The world has increasingly changed from an outward global focus to an inward protectionist focus during the last few years.
Examples of this include “Brexit” and the election of Mr. Trump with his “America First” campaign from the English-speaking world to secession of Catalonia and the recent Italian elections to name a few examples.
My objective is not to understand protectionism, I seek to explore how a potential goods trade war waged by the bigger countries, and in specific the USA, can impact us in Namibia and to contextualise global trade better.
The first question to ask is if global trade is fair or on equal footing as that is the basis of the argument the USA use for its potential trade war? In this respect I compare the mean level of tariffs applied on manufactured goods in several economies as included in Chart 1 below.
It is clear from the chart that Advanced economies such as the USA, with its now inward focus, might feel at a disadvantage to Emerging economies, in the case of this potential trade war China, with generally lower labour costs. China applies tariffs to its imported products to protect its local industry whilst the Advanced economies embrace free trade more with lower applied tariffs on average.
However, embracing free and fair trade is not only limited to tariffs but also include Services Trade, barriers to Foreign Direct Investment and Support for Agriculture offered in countries to name but a few other considerations. Whilst OECD data is not available on some of these measures for Namibia, Table 1 still gives an indication of how well several large economies inclusive of South Africa (a proxy possibly for Namibia) embrace free trade on a broader basis.
The Table highlights a clear disparity between Advanced economies and Emerging economies. We therefore need to consider that some truth might exist in the latest focus of outrage from Mr Trump. The reason and rationale therefore are another area to explore that we will ignore at this stage.
It evident from the Table that several tools exist to embrace competitively skewed behaviour and that these tools are effectively used by a number of countries.
These include the most obvious, currently tariffs, but can also include other considerations such support for specific industries with tax or other interventions (Mr Trumps’ public pressure on Harley Davidson motorcycles to manufacture in the USA as public pressure) and investment restrictions like the local Investment Promotion Act.
With respect to China these also include the need for local partners upon investment that seek technology transfer, a rather efficient research and development effort, without any expenditure being incurred to procure the technology.
In this respect a tariff is the blunt tool in the toolbox and are hopefully used as a negotiation technique by the USA with the rest of the world rather than as a real danger to trade, but one never knows.
The second question to ask is if tariffs are an effective measure to achieve protection for local industry and consider its potential shortcomings as well as other subtle means? In a simple economy a tariff implemented by government can be expansionary for the economy as it raises the price of imports in the local economy.
The tariff therefore divert expenditure from foreign goods to domestically produced goods and acts like a devaluation of the country’s currency, thereby raising imported goods’ prices.
However, this effect can be offset when exchange rates adjust to consider the tariffs or the tighter fiscal result of the increased taxes impact offsets its expansionary intentions.
Most importantly all actions tend to result in reactions and other governments can retaliate and therefore cancel the benefits achieved with incentives or tariffs of their own on exports from a country such as the USA looking to increase tariffs.
In order to understand who will benefit most here is the key consideration for us as certainly incentives or restrictions on behaviour could have an equal effect without per say being as noticeable as tariffs relate to the items traded, the items taxed and the terms of trade.
In general, a country that is a net importer stands to gain more than it loses as a rule in a trade war.
This bodes well for us in Namibia as well as the apparent initiator of the trade war, the USA, as both countries run trade deficits.
Considering the domestic value added in USA imports as a percentage of Gross Domestic Product (GDP) according to Capital Economics the most impacted countries are Canada (17.4% of GDP), followed by Mexico (15.8% of GDP) and Ireland (9.2% of GDP). With respect to our biggest SACU trading partner and currency link, South Africa, this number is around 3.5% of GDP.
South Africa exports vehicles and metals to the USA whilst China who exports machinery and electronics representing around 2.8% of their GDP, hardly the need to a focussed attack.
In the case of Namibia imports generally exceed exports, but unlike the USA we are a small economy and cannot dictate internal policies to our trading partners.
Chart 2 illustrates our exports of goods and services as well as imports as a percentage of GDP.
The chart highlights the openness of our economy, our trade with other countries, as very high firstly and secondly it illustrates the trading deficit since 2007.
We also are in the fortunate position in our trade with the USA in that we run a deficit during the first quarter of 2018, as well as in the recent past, in that USA exports represented 265 million during the quarter of 2018 whilst imports represented 628 million.
(SeeChart 2: Namibia’s imports and exports as a % of Gross Domestic Product)
In conclusion trade wars driven by tariffs are generally bad for global growth and estimates indicate could detract between 1% to 3% of global GDP.
However, trade can be persuaded to a different basis through other means such as incentives, taxes and legislation to achieve similar objectives with likely less retaliation and notice by trading partners.
Namibia as a small emerging economy is likely to be negatively impacted by external factors but our trade with the USA is mostly insignificant to the whole economy and as a net importer of goods and services we are fortunately in a more resilient position relative to the world’s second biggest economy that say the world biggest economy is positioned.