After the Bell: Trump’s trade tariffs hissy fit is a dark omen for Agoa

27 Nov 2024

One of the reasons Donald Trump loves tariff wars is because his image as a supporter of US blue-collar workers is bolstered. And, it infuriates white-collar academics and economists.

So … here we go. It’s 50 days before US president-elect Donald Trump enters the office, and he is already threatening to impose tariffs on his neighbours and allies, and of course China.

Trump’s threat to impose 25% tariffs “on ALL products coming into the United States” from Mexico and Canada, plus an additional 10% tariff on imports from China, makes you feel as though you are caught in an odd vortex. Trump has this extraordinary ability to grab the global microphone and shout into it. And whether you want to listen or not, the volume is set so loud, it’s impossible to avoid.

Is this a great skill or a horrible defect? Probably a bit of both. Making shouty threats about tariffs is useful for Trump for several reasons: they are the one tool countries have to bully and threaten each other, and there is nothing Trump loves more than going into a negotiation mouthing the loudest threats.

It reminds me a bit of the weigh-in at a boxing match where the fighters confront each other; there are stares, jibes, threats, big talking and sometimes even a shove or a smack. Trump loves these confrontations because it puts the spotlight on him and makes him the centre of the economic discussion.

It helps that his arguments are a bit illogical and off-kilter. The broad economic argument is that tariff increases are generally inflationary. Goldman Sachs chief economist Jan Hatzius actually calculated in a note to clients that if this particular proposed increase were to go ahead, it would increase personal consumption expenditure prices by 0.9%.

The other reason Trump loves tariff wars is because his image as a supporter of US blue-collar workers is bolstered. And, it infuriates white-collar academics and economists who argue that:

Tariff increases don’t work (which is mostly true);

They are easily bypassed (which is always true); and

They are paid not by the other exporter (that horrible – spit – other country) but by the importer, which for some reason people don’t appreciate.

During his previous presidency, Trump, of course, renegotiated the North American Free Trade Agreement following a long episode of maximal bluster. But in the end, he settled for a fairly modest renegotiation because, at the time, it was calculated that his proposals would hurt farmers and border states.

Although the US is now a net oil exporter, it still imports a huge chunk of its petrol from Mexico and Canada – about 8.3 million barrels out of a total consumption of 20.3 million barrels. It’s possible when Trump realises that petrol prices will go up, he will soften his demands. And, by the way, increasing tariffs in this way would be contrary to the agreement he signed.

The imposition of the new tariffs is unusual in another respect: its justification is not based on traditional economic issues about cheating or “dumping” products, which would normally require some kind of study. Trump said the tariff would remain in effect “until such time as drugs, in particular fentanyl, and all illegal aliens stop this invasion of our country!” he wrote.

You have to feel a bit for Canada. The number of “aliens” arriving from across the northern border has shot up in recent years – somewhat understandably because the border is almost 9,000km long. The number of “encounters” – where border officials apprehend undocumented immigrants – is currently around 200,000. But that is minuscule in comparison with the southern border, where “encounters” number in the millions.

Although nothing about this latest fandango affects SA, it’s an awful omen. What it says to SA’s new ambassador to the US, Ebrahim Rasool, is that Trump will not hesitate to use the African Growth and Opportunity Act (Agoa) as a bargaining chip, and a political bargaining chip at that.

Rasool has the enormous advantage of knowing the ropes – he was ambassador to the US between 2010 and 2016. But then Barack Obama was president. This is going to be a totally different kettle of fish. To make it worse, the renewal of the Act comes up slap bang in Trump’s presidency next year. SA’s association with Russia and China through the BRICS grouping and its support of the International Criminal Court’s actions against Israel are things that diplomacy, however skilfully exercised, really just can’t obscure.

Rasool does have some cards to play: the benefits of Agoa don’t just go to SA; they go to 30 African states, although SA is a major beneficiary. The other point to make is that although SA does have a trade surplus with the US, it’s less than minuscule in US terms. The US estimates the deficit of both goods and services trade to be about $7-billion in 2022 with SA. Compare that with the trade deficit the US has with China of about $370-billion; and China is now not even the US’s biggest trading partner.

Still, judging from Trump’s hissy fit in respect of his own neighbours, I think if SA is being realistic, Agoa is unlikely to be renewed, at least in its current form, at least in respect of SA. How bad would that be?

Well, it would be a blow. It really has been a boost for African-US trade. According to a Brookings Institution study, exports under the programme rose from $195-million in 2000 to about $10-billion in 2022, which constitutes about 35% of total African exports to the US. It has dropped off a lot. However, it was $65-billion in 2008 when the US was a big oil importer.

About $3.6-billion of SA exports enter the US under Agoa, mostly vehicles and parts, fruits, precious metals and chemicals. Since total exports from SA to the US are now about $16-billion, it’s about a quarter of all SA’s exports. Would those exports stop if Agoa were scrapped?

Well, that depends a bit on where the tariffs would end up, but they would certainly be affected. The share prices of US car companies immediately dropped when Trump announced his plan, and you can imagine the same would apply to SA’s car exports to the US, such as they are.

I think SA should brace itself for disappointment here but, you know, we live in an era where export opportunities are not as concentrated as they used to be in a small batch of like-minded Western countries. I think in the long term, Trump’s use of the tariff bludgeon is doomed: either it won’t work, in which case all the bluster was pointless, or it will work, and it will be inflationary for the US.

In the meantime, keep an umbrella handy. DM

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