From the White House Rose Garden, President Trump called it “Liberation Day” for the United States, but in garment factories in Hanoi and Phnom Penh, the announcement of his “reciprocal tariffs” arrived like a declaration of economic war.
For more than seven decades, many countries have followed the same path out of poverty: make things, and sell them abroad. This strategy, known as “export-oriented industrialization,” was rooted in domestic reforms but turbocharged by the opening of the world economy under American leadership after the Second World War.
Mr. Trump hasn’t just brought this opening to a crashing halt — he has raised trade barriers not seen since the Great Depression. Vietnam and Cambodia will now face punitive tariffs of 46 and 49 percent on exports to the American market. This is a profound shock since these sales account for around a third of their G.D.P.s.
Policymakers and investors in countries that have bet their futures on international trade are right to fear the consequences of America’s protectionist turn. But the truth is that their strategy had been running out of steam for decades and was no longer delivering for most developing nations. To reignite growth, these nations will need to tune out Mr. Trump’s trade antics and focus on the deeper challenges they face: developing their home markets, their middle class and their service sectors to create decent jobs.
The model for poor countries hoping to grow rich was pioneered by the four Asian Tigers: Taiwan, South Korea, Hong Kong and Singapore. In the 1950s, they were about as poor as African nations and heavily dependent on agricultural products and raw minerals. Trade allowed them to specialize in increasingly sophisticated manufactured goods for sale on world markets — toys, clothes, steel, cars, electronics and now semiconductors — while providing them with access to advanced technologies and machinery.
China soon followed suit, perfecting that strategy to become the world’s manufacturing powerhouse, lifting 800 million people out of extreme poverty and emerging as America’s chief rival. (China’s strategy may have worked too well: By the time Joe Biden became president, “beating” China had become a bipartisan imperative.)
After labor costs in China rose, some foreign investment moved to Vietnam, which had also started down this path in the 1980s and could well be the last significant success of the export-oriented model.
Given the almost miraculous transformation of these countries, it is no surprise that other poor nations around the world seek to emulate them. Export-oriented industrialization has become a buzzword for growth experts and multilateral organizations, and an imperative for policymakers in poor nations’ capitals.
But since the 1990s, changes in the technology and organization of manufacturing production have made the strategy far less effective. Automation, robots and 3-D printing have made it easy to substitute machines for workers, diminishing poor nations’ most significant competitive advantage: their pool of abundant labor.
To be sure, many developing countries grew rapidly after the 1990s, especially before the Covid pandemic, but largely not through boosting manufacturing exports. Ethiopia provides a telling example. A couple of decades ago, it was predicted to lead a new wave of export-oriented industrialization as labor costs in China rose. Just as in the Asian miracles early on, Ethiopia had plenty of young people eager for steady work in factories. The Ethiopian government actively courted Chinese and other investors and built industrial parks for foreign firms, but in the end very few factory jobs were created. Ethiopia engineered its rapid growth instead by making public investments in transportation and better irrigation systems for farms, which invigorated domestic markets.
Perhaps Ethiopia’s poor connections to international markets prevented it from becoming a manufacturing power. But now consider Mexico, which shares a long border with the largest economy in the world, and which made economic integration with North America the cornerstone of its growth strategy since the 1990s. Unlike in Ethiopia, exports, manufacturing and foreign investment did increase significantly in Mexico after creation of the North American Free Trade Agreement, or NAFTA. But most of the benefits remained limited to a narrow segment of the Mexican economy while the rest stagnated and overall growth remained low. The problem was that the modern factories set up to service North American supply chains were poorly integrated into the larger national economy and simply failed to create enough jobs.
Mr. Trump’s tariffs will surely be painful for Vietnam, Cambodia, Mexico and other nations that rely heavily on exports to the U.S. market. They will bear the brunt of these tariffs — and could be driven into recession. But if Mexico did so poorly even when it had unimpeded access to American markets, it suggests that exporting goods to rich economies is no longer a golden ticket for developing nations, regardless of what Mr. Trump does.
So how else can these countries improve their lot? While manufacturing remains important, they need to upgrade domestic services such as care, retail and hospitality, where the bulk of jobs will be. The challenge that developing countries face is to create middle-class economies by creating better, more productive jobs in these services. This is a daunting task: productivity in domestic services has historically lagged behind manufacturing.
Fortunately, there are some promising ideas for a new type of industrial policy for labor-absorbing services. They range from encouraging large firms such as retail and platform companies to connect better with the local economy and employ more local workers to helping the more entrepreneurial among microenterprises expand through technology and training. Such interventions are unlikely to yield growth as rapid as in East and Southeast Asian nations during the heyday of export-oriented industrialization. But by directly targeting good job creation for the vast majority of low-educated job seekers, they do have the virtue of producing bottom-up rather than trickle-down growth.
For the billions of people who still live in poverty, then, the path to prosperity may look very different than it did for the rich world and Asia’s high performers. Even before Mr. Trump declared his global trade war, the age of miraculous growth as we’ve known it was ending. More than ever, the fate of developing countries now rests largely in their own hands.
Dani Rodrik is a professor at the John F. Kennedy School of Government at Harvard.
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