Thematic View: How US tariffs could affect SA

The average South African will likely face an increasingly challenging consumer environment in the coming weeks and months through bracket creep (i.e. tax brackets not being adjusted for inflation), the half-percentage point increase in value-added tax (VAT), and the recently announced imposition of 30% tariffs on a range of South Africa’s exports to the US. 

In addition to the tariffs’ impact on the currency, the recent instability in the Government of National Unity (GNU) has added to rand weakness and its implications for imported inflation (although Brent crude oil prices have fallen significantly, so there should be limited immediate pressure at the pumps). Depending on how the final combination of thesefactors plays out, the impact could be significant. 

US tariff ploicy seems to be a moving target. The US appears to have an explicit target to neutralise trade deficits (i.e. where the US imports from a country more than it exports to the country) for all countries that trade with it. But the decision to suspend reciprocal tariffs against all countries except China, for 90 days, suggests this is a more targeted trade war, and we will only have a firmer idea on how tariffs play out in that period.

That said, tariffs of 10% still have the direct result of a reduction in South Africa’s (and other countries') trade balance. The combination of the policies will likely lead to an increase in the costs of goods and services or lower margins for corporates, and may lead to economic stagnation or slowdown around the world, increasing the risks of a global recession. 

The recent selloff in global equity markets, and subsequent rally, are evidence of how tariffs, can influence inflation and consumption. This is premised on the idea that incomes will likely grow at a slower pace than goods inflation, if the tariffs are implemented and subject to the scale of the tariffs, will increasingly erode the capacity to consume (of particular consequence in the US where consumer spending makes up 70% of gross domestic product). This can lead to profitability issues for corporates due to pressures on revenue and rising costs that can ignite an unemployment problem.

Should earnings come under pressure, this will likely lead to a greater selloff in global equity markets. Despite these risks, the 12-month forward price-earnings (P/E) ratio for the US equity market is at a 10% premium to history (chart 1). The 12-month forward P/E ratios of equity markets in Europe, Japan, the UK and South Africa are at a discount to their historical averages. The US, however, makes up around 25% of global economic activity and therefore an economic slowdown there will likely have negative knock-on consequences for South Africa and the rest of the world. 

A few weeks ago, we wrote that South Africa’s situation could be compounded by the suspension from the Africa Growth and Opportunities Act (AGOA), a US dispensation that grants South Africa and a range of low-income countries in Africa preferential access to certain products. That has since changed and the imposition of tariffs has resulted in an “implicit” AGOA suspension.

This should have negative consequences for South African businesses, particularly in the targeted tariff sectors of agricultural and automotive industries, and further negatively impact employment dynamics, with the unemployment rate already sitting stubbornly above 30%. 

Of particular concern is how these targeted tariffs may impact youth unemployment in these sectors, which typically value youth (the young and able-bodied) over experience. The basket of South Africa’s critical minerals has so far largely been spared from the tariff increases.

Critical minerals such as the platinum group metals and manganese make up around 76% of South Africa’s exports to the US and, as such, South Africa should be relatively cushioned from the US’s policy action. This is arguably linked to the theme we explore below on comparative, absolute, and competitive advantages. That said, the negative impact of tariffs on global economic activity can still impact South Africa’s aggregate exports through indirect or second-round effects. 

Chart 1: Select global equity market valuations

It all starts with Adam

To make sense of the current environment, a good place to start is by exploring the history of tariffs and the general role that they play in an economy. According to Adam Hamilton (link, 2025), the origin of tariffs can be traced back to the era of mercantilism between the 16^th and 18^th centuries, with tariffs part of a zero-sum mindset for nations trying to maintain economic dominance over others. The zero-sum mindset is arguably behind the Trump administration’s agenda which seeks to neutralise trade deficits. 

The imposition of a tariff is typically used to increase the cost of goods that are imported into a country in an attempt to rather foster and increase domestic production. The effect of increased domestic production is increased local output and improved employment outcomes.

The effect of tariffs is to decrease the relative attractiveness of importing specific goods and services in favour of domestically produced goods and services. This form of protectionist measure seeks to promote domestic industry and thus create inward-looking economic opportunities.

In this way, tariffs go against the proposition of another Adam, Adam Smith, in the 1700s: that “nations can create mutual prosperity on what they do best” (Hamilton, 2025).

The fundamental underpin of this is David Ricardo’s theories on absolute, competitive and comparative advantages (building on the work by Adam Smith). It is perhaps the recognition of these advantages that gave rise to the more globalist thinking that has emerged over the years since the 19^th century, which acknowledges that any single economy seldom has the full breadth of economic resources to cater to the full breadth of human needs and desires.

Human needs have evolved, which may explain why agriculture has become a smaller component of global economic activity (in relative value terms).  Tastes and preferences have shifted over time and the availability of new or different goods and services (often thanks to new technologies) has created new markets.

In essence, trade development over time has shifted towards a globalised society, primarily concerned with producing what a country does best and importing that which it doesn’t or can’t. This system doesn’t always work well, however, especially where conflict highlights the dependency on specific regions for key products.

We saw this with the sharp rise in oil prices in the 1970s and 2022, which highlighted the dependence of many countries on the energy, agricultural and other resource endowments of Ukraine and Russia.

The exemption of some of South Africa’s critical minerals from tariffs is evidence of the fundamental pillars of the works of Smith and Ricardo. It is inextricably linked to domestic productive capacity. The next questions will relate to the extent to which the US can boost internal capacity to meet localised demand, which will likely create inflationary pressures.

The US Federal Reserve similarly finds itself in a uniquely tricky position where inflation is above its 2% target and growth remains relatively robust. Nonfarm payrolls recently came in at 220,000, above consensus expectations of  140,000. The unemployment rate in the US remains low at 4.1%. Lastly, the National Bureau of Economic Research typically announces a recession 10 months after it has started. There is therefore limited scope for the Fed to cut interest rates to support the economy at this point. 

South Africa’s exposure and response

When it comes to the imposition of tariffs on South Africa’s exports to the US, there are a couple of issues to consider:

1. According to the Observatory of Economic Complexity, exports make up just over 30% of South Africa’s Gross Domestic Product. In essence, exports are important for our overall economic activity. This is also an important point as far as second-round effects are concerned.

2. The US makes up around 9% of South Africa’s total exports by value. Therefore, if the US were to halt imports from South Africa, this would be attributable to around 2.7% of GDP, a significant number. With a significant portion of our exports to the US exempt from tariffs and the imposition of 30% tariffs on the rest, the direct risks to economic activity are negligible, at between 0.1% and 0.25% of GDP. The subsequent revision, to a rate of 10%, reduces this risk to GDP. 

3.  China is South Africa’s largest export market (around 20% of South Africa’s total exports) and therefore there will be a potential indirect negative impact on South Africa’s aggregate exports. At the time of writing,  US tariffs on China had been increased to 125%. Also of concern is the impact of US tariffs on our other key trade partners and the indirect impact on South Africa. The EU (about 20% of South Africa’s exports) is also vulnerable, though it was included in the group that saw its tariff reduced to 10% for 90 days. Should demand for our goods and services in China and the EU fall, that would be negative for SA’s trade balance as well as profitability of our domestic companies. 

For South African products to remain competitive exporters would need to do the following (non-exhaustive) list:

1. Decrease prices to offset the impact of the tariffs and remain competitive (i.e. reduced margins). This implies that exporters will become less profitable, which could negatively impact continuing operations and/or employment outcomes.

2. Introduce subsidies for the potentially affected industries. This is unlikely given South Africa’s precarious fiscal position. The Fiscal Framework was recently approved by Parliament, but the fact remains that South Africa is not in a position to support the economy substantially.

3. Access new markets where prevailing export prices are acceptable and/or competitive. It makes sense that South Africa has been actively engaging countries in Asia and the Middle East on trade matters. Comments by Minister John Steenhuisen are supportive of this notion, particularly within the context of the impact of tariffs on agricultural exports. However, the broad-based imposition of tariffs may have consequences for these new markets.

Returning to our initial comments on comparative, competitive and absolute advantages, South Africa has abundant natural resources, particularly critical minerals. The propositions of Smith and Ricardo still hold today. For many mineral products South Africa has an absolute advantage and the US, like the rest of the world, is reliant on South Africa for some of those goods.

For example, South Africa holds the largest reserve of platinum group metals (PGM) and manganese, has significant reserves of gold, is a major producer of coal, holds significant reserves of chromite ore, and possesses reserves of other important industrial-use metals.

Tariffs on South Africa’s exports to the US would be somewhat disruptive to economic activity in the US because it relies on critical minerals that South Africa produces, hence the export exemptions. And even if tariffs are implemented on these South African exports, they can still find their way into the US, as did Chinese goods through proxies such as Mexico for example.

The US has also imposed tariffs on South Africa’s trade competitors (commodity-exporting countries), meaning that South Africa should not completely lose a relative advantage in some of those particular commodities. Much depends on the final outcomes of trade and tariffs negotiations, but for now South Africa has not lost any of its relative advantage thanks to the broad-based nature of 10% tariffs. 

But we could see a less meaningful impact on overall employment. Tariffs are targeted and carefully considered within the context of the bigger picture for US economic activity (namely concentration of critical minerals).

As a final point, we should consider the impact of tariffs on our other major trading partners, particularly China, as well as the impact of broad-based tariffs on South Africa’s trade competitors. It appears that the US and China are in an escalating trade war, with China announcing retaliatory tariffs and the US responding in kind by increasing tariffs to 125%.

Back to Smith and Ricardo, the Chinese economy is a complex system, and its advantages are attributable to several factors.

The interconnected networks, advanced technology and infrastructure are key elements in understanding these advantages. When thinking about China, we should think beyond the typical “affordable labour” argument. US economic policymakers should consider these aspects when determining the negative impact of tariffs imposed on China, particularly how quickly the US can build its capacity.

Chart 2: Economic policy uncertainty index

Date sampled: 10/03/2025
Source: Investec Wealth & Investment, Fred

In conclusion, resource endowments have been key in how the US has pursued its imposition of tariffs and achieves its economic objectives – particularly as far as SA was concerned. The objective of building domestic production capacity has merit, but building internal capacity takes time. Chart 2 above potentially best illustrates that capacity constraints could become a problem, economic uncertainty at levels last seen during the height of the pandemic.

It would be particularly difficult to replicate China’s spatial economic planning networks in a short space of time. It would have similarly been difficult for the US to find viable alternatives to South Africa’s natural resource endowments. Both replication and finding alternatives take time. If tariffs are sufficiently high without the internal capacity to produce specific goods and services, this would lead to shortages and harm the US economy, and consumer and producer prices in general.

This article was updated on 9 April 2025 and on 10 April to take the latest news about tariffs into account