People in developing countries will lose jobs and poverty will rise
Listening to US President Donald Trump pontificating about how he was going to stop the “cheating” in international trade by implementing “reciprocal” tariffs, one might think that America had finally become fed up with an uneven playing field and was taking corrective measures. Whatever they “charge” us, he said, we “reciprocate” – but because he is being “kind”, the US tariffs will only be half of what other countries are costing the US.
This is nonsensical spin.
Trump’s calculation has little to do with the tariffs/levies other countries place on American goods. His tariffs are simply a way of punishing countries who export more goods and services to the US than they import from the US.
Trump’s tariff formula is simply to divide the US’s trade deficit with a country (the difference between that country’s exports to the US and its imports from the US) by the country’s exports to the US – and then cut that percentage in half. .
In other words, irrespective of what tariffs are actually charged against American goods, a country will face “reciprocal” tariffs from Trump if its exports to the US are larger than its imports – and the greater the difference, the higher the tariff.
This will be bad for economic development in much of the global South. One of the key pillars of economic development strategy since the Second World War has been for developing countries to grow exports in order to obtain foreign exchange so they can import capital goods like machinery. And, by targeting large export markets like the US, small developing countries have been able to achieve vast economies of scale. Where these have been in labour-intensive sectors, such development has boosted manufacturing employment and lifted millions out of poverty.
Countries like Cambodia, Bangladesh, Vietnam and Lesotho have hooked their industrial policies to producing clothing largely for the US market. These countries now face “reciprocal tariffs” for pursuing that development strategy. Lesotho has been charged with a tariff of 50% – the highest one that Trump set. Cambodia, Vietnam and Bangladesh are not far behind (at 49%, 46% and 37% respectively).
Trump seems to believe that these tariffs will encourage countries to “stop cheating” and buy more American goods. But how are developing countries supposed to buy such goods if Trump is undercutting the very developmental strategy currently underpinning their economic growth? More likely, they will stop exporting to the US, and manufacturing growth will splutter to a halt. People will lose jobs and poverty will rise.
Trump hopes that many factories will relocate to the US, and that his tariffs will recover the jobs lost to developing countries. Some (perhaps many) investors may well make that decision, but these are likely to be in higher tech sectors (such as the recent announcement of Taiwanese investment in the US). Firms in labour-intensive sectors such as the clothing industry, if they relocate at all to the US, will do so in a much more capital-intensive manner because wages are higher in the US.
The cost of clothing will thus rise, no doubt hitting many of Trump’s working-class voters in the pocket. But right now, judging by the United Auto Workers cheering Trump on when he announced his 25% tariff on all imported vehicles, Trump’s supporters are hoping that the “wins”, in terms of inward investment and associated employment growth behind tariff barriers – a classic inward industrialisation strategy – will exceed the costs of higher prices for basic goods.
It is too early to tell how that gamble will play out in the US. But it is now clear that Trump’s America First policies are blind to the development challenges facing poorer countries. Trump and his supporters are betting that the US economy is simply too big to fail, that it can grow on the basis of its own internal resources (perhaps with a measure of colonialism thrown in if Trump takes over Greenland “one way or another”).
The rest of the world, including millions of workers in developing countries whose livelihoods depend on access to the US market, simply doesn’t matter to Trump’s America.
It was bad enough when Trump unravelled USAID and other forms of humanitarian assistance. Cutting away one of the remaining developmental ladders for many developing countries is worse.
Nattrass is a Professor of Economics at the University of Cape Town.
Views expressed are not necessarily those of GroundUp.
