With US President Donald Trump threatening to raise import duties on an additional $267 billion worth of Chinese products on top of the tariffs already in place, it is worth pausing to reflect on what the trade wars of the past can teach us about the likely outcomes of the current dispute, especially as South Africa seems likely to get caught up in the cross-fire.
This is according to Tlotliso Phakisi, investment analyst at Cannon Asset Managers, who notes that lessons from the past reveal that trade wars seldom produce winners and that more often than not, the results leave both sides battle-bruised, scarred and worse off for the affair.
“Instead, history teaches us that past trade disputes have led to heightened geopolitical tensions and dampened global economic growth, which in turn have sparked social crises, wars and economic depressions,” he said.
“Take, for example, one of the most famous trade wars of the modern era, initiated under the Smoot-Hawley Tariff Act of 1930.
“In an eerie parallel to current events, this Act was passed by US lawmakers with the promise of protecting American jobs, particularly in the agricultural sector. Attempting to ease the effects of the Great Depression, the Act subsequently raised US import duties from 15% to more than 40% on nearly 1,000 items ranging from eggs and sugar to oil drums.”
However Phakisi highlighted that this strategy did not turn out as planned.
“US import and export volumes plunged 40% over the next two years as trade partners retaliated by raising their own tariffs in a tit-for-tat trade war,” he said.
“The knock-on results saw prices of goods and services falling, unemployment surging, banks collapsing and world trade plunging. For all intents and purposes, the decade following the Great Depression saw a halving in global trade. And as crop prices fell and exports dried up, the American farmers who were supposed to benefit from the trade protection policy instead suffered perhaps the most of all.”
“Far from the heroic measure needed, the Smoot-Hawley Act is now widely blamed for amplifying and elongating the Great Depression and, if not instigating, at least contributing to the eruption of World War II.”
Phakisi noted that there is a difference between the Smoot-Hawley Act and Trump’s trade proposals in that the Smoot-Hawley Act raised tariffs against everyone, whereas Trump’s focus has remained largely on Mexico and China.
“Ultimately, however, the outcome is likely to be the same, as world economies are even more interdependent now than they were in the 1930s. The tariffs imposed on China and Mexico will have a ripple effect on other trade partners, undoubtedly compromising the current system of relatively open and reasonably free markets,” he said.
What next for South Africa?
While the full impact of Trump’s trade war has not yet been seen, US trade policies will have a series of far-reaching effects that are likely to be felt around the globe, said Phakisi.
“Unable to import the materials they need or export the goods they produce, companies will lose profits and lay off workers, while consumers will be hit with higher priced goods. US economic growth will falter, low business confidence and uncertainty will slow global investment, governments will lose revenue and, ultimately, global growth will be pulled lower,” he said.
“One of the most prominent economists of the twentieth century, Joan Robinson, was fond of pointing out that raising tariffs, as a primary tools of trade wars, is like throwing rocks in the harbour to make imports more difficult. And just because you are throwing rocks in your harbour, there’s no reason I should throw rocks in my own. To do so just makes me worse off and why should I do that? Put simply, trade wars don’t produce winners. Everyone loses.”
Unfortunately for South Africa, the global headwinds of protectionism, trade war anxieties and emerging market risk aversion have already hit investor sentiment, demonstrated by the dramatic fall of the Turkish lira over the course of 2018, Phakisi said.
“And resilience, defined as the ability to quickly recover from setbacks, is a quality that our economy sadly lacks.
“Without the kind of solid foundation that can withstand such circumstances, or the flexibility to respond quickly when global challenges arise, South Africa’s economy has been caught up in the emerging market storm. The policy flip-flops and posturing we have witnessed of late have only exacerbated the situation.”