David Gracey

• Trump has spent the first few weeks of his second administration signing executive order after executive order. Tariffs have been high on his agenda as he threatens everyone from Panama to Greenland. Mexico to Canada and almost everything in between.
• Elon Musk has been at his side, hard at work.
• Between all his DOGE work, trying to eradicate about a trillion USD of wasteful expenditure, and his endless tweeting (or Xing?), as well as running 5 different companies, its hard to imagine when the man actually lays down for a bit of shut-eye. Any free time seems to be spent playing video games. He may actually prove to be the reincarnation of the Garuda, a Hindu/Buddhist mythical creature that never sleeps.
• South Africa has not escaped both Trump and Musk’s attention, with late-night tweets about land expropriation gaining the attention of investors as well as local left and right-wing organisations.
• To observe that Trump is tearing up the old playbook may be a bit of an understatement.
• From wanting to abolish Pennies, the Federal Education Department, and USAID, and introducing tariffs across a swathe of products affecting many nations across the world, its safe to say that the old order is a thing of the past.
• At least for the next 4 years, unless of course, he finds a way to engineer a third term (joking – only just)
• We can speculate about his intentions for little old South Africa, but let's leave that aside for now and wait for some clarity and hopefully for some rational dialogue to calm the frothy waters.
• Oh and let’s not forget that he also wants to turn Gaza into the Riviera of the Middle East, and perhaps at the same time spend a Tuesday evening loudly annexing Canada as the 51^st (or 52^nd – I’ve lost count) state of the union.
• And by the way, he may also want to do away with the IRS, and also dismantle the Federal Reserve.
• It's not easy to keep up with developments, so let's try to eat the Bison slowly, one bite at a time.

Let's attempt to take a deeper, yet simplified approach to analysing Trump's endless Tariff arguments and see how they potentially play out if he follows through with his stated intentions.

• It is true that the USA runs an enormous trade deficit annually as they import and consume far more than they export.
• It is true that historically the USA has enjoyed an enormous privilege of being able to fund this deficit fairly cheaply by virtue of the US dollar being the global means of trade.
• It is also true that as a consequence of this privilege, the USA has built up a mountainous pile of debt that will at some point threaten the very fabric of the USA’s hegemony.
• Trump is also under the impression that this endless cycle of importing stuff, and borrowing the dollars back, has had the effect of exporting jobs to countries that have an efficient manufacturing base – said another way, those countries that have cheap labour.
• And so in effect, you have one economy that is service-based and another that is manufacturing-oriented.
• And this is where I would like to try to simplify the analysis to try and see what the potential destination is of this long and windy road.
• Imagine a world with only two countries (and one Island), completely hypothetical of course.
  • Country one – let's call it the “Not so United Territories of Merica” , or “NUTs M” for short
  • The other we will call the “Undemocratic Peoples State of Renmin Territories” – the UPSTART.
• “Nuts” is wealthy with historical privilege, and “Upstart” is, well, exactly that.
• They have aspirations for their people and want to gain a seat at the table of Global influence.
• Upstart has cheap labour and has recognised that they can satisfy the endless demand for stuff from Nuts.
• Until the point where NUTS realises they have a growing problem.
• The President of NUTS figures that the only solution to the growing problem is to add a tariff to everything that they buy from UPSTART.
• In so doing, he figures that at some point this Tax will equalise the labour cost benefit that UPSTART enjoys and that NUTS will be able to reinvigorate its own manufacturing base, thus creating jobs and eliminating the need to import stuffs, and thus not pay away many trillions of dollars to UPSTART.
• So far it all makes sense. (to some)
• However, this is where it all gets a little bit tricky and here in my opinion is why.
• NUTS’s people have so far enjoyed the fact that they can buy TVs and Toasters from UPSTART very cheaply.
• Suddenly everything is now X percent more expensive and NUTS’s people are not happy.
• The (still existing) Central Bank has to raise interest rates to combat rising inflation, and Joe Public has less money in their collective wallets as they have to pay more for their goods.
• “But you have jobs “ says NUTs President.
• “YES, but we have less money” – “we demand increases”.
• “How much would you like?”
• “Everything is X% more expensive and interest rates are higher, so we need X+Y increases- we demand, we demand!!!”
• And so salaries go up, resulting in that manufacturing base no longer being able to compete with UPSTART. Back to square one.
• With the result that:

1. Everything costs more.
2. Interest rates are higher.
3. And UPSTART can still compete until NUT’s President raises tariffs again.

• Now I realise that this is an extremely simplistic analysis, but I cannot imagine a scenario where this ends well for NUTS.
• If you factor in that NUTS is also busy re-patriating all of its potentially cheap labour (illegal immigrants) to the Island, you can see why it's not easy to unwind decades worth of systems.
• Consequentially I see a very uncertain 4 years ahead of us.
• The world of course does not consist of only 2 countries, and so every decision is going to have knock-on consequences everywhere.
• What this means for the USD and other currencies in the medium term is very difficult to forecast.
• I cannot really see a scenario where interest rates are meaningfully lower than where they are now (barring a global recession).
• For a small player like South Africa, it's bound to be a difficult period, and given our current political affiliations I can foresee a scenario where we are caught in the crossfire.

It's going to be interesting, it may be tumultuous – but it's certainly going to be NUTS.