TRADE WARS

Source: Investor Almanac

Source: Investor Almanac

DID SOMEONE SAY 200 BILLION DOLLARS?

That’s right. United States President, Donald Trump, has announced tariffs equivalent to nearly R3 trillion on goods imported from China into the US if Beijing retaliates against earlier tariffs imposed by the United States. These earlier tariffs began in January 2018 with taxes on imported solar cells and washing machines and now include everything from from aircraft tyres to chicken incubators. In response, trading partners like China, Canada and the European Union have imposed tariffs of their own worth billions of dollars on goods imported from the US.

IS THIS A TRADE WAR?

It certainly feels like the start of one. A trade war happens when one country imposes tariffs on imported goods in order to protect a local industry and that country’s trading partners respond with tariffs of their own, leading to escalating protectionism. Former US Treasury Secretary, Larry Summers, points out that what we call the current situation is less important than the economic damage that it causes.

WHAT KIND OF DAMAGE?

Over  half  of the world’s economic output  depends on trade, so any disruption to trade can slow economic growth, raise prices for consumers and cost jobs. International relations and prices on global stock markets can also be negatively affected. Economists estimate that a full blown trade war could backfire and lead to between 250,000 and 2.6m job losses in the US and $210 - 320 per year in higher costs for the average American family. History supports this negative outlook as the last time the US experimented aggressively with tariffs was the Smoot–Hawley Tariff Act of 1930, which made the Great Depression worse.

HOW WILL SOUTH AFRICA BE AFFECTED?

South Africa has not been exempted from tariffs of 10% on aluminium and 25% steel. This will directly impact 7,500 local workers and may cost South African exporters R3bn worth of steel products and R474m worth of aluminium products. There will be other direct impacts from industry specific tariffs.

Financial markets also do not like uncertainty or volatility and one of the first things investors do in a situation like this is to reduce their exposure to emerging market currencies. As a result, the rand has reached it worst levels against the dollar since November 2017. If a protracted trade war develops and global trade and global growth are affected then economic growth in South Africa will be lower than it otherwise could have been.

WHY WAS THIS A GOOD IDEA IN THE FIRST PLACE?

Source: Twitter

Source: Twitter

President Trump believes that the US faces unfair trade practices from its foreign partners. In a tweet on 2 March 2018 he wrote that “trade wars are good, and easy to win”. This statement is not supported by academic theory, but it is possible to use tariffs or the threats of tariffs to extract concessions from trading partners. South Korea has recently agreed to double its import quota for US cars in return for exemption from steel tariffs, and Germany has proposed dropping the EU’s 10% import tax on US cars in return for the US not implementing the new 25% tax on European car imports.

WHERE TO FROM HERE?

The value of goods that the US imports from China exceeds the value of goods that it exports to China by $375 billion. Mr Trump wants to reduce this trade deficit to $200 billion by 2020. What’s interesting is that China also wants to reduce its trade deficit with the US as it tries to diversify its economy and become less dependent on exports. These are very ambitious goals and seems obvious that they will be better served by cooperation and collaborative planning than by aggression.

Mr Summers believes that there will not be a full blown escalation and that Mr Trump will step back from his policy after he is able to declare early victories. We certainly hope so. In the meantime prepare for economic headwinds and volatility in the rand and stock prices.

Andrew Louw CFA

Sources: The Balance, Bruegel, Business Insider, CBS, CNBC, Fin24, Forbes, The Independent, Market Watch, New York Times, Der Spiegel, Trade Vistas, Wall Street Journal, Washington Post, Wikipedia, World Bank

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