Sanisha Packirisamy, Chief Economist at Momentum Investments

The recent focus on tariffs, particularly in light of United States President Donald Trump’s latest tweets regarding Canada and Mexico, underscores a significant shift in trade policy that could have far-reaching implications for international relations and economic stability. On 1 February 2025, Trump announced a sweeping 25% tariff on imports from these two neighbouring countries, alongside a 10% tariff on goods from China. This move is framed as a response to concerns over illegal immigration and drug trafficking, with the administration asserting that these tariffs are necessary to hold these nations accountable for their commitments to the US.

Trump’s rhetoric suggests a willingness to escalate trade tensions further if Canada and Mexico retaliate, which they have already indicated they will do by implementing their own tariffs on US goods. This tit-for-tat approach not only risks destabilising the economies of the involved countries but also threatens to disrupt supply chains and increase prices for consumers in the US.

Source: Momentum’s January 2025 Economies at a glance

Moreover, Trump’s latest remarks about South Africa, where he threatened to cut funding over alleged injustices, highlight his administration’s broader strategy of using trade and economic measures as tools for foreign policy. This trend reflects a significant departure from traditional diplomatic engagement, raising questions about the long-term consequences for US relations with its allies.

1. What are the potential impacts of President Trump’s newly imposed tariffs on imports from Canada, Mexico, and China on market stability and investor confidence?

Investor confidence is likely to remain rattled in the context of ongoing market volatility in response to Trump’s policy announcements.

The US will impose a 25% tariff on imports from Canada and Mexico, alongside a 10% tariff on Chinese goods. Canadian energy products will face a reduced tariff of 10%. This marks the initial step in what could possibly escalate into a broader global trade conflict. Within the next few months, imports from the European Union are expected to be targeted, with the possibility for a universal tariff thereafter. Given that exports to the US constitute roughly a fifth of Canada’s and Mexico’s GDP, these tariffs could possibly push both economies into recession later this year. Furthermore, the resulting inflation jump in the US is projected to be faster and more significant than anticipated, reducing the Federal Reserve’s window for cutting interest rates further.

2. How might Trump’s statements regarding land expropriation in South Africa affect US-South Africa relations and future investment opportunities in the region?

Overall, a negative. However, there are some positives emerging in the local economy, which are encouraging for investment. These include:

1) Brighter growth outlook for 2024 in part due to a reduction in loadshedding (notwithstanding the latest bout of loadshedding).

2) Ongoing reforms in energy, logistics and water à effectively crowding in the private sector.

3) Low inflation environment (low exchange rate pass through).

4) Possibility of one more interest rate cut.

5) Possible removal of SA from the Financial Action Task Force greylist in October 2025 (6 outstanding action items that government is slowly making progress on).

6) Possible upgrade in SA’s sovereign rating by the end of the year following an outlook shift to positive by Standard and Poor’s in November 2024.

7) Acknowledgement of ongoing reforms by the International Monetary Fund.

8) Expecting fiscal authorities to continue to toe the line in the upcoming budget – expect the 5.5% wage offer by government to be broadly excepted by trade unions; social relief of distress grant already penciled in at the current level for another year; not expecting a large unconditional bailout for Transnet; progress to be made on the fiscal anchor later this year.

9) Some political stability in 2025 following the formation of the government of national unity.

10) Business confidence has improved in SA in the past quarters and manufacturers are rating the political climate as less of a constraint than in the past decade. However, this needs to translate into higher growth in fixed investment. Growth in renewables has buoyed growth in fixed investment, but this needs to broaden into other economic areas. Ongoing reform, allowing for increased economic participation of the private sector, should enable this going forward.

3. What changes can be anticipated in the management of funds or assets in response to Trump’s tariffs and foreign policy decisions?

Our current asset allocation favours US equities over bonds given above-trend growth in the US. Deregulation and potential corporate tax cuts would further enhance US equities in the short term. In contrast, the US bond market faces challenges in the form of a higher inflation environment and potentially weaker fiscal outcomes in the US. Even though valuations are stretched in the US equity market, they may persist for some time given the positive implications for growth in the US, and consequently equities, arising from Trump’s proposed policies. These views are in the context of a diversified portfolio. Locally, we still think SA equities offer value given its large valuation discount relative to its own history and that of developed and emerging equity markets. The SA equity market remains under-owned against a typical global emerging market benchmark, allowing for a structural underpin as well.

4. How will Trump’s approach to trade and foreign aid influence the behavior of international markets, particularly in relation to emerging economies like South Africa?

Trump’s America-first/protectionist/nationalistic approach is a threat to multilateralism. Small, open emerging economies such as SA have to ensure good relations with both economic giants, namely the US and China to protect trade and the contribution it makes to SA’s economic growth. SA’s role as President of the G20 this year will place SA on the global political map and creates an opportunity to foster healthier international relations with key strategic and economic partners, globally.

5. What are the implications of Trump’s threats to cut off aid to South Africa for companies and investors operating within that market?

We see two key (direct) risks to SA. The first is via SA’s favourable tariff arrangements under AGOA. While revoking SA’s trade benefits under this arrangement would not entirely devastate SA’s export industry (our exports to the US make up roughly 7% of the total – other markets include China (c.12%) and Germany (7%), amongst others), it could be damaging to specific industries such as the agricultural sector (particularly in the Cape) or vehicle manufacturing (Source: SARS). Overall, the trade that goes through AGOA accounts for less than 2% of our total trade – i.e. not all of our trade with the US falls under the AGOA arrangement.

A second key risk is the socio-economic effect of the loss of funding for SA’s HIV/AIDS programme through PEPFAR. In the last US fiscal year, the US funded 18% of this programme (c.US$450 miilion), with the SA government funding the rest (Source: SBG Securities).

The Trump administration’s decision to suspend US aid presents significant challenges for numerous economies embroiled in conflict, such as Syria and Ukraine, along with various regions in Sub-Saharan Africa. However, this move is not expected to have a substantial impact on the overall economic landscape of most emerging markets. The more critical consequences may emerge over the long term and in terms of geopolitical dynamics. Should this action signal a trend toward reduced funding for multilateral organisations by the US, it could create considerable difficulties for many emerging markets. Additionally, it might provide an opportunity for China to increase its financial involvement, thereby enhancing its influence on the global stage.

ENDS