While the “reciprocal” tariffs US President Donald Trump imposed on the world are on hold (bar China), their 90-day pause is hardly a sign that order will be restored.
In the background, the White House and its economic advisers are still full steam ahead on the tariff plan, despite the havoc it wreaked on the markets.
This suggests those South Africans invoking the cliché that “sanity will prevail”, and hoping Trump’s 31% tariff on this country will be scotched, may be sorely disappointed.
This is because these tariffs are part of a wider plan to end the US trade deficit, reinvigorate the American manufacturing industry and, well, “Make America Great Again”.
The blueprint is the brainchild of one of Trump’s closest economic advisers, Stephen Miran, who, in November 2024 authored an essay titled “A User’s Guide to Restructuring the Global Trading System” – a detailed framework on how to recalibrate trade to benefit the US.
Last week, Miran expounded on this masterplan in an eye-opening speech at the Hudson Institute in Washington DC.
It was, experts say, a disturbing and half-baked address that painted the US as a victim of its own global hegemony, while presenting a list of dubious commands to its economic vassal states.
Voodoo economics
Miran opened his speech by claiming the US had been burdened by its position as the provider of the global reserve currency, the dollar.
“The reserve function of the dollar has caused persistent currency distortions,” he said, causing “unsustainable trade deficits” and decimating American manufacturing. He said, in other words, that a stronger dollar means the US could never compete with cheaper imports, which is why America’s factories closed.
But Donald Mackay, founder and CEO of XA Global Trade Advisors, argues the US has benefited from having the dollar as the global reserve currency for so long. This has allowed its taxes and the interest rates charged on its ballooning debt to remain low.
The only downside to being the global reserve currency is that the dollar is “stronger than it should be” – and that isn’t even an issue unless you are attempting not to run a trade deficit, which is Trump’s new obsession.
To blame the dollar for the decline of the US manufacturing industry, Mackay says, is “an oversimplification of the problem”.
He argues that few Americans would want to be employed sewing T-shirts in factories. And, more to the point, the US labour market is not nearly big enough to support a situation where clothing and everything else it buys from overseas has to be made in the US again.
As it stands, unemployment in the US sits at 4%, or six-million people. Not only is this not large enough to staff all the factories Miran would want, but this labour pool is likely to shrink further as a consequence of Trump’s aggressive policy of deporting immigrants.
So, with a tiny labour market, “labour costs rise, you become a less competitive producer, and the cycle continues”, Mackay says.
If Trump really wanted to make America wealthy again, this is not the way to go about it, says Jaco-Chris Koorts, a portfolio manager for both Sanlam Investments Multi-Manager and Glacier Invest.
“By trying to shift manufacturing back to America, you’re only going to raise costs and push up inflation,” Koorts says. “The logic seems to be to take workers from a services-led economy, where they are productive and well-paid, and turn them into blue-collar workers where they make goods and are less productive.”
The framing of the problem Miran is trying to solve – a return to the so-called glory days of the 1950s – is not even realistic. “In reality, Americans are far wealthier than they ever were 50 years ago,” Mackay says.
One of Miran’s central arguments is that tariffs should be used to address “forms of cheating like currency manipulation, dumping, and subsidies to gain unfair advantage”.
But this is a strange stance to take, as the US is no stranger to dumping products on other countries itself, nor to granting subsidies to make its own industries competitive with overseas firms.
The US, for instance, massively subsidises its defence industry. While this is understandable in the face of security concerns – no-one wants their enemies to control weapons manufacturing – this is not a strong argument in favour of tariffs.
As it is, Mackay says there are “already tools that the whole world agrees on” to mitigate trade concerns like dumping; hitting other countries with tariffs only alienates your allies.
Send in the goons
At the heart of Miran’s speech is the claim that other countries should “share the burden” of America’s position as the provider of the world’s reserve currency. To do this, countries should “accept tariffs on their exports to the US without retaliation”.
This, Mackay says, is laughable. Only a mob boss would think that “if you hit someone, everyone is not going to hit back at you”.
If tariffs come out of nowhere, based on calculations with no credibility, it is senseless to expect there will be no retaliation, he says. “The idea that people will just suck it up is insane.”
But Miran’s grand plan goes further. He argues that countries should buy more American goods – like weapons – and build factories in the US to avoid tariffs. This, he believes, would reinvigorate America’s manufacturing industry.
But there are several problems with this view. Not only is America not a competitive manufacturer, but the products it does export in volume are often subsidised.
Mackay says it is hugely arrogant to assume countries will buy your more expensive products simply because you bully them into doing so. Particularly when companies aren’t inclined to buy more expensive products when they can get cheaper versions elsewhere.
As for building factories in the US, Mackay expects there might be “some relocation of business”, but he says “this would require tariffs to stay in place for a very long time”.
Instead, if Trump keeps flip-flopping on tariffs, investment will drop, as companies are wary of investing in a country with no long-term trade predictability.
Chris Hattingh, the executive director of the Joburg-based Centre for Risk Analysis, says there is nothing that investors despise more than uncertainty.
“When you look at large capital outlays and long-term investment plans, what’s going on with the tariffs elevates that uncertainty and elevates those costs,” he explains.
Scarily enough, we already have a taste of how investors will likely respond.
Contrary to Trump’s expectations, as his trade war ratcheted up, the dollar fell to a three-year low against the euro. This suggests investors are preparing for a world where the US loses its status as a “safe haven”.
“There is [now] a very good case for the end of American dollar exceptionalism,” Bob Michele, chief investment officer of JPMorgan Asset Management, told the Financial Times.
These lurches undermine the US position “as a safe haven”, the newspaper quoted Bert Flossbach, the chief investment officer of Germany’s largest independent asset manager, Flossbach von Storch, as saying.
For a country that has spent decades trying to position itself at the centre of the economic world, this is serious self-harm.
It is, as Koorts concisely describes it, “like flipping over the Monopoly board when you’re winning”.
Last, Miran argues that countries “could simply write checks to treasury that help us finance global public goods”.
If this sounds a lot like extortion, that’s because it is. “It’s not a tariff anymore; it’s a tollgate,” says Mackay.
If Trump doubles down, who pays up?
So how will this great economic plan actually pan out for the US?
If Trump sticks with the tariffs, Mackay says the US will indeed end its trade deficit – “but the cost of that removal would be a much smaller American economy”.
The country would pursue economic independence, transitioning from a consumer economy into a manufacturing one, but it would become increasingly isolated.
Sahil Mahtani, head of macro research at asset manager Ninety One, projects a modest US recession, with tariffs likely to settle at about 15% as investor confidence falls.
Mahtani’s most probable scenario is that “inflation initially rises as higher import costs filter through, but as demand weakens, core inflation falls below 2% by year-end”.
As for the global market, “growth will decelerate, and disinflationary pressures will build, especially in regions reliant on external demand”, he says.
Hattingh also has little hope for the US market, unless Trump ditches his plan entirely. “Best-case scenario, it dampens growth. Worst-case scenario, it tips the US into a recession.”
For a small country like South Africa, there aren’t many levers to pull. Some countries have opted to insulate themselves from the US, replacing America in their trade basket – and this trajectory would only accelerate if America’s growth falls too.
But South Africa should tread exceptionally carefully, Hattingh says.
Economic uncertainty is “especially negative for emerging markets” like South Africa, which are “so exposed to imported costs and imported inflation”, he says.
Quite where America will be in 10 years’ time depends entirely on what happens in the next few months.
If Trump doesn’t waver, the outlook is especially grim. Mackay does not doubt that through hard work, the US could become “completely self-sufficient – but everyone would be a subsistence farmer”.
It seems unlikely that this is what most people in Trump’s country would consider “making America great again”.
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