By: Dionisio Babo Soares
The global trade disruptions triggered by the Trump-era U.S. tariffs may have been designed to pressure large economies like China and the European Union. However, their ripple effects have also reached smaller, more vulnerable nations. For Timor-Leste, a country with a narrow export base and deep import dependency, the direct impact of these tariffs has been minimal. However, their indirect implications—highlighting the risks of global policy shifts—are instructive. They underscore the urgency for Timor-Leste to address its more profound structural weaknesses: overreliance on petroleum, a small and undiversified export sector, and limited fiscal buffers. At the same time, untapped opportunities—particularly regional integration, agricultural reform, infrastructure development, and diaspora engagement—could offer a path toward a more resilient and self-sustaining economy.
A significant structural imbalance marks Timor-Leste’s economy. The country imports nearly $900 million annually, including essential goods such as food, fuel, vehicles, and machinery. Meanwhile, exports hover around $200 million, 90% of which come from oil and gas. This leaves the country highly exposed to fluctuations in global oil markets and external supply chains.
Outside of hydrocarbons, the export sector remains weak. Coffee is the leading non-oil export, accounting for around $15–20 million annually, followed by small quantities of marble, sandalwood, and crafts. Export volumes are low and geographically limited, with few established trade relationships beyond several regional and niche partners. This imbalance reflects a deeper problem: the country’s production base is narrow, with insufficient industrialization and underinvestment in value-added sectors.
The 10% tariffs introduced by the U.S. have had little direct economic effect on Timor-Leste, which sends only a small portion of its goods—mainly coffee—to the American market. Still, the situation brings to light the vulnerability of the country’s limited export channels. Coffee, for instance, represents a quarter of Timor-Leste’s non-oil exports and supports tens of thousands of smallholder farmers. A drop in demand from a key buyer—even a minor one like the U.S.—could have outsized social and economic consequences in rural communities.
Beyond the numbers, the symbolic impact of U.S. tariffs highlights the more significant risks of being a marginal player in global trade with a highly concentrated export portfolio. It reminds us that economic resilience depends on trade volume and diversity, flexibility, and the ability to pivot when shocks occur.
Timor-Leste’s use of the U.S. dollar has helped stabilize its post-independence economy by controlling inflation and establishing monetary credibility. However, dollarization also comes with long-term limitations. Without control over its currency, Timor-Leste lacks monetary policy tools—such as interest rate adjustments or currency devaluation—that could help stimulate growth or make exports more competitive.
As a result, Timorese goods and services are often priced higher than those of regional competitors. Countries like Indonesia and Vietnam can use flexible exchange rates to promote exports and respond to market volatility. Timor-Leste, by contrast, remains a passive recipient of global economic tides. While abandoning the dollar is not an immediate option, the current system requires complementary policies—such as export subsidies or targeted tax incentives—to offset its constraints.
Timor-Leste’s pursuit of ASEAN membership represents one of the most transformative prospects for its trade and development strategy. ASEAN countries already make up a significant share of Timor-Leste’s import sources, and accession would allow the country to participate more fully in the ASEAN Free Trade Area (AFTA), potentially reducing tariff barriers, aligning standards, and integrating into regional supply chains.
For exports, ASEAN offers a market of over 600 million people—ideal for agricultural products like coffee, vanilla, and fisheries. Membership could also attract new logistics, tourism, and manufacturing investments, particularly if Timor-Leste streamlines its customs procedures and enhances transparency. However, progress toward full membership depends on significant domestic reforms, including regulatory improvements, digital infrastructure, and institutional capacity-building.
Amidst a narrow domestic economy and limited job creation, foreign remittances have become a crucial economic lifeline. Thousands of Timorese work abroad, particularly in countries like Australia, South Korea, the United Kingdom, and Portugal, many under temporary labor mobility schemes. These workers send home an estimated $100–150 million annually, making remittances the second-largest source of foreign exchange after petroleum.
These funds support household consumption, education, housing, and small business investment. They also stabilize economic distress by injecting liquidity into rural and low-income communities. For a country with high youth unemployment and few formal job opportunities, labor mobility provides income and fosters skill development and international experience.
Despite their importance, remittances remain underleveraged. Financial literacy, high transfer costs, and limited access to formal banking channels reduce the developmental impact of these funds. Targeted policies—such as incentivizing savings, investing in diaspora bonds, and improving banking access—could help channel remittances into more productive uses, such as housing, education, and micro-enterprises.
Timor-Leste’s petroleum revenues have financed the bulk of public spending through the sovereign Petroleum Fund since independence. This model has provided fiscal stability and enabled massive investments in infrastructure, health, and education. However, the clock is ticking. With production declining and reserves projected to run dry by 2030, the country faces a looming fiscal cliff.
If new oil fields are not developed and substantial diversification does not occur, government revenues will collapse, triggering cuts to services and development programs. The current spending trajectory is unsustainable unless matched by new revenue sources. Diversification into agriculture, fisheries, tourism, manufacturing, and renewables is not a luxury but a necessity for survival beyond oil.
So, what are the Policy Priorities for a Resilient Future?
Timor-Leste has a narrow window to implement structural reforms to lay the groundwork for sustainable and inclusive growth. Priority actions include:
Negotiate tariff exemptions for key non-oil exports like coffee in the U.S. and EU markets to ensure continued demand. This will require an extra approach from the government, namely the Coordinating Minister of Economy.
Fast-track ASEAN membership by meeting regulatory benchmarks and modernizing trade infrastructure. While the prospects of Timor-Leste joining ASEAN this year are bright, work needs to be done to align all its national laws, particularly on imports and exports, to help boost the economy.
Enhancing remittance mobilization through better financial inclusion, diaspora engagement, and incentives for productive investment is necessary.
The government needs to expand logistics and trade capacity, primarily via Tibar Port and border improvements, to lower transaction costs and improve export flows. Although Tibar Port has been open for a few years, activities remain relatively low.
The country needs to develop light manufacturing hubs that absorb labor, generate foreign exchange, and reduce reliance on imports. The experiences of some small economies in the early years of their nationhood should serve as a model for Timor-Leste.
Timorese must also scale up renewable energy investments to reduce fuel imports and position the country in emerging green markets.
The central bank of Timor-Leste needs to review a long-term currency strategy and explore hybrid or dual-currency frameworks to balance stability and flexibility.
While U.S. tariffs have had a muted immediate impact, they expose a larger truth: Timor-Leste’s economy remains dangerously fragile, heavily reliant on oil and imports, with limited buffers for external shocks. The country stands at a critical juncture. As oil revenues decline and global competition intensifies, the need to diversify, modernize, and regionalize has never been more urgent.
Foreign remittances provide a vital lifeline—but cannot replace comprehensive economic reform. Timor-Leste must act now to develop new sectors, strengthen institutions, and integrate into regional markets. If successful, the nation can transition from vulnerability to resilience, securing prosperity for its people long after the oil runs out.
The opinion is personal and does not bind the institutions the author represents.
