The Deluge and the Delusions
“If it keeps on raining, levee's going to break
If it keeps on raining, the levee's going to break
When the levee breaks, have no place to stay”
- Led Zeppelin
Flood warnings were issued downstream of the Vaal Dam last week after authorities opened its sluice gates. Floodwater travels at a speed of 10 to 20 kilometres per day, depending on the topography of the land, meaning that it takes a few days to hit the towns a few hundred kilometres downriver. This is a useful metaphor to think about US President Donald Trump’s trade war. The immediate impact of heavy rain can do a lot of damage on the area where it falls, sometimes in surprising ways. In this case, it is the world’s financial markets that took the first blow. But all that water still needs to go somewhere, and swollen rivers can wreak havoc days away from where the deluge was. Economic activity, the decisions of companies and consumers, sit downstream of Trump’s tariff announcements, and it will take time to see how much destruction the floodwaters cause.
There are a number of factors to think about here. As in the 1971 Led Zeppelin classic, the first question we need to ask is whether it will keep on raining – or will Trump offer some respite?
The answer we got last week was yes and no. The “reciprocal” tariffs on most nations were suspended for 90 days, much to the relief of everyone. It means that South Africa, for instance, will not face 30% tariffs but only 10%. For a country like Lesotho, faced with 50% tariffs and with exports to the US accounting for 10% of GDP, the relief is even greater.
Communication breakdown
However, since China retaliated to the initial 34% reciprocal tariff, Trump raised import taxes on Chinese goods to 145%. This is such a high trade barrier that its imports from China will mostly become unaffordable. Except in rare cases, it is too high for companies to absorb in their margins, and it similarly cannot be offset by exchange rate movements. And unlike other countries, China seems in no mood to bend the knee and negotiate, at least not yet. In fact, on Friday Beijing retaliated to the retaliation with a further retaliation of its own.
The US imported more than $400 billion in goods from China last year, and China is more vulnerable to a trade war than the US. However, China also imported $140 billion in goods from the US last year, and $40 billion in services. It can inflict serious damage on American businesses. Moreover, it will be difficult for the US to replace Chinese goods quickly. China is the source of 90% of microwaves, 80% of smartphones and 75% of toys, and 66% of laptops sold in the US, according to an analysis by the Financial Times. Trump has temporarily exempted phones and computers from his tariffs. Either way, trade between the world’s largest economies grew massively over the past 25 years, but now looks set to shrink with potentially devastating consequences.
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