South Africa’s tariff experiment

South Africa has a long history of imposing tariffs on goods imported into the country to protect its local industry from global competition. 

This history offers a cautionary tale for countries willing to impose tariffs in a modern world, Coronation portfolio manager Charles de Kock said. 

De Kock referenced South Africa’s tariff history in a recent research note outlining the impact of US President Donald Trump’s trade policy on financial markets. 

Less than three months into the new Trump administration, a whirlwind of policy changes and executive orders has unsettled financial markets. Among these, the most consequential has been the swift introduction of tariffs. 

While the imposition of tariffs was a central promise of the Trump campaign, the scale and speed have exceeded market expectations.

Trump initially imposed a 10% across-the-board tariff on all imports into the United States alongside higher reciprocal tariffs for most of the country’s trading partners. 

South Africa, for example, was hit with a 10% across-the-board tariff and an additional 30% reciprocal tariff based on the country’s trade surplus with the United States. 

Trump has since walked back the higher reciprocal tariffs, implementing a 90-day pause for negotiations to occur. 

The 10% across-the-board tariff, which effectively nullifies any benefit of the African Growth and Opportunity Act (AGOA), remains in effect. 

However, De Kock said the horse has bolted from the stable and retaliation, specifically from China, is likely and will significantly impact the global economy. 

A trade war is a classic “lose-lose” scenario for the global economy, and South Africa, as a major commodity exporter, could lose out significantly. 

As the trade war unfolds, global growth is expected to slow, and consequently, demand for commodities is likely to decline. As a result, South Africa’s exports will decline, and its economy will suffer a setback. 

Consumers ultimately bear the burden as the cost of imported goods rises, and inflationary pressures could make the central banks more reluctant to cut interest rates, even in the face of slowing growth.

South Africa’s failed tariff experiment 

De Kock said that looking at South Africa’s own history of implementing tariffs on trade shows that such a policy is unlikely to have the intended consequences. 

Under the National Party, South Africa pursued a policy of inward industrialisation by developing largely state-run giants with monopolies, De Kock explained. 

The gist of it was to maximise local production and reduce reliance on imports to make the country more resilient to external pressure and shocks. 

High import tariffs were central to this policy, making imported goods very expensive to encourage the purchase of local goods over foreign alternatives. 

The result was a surge in domestic manufacturing, with many companies establishing local production facilities and enjoying protection that allowed them to charge significantly above global market prices. 

Such an extreme level of protectionism was bound to result in operational inefficiencies at these companies, which threatened to make them uncompetitive when exposed to global competitors. 

However, in the early 1990s, as South Africa re-entered the global economy and signed the World Trade Organisation, import tariffs were reduced. 

A number of those manufacturing businesses shut down, unable to compete with higher-quality, lower-priced imports, particularly from Asia. 

South Africa’s experience is not unique and offers important lessons, De Kock said. The tariffs may encourage some US firms to produce locally, but if those firms are not competitive, they will remain reliant on ongoing protection.

A future US administration could reverse course and reinstate a free trade agenda, with a very predictable outcome for those firms that started their businesses behind the tariff barriers. 

Trump’s ambition to reinstate the US as a big manufacturing country is therefore fraught with uncertainty, as few businesses will look to commit significant capital to building capacity behind what may prove to be temporary trade barriers.