Donald MacKay
On November 5 Americans go to the polls to elect Potus 47. It unnerves me, but I suspect when President Cyril Ramaphosa calls to congratulate the winner, he will be speaking to the Honourable Comrade US President Donald Trump.
It is darkly ironic that Trump has enacted so many policies beloved of the far left. At a rally in New York, US, on September 18, 2024, Trump announced "while working Americans catch up we’re going to put a temporary cap on credit card interest rates we’re going to cap it at around 10%. We can’t let them make 25% and 30%.”
Even US Senator Bernie Sanders finds himself to the right of Trump on this issue, having 'only' called for a cap of 15% in 2019. Should this be done, Americans will soon find themselves with less access to credit than before as banks clear their books of high-risk (poor) customers.
Elon Musk will be ok, but poor people will find their credit options limited. Americans hold $1.14 trillion (R20.13trl) in credit card debt, almost four times as much as South Africa's total debt.
Not since US senators Reed Smoot and Willis Hawley, has anyone loved tariffs more than Trump, even self-identifying as "Tariff Man".
Speaking at a round-table with voters in Auburn Hills, Michigan, the Republican presidential nominee said he thinks 'tariff' is "the most beautiful word in the dictionary. "You have other words that are damn nice, like 'love,' Trump said, while others in the room laughed. “But I tell you, I think it's more beautiful than 'love.'"
As Tariff Man, Trump has proposed various tariff policies including tariffs of up to 20% on all imports not out of China and 60% on Chinese goods. In what appears to be a response to Chinese electric vehicle (EV) giant BYD announcing that it was going to establish an EV plant in Mexico, Trump threatened to impose up to 2 000% tariffs on cars from Mexico if the investment went ahead.
Mexico, a member of the United States - Mexico - Canada (USMC) Free Trade Agreement, must be thrilled. Mexico is America's largest trading partner ($798 billion in 2023), followed by Canada at $773bn in the same year. These countries don't only supply the US, being America's number one and two export destinations. China is number three.
Trump loves tariffs so much , he has promised to replace income tax with tariffs. This was the state of affairs of most of the world in the time of President William McKinley (1897 to 1901, when he was assassinated), Trump's favourite president. Under McKinley, "the Napoleon of Tariffs", import duties were raised from an average of 38% to 49.5%. The current average is 1.47%.
Tariffs can't replace income taxes
It could be argued that every strong and capable state in the world is built on income taxes, despite how much we hate them. Large portions of the poor world rely on tariffs for their revenue, barely collecting any income tax. 47% of Eswatini's and 24% of Uganda's revenue is collected from tariffs. In South Africa it's 4% and in the US about 2%.
Income taxes work because they only tax success. A company makes a profit or a person has a job before they need to pay income tax, whereas tariffs tax an activity (importing).
Trade is what creates economic value, which is why National Treasury is so loathe to increase VAT rates, another tax which taxes activity (buying something). Trump's localisation strategy, for that is what it is, aims to get factories to locate in the USA "creating American job", but America is close to full employment, so even if the factories came, it is not clear who would work in them. Definitely not illegal migrants.
Trump’s deportation tsar, Stephen Miller (no relation to Gayton McKenzie), says "[y]ou grab illegal immigrants and then you move them to the staging ground and that's where the planes are waiting for federal law enforcement to then move those illegals home". JD Vance, Trump's running mate, says it is reasonable to deport a million people a year.
Even if they did find workers, those imports would not happen and so no taxes would be collected at the border. Given there is no income tax, it's not clear where the revenue would come from to run the state and pay back the staggering debt America has to service ($36trl as of October 2024). Maybe sales taxes will be increased locally?
Trump assumes there will be no retaliation, a poor assumption in 1930 when the Smoot-Hawley Act was passed and a poor assumption now. Smoot-Hawley attempted to localise production and subsidise farmers, but most economists agree, ended up adding years to the depression as America faced savage retaliation from its trading partners.
This is a reversion to crude mercantilism and the bullying of smaller nations by the hegemon, but the world doesn't look like it did in the golden era of imperial piracy. Trump's autarkic localisation policies will impoverish both America and the rest of the world. Adam Smith spotted the problem in 1776. Perhaps someone should send Comrade Trump a copy of An Inquiry into the Nature and Causes of the Wealth of Nations?
Donald MacKay is founder and chief executive of XA Global Trade Advisors. MacKay has been advising local and foreign companies on global trade issues for more than two decades. X handle: XA_advisors; email: donald@ xagta.com; website: xagta.com. The views in this column are independent of Business Report and Independent Media.
BUSINESS REPORT