US tariffs: fragmentation and reshaping global supply chains and African MNEs

The Citizen

2 days ago

South Africa has reportedly reached an agreement with the US about tariffs, but government is keeping it under wraps until it is finalised.
The US tariffs that will be implemented on Friday if countries do not make a deal with US president Donald Trump, will mark a fundamental economic shift towards fragmentation and reshape global supply chains and African Multinational Enterprises (MNEs).
Arthur Kamp, chief economist at Sanlam Investments, warns that the sharp rise in US tariffs represents a significant shock to the system due to its stagflationary risks. 'You would expect higher inflation and lower growth in the US. After all, this is effectively a significant tax increase.'
However, despite market calm, he cautions that from a macroeconomic perspective, the backdrop has worsened.
The current US tariff for South Africa is 30%.
Roy Mutooni, portfolio manager at Sanlam Investments, believes the initial market reaction may have been overly complacent. He explains that tariffs typically hurt companies in one of two ways: either manufacturers absorb the costs, which squeezes margins, or they pass them on to consumers, which dampens demand.
'It seems to me that the market's initial response was to derate – to reduce the value of future earnings. Then, as uncertainty grew, markets began assuming it would all be rolled back. That is the prevailing view now – that the full effect of the tariffs will not materialise,' Mutooni says.
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US tariffs shock will likely affect margins and consumer demand
However, he cautions that this represents 'very much the best-case scenario' and warns that the shock is likely to affect margins as well as consumer demand.
Kamp's core observation is that the world is changing. 'We have come from an era of global integration, freer trade, low inflation and high growth. That is clearly changing with increasing protectionism, trade barriers, financial sanctions and a shift toward a more geo-economically fragmented world.
'We are moving into a more difficult environment for multinationals, with potential disruptions to capital flows already evident in some cases.'
Mutooni adds that the traditional global trade model, with emerging markets supplying commodities to Asia and Asian economies exporting to the US consumer, is starting to break down. 'What the US is saying is: you will pay a toll or tax to access our consumer. And for the rest of us, there is no alternative.'
This shift leaves investors needing to assess how companies will adapt, whether by finding new markets, changing business models, or investing in the US. 'Effectively, as an investor, you are still stock picking, but you must do it in the new context.
'Key questions include: how is the company dealing with the changed environment, how are its supply chains adapting, can its customer base handle the higher costs and are there new competitors emerging better able to navigate the changed circumstances, such as domestic producers or those from countries with lower tariffs and is management looking to new markets?'
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Multinational enterprises will face complex questions under US tariffs, expert warns
Michael Hewson, director at specialist African transfer pricing advisory firm Graphene Economics, says as Trump's second term seems set to be defined in part by a renewed surge of tariffs and trade protectionism, MNEs face complex questions about supply chains, profit allocations and the overall structuring of their global value chains.
'A key area under pressure is transfer pricing, the term for how multinational groups set the prices for transactions between related entities in different countries. These prices affect where profits are reported and in turn, how much tax is paid in each jurisdiction.
'While transfer pricing is usually a behind-the-scenes concern for finance and tax teams, it becomes highly strategic in times of global economic upheaval.'
He says tariffs, which tend to be used to shield domestic industries from foreign competition, act as a tax on imports. 'Trump's focus on introducing new tariffs and his swift changes of direction regarding implementation triggered retaliatory actions from certain trade partners and injected fresh uncertainty into global markets. For African-based MNEs, or those routing goods through Africa to the USA, the impact could be substantial.'
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MNEs manufacturing in Africa will have to reconsider supply chains considering US tariffs
Hewsom says MNEs manufacturing in Africa and then distributing into the US will need to consider their value chains. 'For example, imagine a South African company that manufactures automotive components and sells them to its sister company in the United States, which then sells the completed vehicles to American customers. The price at which the South African company sells the parts to its US counterpart is the 'transfer price'.'
He points out that revenue authorities in South Africa and the US want to ensure that the price of these components reflects what independent businesses would charge each other, known as the arm's length principle.
'If the price is deemed not to be arms-length, one country might claim it is losing out on tax revenue, which can lead to audits, penalties, or even double taxation. If the US levies high tariffs on South African goods, including these car parts, the multinational group may need to ask whether it makes sense to continue manufacturing in South Africa, or to use one of the other plants in the world that may have lower duties imposed.
'Or it might ultimately decide it is better to build a plant in the USA. These decisions have potential tax consequences. For example, if the profitability of the South African entity reduces because production is shifted to another company within the group, it may be considered as a business restructuring for transfer pricing purposes.'
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US tariffs will affect MNEs on many levels
Hewson says that when tariffs raise input costs or make cross-border goods less competitive, traditional intercompany pricing structures may no longer reflect economic reality. 'This affects MNEs on many levels, from shrinking margins to costly compliance breaches. However, the knock-on effects on African economies can also be substantial.
'The ripple effects of tariff-driven supply chain realignments and transfer pricing adjustments can be significant for African economies. If, for example, the car manufacturer decides to shut down its local car parts plant in favour of producing in a lower-tariff country or relocating operations to the US, this could lead to significant job losses in a country already grappling with high unemployment and widespread poverty,' he warns.
'Reduced industrial activity also means lower tax revenues for African governments and diminished demand for local suppliers and service providers. In economies where multinationals play a crucial role in employment and development, these decisions, while financially prudent from the MNE's global business perspective, can have negative local consequences.'