Global Trade Turmoil and Likely Impacts on Timor-Leste

By: Mario F Da Costa Pinheiro

The U.S. is imposing reciprocal tariffs globally to reverse its trade imbalances and counter China’s manufacturing dominance. The immediate economic disruptions are already evident: stock markets in the U.S., Asia, and Europe plummeted after the April 2, 2025, announcement.

Perceiving itself as losing ground in the free trade system it once dominated, the U.S. sees these tariffs as a drastic “course correction” to reclaim lost advantages. Banking on America’s industrial legacy and its position as the world’s largest consumer market, Trump’s strategy may prove effective long-term, but at the cost of short-term global turmoil. Retaliatory measures from China, the EU, and others risk escalating into a full-blown trade war, exacerbating supply chain disruptions and inflation.

This is a high-stakes gamble. The outcome could either restore the U.S. manufacturing dominance or backfire spectacularly, damaging the global economy for decades. Economists universally predict an impending recession, with global GDP growth projected to decline, and fear a return to pre-WTO protectionism.

Should Timor-Leste Be Concerned?

Yes. Timor-Leste must brace for the impacts of this sweeping tariff on the U.S. dollar, its foreign trade, and inflation if the tariffs persist. It must be strategically prepared to avoid being caught unguarded.

Impacts on Trade

While Timor-Leste’s trade with the U.S. is minimal as a share of the US trade balance, the US is the fourth largest export destination for Timor-Leste, accounting for 13% of total exports in 2023, with a little over 92% of the export being coffee. The Trump administration’s sweeping 10% baseline tariff, hence, poses significant risks to TL trade balance and the country’s macroeconomic goals.

It will increase the costs of exports. Coffee exports in particular, being Timor-Leste’s largest non-oil commodity, will become less competitive due to higher trade costs. With 38% of households in Timor-Leste relying on coffee farming to a varying degree as a source of income, and coffee export has already been declining in both value and volume since 2021, the tariff will compound farmers’ existing financial predicament. Other non-oil exports (e.g., candlenut, copra, konjac, and other) may also face new barriers as the effect of the baseline and reciprocal tariffs begins to disrupt supply chains across the globe.

Although this development poses significant challenges to the export sector, it also underscores the urgent need for both diversifying the export markets and government intervention to sustain export competitiveness during this challenging adjustment period. In practice, this would require the government to temporarily provide income stabilization support to affected farmers while the government negotiates new trade deals with potential partner nations.

USD Volatility and Import Costs

Timor-Leste’s dollarized economy and heavy import dependence make Timor-Leste’s economy highly vulnerable to external shocks. The country has persistently run a chronic trade deficit since independence, with imports in 2024 alone exceeding 50% of non-oil GDP. While a strong USD has eased inflation historically, higher trade cost combined with looming tariff-induced currency volatility raises significant concerns over inflation and associated consequences to the country’s import-dependent economy. A weaker USD would further amplify inflationary pressures and disproportionately hurt a large portion of the country’s population on the lowest income level.

Strengthening Timor-Leste’s buffer against external shocks is, hence, critical to safeguarding national purchasing power from eroding. Building foreign reserves, particularly in currencies of key trading partners like the Indonesian Rupiah, Chinese Yuan, Singapore Dollar, and Australian Dollar, should form the cornerstone of this strategy. This should provide essential protection against inflationary pressures and prevent inflation from damaging the economy.

Opportunities for Negotiating a New Deal

It is well-documented that the Trump administration has consistently employed tariffs as a negotiating tool to advance trade negotiations and secure favourable deals. This explains why even after imposing a sweeping 10% baseline tariff, the administration continues to signal openness to bilateral discussion and negotiations with affected countries.

Timo-Leste has a strong case to be made against the tariff. Except for several excisable goods, it has a flat rate tariff system and is regarded as among the lowest in the region. And given the severe risks tariffs pose to our exports and the economy as a whole, it should seize the moment to negotiate for a fairer deal. This is imperative and serves two interrelated purposes: shielding the coffee industry from extreme shocks and keeping our export or at least the coffee export, to the state and other countries competitive.

Alternatively, should diplomacy falter, Timor-Leste could reciprocate with its own 10% tariff on U.S. goods (valued at 13 million in 2013). While such a move would largely be symbolic and do more damage to the economy given the trade volume, it may signal resilience.

Silver Lining: Industrialization Push

Amidst this global trade upheaval, a silver lining emerges for Timor-Leste. Many quietly hope the nation’s chronic trade deficits, long fuelled by import dependency and now exacerbated by the tariff and looming trade wars, could finally catalyze a decisive shift toward industrialization. A defining moment that may unlock Timor-Leste’s long-dormant domestic production potential.

This transformation, however, requires proactive public-sector investment specifically, strategic investments in sectors where Timor-Leste holds natural competitive advantages, such as high-value agriculture and labor-intensive light manufacturing. By focusing state support on these targeted industries, the country could reduce import dependence whilst also developing export-competitive sectors.

Such a shift would not only buffer the economy against external shocks but also position Timor-Leste for sustainable trade integration.

Conclusion

The escalating global trade war demands immediate action to protect the export sector, mitigate currency volatility, and accelerate economic diversification. Passivity is not an option. While the road ahead is undeniably challenging, decisive measures, particularly those advancing greater self-sufficiency, will fortify Timor-Leste’s economic resilience and secure a more stable future. Policy Analyst