JOHANNESBURG - Economics tells us of the benefits of free trade both in terms of its impact on employment and increased incomes.
Free trade meets all the hardcore economic conditions for growth and hopefully for development.
First, it has the potential for increasing labour productivity, second, it can improve labour absorption and, finally, it can improve the terms of trade. All these are conditions that the Growth Accounting Framework provides for in planning economic systems.
It is an extension on the supply and use tables and the input-output tables. With such a tool at hand, governments can and should provide a line of sight that the private sector can and should use in their task of agricultural, mining and manufacturing business.
High performance in the production of goods and services in the economy and their subsequent exports improves terms of trade, increases levels of employment provided the social policies are geared up to the improvement of education. Such helps society not to be outpaced by technology and see it as a hindrance to progress.
However, the trade wars between China and the US suggest a different path towards development. Issues such as competitive advantage and import substitution seem to be thrown out of the window.
The list of products the US has tabulated as qualifying for tariffs is impressive. It covers agricultural, mining and manufacturing products and all in all they are 8000 odd.
Products come to being from a complex production system of value chains and when more than 8000 products are listed and subjected to a $200 billion tariff such runs the risk of collapsing production systems, including global value chains which is the modern system of getting goods and services. For the world, this portends major realignments.
This is not only for the US, but it is a matter for China as well.
China has two options. The first is to continue production by reducing the cost of factors of production – possibly an impossible ask the Chinese, who are now poised for a high-income society. So what can happen is to hike the price of products and absorb part of or a relatively favourable margin after the tariff. The US may choose to revive its industrial form and manufacture the list of goods itself.
But to organize factory lines and get the US citizens to be super efficient in large numbers and produce what China provided is a tall order.
In addition to this tall order is whether the products will be at a price lower than the one with an added tariff. It is doubtful if the US intends to start a whole industrialization programme even if that would make the US great again. It is virtually an impossible task.
There is, therefore, a possibility of a stand-off and a stalemate in the production of goods and services. The Chinese already may have an upper hand in these heightened stakes.
Whilst they might not have planned for the eventuality of trade wars and in fact quite to the contrary through the One Belt One Road, the Chinese were anticipating a world that promotes free trade.
The physical form of the One belt One Road largely driven by the Silk Road Concept of ages past, would naturally not include the US, although the maritime nature of trade could open such possibilities.
So China is better prepared for the future with the One Belt One Road format and this will dampen the impact the US would have by using tariffs.
Second, China relaxed the one-child rule to avoid the negative effects of ageing and now allow since 2012 a two-child policy.
Through this policy China is turning the tide on its growth and development strategy to one driven by domestic consumption based on a younger population that will be available for the next sixty years. This strategy will certainly weaken the full impact of tariffs.
Finally, China as a future high-income country is going to shed the jobs that produce the goods on the US list.
Eighty-five million jobs in the next ten years are up for the picking from China as China reduces the proportion of its workforce in agricultural, mining and manufacturing in the next ten years.
These jobs are not going to shift to the under-prepared US, which has seen the migration of such jobs in the second wave of industrialisation. The jobs are poised for India and predominantly Africa, with Africa certainly less prepared for them.
Thus the impact of tariffs by the US is by far going to impact India and Africa in the long run and less so China. The US is not going to escape the negative consequences of their action. The One Belt One Road programme has the potential of dampening the impact of the tariffs globally including for the US.
Dr Pali Lehohla is the former Statistician General of South Africa and the former head of Statistics South Africa.
The views expressed here are not necessarily those of Independent Media.
-BUSINESS REPORT