If US president Donald Trump’s trade war with China escalates and other countries get involved by implementing trade barriers, it could slip the already cooling world economy into a recession.
Economists speaking at Export Week 2018 hosted by Trade and Investment KwaZulu-Natal in Durban last week highlighted the negative global impact of the US president’s trade war policies, in particular the latest steps taken in the United States-MexicoCanada Agreement (USMCA) which negotiators reached recently to replace the North American Free Trade Agreement.
According to USMCA, which still has to be approved by congress, automobiles that do not meet certain requirements will be subject to tariffs. Vehicles must have a minimum of 75% of components made in Canada, Mexico or the United states and a minimum of 30% of the vehicle – which will rise to 40% in 2023 – must be made by workers earning a minimum of US$16 per hour. The deal also provides better access for the US dairy sector to the Canadian market, and existing steel and aluminium tariffs remain in place.
Trade Advisory economist Francois Fouche said historically trade wars did not produce any winners, as the SmootHawley Tariff Act in the US had shown when tariffs were hiked across 20 000 agricultural and industrial goods in 1930. For Canada, Spain and other trade partners, imports dropped by 66% and exports decreased by 61%.
“Smoot championed tariff increases but more than 1000 economists wrote to the president saying the bill would be an economic disaster. We can’t say the SmootHawley Act caused the great depression but it exacerbated it,” Fouche said. Trade wars “messed up” supply chains and had a negative impact on economies as inward looking protectionism did not stimulate global growth, he added.
“This is coming at the end of a very mature global cycle. The world economy is slowing down and if this trade war escalates, and if other countries become involved and the auto industry gets involved, then we could take the world economy into a recession - and then we are in trouble,” he said. According to the World Trade Organisation, the world’s largest exporters in 2017 were China ($2.263 trillion), the US ($1.547 trillion), Germany ($1.448 trillion), Japan ($698 billion) and the Netherlands (652 billion). By comparison in Africa South Africa exported $89 billion, Nigeria $47 billion, Algeria $35 billion, Angola $33 billion and Morocco $25 billion.
The biggest importers were the US (2.409 trillion), China (1.842 trillion), Germany (1.167 trillion), Japan (672 billion) and the United Kingdom (644 billion). Bureau for Economic Research economist Pieter Laubscher said the best strategy a country could take at a political level was to “take care not to become embroiled in the same tit for tat tariff hikes but to pursue trade relations more aggressively and to position your goods in the export market”.
“Where South Africa is a part of Brics we are in a relatively favourable position to benefit from some of the trade aversion as companies in the US and China seek alternative suppliers, so being flexible and more aggressive in building trade relations is the best way,” he said. The SA economy had become unhitched from global economic growth trends in recent years and had not experienced the uptick that had seen global economic growth improve since 2016, he added. “The big gap between global growth and the SA economy is quite worrying. It’s going to be a fight to close this gap.”
Laubscher said the global economy was expected to grow by around 4% in 2018 and 2019, while SA’s growth was predicted to be 0.5% in 2018, 1.5% in 2019 and 2% in 2020. “The global business cycle is quite mature and it’s being impacted by a trade war.
We do expect growth to slow down.” he said. Economist Jacob Twala of Tutwa Consulting Group said trade wars were short sighted because, for example, US companies, such as Walmart and its employees that benefited from Chinese imports, would be impacted by tariffs.
