The Trade War Explained: Part I – The Effect on South African Manufacturing

The US-China Trade War has hit the world hard, causing a number of issues the effects of which are being felt on a global scale. South Africa is no exception – its already fragile economy is facing additional distress with major implications felt in the manufacturing industry…

What is the Trade War?

After the end of the Cold War, the US received official recognition as the sole superpower in the world. But the space left behind by Russia has quickly been filled by China, whose economic, political and even military status have left experts describing the country as an emerging superpower. The implications of this for the rest of the world are great – more so now in light of the Trade War US president Donald Trump initiated in 2018.

A trade war occurs when countries attempt to impair each other’s trade markets, usually through trade restrictions or increased tariffs. The US-China Trade War arose from America’s extreme protectionism policies, and Donald Trump has frequently used the so-called risk to national security to defend the restrictions and tariffs his administration has imposed in the Trade War. The reasons for this Trade War include:

• To make Chinese products more expensive for American consumers, forcing them to buy these products elsewhere, which causes Chinese companies to lose money
• To encourage American economic growth by forcing consumers and companies to purchase locally produced goods rather than exported goods
• To penalise China for their more controversial trade practices, which includes forcing foreign businesses to provide Chinese companies with technology in exchange for access to the Chinese market
• As a power play to pressure China to comply with trade agreements that better suit the US.

Currently, the US has imposed a 25% border tax on imported Chinese goods, though Trump has explicitly threatened to increase these tariffs if Chinese president Xi Jinping does not comply with trade agreements. Thus far, China’s response to the US-imposed tariffs is to implement tariffs of their own on imported US products. Talks of the trade agreement are expected to continue prior to and during the G-20 summit, to be held in Japan next week.

Caught in the Crossfire of the Trade War

Initial fears incurred by the Trade War have since grown worse as countries outside the US and China start to feel the repercussions of a “Cold War” that’s affecting the global economy. Emerging and open economies like South Africa’s may be the hardest hit by the implications of the Trade War, especially considering about 10% of South Africa’s manufacturing exports are held by China. Apart from this, having an open economy means that the country sells into the global demand, but with global economy growth slowing and countries around the world holding their breath through US-China tensions, the South African economy and others like it will suffer greatly. In light of the -3.2% GDP decline the country already sustained in the first quarter of 2019 this foreshadows greater struggle in the future should trade talks not reach a happy medium.

What It Means for Manufacturing

The South Africa economy surpassed even the worst performance estimations for the first quarter of 2019, with manufacturing serving as one of the greater contributors to the country’s poor GDP figures. Internal issues faced by the sector are to blame, though the US-China Trade War may be the final nail in the coffin. The manufacturing industry is potentially one of the country’s most lucrative, and South Africa exports manufactured goods to many countries around the world, like those in Europe and Latin America. Combined with the 10% of exports held by China, those that travel to the US comprise over 7% of the country’s total exports, meaning under 20% of the income derived from exporting to the US and to China is at risk because of the implications posed by the Trade War.

According to 2018 statistics, manufactured goods like vehicles, machinery, iron, steel and plastics grossed approximately US$24,3 billion. The tariffs imposed by the US and China on imported goods will change this figure going forward, for as long as the Trade War lasts – especially considering the US’s refusal to include South Africa in the list of countries exempt from the tariffs. What this means for the manufacturing industry is that goods exported to the US will become more expensive for American consumers and for companies purchasing South African goods, or materials which are exported to China and then sold to the American market. Countries which are exempted from the new tariffs will receive favour over those that aren’t as the cost of imported goods rise, and exports will likely see a decline, or an outright plummet, of goods purchased by these markets.

Currently, tariffs on steel sit at 25% and aluminium at 10%, which is already having adverse effects for South Africa. These increases come after the US government conducted an investigation under section 232 of the Trade Expansion Act – an Act which enables the US president to adjust tariffs on imports if they feel these imports are a threat to national security. Car manufacturers in South Africa face similar tariff hikes that they were previously exempt from under the African Growth and Opportunity Act (AGOA) which enabled them duty-free trade access to the US market. Tariff hikes in these industries not only mean massive income losses but pose an enormous threat to the South African job holders who face retrenchment.

Fuelling Africa’s Manufacturing Industry

Following on from the severe ramifications of the Trade War, coupled with business-unfriendly policies locally, the manufacturing industry in South Africa continues to struggle to regain its footing after the harsh results it saw in Q1 of 2019. The last thing a manufacturer needs worry about is the security of its fuel supply – as industry experts, SA Oil is equipped to provide a variety of reliable fuel products suited to keep manufacturing operations working – contact us for a tailored business solution.