IMF wanted import taxes as a revenue source. Import taxes are a source of revenue only as long as a product is not made in the country.
If the product is made locally the tax is pocketed by the domestic producer in a process known as ‘tax arbitrage’ and the government loses it, though the customer pays a price equal or close to the global+ price+plus+tax price.
Anti-Export Bias
It was pointed out that the IMF advocated phasing out para tariffs to make Sri Lanka an exporting nation that can compete by joining global value chains.
How protectionism kills exports is generally known now as the Lerner Symmetry Theorem, described in short as ‘a tax on imports is a tax on exports.’
Long before Abba Lerner developed the theory in the last century, which explains the problem in detail including resource allocation, the general problem of protectionism in terms of supply chain inefficiencies was well known to classical economists and industrialists in Britain in particular.
Bread (or Rice) Taxing Oligarchy
In the 19th century, British industrialists lobbied to cut taxes on imported foods (the Corn Laws) explaining that high grain prices in the UK led to higher wages and/or lower living standards for industrial workers and a clamour to raise wages, which in turn made their products expensive abroad.
In Sri Lanka, rice is taxed at 200 dollars a tonne (the import cost is only about 450 dollars) and maize is not only taxed, but is also under a license raj to give profits to farmers, landowners and collectors.
Corn Laws were abolished by Prime Minister Robert Peel in 1846, who was defeated in parliament by the farmer/landowner lobby, but was immediately re-elected by the hungry people who were already hit by a potato blight.
William Cobden, an ardent free trader (and manufacturer) repeated the following statement said to have been made by a worker.
Ironically, unlike Sri Lanka’s protectionist domestic apparel producers, the British free traders – including Cobden – were in textile manufacture. When food prices are high, it was explained that even domestic demand for garments fell.
“When provisions are high, the people have so much to pay for them that they have little or nothing left to buy clothes with; and when they have little to buy clothes with, there are few clothes sold; and when there are few clothes sold, there are too many to sell, they are very cheap; and when they are very cheap, there cannot be much paid for making them: and that, consequently, the manufacturing working man’s wages are reduced, the mills are shut up, business is ruined, and general distress is spread through the country. But when, as now, the working man has the said 25s left in his pocket, he buys more clothing with it (ay, and other articles of comfort too), and that increases the demand for them, and the greater the demand … makes them rise in price, and the rising price enables the working man to get higher wages and the masters better profits. This, therefore, is the way I prove that high provisions make lower wages, and cheap provisions make higher wages. ”
Sri Lanka industries however have not lobbied either to reduce their own para tariffs (large industries are in zones which are free of taxes) to build competitive SMEs, or advocated lower taxes on rice and more importantly maize to reduce protein malnutrition of the children of the poor or the living standards of their workers.
British free traders had pointed out that food import taxes were promoted by the “bread-taxing oligarchy, unprincipled, unfeeling, rapacious and plundering.”
In Sri Lanka rent-seeking special interests that push up prices through import taxes or licenses are generally known as ‘mafia’.
After the abolition of Corn Laws, Britain became an industrial power that has largely remained true to free trading principles to this day and it was not shaken even during Brexit.
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A speaker at the media briefing also claimed that online platforms did not have local offices or create jobs.
But when imported goods are ‘cheap’ more money is left at the hands of consumers, who will buy more goods or non-traded services, creating jobs and entirely new businesses. The money may be spent on travel, food, eating out, entertainment, bank deposits, tuition fees, adding jobs and VAT revenues to the state.
That is why free trading countries prosper, have low taxes, have big domestic tourist sectors, and import labour, while those with protection and self-sufficiency like North Korea or Sri Lanka lag behind, have unemployment or export labour, analysts say.
However without monetary stability none of the growth or even free trade will happen as import restrictions will come and currency depreciation will impoverish people across the board and destroy real capital.
Monetary Stability
In addition to ending food import taxes, Prime Minister Peel also brought a strict law against the Bank of England, (and effectively made it difficult to start new note issuing banks) to reduce the central bank’s independence to print money.
Like in Sri Lanka, where macro-economists blame car imports (or oil or gold according to the fashion of the day, as forex shortages emerge after money is printed to cut rates) corn imports were blamed for monetary troubles by some British Mercantilists.
Prime Minister Robert Peel however is said to have studied Adam Smith, David Ricardo (who was also a free trader despite being a landowner who profited from a high tax on grain imports) and also David Hume.
Modern central banks create forex shortages and external default primarily by rejecting Hume’s price-specie-flow mechanism.
Forex shortages are another reason for protectionism and import substitution to ‘save’ foreign exchange.
“When imports were restricted during President Gotabaya Rajapaksa’s time, due to foreign exchange problems,” Paramanantham said. “We showed we could make all the clothes that were required in the country. New businesses were born.
“But about 30 months ago the challenge came from online platforms like Temu and Ali baba (sic),” he said.
He claimed ‘low quality’ and ‘cheap’ goods were sold.
Similar claims had been made by other domestic producers in the past including tile and ceramic makers, who sold factory rejects at special shops.(Colombo/July10/2025)