The impact of tariff on economic development: a study on Sri Lanka

Abstract

Tariffs remain the central component of trade policy, especially in developing nations as a source of government revenues and as a means of protection for local companies. Tariff structures in Sri Lanka have been changed numerous times between 1990 and 2020 by political regime changes, economic reforms, and external shocks. This study examines the long-run and short-run effects of tariff policies on Sri Lanka’s economic development over the past two decades. Using secondary time-series data sourced from the World Bank, WTO, CBSL, and IMF, the analysis applies regression techniques, causality testing, and trend analysis to capture the relationship between average tariff rates and development indicators such as GDP growth, per capita income, and the Human Development Index (HDI). Early evidence is that although reductions in tariffs often inaugurated short-run trade and import expansion, these contributed to undermining fiscal discipline and balance of the external account in the long run. Increases in tariffs, conversely, brought short-run increases in revenue but discouraged export competition and productivity gains. Evidence is that ad hoc policy actions introduced uncertainty, dissipating the beneficial effect of development from trade policy. This paper contributes the following to the literature: it has Sri Lanka-specific long-run evidence and policy implications for small open economies in the context of establishing stable, development-friendly tariff regimes.The research concludes that unstable trade policy mechanisms in 1990-2020 provided temporary expansion of the trade, however, at the cost of export competitiveness and the stability of investments. Continued policy instability and foreign shocks also undermined the economic stability and growth momentum in Sri Lanka.