WeeklySA_AdminTRADE WARS: Significant drop in living standards for RSA and SADC region inevitable as reduced demand for South African exports to the US begins to bite…
By Sandile Swana and Tafadzwa Ruzive
Wars often achieve unclear outcomes at a great cost and nothing improves afterwards. Trump and company have started a worldwide tariff war reminiscent of the Thirty Years War in Europe.
A memorable quote from CV Wedgewood (1938), about the Thirty Years War (1618-1648):
“The war solved no problem. Its effects, both immediate and indirect, were either negative or disastrous. Morally subversive, economically destructive, socially degrading, confused in its causes, devious in its course, futile in its results, it is the outstanding example in European history of meaningless conflict.”
Trump and company, by unleashing the tariff war, seek to achieve one principal objectives – to make sure that the revenue of the state and its expenditure are equal (eliminate budget deficits) with the favoured method being balancing US exports against imports into the US through punitive tariffs on friend and foe alike.
Other related aims are to maintain the US dollar as a Reserve Currency and to make the US dollar cheaper so that US exports can once again compete on global markets.
To achieve these dubious objectives, Trump and the US Trade department chose to start an unstainable worldwide tariff war. The question is how the journey has been so far.
According to the Guardian newspaper, Trump and his trusted lieutenants put it thus: “Donald Trump has said tariffs on goods from China will be reduced substantially but won’t be zeroed” after the US treasury secretary Scott Bessent said he expects a “de-escalation” in the trade war between the world’s two largest economies…
But the US President on Tuesday said he would be “very nice” to China and not play hardball with the Chinese President Xi Jinping. “We’re going to live together very happily and ideally work together,” Trump said…”
Meanwhile, Tesla chief executive Elon Musk said he would start pulling back from his role at the “department of government efficiency” from May, “as the company reported a massive dip in profits amid backlash against his White House role.”
In simple terms, Trump is backing down on the tariff war and on aggressive cutting of state expenditure and programmes without reporting whether the original aims have been achieved or are likely to be achieved.
US National debt has grown from 35.8% in 2005 to 97.8% of GDP by 2024. At the same time the US Congressional Budget Outlook states:
“The total federal budget deficit remains large by historical standards over the next 30 years, averaging 6.3% of GDP—more than one and a half times its average over the past 50 years—and reaching 7.3% of GDP in 2055. Those amounts are the result of rising interest costs and sustained primary deficits, which exclude net outlays for interest. Primary deficits average 2.0% of GDP over the 30-year period; over the past 50 years, they averaged 1.7% of GDP.”
Worry about the deficit and debt is based on a neoliberal belief that the state budget is like a household budget and therefore must balance (spending must be equal to revenue). Nothing could be further from the truth as the state is a currency issuer and the household a currency user.
Ideologically, this is the root of the tariff campaign, simply collect tariffs and eliminate the budget deficit and build a strong USA.
A recent JP Morgan article titled ‘Have debts and the deficits received too much of a wrap?’ corroborates that the US debt and deficit situation have driven its national growth outperformance since the Covid 19 crisis.
The budget deficit is empirically a good way to fund economic growth and to pursue full employment of all national resources.
Trump, under the urgent and dire need to reduce taxes on his donor class that funded his latest election campaign, believes he can fund the budget deficit through tariffs replacing any wealth taxes, including capital gains taxes and income taxes.
Ironically tariffs are paid by all importers and therefore by citizens of the US, not by exporters to the USA. Tariffs reduce the buying power of US residents and citizens.
He is being driven by a reminiscence of America’s industrial economic take off in the late 19th century which was driven by, among its policy levers, high tariffs that funded public infrastructure initiatives.
However, his immediate pressing need is to create fiscal space to allow him tax cuts to payback the donor class that funded him, and this has created the tariffs that are affecting the whole world.
To give face to the whole exercise, Trump has engaged in American spending cost cutting initiatives at three levels, including DOGE under Elon Musk.
At a global level it can be seen through Trump’s recusal from multilateral bodies like the World Health Organisation, Paris Climate Accord, NATO, WTO and in trade USMCA show a trend spanning across geopolitics, environment and now economics where Trump is rewriting America’s approach from multilateralism to unilateralism. Cutting funding to these entities will reduce strain in the US budget and leave more fiscal space for tax cuts especially to the upper classes.
Trump believes that large trade deficits to the US’s chief exporters show that America is losing money. Trade deficits are created when Americans import more goods than they export are reflected in the high standards of living that Americans enjoy.
Cutting trade deficits reduces American living standards. However, high American living standards stand in the way of creating more fiscal space for tax cuts (remember to balance the budget) and hence living standards are going to be trimmed through higher tariffs on US consumers.
The tariffs cut the demand for imports while adding indirect tax revenues to the state, creating space for other tax cuts.
At a domestic policy level, Trump’s support base (mainly from previous industrial areas) has been told that this will result in more jobs through re-industrialisation. Unfortunately, tariffs are a necessary but insufficient condition for re-industrialisation. Public finance of infrastructure and public monopolies as well as a progressive tax regime to direct resources into key development sectors create sufficient conditions for re-industrialisation.
The US needs to create a skills base and relevant supply chains to support advanced re-industrialisation.
All in all, the current outcomes of the tariff war are dubious and the course of this war unenviable and unsustainable.
According to AP, Bessent states: “The US treasury secretary Scott Bessent said in a Tuesday speech that the ongoing tariffs showdown against China is unsustainable, and he expects a “de-escalation” in the trade war between the world’s two largest economies.
There are self-evident negative effects of the tariffs such as China being effectively embargoed from the US market, the EU is losing market share in America resulting in job losses, inflation and possibly a recession. Africa is likely to suffer directly by losing US markets as these tariffs effectively remove AGOA benefits.
Constructive innovative partnerships between the G20 and the Global South have birthed retaliation and realignment away from the US and put US leadership in world affairs into question.
Africa has begun looking inward for new trade arrangements, an idea that was entailed in NEPAD but had been largely ignored until now.
Indirectly, Africa will suffer as Chinese and US exports that require African raw materials might experience negative knock-on effects due to reduced demand.
Since Trump’s America First approach favours using economic levers to drive concessions in the political arena, there are two ways to deal with this barrage of tariffs. First negotiate with the US for fresh trade agreements.
Second, China, EU and the rest of the world, the solution is to expand into new markets. China is already strengthening trade ties in the Indo-Pacific with trade treaties with Japan and South Korea. Countries like Indonesia, Vietnam and Thailand are already taking more productive slack from China as they are on lesser tariffs than China.
The EU is negotiating new trade deals with China and re-entering treaties with countries in Africa. In South Africa’s case, there might be potential in increasing shipments to the EU and BRICS countries and other places in Africa where American supply will retreat due to new trade deals. The African Continental Free Trade Area (AfCFTA) will be crucial in this regard.
There is going to be a significant drop in living standards for RSA and SADC mainly due to losses in aggregate demand caused by three things. Businesses will lose significant income due to reduced demand for South African made goods in the US.
Job losses in the automotive, manufacturing and agricultural sector will cause reduced demand and inflationary pressures to emerge due to reduced production. Private domestic and foreign Investment tailing off due to reduced access to the US market.
Local banks will take a knock as they lend to exporters too. If not mitigated, Trump’s tariff war will get SA into a recession unless there is a concerted drive to boost local incomes through re-funnelling demand for would-be exports into the economy as well as investing to clear bottlenecks to make the transport, water and energy systems more robust to deliver competitive high-quality goods to new trading partners.
· Swana is a political and governance analyst for local and international media, independent consultant on governance, leadership and strategy
· Ruzive is a post-doctoral researcher at the University of Free State, focusing on credit systems, post-school employability, cross border labour mobility and funding mechanisms for higher education
