As global trade tensions continue to rise, economists continue to worry about what a full-scale trade war would mean for the global economy and especially for the emerging market economies of which South Africa is one.
With trade between South African and the US of less than 2% of our GDP and with relatively low levels of exposure of our stock exchange to that country, the direct impact of American trade tariffs will be relatively low when compared with that on countries with much deeper trade relations with the world’s biggest economy.
Nevertheless, our failure to secure an exemption from Trump’s imposition of punitive tariffs on steel and aluminium imports into the US will hurt, especially if the likely loss of R11.2 billion of steel exports to that country is taken into consideration. The Steel and Engineering Industries Federation of Southern Africa has estimated that US tariffs against South African aluminium could cost as much as R500 million putting as many as 7 500 jobs at risk. This perfectly illustrates that the real downside of the “trade war” for South Africa is in the risk it poses in terms of our exports to suddenly more protectionist markets.”
On the flip side, there may however be benefits for South African exporters of wine, fruit and nuts to China following that country’s retaliatory imposition of a 15% tariff on imports of those products from the US. But it isn’t a given that South African exporters to China will manage to secure access to Chinese markets. As always, it’s a bit more complicated than that.
What is clear though is that as the “trade war” escalates, predicting outcomes accurately becomes increasingly difficult. Suffice it to say though that there aren’t really winners in a trade war except a small category of domestic producers in the warring nations who are protected by the new measures. While South Africa has a relatively weak trade relationship with the US, China on the other hand is an increasingly important trading partner and so to the extent China gets hurt in a trade war with the US, we will also get hurt.
The bottom line is that increased tariffs and the imposition of other barriers to trade that typically get deployed by increasingly protectionist warring factions reduce economic efficiency and impact negatively on economic specialisation. Typically, tariffs result in rising manufacturing costs and therefore higher prices for goods produced. In short, it is the poor old consumer that will be most affected by higher prices and fewer options.
Unfortunately, the first skirmishes of Trump’s trade war have coincided with the continued strengthening of the US dollar and just this last week the South African currency fell to close to the R14 to the Dollar mark. As US interest rates have begun to trend upwards, foreign investors sensing increased levels of risk in the emerging market economies as a full-blown trade war looms are divesting from these economies. In May and June, the sale of almost R75 billion of South African portfolio assets has further weakened demand for the local currency.
Always one of the most volatile emerging market currencies, the Rand has fallen sharply from around R11.50 to the dollar in February this year to close to R14 to the greenback. With oil prices seemingly settling at around $75 a barrel, imported inflation is inevitably going to translate into higher fuel and food prices going forward. Together with the negative impact of the trade war on our economy this will intensify pressure on household incomes, especially amongst the poor.
Now more than ever, prudent macro-economic management will be essential if the positive impact of “Ramaphoria” isn’t to be relegated to a mere blip in our economic history. The President is going to have to redouble his commendable efforts to market the country as a sound investment destination. But more than that he and his economic ministers are going to have to find a way to counter the deleterious effects of a weakening currency, rising inflation and the negative impacts of getting caught in the crossfire of the US, or should that read Donal Trump, instigated trade war.