To understand US president-elect Donald Trump’s infatuation with tariffs we must appreciate that the US’s economic clout mostly stems from its surplus purchasing power. Trump is a dealmaker who will leverage this advantage when negotiating with both hostile powers and allies.
Whereas SA needs access to about a third more purchasing power to achieve normal workforce participation, today’s high-growth emerging nations, most notably China, overcame similar challenges by increasing value-added exports — most frequently to the US.
Conversely, the ANC’s localisation policies seek to grow our GDP by focusing on domestic consumption, which was inadequate 30 years ago to support full employment and its growth has been constrained by policy mishaps.
SA’s discretionary purchasing power peaked during Thabo Mbeki’s presidency. Our ANC-led journey has subsequently entrenched the world’s most severe youth unemployment crisis. This, along with electricity that became unreliable and then unaffordable, has typified the ANC economic stewardship.
The US’s surplus purchasing power reflects its economy having long been highly productive and many US households having saved and invested prudently, with home ownership playing a lead role.
China has been growing rapidly, but from a low base. Whereas household wealth in the US has been compounding for many generations, more than 90% of Chinese were very poor in the early 1980s. China’s households save prodigiously but their investing heavily in home ownership is undermined by overbuilding — despite the country's population having begun to rapidly contract.
China’s youth unemployment being above 20% despite strong GDP growth traces to inadequate domestic spending power. The country remains dependent on high growth generated from aggressively investing in fixed assets and value-added exporting.
“Made in China 2025" is the plan, launched in 2015, to use government backing to make Chinese companies globally dominant in hi-tech manufacturing sectors. Unlike tolerance for China’s dominance of solar panel production, its use of “unfair trade practices” to dominate auto production is unacceptable to governments in Europe, Japan and North America.
Notwithstanding many faults and missteps, the US has been a relatively benign global hegemon. Its military heft has corresponded with a long pause in great power wars while its surplus purchasing power, free trade preferences and ability to keep sea lanes open has supported extraordinary global upliftment. China’s 1970s policy pivots were also crucial.
When Japan and the EU have run large trade deficits, this has largely reflected their reliance on importing energy. Such deficits spur remarkably little upliftment. Most of today’s poor countries are commodity exporters. This era’s high volume upliftment escalator is value-added exporting. Our exporting coal to China creates relatively few jobs; rather it helps to fund grants.
US trade deficits consistently dwarf those of other major economies and the US is largely energy independent. America’s surplus purchasing power has been essential for creating jobs and upliftment among emerging and many more developed countries. This has helped expand markets for US goods and services. China’s policies and practices suggest that it only half believes in such win-win outcomes.
Tariffs in the hands of a dealmaker who determines US trade policies can be applied narrowly or broadly and they can be ratcheted up and down. We can expect much of this from Trump. The disadvantage of tariffs is that they can trigger inflationary pressures.
Trump seems ruthless and unpredictable relative to the current US president and vice-president, or typical European leaders. Yet compared to the rulers of China or Russia his deal-making style seems to mix toughness with considerable tactical flexibility.
The customer is king, particularly the customer who spends much more than others. The US’s tariffs, sanctioning power and its reserve currency status are all underwritten by an overabundance of purchasing power.
This “exorbitant privilege” positions Trump to transcend territorial and security considerations when seeking to end the war in Ukraine. Russia’s future is much brighter if it can meaningfully reintegrate with the West.
The only significant constraint on Trump’s use of tariffs is their impact on inflation, and much of that dilutes over time.
• Hagedorn (@shawnhagedorn) is an independent strategy adviser.
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