MAMOKETE LIJANE: Brace for further US trade curbs and loss of Agoa access

Donald Trump fired his first salvo in the trade war he is determined to start almost immediately after being sworn in as US president.

He signed executive orders imposing 25% tariffs on Canada and Mexico and 10% tariffs on China. Two days later he agreed to pause the tariffs on Mexico and Canada for 30 days, after some concessions on border security with the two countries. The tariffs on China remain in place. China has responded with its own tariffs and restrictions on trade with the US.

In the meantime, Trump continues to threaten tariffs against the EU and has noted that he could still bring the tariffs on Mexico and Canada when the 30-day pause expires. The most recently announced 25% tariffs on all steel and aluminium imports will also hit Canada hard.

The broadside against the US’s largest trading partners makes sense in the context of a need to rebalance US trade relations with the rest of the world. This president has made it clear that he would like to see manufacturing jobs moving back to the US.

The economic fallout of globalisation for the lower middle class in the US — those who historically relied on stable, good quality jobs from the manufacturing sector — is well discussed.

While globalisation has led to unprecedented improvements in wealth and wellbeing around the world and pulled millions out of poverty, especially in developing countries, it has created an underclass of losers in developed economies and their needs have found political expression.

But rewiring global trade will be complicated and expensive for the US and world economies. For tariffs against one economy to be effective a country will have to have higher tariffs with multiple countries. In response to the imposition of US tariffs on China in 2018, some trade moved to Mexico and Canada and imports from those countries rose.

Now the US must impose tariffs on those countries too. In the meantime, firms will continue to shop for countries not subject to trade restrictions to access the US market until the value opportunities are also closed. India, Indonesia, Vietnam... the list is endless.

Countries subject to tariffs will retaliate, creating inertia and cost in global supply chains. The US will have to impose tariffs on every competitive locale or make the tariff so high that it pulls the price to the level the item would be if it were manufactured in the US. This is the very definition of a trade war, and the reason multilateral trade deals work better than bilateral ones.   

The implications of this nascent war on trade will be negative. The US is the world’s consumption economy and closing it off to the world will hit demand. For SA, a country whose economy is linked to global growth, this spells bad news.

Global costs of capital

In addition to the threats to global growth, there is also the threat to the global costs of capital. When the market finally moves to price in a dimming US economic outlook expect risk premiums to rise.

For now the dollar is behaving, but it could start to rise again when concerns about growth surface. These two factors will likely be a more important developments for SA than the targeted measures the US has directed at us.

The rand has been stable considering the adverse, SA-specific news flow. Trump signed an executive order halting all US aid to SA and opening the way for the resettlement of Afrikaners in the US as refugees, ostensibly a response to SA’s discrimination against Afrikaners, the country’s International Court of Justice action against Israel and the cordiality of its relationship with Iran.

At a minimum, we should brace ourselves for further trade sanction from the US, and the loss of preferential access to US markets afforded by the African Growth & Opportunity Act.

The rand has so far shrugged all of this off, but the currency will not be as well supported when US and global growth concerns raise their ugly heads.   

• Lijane is global markets strategist at Standard Bank CIB.