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13 Aug 2019

Trade Wars - There Are No Winners

The World Trade Organisation (WTO) is the guardian of the rules-based system of global trade. US President Donald Trump’s displeasure with the WTO is clear as he provokes trade wars with China and with the US’s nearest neighbours. Foord Singapore portfolio manager GUY SHIRTLIFF takes a closer look at Trump’s trade wars.


Protectionism is the antithesis of globalisation, which integrates the world economy through trade and global value chains. Globalisation drives economic growth and reduces poverty. It was the powerful driving force behind the rise of China and many emerging markets, including South Africa.


But globalisation and the US’s rise to global technology superpower have caused the export of lower-end US manufacturing jobs to cheaper labour cost markets. Automobile construction went to Mexico, electronics and appliances to China and clothing spread throughout Asia.


Trump’s protectionism is deeply rooted in his 2016 presidential campaign success. He promised to “Make America Great Again” and bring manufacturing jobs back home. Now, in the second half of his first term, Trump has upped the ante on trade. He hopes to deliver on his promise and regain the crucial support of the neglected American middle class ahead of the 2020 presidential elections.


Protectionism can take many forms. Tariffs are the bluntest protectionist instrument and Trump’s preferred headline-grabbing weapon. Import quotas, currency devaluation, regulation and domestic industry subsidies are more underhanded measures which the US accuses China of using.


The US–China trade war is ostensibly focused on manufactured goods. China is the US’s largest trading partner and accounts for almost half of the US global trade deficit. In 2018, China exported $558 billion to the US, but imported only $179 billion. The US has imposed 25% tariffs on half of Chinese exports.


Trump’s primary goal in the near-term is re-election. Does he achieve this by rallying nationalistic support with attacks on China and other foes? Or does he seek to bolster growth by withdrawing the drag of trade conflict?


Trump’s erratic nature makes it especially difficult to predict his trade war strategy. His name and fame are synonymous with deals. His book The Art of the Deal and hit TV show The Apprentice bear testimony. The American people chose him to champion change and to find the US a better deal.


But the trade war is fast evolving into a US–China cold war, as the US tackles the Chinese threat to America’s global hegemony. Fronts are developing first in economics and technology. China has not always played fair and the US appears resolved to retaliate. Accordingly, a firm and lasting trade deal seems questionable.


The weaponisation of trade at this late stage of the expansion cycle is economically dangerous. We can measure the direct impact of trade tariffs. But the hidden costs are likely to be far more detrimental to global growth and financial markets. The knock-on effects to consumer confidence, damage to planned business capex and sentiment, China closing its doors to trade and pulling back on commodity purchases are the more severe, long-lasting implications.


China is not the only country in the cross-hairs. Trump has targeted neighbours Canada and Mexico with tariffs to achieve specific trade and other outcomes. He has also threatened the EU. Could South Africa fall foul of Trump? This is possible but seems unlikely.


South Africa is the US’s 38th largest goods trading partner, running a $3 billion net trade deficit. South Africa’s primary exports to the US are precious metals (mostly platinum) and other raw materials. The US lacks these unprocessed commodities and taxing them would not produce the industry development or American jobs that Trump seeks.


From an economic perspective, no one wins a trade war. In the short term, domestic producer competitiveness and employment improve. But in the longer term, trade wars cost jobs by suppressing growth and pushing up prices for domestic consumers.



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