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Kganyago: We will all be losers in trade wars

Jul 19 2018 19:01
Lameez Omarjee

Small open economies like South Africa are likely to suffer due to global trade wars, Reserve Bank Governor Lesetja Kganyago has said.

The governor was speaking during a question and answer session following the rates announcement on Thursday afternoon. The monetary policy committee unanimously decided to keep interest rates on hold at 6.5%.

The Reserve Bank also revised down the growth projection for 2018 to 1.2%.

When asked what would be the impact of the US-China trade wars on the SA economy, Kganyago compared the actions of the global community following the 2008 Global Financial Crisis to those during the Great Depression in 1929.

As a solution to the Global Financial Crisis, the global community decided to restart global trade flows, he explained. 

This was in contrast to the 1929 economic crisis, when there was a surge in protectionism which depressed global trade.

"What you are going to have now if trade wars materialise and [if] there is a rise of protectionism, is that small open economies will feel the pain immediately. For many small economies, we are hooked into global value chains," said Kganyago.

With protectionism, small open economies dependent on exports will no longer be able to sell to major markets.

"I think that we will be the immediate losers as small open economies. But overall, as a global community, we will all be losers from the trade wars. No one can gain from these things," he said.

"Once you start a war, you are not going to be the one to stop it because everyone will try to hit back."

But Kganyago said it was unlikely small open economies would "hit back", as their markets are small and have to rely on selling to the global economy. He added that many countries in the world are small open economies.

He warned that protectionism would lead to a rise in domestic prices. Many countries which have embarked on protectionism reduced competition in markets which increased the pricing power of producers.

This leads to the increase in inflation in those markets, Kganyago explained.

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