In these crazy days it seems hard to write anything about economics that won’t be overtaken within days, if not hours.
On Wednesday US President Donald Trump backed down on his shock “Liberation Day” reciprocal tariffs just hours after they came into effect, in the face of a market meltdown that threatened to turn into a full-scale global financial crisis as well as pushback even from some of the US business leaders who supported his election.
Few believed his claim that this was all part of the plan. And while markets have staged a relief rally for now, the trouble is just starting.
First, this is just a 90-day pause. It can only increase the uncertainty about Trump’s tariff policy and its likely global fallout. And uncertainty itself acts like a tariff, as former Council of Economic Advisers chair Jason Furman pointed out recently. When businesses are not sure what future policy will be, they tend to avoid making big, irreversible investment decisions until this is resolved. The result is less investment and lower growth.
Trump only paused the “reciprocal” portion of the tariffs he announced on April 2. This was the extra, customised piece that applied to each country with which the US had a trade deficit, the one that took SA up to 30%.
He has not backed down on the 10% baseline he imposed on countries across the board. That is still in place, as are sector-specific tariffs such as those on cars and steel. Also in place, dramatically, is the tariff on US imports from China, which Trump has upped to 125% after China retaliated with its own steep tariffs on the US.
The net effect is the US’s effective tariff rate has gone from 2.5% to over 20% in just two months, in what The Economist magazine calls the most disruptive policy in the history of global trade.
What does all this mean for a small, open economy such as SA?
The direct impact of the tariffs is the first channel by which the economy will be affected. The US is SA’s second-largest bilateral trading partner, and exports to the US accounted for just over 2% of SA’s GDP last year, Goldman Sachs estimates. On the upside, much of this is platinum, gold and other minerals that are exempt from tariffs — Absa estimates about half of SA’s exports to the US by value will still enter duty-free.
On the downside, the African Growth & Opportunity Act (Agoa) is out the window. One can’t yet assume the US will eventually drop the 30% “reciprocal” tariff on SA’s non-mineral exports to the US, but even if it does there is still the 10% across the board tariff, not to mention the 25% on cars and steel.
SA’s agricultural and automotive sectors, which could enter the US duty-free thanks to Agoa, will be hit hard, especially in the shorter term. It will take time to find alternative markets. And they will be looking for new customers at a time when everyone else in the world that’s been hit by Trump’s tariffs will be trying to do likewise.
The direct impact of Trump’s tariffs on the economy as a whole will likely be small compared to the bigger, indirect impact of a slowdown in US and global growth. Economists are revising US growth forecasts down and US inflation forecasts up. The tariffs are a giant supply shock to an economy that depends on others to provide the cheap inputs and cheap consumer goods underpinning its prosperity. Investment and growth will be severely damaged. Prices will go up.
The US faces the dreaded “stagflation” — low growth or even recession, combined with high inflation, making it difficult for the US Federal Reserve to contain inflation without driving up unemployment. The US’s troubles will spill over to the global economy, especially if the trade wars intensify and sentiment grows more bearish — as it surely could in a world in which so erratic a leader is in charge of the world’s largest economy and its largest military force.
The US and global economic slowdown will in turn spill over to SA, whose economy depends heavily on trade and capital inflows. More hostile global markets could spill over too, raising borrowing costs across the economy. Economists are shaving their forecasts while they wait to see how the tariffs play out, and whether the worst-case scenarios materialise.
Where it gets more interesting, and potentially less depressing, is inflation and interest rates. Few doubt that US inflation will be higher, making further interest rate cuts less likely. But it is at least possible that in the rest of the world inflation could be lower.
The oil price dropped 12% after “Liberation Day” cut global growth forecasts. Supply chain disruptions could again raise prices globally as they did during Covid-19. But against this, the oil price has dropped sharply on fears of lower global growth and that could dampen inflationary pressure. And the tariffs could set off a global competition between countries seeking new markets for products they used to export to the US, which would force cheaper prices all round.
Central bankers will be mulling over this in coming months, no doubt including our own. The Fed’s decisions have a big impact on financial conditions and our own interest rates, but it’s hard to see which way the Fed will go.
SA’s inflation rate is already hovering at or below the bottom of the target. And while the Reserve Bank will be worried about global markets and the rand, it will also have to grapple with the prospect of lower economic growth and possibly even lower inflation. It should make for an interesting monetary policy committee in May.
But whatever happens after Trump’s 90-day pause, this is not just a blip. The world trade order, in place for decades, has been upended. Countries will have to navigate their way carefully through a changed environment in coming months and years.
Whether SA’s political leaders have the bandwidth for this in a fractured domestic political environment is unclear. But it’s more urgent than ever for SA to pull the levers it has at home to grow the economy, even in an unfriendly external environment.
• Joffe is editor-at-large.
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