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How a global trade war would hurt SA

It’s about much more than just the tariffs.

At the start of 2018, the outlook for emerging markets seemed extremely positive. A strong global growth environment and continued risk appetite from investors was good news for these economies.

This was also encouraging for South Africa. It seemed that the country’s change in political leadership and the potential for improved business and consumer confidence could see it benefit from the continued appetite for emerging markets.

However, when president Donald Trump announced at the start of March that the US would be imposing tariffs on steel and aluminium imports, this picture began to change. When Trump added to these earlier this month with his announcement that the US would be placing a 25% tariff on $50 billion of Chinese goods, things grew even gloomier.

From what had been a positive global backdrop, the environment was suddenly far less supportive. Uncertainty about where the US stance would lead and the potential for a trade war made investors far less keen to take on risk, and therefore much less bullish on emerging markets.

Read: US trade attack sparks emerging market sell-off

Speaking at the CoreShares ‘Think Index Investing’ Convention last week, Mike Schüssler, the founder of economists.co.za, said that South Africa can’t ignore these impacts, even if it’s still unclear just how far the US will go.

The unpredictable Trump

“A lot of people think it won’t lead to a full trade war,” said Schüssler. “What we have at the moment is a skirmish. The $50 billion of trade that they have put tariffs on already is a very small amount in the global picture.”

Even though China and the EU are imposing retaliatory tariffs, these are significantly smaller than those the US has already approved. In an announcement on Friday, the two imposed tariffs on $3.3 billion of American products.

The unpredictable factor, however, is Trump. It is extremely difficult to judge what he will do. As he has shown with his approach to North Korea, highly antagonistic rhetoric can very quickly lead to conciliation.

“We cannot read people’s minds,” said Schüssler. “We don’t know how far Trump is willing to take this. At the moment it looks like a lot of noise and warning shots.”

Gina Schoeman, South Africa economist for the Citibank Global Economics team, agreed.

“It’s impossible to know how this all ends up,” she said. “We don’t know who is going to do what over the long run.”

It may be that Trump’s threats of much greater tariffs is simply his way of forcing other countries to compromise, however one can’t discount that they could be genuine intentions. If they are the latter, then there really will be trouble.

“If this escalates to tariffs on $200 billion worth of trade from the US side, then it becomes a real issue,” Schüssler said. “Then the retaliation is going be so much bigger from everyone else, and that will be a problem.”

The impact on growth

Already it seems that the uncertainty is impacting global trade. Judged by the world container index, trade is still growing, but it has slowed from 4% to 1%.

“I think there are some nerves there, so the economic growth that everyone expected this year might be slightly lower,” said Schüssler. “Instead of the world growing at 3.7% or 3.8%, it might be 3.5%. And if things escalate from here, growth could slow meaningfully.”

As the effects take a long time to work through, it would also have a significant impact on global growth for next year.

This is not good news for South Africa, which is trying to work itself out of years of poor economic performance. A strong global growth environment would be supportive, but weakness in the global economy would make it even more difficult for the country to accelerate its fortunes.

South Africa is also highly dependent on foreign investment inflows. However the uncertainty being created in the global environment has already shifted investor perceptions, with risk appetites diminishing significantly and emerging markets falling out of favour.

This is bad news for a country that relies on portfolio inflows to balance its current account deficit. The rapid weakening of the rand since the middle of May from R12.25 to the dollar to around R13.50 to the dollar is an indication of this.

“If you’re an open economy like South Africa, you are extremely vulnerable,” Schoeman explained. “We massively rely on risk.”

A falling rand also inevitably leads to higher inflation. This too is negative for the local economy.

Around 60% of South Africa’s GDP is consumer spending, and rising prices depress consumer activity. If inflation climbs higher, that therefore takes away from GDP growth.

The implications for South Africa are therefore likely to be largely negative. There is however one potential silver lining.

“Maybe we could benefit in the long run if we took exports away from other countries,” said Schoeman. “But we would have to prove ourselves.”

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‘’An honest politician is one who when he is bought will stay bought’’
Simon Cameron (1799 – 1889)
Globalists should take note that Donald Trump is unlikely to bow and comply with counter sanctions by the US Trade partners.
Trump is serious about ‘’free, fair and Smart Trade. As is a bona fide ‘’protectionist’’ Trump obviously owned up to his promised protection “for a long time”, and warned his trade partners that “you’ll have to grow your industries’’
There is a global glut of steel and aluminium, largely driven by an enormous expansion of China’s production capacity since the early 2000s. That created trade flows to America that over 420 separate anti-dumping and countervailing duties could not fully stem.
Mr Trump’s move falls under Section 232 of the Trade Expansion Act of 1962, which allows the president to act without congressional constraints.
I think a plethora of these ‘’trade deals and tariffs’’ were agreed to during times, many moons ago when the US was still the ‘’main economic driver’’ in the world. It’s no longer the case with countries like China, India, Canada and Euroland that grew their markets enormously.
You ignore Donald Trump at your own peril – he knows that ‘’you will get wet if you go into the water’’- Sunny SA will have to adjust very quickly as the days of ‘’the martyr money’’ and ‘’debt forgiveness’’ is long gone, and we will have to get used to the prices if we need the products!

What if for argument sake it is suggested that this trade war is any secret agreement between the USA and China? In this way, each country imposes their 25% tariffs on certain goods, and the agreement lasts for an agreed period of time when the two countries meet, kiss and make up and then each drop the additional tariffs on each other. At that stage, each country has collected millions, if not billions of dollars each which is pumped into their tax chest, and then nobody is any the wiser that the exercise was by agreement for each country to collect a pile of cash, and the consumer ends up forking out money unwittingly.

Just a thought should any politician be devious enough too do this???? Not Trump, he he as honest as a $3 dollar bill.

”Honesty is the best policy, but it is not the cheapest”

Mark Twain.

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