/ 15 June 2018

A global trade war is no joke

Trump’s tit-for-tat protectionism could deepen the deceleration of global growth and cause volatility in emerging markets
Trump’s tit-for-tat protectionism could deepen the deceleration of global growth and cause volatility in emerging markets

The memes of a recalcitrant Donald Trump being loomed over by Germany’s Angela Merkel, in the wake of last weekend’s G7 summit, are funny.

The one with Trump seated in a toddler’s high chair, wearing a bowl of spaghetti on his head, is particularly hilarious.

But what is less funny is what a real trade war between some of the world’s largest nations means for economies like South Africa, particularly at a time when emerging markets struggle to maintain their shine.

Trump’s ultimate refusal to sign the G7 joint communiqué and the Twitter attack on his Canadian counterpart, Justin Trudeau, put paid to hopes that cracks between the United States and the globe’s other major democracies could be papered over.

Ahead of the summit the US went ahead with raising tariffs on steel and aluminium products for not only the likes of China, India and South Africa, but also for allies such as Canada and the European Union. Since then, countermeasures have begun in earnest.

Canada announced its own series of tariffs on goods from the US —ranging from fungicides to toilet paper and sailboats, and is challenging the US at the World Trade Organisation (WTO).

The European Union has opened a case at the WTO and has slapped “rebalancing” tariffs on a series of US imports.

South Africa, meanwhile, also took a hit in Trump’s tariff salvo. This country exports about 330 000 tonnes of steel to the US, which accounts for 5% of total production, representing about 7 500 jobs in the steel value chain.

There is an escalation of rhetoric, said Kevin Lings, chief economist at Stanlib, and Trump appears “intent on carving out a different set of rules for the United States”.

What form this will take is not clear, however, said Lings. But if it does lead to further retaliation, the effect would be a slowdown in global trade, he said.

Global trade is strongly coupled with global economic growth, Lings noted. The nature of this growth also draws in more countries able to benefit from it.

“When global trade picks up, global growth follows immediately and you broaden it out to the second-tier and third-tier producers, and that is when a country like South Africa benefits,” he said.

There is also a tendency for the pick-up in trade and growth to be associated with a pick-up in commodity prices, which buoys commodity-producing nations such as South Africa.

Last year was a “bumper year” for world trade, which accelerated to more than 5%, Lings noted, and saw improved South African exports as well as a trade surplus.

READ MORE: South Africa should care about the US-China trade turf

But given Trump’s aggression and his responses to countries that criticise his administration, it is “very difficult for these countries to do nothing”.

“I think it is going to lead to retaliation,” said Lings, adding that the result would be a slowdown in global trade, which impacts negatively on growth.

Analysis firm Oxford Economics said the US’s protectionist measures and the “rancorous atmosphere” of the G7 summit come just as global growth shows signs of decelerating. Its in-house world trade indicator fell to its lowest levels since 2016, it said in a note, and “tit-for-tat” protectionism could deepen this slowdown.

Given where global financial markets are in terms of earnings expectations and valuations, uncertainty about growth could lead to a significant market correction, according to Lings.

In this scenario, it would leave emerging markets under a great deal of pressure.

In a recent research note, Lings showed that money flows into emerging markets in the form of bonds and equities hit record highs of more than $2.5-trillion between 2009 and 2017. Eight countries, including China, Mexico, Brazil, Turkey and South Africa, attracted 66% of these flows.

He warned that the continued inflows would be contingent on a number of factors, including a moderate and predictable tightening of monetary policy from the US central bank, and relatively stable commodity prices.

Any unexpected turbulence in the global financial markets could negatively affect flows to emerging markets, he warned, generating major challenges for a wide range of emerging market currencies —particularly in countries with high corporate debt levels, significant foreign debt holdings or weakening economic fundamentals.

“A trade war is a real threat,” said Nedbank economist Dennis Dykes.

The world has benefited immensely in recent decades from growing trade, and stifling it would have the opposite effect, he argued.

It could potentially be very negative for a country like South Africa, he said, which is a small, open economy with a limited domestic market that needs to expand trade.

There was synchronised global economic growth last year, Dykes said. But concerns about a trade war come at a time when that global environment looks somewhat “less benign”.

Emerging markets are highly influenced by growth in their destination trade markets such as China, the US and the EU, he said.

“If these take a hit and there is a wobble, it’s not good for emerging markets generally.”

READ MORE: United States refuses South Africa import exemption over ‘national security’ fears

Measures by the US, including extensive tax cuts, are providing a short-term injection into that country’s economy and are feeding into higher consumer incomes, he said.

But he argued that these effects could be short term: “You will probably squeeze out short-term gains, but for long-term pain.”

Whether an entrenched trade war does in fact materialise, however, remains to be seen, said Lings.

“Because Trump is that unpredictable, because he has not framed his trade policy well … it’s possible that he changes his mind and backs away from all of this.”

Nevertheless, Trump’s escalating rhetoric does mean “more volatility, more vulnerability, more risk for emerging markets”, Lings said. This was all the more reason for economies like South Africa to have their economic fundamentals in place.