Well this is an embarrassing moment. My last mail on Trump’s steel duties on the steel sector was simply all wrong. So let me set the record straight. I misread the DTI’s press release which resulted in the embarrassing moment of the incorrect blog post. This still however stands:

Donald Trump’s proposed steel duty will not affect $950m worth of steel exports.

The correct value is closer to R3.3bn for 2017. This is a lot even if it is not as large as the approximately R11bn most commonly quoted in the media. In fact, when viewed collectively, the USA appears to be South Africa’s largest market for steel so certainly we should sit up and take notice and the DTI’s efforts to negotiate a duty concession for South Africa is clearly important.

When Donald Trump recently announced his intention to impose a 25% duty on imported steel into the USA and 10% on imported aluminium, these duties will ultimately be implemented on individual tariff codes, not on the whole of the steel or aluminium industries.

Whenever anyone imports or exports a physical product, the movement of this product has to be cleared through SARS. At the time of clearance, a certain minimum amount of information is given to SARS, most critically, the value, volume, country of destination (if exported) and the tariff code of the product. A tariff code is a numerical code allocated to a group of products, allowing that product to broadly be identified anywhere in the world. This global coding process is known as the Harmonised System and is a foundational component of global trade (all duties, for example, are set at the level of a tariff code).

When assessing the impact of the proposed American duties on South African exports of steel, we need to first understand exactly which tariff codes this would apply to. Fortunately, the DTI published such a list. Working off the list which the DTI published, the actual impact on South Africa is markedly different to the impact implied in the press release and then amplified in the media. The DTI refers to steel exports to the USA being worth $950m per annum, a number quite meaningless out of context. Is this $950m primary steel only? Does this include products such as steel pipes or possibly even items like earth-moving equipment? The number is completely disconnected to any sort of detail and detail really matters in this case.

Approaching this problem from the other side, we can look at exactly how much steel was exported under the tariff codes given, only to find we exported around 309 000 tons (R3.3bn) of steel under the identified tariff codes, to the USA in 2017. Even though South Africa exported considerably less steel under the relevant tariff codes, Trump’s decision is still cause for concern.

Why we should still worry about Trump’s decision

The world (and South Africa) is moving at varying speeds into a phase of markets closing. Closed markets are known for high barriers to trade, as duties increased and other barriers are erected to block imports from entering the market. Seen from the perspective of any one company benefitting from higher duties, this would be as a good thing, but the world we live in is not disconnected. It is hard to conceive of any trade-related action of significance which does not reverberate across borders and so the USA’s decision to increase duties and protect their steel sector will almost certainly be met with some form of retaliation.

Let’s for a moment assume this doesn’t escalate beyond steel and aluminium (unlikely), we will still feel the waves around the world. The steel which was destined for the USA will now have to find a new home and so the total supply of steel into other markets will increase. This is not accompanied by increased demand in those markets and so the price of steel will come under pressure. If other markets then react to this lowering price, by say imposing anti-dumping duties, then the markets left over will be under even greater pressure to absorb what is now even more steel and prices will drop again.

If we take this to an absurd conclusion, you will eventually have every country producing just enough steel for their own markets and all economies of scale will be lost. Steel prices will become extremely high as global efficiencies are completely removed from the market. If we begin to replicate this for other industries, we could rapidly find ourselves in a 1930’s style trade driven depression, lengthened in large part by the implementation of the Smoot-Hawley Tariff Act in the USA (although much broader than Trump’s Section 232 duty increase, the underlying thinking is similar). No matter which side of the economic debate you sit on, pretty much all economists agree that implementing Smoot-Hawley exacerbated the depression, by increasing the duties on over 20 000 imported products.

None of this may pan out (and almost certainly won’t pan out to the extremes I noted), but these absurd extremes demonstrate the point that no one gets to arbitrarily impose duties without consequence. The bigger the country and market, the bigger the consequence. In the case of the USA steel duties, the implications will most profoundly be felt by the rest of the world.

The reason most countries carry out tariff investigations, to varying degrees of public scrutiny and participation, is to avoid trade wars. When the process of a duty investigation is predicable, the parties affected by the decision are far less likely to react in an aggressive manner. There are never winners in a trade war and they are incredibly difficult to reverse once underway. The reason the World Trade Organisation (WTO) exists is at least in part to avoid trade-related conflict. By introducing a rules-based system of trade, we remove much of the risk of capricious behavior on the global markets. Trade wars always carry terrible economic costs, but even more terrifyingly, they can very easily become hot wars—with real people dying.

The 2 opium wars in China were a direct result of Great Britain importing valuable commodities from China (creating a trade deficit with China), while China had very little interest in importing much from Britain (giving them a trade surplus). China was however interested in purchasing silver, which Britain then had to import from Mexico, further exacerbating their trade deficit position. A relatively simple solution to this was to find a way to export the opium from neighbouring India, which was under British control. In fact, the British increased production of Indian opium specifically to use as a trading product with China (although Britain never actually exported opium directly, opting instead to sell to traders in exchange for silver). The Chinese understandably attempted to stop this which ultimately ended up in a conflict. Many people died and the very structure of China changed as a result (Hong Kong ended up under British control for 100 years as an example).

The steel tariffs (and the general American attitude to China) should give us all cause for concern. The USA, just like Great Britain in 1839, has run up a massive trade deficit with China. Unlike the China of 150 years ago however, modern China funds this deficit largely by purchasing USA treasury bonds (think of this as China lending America money, so they can buy Chinese products). You can see how this cycle at some point ends poorly and we may very well be at that point now. Just the staggering size of the USA debt of around $1.2 trillion to China could create global havoc if this cycle is not closely managed.

I am not sure Trump is our ideal candidate to manage such a sensitive relationship, nevertheless, the Chinese appear to have cooler heads and their reaction will if anything be even more important. One of the ways they could react would be to slow down their purchase of treasury notes even further (lend the USA less or stop rolling over debt when it falls due). Things could get exciting if this happens and the USA would certainly feel the impact of such a move—particularly if the slowdown is fairly swift. Of course, China would also be impacted, as the Yuan would strengthen and cause their export-dependent economy to become less competitive. China could also retaliate and increase duties on sensitive USA exports, which we have just seen, with their duties on USA pork and fruit. (This action may actually present an interesting opportunity for South Africa to fill the space left by the USA products in China).

No matter how China retaliates though, this will affect the rest of the world and no part of that impact is good. This is what should worry us. This is where all strategic attention should be placed. If we find our markets suddenly flooded with products which are the subject of a Sino-USA trade war, we could rapidly find whole industries disappearing, and those industries may have nothing at all to do with steel or aluminium.

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