Dawie Roodt warns of trouble ahead

Although there were some valid concerns behind United States President Donald Trump’s tariffs, they come at a cost, including global economic disruption, weakened US currency dominance, and strained international relations.

Efficient Group chief economist Dawie Roodt recently explained to Praag that Trump is seeking to implement trade tariffs for a number of reasons, ranging from ideological motivations to valid concerns.

One of the drivers behind these tariffs is the trade deficit that exists between the United States and other countries.

Roodt said it is important to contextualise why this is happening by remembering that the United States has the world’s biggest economy and the world’s most important currency.

This inevitably means that the United States buys more products from the rest of the world than the rest of the world buys from the United States.

Roodt explained that Trump’s statement that everyone wants the United States to buy from their countries, but they don’t want to buy American goods, is true.

These countries want to protect their own industries, but they also want the United States to allow them to sell their products there.

While this may be the case, Roodt said the United States is also being compensated for this through the fact that the US dollar is the world’s most important reserve currency.

It is common for central banks around the world to maintain significant foreign exchange reserves, and most of these reserves are held in US dollars, as it is the most widely traded currency.

Foreign exchange reserves can also consist of other currencies, such as the British pound (GBP), the euro (EUR), the Chinese yuan (CNY), and the Japanese yen (JPY).

Trump wants to have his cake and eat it too

Reserve currency status comes with a number of benefits – or, as Roodt describes it, indirect tax benefits – for the holding country.

A country that issues a reserve currency enjoys lower transaction costs, as both parties in a transaction are using the same currency, which is also the currency of the issuing country.

In addition, countries that issue reserve currencies face less exposure to exchange rate risk, particularly regarding commodities, which are typically quoted and settled in dollars.

Since many countries desire to hold a reserve currency for transactions, higher demand also leads to lower borrowing costs, resulting in decreased bond yields, as most reserves are in the form of government bonds.

Countries that issue their own currencies can also borrow in their home currencies and are less concerned about needing to support their currencies to avoid default.

For example, if South Africa sells goods to the United States, that transaction will take place in US dollars, which South Africa uses as part of its Reserve.

South Africa will even use the US dollar when trading with Europe.

Therefore, even though the United States imports more goods from the rest of the world than it exports, Roodt reiterated that they are also compensated for that through its reserve currency status.

This is why Roodt believes Trump wants to have his cake and eat it too.

He explained that the United States President wants to even the playing field so that the imports and exports to and from the United States are roughly the same.

However, what Trump isn’t saying is that the United States will pay a price for this, and that price will likely be that the US dollar plays a less important role as a reserve currency.

Trouble ahead

Over the last few decades, the world has experienced unprecedented growth, especially in countries like China, which has benefited from the United States moving many of its factories there.

Roodt said Trump does not like this and wants to protect local industries and bring overseas factories to the United States through his tariff policies.

A 2023 report by the Boston Consulting Group revealed that more than 90% of manufacturing companies in North America have moved at least some of their production or supply chain in the previous five years.

Of those, half reported that they had shifted more than 20% of their manufacturing and supply chain spending.

Due to ongoing geopolitical uncertainties and high tariffs in the United States, more than 90% of respondents said they planned to make similar moves over the coming five years.

The report found that Mexico, India, Southeast Asia, Turkey, and Morocco were quickly emerging as future export powerhouses due to their large labour pools and expanding capabilities across various industries.

By implementing these tariffs, Trump hopes to make it more difficult for these countries to export to the United States.

For Trump, the message is that if someone wants to do business with the United States, they should also build their factory there.

Roodt explained that Trump is also implementing these tariffs to raise money and reduce harmful taxes, such as income and company taxes.

This is because tariffs are essentially just taxes on imported goods. Ultimately, though, tariffs will still be a tax burden on the American people.

Whatever the US President’s reasoning, Roodt said that by implementing these tariffs, Trump is dramatically disrupting the world’s supply chains and destroying all existing trade agreements between countries.

He is busy wreaking havoc on political ties and relationships across the world, Roodt said.

In the end, he said there are truths and untruths on both sides of the tariff argument, but Trump is undoubtedly busy turning the world on its head, and this will have an extreme impact on the world’s financial markets.