It is important to note that the Trump administration’s trade policies are premised on a trade notion synonymous to “mercantilism”, which was practised in Europe between the 16th to 18th centuries. Under mercantilism, an economy aims to maintain a trade surplus, the government regulates the economy, discourages imports and promotes growth of home industries among other initiatives.
Trump’s administration is calling for firms across the world to move and produce goods in the US to avoid tariff levies. The action works against the benefits of free trade and can affect firms’ comparative advantages. The production cost structure in the US can be higher than in other countries, leading to firms realising low profits if they move to the US.
It is essential to note that free trade with no trade barriers will enhance the welfare of citizens at large, as goods and services will be purchased at low prices. The US government’s act of over-regulating trade can limit economic growth not only of other countries but even that of the US economy.
In the face of trade adversity, SA must not fold its hands and do nothing. It is enlightening to note that the authorities have already initiated diplomatic and trade negotiations. Negotiations can focus on tariff reduction, maintaining the Agoa and delving deep into the logic used to arrive at the 30% tariff hike.
The diplomatic initiatives must encompass improving perceptions and clarity of SA policies such as the Expropriation Act which is one of the reasons cited by the US administration in ratcheting the tariff trade war.
SA must reorient its trading patterns and partnerships. The aggregate world GDP is greater than the US total production for goods and services. There is a need for SA to improve trade relations with other economies to broaden its trade base.
The current frosty trade relationship between SA and the US presents a window to strengthen trade with the EU, Asia, Brics plus Africa, and any other economy willing to get into trade partnerships. SA must explore other markets where export goods still enjoy competitiveness.
To ensure economic resilience to trade wars in the long run, SA needs to seriously invest in research and development that promote value addition of local production, enhancing local production and technology advancement that can stimulate economies of scale, which can boost competitiveness of export goods. Competitiveness can be further enhanced by improving energy production efficiency, which is a crucial input of goods and services production.
The SA government must consider developing and supporting new industries that can compete in the local and international markets. In this way, the trade challenges posed by unfriendly US administration trade policies can present opportunities to the SA economy in the long run.
• Dr Mudzingiri is assistant dean: faculty of economic and management sciences at the University of the Free State, QwaQwa campus.
SowetanLIVE
OPINION | Import tariffs hike allows SA to strengthen trade with other countries
Image: Nathan Howard
The sudden hike of import tariffs by US president Donald Trump and his administration to countries across the world is set to reduce the volume of goods traded and affect citizen welfare across the globe.
The Trump administration implemented a global 10% import tariff and a varying targeted reciprocal tariff to a host of countries, including SA.
The reciprocal import tariff to be levied on SA export goods to the US is set at 30%. Historical data show that yearly trade between SA and US amounts to $23bn (about R483bn) and the US is SA’s second biggest trading partner after China.
The high tariff will reduce the competitiveness of SA export goods to American markets, leading to reduced demand of SA exports in US markets, low income to firms, job losses, low income to households and ultimately lower SA economic growth.
SA exports platinum, locally assembled cars, raw aluminium, ferroalloys and agriculture products, among other goods, to the US. The implication of the 30% tariff hike could result in job losses in the mining, automobile, agriculture and many other industries.
More income losses to SA agricultural exports can also be experienced if the African Growth Opportunity Act (Agoa) expires in September, if the US Congress decides not to renew the agreement. Given the low economic growth rate in SA in 2024, which is estimated at 0.6%, the tariff hike by the US will worsen sluggish economic growth and recovery from the Covid-19 pandemic.
Statistics also show that SA imports energy products, machinery, vehicle, industrial and other consumer goods. The goods and services SA imports from the US play a critical role in developing and sustaining local industry.
SA can decide to source the goods from other markets and if this happens with all economies where tariffs were imposed, the US will be worse off. There is a possibility that economies which received a tariff hike from the US will implement a reciprocal tariff hike to the US, reducing the volume of global trade. The reduced trade volumes have dire implications for job creation, income generation by firms and households, making citizens worse off.
It is important to note that the Trump administration’s trade policies are premised on a trade notion synonymous to “mercantilism”, which was practised in Europe between the 16th to 18th centuries. Under mercantilism, an economy aims to maintain a trade surplus, the government regulates the economy, discourages imports and promotes growth of home industries among other initiatives.
Trump’s administration is calling for firms across the world to move and produce goods in the US to avoid tariff levies. The action works against the benefits of free trade and can affect firms’ comparative advantages. The production cost structure in the US can be higher than in other countries, leading to firms realising low profits if they move to the US.
It is essential to note that free trade with no trade barriers will enhance the welfare of citizens at large, as goods and services will be purchased at low prices. The US government’s act of over-regulating trade can limit economic growth not only of other countries but even that of the US economy.
In the face of trade adversity, SA must not fold its hands and do nothing. It is enlightening to note that the authorities have already initiated diplomatic and trade negotiations. Negotiations can focus on tariff reduction, maintaining the Agoa and delving deep into the logic used to arrive at the 30% tariff hike.
The diplomatic initiatives must encompass improving perceptions and clarity of SA policies such as the Expropriation Act which is one of the reasons cited by the US administration in ratcheting the tariff trade war.
SA must reorient its trading patterns and partnerships. The aggregate world GDP is greater than the US total production for goods and services. There is a need for SA to improve trade relations with other economies to broaden its trade base.
The current frosty trade relationship between SA and the US presents a window to strengthen trade with the EU, Asia, Brics plus Africa, and any other economy willing to get into trade partnerships. SA must explore other markets where export goods still enjoy competitiveness.
To ensure economic resilience to trade wars in the long run, SA needs to seriously invest in research and development that promote value addition of local production, enhancing local production and technology advancement that can stimulate economies of scale, which can boost competitiveness of export goods. Competitiveness can be further enhanced by improving energy production efficiency, which is a crucial input of goods and services production.
The SA government must consider developing and supporting new industries that can compete in the local and international markets. In this way, the trade challenges posed by unfriendly US administration trade policies can present opportunities to the SA economy in the long run.
• Dr Mudzingiri is assistant dean: faculty of economic and management sciences at the University of the Free State, QwaQwa campus.
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