The global trade system has been jolted by the emerging trade war initiated by US President Donald Trump. Photo: Delwyn Verasamy, M&G
In April, the United States triggered a steep and rapid escalation to its import tariffs; one that mirrors the magnitude of the 1920s, but which was delivered in a matter of months, rather than years. This policy shift, implemented in two phases, introduces considerable risk to the global economy and materially alters the macroeconomic outlook.
While we expect that the effects on trade volumes, investment sentiment and broader real economic activity — in the US and globally—– are likely to be keenly felt, hopefully diplomacy and legislative checks will temper the extent of these outcomes.
Biggest tariff hike since the Great Depression
On 5 April 2025, the US imposed a 10% baseline tariff on all imports, exempting only USMCA-compliant goods from Canada and Mexico. But far higher tariffs have been imposed, as from 9 April 2025, on a number of countries which the US argues have adopted especially protective trade measures against US exporters.
Once exemptions are accounted for and factoring in additional tariffs imposed earlier this year on China, as well as US imports of automotives, steel and aluminium, the effective increase in US import tariffs is close to 19%, which leaves the overall effective US import tariff at more than 20%.
The situation is fluid. At the time of writing, indications are that a further 50% tariff is to be levied on imports from China over and above the cumulative 54% increase in tariffs announced in the year to date (with some exclusions). If sustained, the implications of this would be dire, starting with an increasing probability of a US recession, which holds obvious negative consequences for the global economy.
It took more than a decade — from 1918 to 1932 — for the average US import tariff to rise by a similar amount previously. The pace and scale of this year’s hikes are without precedent in the post-war era.
From scenario to reality
The increases align with assumptions we had previously reserved for a low-probability, high-impact “worst-case” scenario. Even if tariffs are scaled back towards the baseline increase of 10% — which seems unlikely across the board given the rapid announcement of reciprocal tariffs by, for example, China — this represents a material jolt to the global trade system.
Historical precedent offers a sliver of optimism: the tariffs imposed under Phase 1 of the 2018 US-China trade dispute were eventually scaled back through negotiations and exclusions. It also appears that a number of countries are willing to deliver concessions to reduce announced tariff increases.
That said, the risk of a trade war reflected in further escalation with, for example China, remains — especially in the apparent absence of a moderating force in the US Congress. Although, given the extent of the fall-out, we hold out the hope that there will be sufficient push-back from lawmakers and society more broadly to deliver a more tempered outcome.
US economy: Recession risk rising
The economic consequences are already materialising. Given the shock to sentiment, which is likely to weigh heavily on the US economy, it seems reasonable to argue the recession probability is above 50% if there is no meaningful roll-back of the tariffs announced and the current tariff regime is maintained.
Business confidence is deteriorating, and capital expenditure plans are likely to be curtailed.
But a full recession may only materialise once jobs growth turns negative — a historically reliable, albeit lagging, indicator. In recent times, elevated household net worth, supported by buoyant equity markets, has allowed US consumers to maintain spending. But, given the fall in the equity market, the implied decline in wealth can be expected to prompt households to increase savings and reduce consumption.
The University of Michigan’s Consumer Inflation Expectations survey shows that consumers are bracing for an inflation shock. A pronounced shift in consumer sentiment, paired with falling net wealth and lower real incomes, would probably weaken household spending and overall economic activity markedly.
Federal Reserve’s dilemma
The US Federal Reserve appears reluctant to cut its policy interest rate. But, given the rising risk of recession, it seems reasonable to expect the Fed to cut its policy rate if the US enters a sharp downturn.
Although US inflation is expected to increase materially in response to the tariff shock, a rising unemployment rate would reduce the risk of a wage-price spiral developing.
A lower US policy interest rate could mitigate but not eliminate the effect on emerging markets — including South Africa. As usual, the rand is the shock absorber, which holds inflation risk although some countries may attempt to offload previously US-bound export products cheaply.
South Africa: Trade and sentiment
South Africa’s direct trade exposure to the US is relatively modest but not insignificant. In 2024, goods exports to the US amounted to R156.8 billion (7.6% of total goods exports, and 2.1% of GDP).
The US has announced a 30% tariff increase for South Africa. After taking the 25% US import tariff increases on aluminium, steel and motor vehicles into account, while also adjusting for exclusions, we estimate the overall effective US tariff increase for South Africa is likely to be less than 20%.
This is still a large increase and is likely to see a sharp decrease in South African exports to the US, including motor vehicles. Some exclusions may also be rescinded. The effect will be far greater than losing our African Growth and Opportunity Act status alone. Downward revisions to South Africa’s GDP forecast for 2025 are already emerging. Combined with heightened geopolitical risk, the effect on business sentiment and investment could be more pronounced — particularly given South Africa’s dependence on the US for foreign capital, especially portfolio capital, which is highly liquid.
Geopolitical tensions are also resurfacing. The US-South Africa Bilateral Relations Review Act, previously shelved, has been revived under a Republican-controlled Congress. Full financial sanctions (including exclusion from SWIFT) remain a low-probability scenario.
A global reorientation away from the US
The shift in US trade policy also has broader implications. While the US remains a major economic force, we expect many countries, especially in emerging markets, to pivot towards alternative trade corridors. Trade linkages among non-US economies, particularly in Asia and Africa, are likely to deepen. But the transition will not be without friction. Countries such as Vietnam, Cambodia and Bangladesh — facing effective tariffs of over 40% — may endure severe near-term dislocations before new opportunities emerge (although we should watch for potential concessions which lower the announced tariff increases).
At the same time, the role of the US dollar as the world’s reserve currency is open to question. There is currently no natural alternative to take over the mantle of the US currency, which continues to hold a liquidity premium. But, in time, capital may well drift towards alternative assets.
Structural shift with consequences
What began as a shift in US domestic policy could rapidly become a structural realignment of global trade. The magnitude of tariff escalation is reminiscent of the 1920s — although today’s economy is far more interconnected, financialised and reliant on cross-border capital flows.
Again, we remain hopeful that diplomacy and legislative checks will eventually temper the impact. But in the interim, expect short-term effects on trade volumes, investment sentiment and real economic activity. This is not simply a trade spat. It is a systemic shock to the global order.
Arthur Kamp is the chief economist at Sanlam Investments.