US President Donald Trump’s implementation of “reciprocal tariffs” has caused global upset. He has reversed a 70-year, wealth-generating project founded on international trade. And, as every action invites a reaction, short-sighted nations have retaliated with tariffs of their own, compounding the damage still to come.
Trump brags that his new taxes will result in billions of dollars flooding into the US, but this is economic ignorance of the worst kind. Tariffs are a domestic tax on consumption — a burden shouldered by Americans, not a windfall wrested from abroad. Before long, US consumers will realise it is their own money filling the treasury’s coffers, not that of compliant foreigners.
That SA has not responded in kind to this economic derangement is to its credit. Yet the reality remains: a vast market for our exports has been slammed shut, and the consequences will be deep and painful. This while we already battle high unemployment, anaemic growth and a state in steady decline.
These developments bring to mind a lesser-known truth first articulated by Adam Smith in 1776. In The Wealth of Nations he offered a chapter heading: “That the division of labour is limited by the extent of the market”. Smith illustrates his point with a small Scottish village where one man has the role of carpenter, shoemaker and ploughman, simply because there isn’t enough demand for any one of these trades alone. In larger markets, by contrast, demand is sufficient to support highly specialised occupations, with trade enabling the exchange of surplus output.
This Smithian insight is often overlooked. If the capacity to exchange is limited — by geography, poor infrastructure, small population or other trade barriers — the extent of specialisation is also limited. By leveraging the advantages and temperaments of the nations of the world, all stand to benefit through ever-greater returns to scale.
There’s no better example of national specialisation than South Korea. In the 1960s the country was a backwater struggling in agrarian poverty. However, with a policy mix focused on economic freedoms and international trade, by the 2000s the country was a global leader in shipbuilding, hi-tech electronics and car exports. None of these industries would be possible if they had relied solely on their domestic market.
We cannot ignore the impact of America pulling back from global supply chains. While Smith spoke of physical constraints to specialisation, Trump’s tariffs will have a similar effect. With 350-million fewer customers in play, the world will be forced to scale back its productive capacity, turning inward and eroding the very specialisation that fuelled global prosperity.
What does this mean for SA? Sadly, we’ve been following zero-growth policies for decades, and this latest development represents a further setback. But perhaps in adversity we can consider South Korea’s example and look anew at an export-led growth strategy that aims for the benefits of international specialisation. International demand dwarfs anything our small domestic market can sustain, so how do we get our economy to aim out, not in?
We can unilaterally lower all import tariffs to stimulate the incremental yet structural changes needed in our economy. We should remove all barriers to high-skills immigration to facilitate innovative product development, which raises demand for low-skilled workers. We must fix the state-owned enterprises that clog our production and logistic systems. Fix them, sell them or remove their monopolies — any approach that helps ensure our whole economy intensely focuses on finding products and markets beyond our own.
While specialisation is key to economic growth, there’s always the danger of concentrated specialisation, in which a country becomes too reliant on just one or a few sectors. This narrow focus makes the economy vulnerable to global demand shifts or technological disruptions that affect not just a sector but the whole country.
To build resilience, SA needs to aim for diversified specialisation. This means developing pockets of expertise across a variety of industries, each connected in their own way to global markets. Instead of putting all its eggs in one basket, the economy spreads risk and taps into different sources of growth and innovation. Achieving this outcome is often at odds with national policies of industrialisation, which focus on a handful of large initiatives.
Diversity is achieved through the entrepreneurial drive of independent actors, not necessarily the actions of an overreaching state. What’s needed is not so much government incentives as a focus on the removal of disincentives. Where are the blockages to finance for small and medium-sized enterprises? What stops the hiring of low-skilled workers or the moving of goods from factory to port to market? We don’t need smart industrial policy. We just need the hurdles removed.
This also means abandoning policies of beneficiation. Beneficiation runs counter to the principle of specialisation. It encourages trying to do everything domestically rather than concentrating on areas of true comparative advantage. Such policies deserve rigorous scrutiny before being pursued.
Similarly, “Buy Local” campaigns often do more harm than good, fostering artificial demand that is not sustainable in the long term. Entrepreneurs must be given the freedom to identify and develop SA’s genuine strengths. True economic progress depends on enabling market forces to reveal where our real advantages lie, not clinging to protectionist illusions of autarky.
For SA, Trump’s spanner in the works is certainly a challenge. But it is also a chance to critically assess our place in the global economy, dismantle barriers and embrace an outward-looking, export-led revival. In the face of the looming economic storm what choice do we have?
• Emerick is deputy chair of the Free Market Foundation.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.