Tariffs, turmoil and trade-offs

South African investors have been hit by a double whammy of geopolitical and domestic political uncertainty. Neither is good, but before making rash decisions, perspective is necessary.

Let’s start with a global view. US President Donald Trump’s “liberation day” announcement of sweeping new import tariffs was much worse than investors expected. The expectation was that tariffs would be reciprocal to broadly match what other countries charge for imports from the US. Instead, it appears to be driven by a formula that has little grounding in economic theory or trade realities (no need to get into the details). For instance, South Africa’s average duty on American imports is 7%, but the US tariff on South African imports jumped to a staggering 30%. Sixty countries will be hit by these tariffs, which Trump still terms “reciprocal”, though they clearly go far beyond what these countries charge the US. The remaining countries will be hit by a 10% tariff, including Australia, Brazil and the UK. Canada and Mexico were spared new tariffs, but previously announced import duties, including those on steel, aluminium and vehicles, remain in force.

Chart 1: New “reciprocal” US import tariffs, selected countries

Source: The White House

Since there are always exceptions, loopholes and give-aways, the effective tariff level is constantly lower than the headline number. Even so, this amounts to one of the biggest shocks to the global trading system in years.

Ratings agency Fitch estimates that the effective tariff rate that Americans will pay for imports will jump to 22% from around 2.5% currently. This puts us back in the same territory of the Smoot-Hawley Act, a 1930 piece of legislation that hiked the tariff rate to 20% and contributed to the Great Depression. The impact will not be the same this time round, since the economic and geopolitical backdrops are very different. The US and global economies are also more services-orientated these days, and less dependent on goods trade. Fiscal and monetary policymakers have learned important lessons in managing crises since the 1930s, and their actions will be important to watch. Finally, other major economies retaliated to Smoot-Hawley by raising their own tariff levels on the US, but also on one another. How will they react this time?

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