By Christo Luüs, Ecoquant
There has been a lot of speculation regarding the future of trade agreements involving the USA. President Trump mentioned during his election campaign that tariffs of between 5% and 45% could be levied by his administration on imports from countries such as China and Mexico. A full-scale trade war with the USA’s trade partners levying similar tariffs on American imports, could likely lead to a global recession.
There are strong indications that quadrupling import tariffs in 1930 contributed to the Great Depression. The USA’s imports dropped by 66%, exports by 61% and GDP by 46% during the four-year period to 1933. Unemployment rose from 8% to 25%. The Smoot-Hawley tariff act that became operational in 1930, thus had the opposite effect from what was originally intended. President Hoover, under pressure from his party, supported the act and had to face the resulting retributive tariffs imposed by other countries on American products. World trade during this period decreased by two-thirds.
President Trump withdrew from the TPP (Trans-Pacific partnership) within a few days of taking office. The TPP required seven years’ negotiations by the Obama administration and united twelve countries in the Pacific Ocean area in an extensive trade partnership – partly with the aim to counter China’s growing trade dominance.
But the possible levying of higher trade tariffs by the USA is not the only risk faced by the world economy. Developments in China and the European Union (EU) could also lead to a downturn in global economic growth.
Currently, China could expect a sharp pullback in its economic growth rate during 2018. Growth could decline from approximately 6.7% in 2016 to 4.2% next year. Political moves later in 2017 could pave the way for economic policy changes that could, among others, focus on the extremely high increase in credit supply. The Chinese debt-to-GDP ratio is already at 200%. As such a decline in China’s growth rate will be managed, unemployment should not experience upward pressure, and the social impact could thus be limited.
There is nevertheless a danger that the Chinese housing market could stagger under the downward pressure on credit supply and that the Chinese government may find it difficult to manage the process. The consequences for the economy could be negative if small and medium sized banks start to fail. The resulting downturn in the Chinese economy could place downward pressure on international commodity prices – especially metals. Other exports to China could also be negatively affected, which could in turn have a global impact.
The United Kingdom’s decision in June 2016 to bid farewell to the European Union (EU), caused concern regarding the future of the union. The hostility of the UK’s voting public towards the union, is also prevalent in other countries. Parties like the Party for Freedom in the Netherlands (Geert Wilders as leader) and the Front National (Marine le Pen) in France also campaign for withdrawing from the EU.
Even if none of these parties come to power in the foreseeable future, established parties in the EU member states could also decide to hold referendums regarding this matter in an attempt to win back the support of the populist parties. The danger exists that such referendums may have the same result as the UK referendum. Immigration policies and loss of sovereignty-issues are important issues in most European countries.
Moreover, a lot of resentment remains in Mediterranean countries with regard to the austerity measures enforced by the EU, and this leads to more support for parties with a nationalistic agenda.
There is renewed focus on Greece’s weaknesses, with the IMF recently warning that the country’s debt burden could “explode” should debt relief not be granted by the EU. However, most EU leaders reject this idea. This stalemate situation demonstrates the fundamental weakness of a single currency system without fiscal integration. It also creates an increasingly fertile soil for the rise of populist politicians.
One of the candidates in the French presidential election scheduled for 23 April, Marine le Pen, suggests a return to a system where national currencies exist side by side with the euro. But such a system would have enormous risks, with approximately 80% of France’s €2.1 trillion state debt that will ultimately be switched to French francs. According to ratings agencies, this will constitute the largest sovereign default in the world’s history – approximately 10 times larger than Greece’s default in 2012. This will definitely ring in the death knell for the euro and cause chaos on international markets.
Without a convincing road map for the future of the “European project”, there is a growing risk that Europeans will reject the model in favour of nationalistic models outside the EU. The reintroduction of national borders will obstruct trade flows and economic cooperation, which could ultimately lead to the renegotiation of international trade agreements. The disintegration of the EU will cause worldwide uncertainty on capital markets and large currency fluctuations.
It is asking too much of the current political leadership in South Africa to implement proper constructive economic policies, so our growth rate over the next five years has an upper limit of only around 2.5%. One can only hope that the world’s largest economies will stay on track in these turbulent times, so that South Africa’s exports at least will stay afloat.