When US President Donald Trump announced that he would ask Congress to impose a 25% tariff on more than 1,300 Chinese imports amounting to an export value of US$50 billion, the world held its breath for signs of a full-blown trade war between the world’s largest economies.
Retaliation from China and a subsequent escalation from the US was swift, confirming that trade relations between the two are in stormy waters. Watching super powers edging towards a hostile relationship strikes fear into the rest of the world.
What does this mean for us?
According to the Department of Trade and Industry (DTI), South Africa exports $950 million worth of steel and $375 million worth of aluminium to the US, accounting for 1.4% and 1.6% of US imports. The US is also South Africa’s smallest steel and aluminium market with Asia and Europe importing significantly more. But an ailing industry can ill afford any setbacks, and South Africa was quick to ask the US for an exemption from the tariffs.
Despite diplomatic efforts in Washington and Pretoria, trade and industry minister Rob Davies is yet to hear from the Trump administration on where South African steel and aluminium exporters stand. Of course the tariffs could hurt our steel industry, especially since competitors like the EU, Canada, Mexico, South Korea, Argentina, Australia and Brazil have been temporarily exempted from the tariff hike.
South African aluminium exports equally could be hurt, which could be a devastating blow to companies supplying Tesla with components for its electric vehicle production value chain. Although still a small new industry, South Africa should be exploring it and stepping up as the production of electric vehicles increases.
The real danger is that Chinese aluminium exports to the US, which are much higher than its steel exports, could end up being diverted to markets that could impact South Africa more directly.
Global value chains have become the clarion call of development economists, encouraging developing countries to position themselves within value chains by specialising in specific components of larger production pipelines. It is estimated that around two-thirds of the world’s trade now occurs within value chains, making it very difficult to anticipate what impact a tariff hike on one element of the value chain could have on the end product.
Many analysts predict that the tariff increases will hurt US companies and US consumers, from car manufacturing to basic beer can sales, even though the tariffs are meant to protect them from Chinese competition, fair or otherwise.
SA agriculture would battle to up exports
China’s retaliatory tariffs included a 15% increase on US wine, nut and fruit imports. South Africa is a strong competitor in these products and stands to gain on the Chinese market, if the country could increase exports rapidly. But South Africa already struggles to fill quotas on these products destined for the EU market.
The ongoing Western Cape drought has also affected fruit and wine production. Many of South Africa’s nut producers are very small and most exports are already destined for Asia. Investing in nut plantations to reap bigger harvests will take years.
More broadly, analysis done by Citi shows that South Africa’s total exposure to the US market is relatively small from a trade and stock market perspective, cushioning the country from any major economic fall-out that may occur in the US.
Final death knell for the WTO?
The WTO should have been President Trump’s first port of call to lay a complaint against the ‘unfair’ Chinese practices harming American producers. Interestingly, China has filed a complaint at the WTO, which opens the door for dialogue, negotiations and formal dispute settlement procedures. However, retaliation cases are rare and a WTO dispute case on this issue will likely take years to resolve. The failure of the Doha Development Round of negotiations has further discredited the WTO trading system as a win-win scenario for all countries. The rise of regional, bilateral and plurilateral trade agreements weaken it further.
Ironically, the WTO owes its existence to the global trade war after the First World War that led to the Great Depression and ultimately the Second World War. Of course, the world was different then, but could this new trade war be the final death knell for the WTO?
South Africa is a very active participant in the WTO – our open economy benefits from an open global trading system. An effective WTO is essential for a common set of global rules, rather than the powerful calling the shots. South Africa and the rest of the continent have a vested interest in the continuation of a rules-based global trading system as it levels the playing field for all member states.
Talk of a trade war increases global uncertainty and should be seen within the broader context of other rising global tensions, including the expulsion of Russian diplomats from the US and many EU countries, and Russia’s retaliation in kind. The questions around North Korea and the apparent warming of relations with China also come into play. Trump has signalled his intent to withdraw troops from Syria despite dire warnings from his own military that this could allow the so-called Islamic State to rise again.
Trump has chosen to tread where many countries would not for fear of dismantling a convoluted trading system in which an attack on one partner results in damage for all. Chinese President Xi seemed to have calmed matters down, stating that China is committed to liberalisation. Confusingly, President Trump announced new interest in the Trans Pacific Partnership.
Global insecurities may impact the gold price positively, but developing countries like South Africa generally benefit from a stable global environment. Disconcertingly, uncertainty is now the new normal.