EDITORIAL: The global cost of Trump’s narcissism
Fighting talk of a new trade war this week means we now risk a return to the dog-eat-dog world of protectionism
Fighting talk of a new trade war this week, thanks to a series of ham-fisted blunders by US president Donald Trump, means we now risk a return to the dog-eat-dog world of protectionism.
It’s a threat, not just to SA’s weak economic recovery, but to global growth. Until recently, analysts like Goldman Sachs dismissed Trump’s grandstanding as bluster. Now, however, the markets are beginning to believe Trump may lead the world into a full-blown trade war. So far, Trump’s moves to hike tariffs have invited costly tit-for-tat retaliatory measures — but his belligerence remains undimmed.
Trump seems to still believe that his stance will force countries with which the US has a trade deficit to the negotiating table. But it could just as easily backfire, stoking resentment and inflaming international tensions.
If Trump knew his history — and there is no evidence he does — he would know there are no winners in a global trade war. It would hurt all sides, including the US, as well as small countries not directly in the line of fire, like SA.
This is because a trade war would act as a drag on US growth, depress global activity, raise risk aversion and drive up inflation. Many thought Trump understood this, and would abandon the protectionist path he was heading down.
Not so. This week, reports emerged that the US treasury is set to impose limits on Chinese technology investments — sending US stocks into their steepest slide since early April.
Global risk appetite also plunged, forcing investors out of riskier assets into the safety of US government debt. This has strengthened the US dollar and hurt emerging-market currencies.
This week, at R13.50/$, the rand is back at pre-Ramaphosa levels. It’s bad news since rand weakness stokes inflation and, given SA’s reliance on portfolio inflows to finance its current account deficit, raises the prospect of rate hikes. The Reserve Bank has enough room to keep rates on hold for now, but rate cuts are off the table.
A stronger dollar is, of course, the opposite of what Trump needs, as it makes US exports less competitive and imports cheaper. It will also offset the benefits of his corporate tax cuts, as US companies feel the bite of the tariff hikes. Harley-Davidson, for instance, has said it will shift more production overseas.
The global flight to safety has pushed long-term US bond yields below 2.8% — nearly eliminating the gap between the two-year and 10-year benchmark yields. With the US Fed on a path to hiking rates, there is now a real danger that short-term yields could exceed long-term yields, causing the yield curve to invert — a sign the US could tip into a recession within a year.
The Organisation for Economic Co-operation & Development says a permanent 10% rise in global trade costs would lower global GDP around 1% to 1.5%, while the Peterson Institute for International Economics says a full-blown trade war could cost 4.8m US jobs.
Presidents George W Bush and Barack Obama came a cropper when they raised tariffs. Bush imposed tariffs on steel imports in 2002 but reversed them after 200,000 US job losses. Obama imposed tariffs on tyre imports, which created 1,200 jobs in the tyre sector but destroyed 3,700 jobs in retail. Trump assumes he’s the exception.
The prospect of weak global growth, rising inflation and diminished risk appetite raises the urgency for President Cyril Ramaphosa to deliver jobs-rich growth, and reduces his margin for error. National treasury’s 2018 growth forecast of 1.5%, once thought tame, seems more realistic by the day.