By Felicity DuncanÂ
US president Donald Trump has ratcheted up his trade war against China, imposing 10% tariffs on an additional $300bn of Chinese goods, on top of the 25% he has already imposed on another $250bn of goods.
The decision came after talks between the US and China broke down last month. With no clear solution to their trade differences in sight, the self-declared “Tariff Man” Trump chose to escalate the dispute.
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In response to the tariffs, the Chinese renminbi fell below the psychologically important ÂĄ7/$1 level. As the renminbi fell, Trump and his administration swiftly labeled China a currency manipulator, although the truth is that China actually stopped intervening to support its currency and market forces pushed the yuan down. The rhetorical escalation, however, has added fuel to the fire.
In short, the US/China trade war has gone hot and the damage is piling up. Markets worldwide fell in response to these latest moves and it looks like rough seas ahead.
The two giants now face an impasse. Trump wants the trade deficit reversed – although this is a function of US domestic spending and borrowing in capital markets, not trade – and wants China to cede control of the trade relationship to US courts and cease discriminating against US companies. China wants to continue protecting its domestic industries and accumulating Western technology, and rightly points out that it cannot unilaterally reduce America’s trade deficit.
Whatever the merits of America’s trade grievances or China’s position, a hot trade war is not going to do anyone any favours. The FT pointed out that as America’s trade deficit with China has fallen in the wake of tariffs, it has simply risen elsewhere, especially with Canada, Mexico, Taiwan, Europe, and Japan, because trade deficits are structural. The US has also cut rates on growth fears, with the trade dispute playing a role in slowing economic momentum. In the meanwhile, China’s economy is hurting, and it is using a growing pile of debt to keep growth going.
But who cares about those guys? The real question is, what does this mean for South Africa? Unfortunately, the answer is: Nothing good.
Risk-off markets
The trade war is draining capital out of emerging markets (EMs), SA included, at a time when we really need it.
Capital flooded into EMs over the last few decades because China’s rise offered a blueprint for growth: use low labour costs to become a workshop and take advantage of free global trade to sell your goods. EMs worldwide benefited from freer trade, and it seemed like they would be able to use rich world markets to grow themselves to prosperity.
That whole plan is now in jeopardy. Trump clearly dislikes the World Trade Organization (WTO), which is the global forum for dealing with trade disputes and setting tariffs. He prefers to negotiate aggressive bilateral trade deals, where the US can use its might to force concessions out of its trading partners.
For a small, open economy like SA, this is a disaster. SA benefits from low-friction global trade. It doesn’t have the global clout to get itself favourable trade terms, so a worldwide set of rules like the WTOs helps small nations like us by levelling the playing field.
With the US and China throwing up the barricades, trade is going to look quite different in the future.
One likely scenario is that SA may have to choose which bloc to align itself with: the US, Europe, or China.
Trump views China as a strategic threat and he is working to decouple the US from China. This will mean that, down the line, other nations will have to choose between the two. Europe offers a third alternative, but trade relations between Europe and the US are strained, so aligned with the EU is just another way of picking a side.
This is bad news for SA, which has worked hard to build relationships with all three blocs. Picking one will mean less opportunity, no matter how you slice it.
What’s worse, in this context, global investors are pulling cash from EMs like SA. EM currencies took a hit when the yuan fell. They’ve regained some ground, but the trend will likely be downward as markets adjust to the hotter trade fight. Similarly, we are likely to see EM bond yields rise over the next few years as investors look elsewhere for opportunities.
Given SA’s need for significant capital infusions, not least of all to deal with Eskom, this is a bad situation. With plenty of domestic challenges, the last thing SA needs is a hostile global environment. It will be like swimming upriver in lead shoes.
