“The Unfolding Trade War will not become an Economic Crisis of the scale of the Covid-19 Pandemic…

Interview: Dr Vinaye Ancharaz, International Economic Consultant

… nevertheless, these crises highlight the urgent need for an emergency fund”

* ‘Trade theory teaches us that, for a small country, free trade is the best policy irrespective of what other countries are doing’

* ‘Change was a central focus of the Alliance du Changement’s political agenda
The government has a responsibility to deliver the much-promised change’

The global trade landscape is currently going through a period of significant turbulence, largely driven by the unpredictable policies of the United States and the ripple effects of ongoing trade disputes. In this interview with the Mauritius Times, Dr Vinaye Ancharaz, an International Economic Consultant, offers his perspective on how these international headwinds, particularly the imposed on-off “reciprocal tariff” by the US, could impact the small, trade-dependent island economy of Mauritius in both the immediate and medium term. Readers will surely appreciate that, while there’s no cause for alarmism, the interview strikes a cautious tone and thoughtfully explores policies and measures to address a worst-case scenario.

Mauritius Times: The world is facing today a volatile global trade environment driven by unpredictable US policy and Trump’s trade wars. At the time of this interview, affected countries like the EU and China have already vowed countermeasures, making a cycle of retaliation seem likely. The long-term effects might not be visible yet, but how will all of this impact a small island economy like Mauritius in the immediate and mid-term?

Dr Vinaye Ancharaz: Not only are the long-run effects of Trump’s tariffs unclear, so also are the short-term impacts since much will depend how deep the trade war gets as major trade partners decide whether to retaliate, make tariff concessions of their own, or negotiate with the Trump administration. So, we can, at best, speculate about the near-term effects.

The US initially imposed a 40% “reciprocal tariff” on Mauritius’ exports to the US, but the latest news is that the Trump administration has suspended this tariff for 90 days, which effectively means that Mauritius will now face the baseline tariff of 10% imposed on most countries. This back-and-forth tariff game creates a lot of uncertainty, which is detrimental to economic activity.

It is useful to begin by understanding the origins of the 40% tariff – for its sheer rate defies common sense. Trump’s economic advisors have used a complex formula to calculate the tariffs charged by other countries on US imports, including the compounding effects of currency manipulation and non-tariff barriers. To help your readers understand the tariffs, it would be useful to reproduce the calculation formula. It essentially boils down to

where X is US exports, M is US imports and j indexes the partner country.

In 2024, US exports to Mauritius amounted to $48 million while US imports from Mauritius reached $234.4 million. Plugging these numbers into the formula gives a “Trump tariff” of 79.5%. The “reciprocal tariff” is simply half of this figure, rounded off.

The tariff rate thus calculated has nothing to do with the actual tariffs charged by Mauritius on US imports – the so called applied Most-Favoured Nation (MFN) tariffs – which currently average a low 1.3%, with a maximum rate of 100% applied on refined sugar. In 2024, US’ top exports to Mauritius included machinery, electrical and electronic equipment, optical apparatus, and medical instruments. Over 95% of these imports are duty-free, including the top 20 US exports to Mauritius. The MFN duty on these products averages a mere 0.5%. So, whichever way you look at it, the 40% reciprocal tariff is disproportionate, illogical and WTO-illegal.

Moreover, the formula used to calculate reciprocal tariffs is inherently flawed and biased against small countries, like Mauritius, that have weak export capacities. It suggests that, for a given level of US exports to country j, the Trump tariff will be lower, the higher the US imports from country j (notice that M_j appears in the denominator). This is clearly counterintuitive.

To be sure, the tariff will have significant, adverse impacts on the Mauritian economy, but the direct trade effects are likely to be moderate, especially now that it has been scaled back to 10%. Mauritius exported Rs 11 billion worth of goods to the US in 2024, representing just 10% of our global exports. The top 5 exports to the US in 2024 were live animals (notably primates), clothing, industrial diamonds, fish and fish preparations, and sugar. Exports of primates, which accounted for 36% of our total exports to the US, are unlikely to suffer much from the 10% tariff since the demand for primates is deemed to be inelastic by virtue of a lack of substitutes. The impact on clothing exports, on the other hand, may be diluted by the fact that most of Mauritius’ closest competitors (China, Bangladesh, Cambodia, Vietnam and, sadly, Lesotho) are slapped with equal, if not higher, tariffs.

The biggest impacts may arise from the indirect effects of an escalating trade war between two of the world’s biggest economies. US has now increased the tariff on Chinese imports from 34% to 125% while China has vowed to retaliate with an 84% tariff on US goods. Such high tariffs could be prohibitive, halting the bilateral trade between the two countries altogether, and pushing the world economy towards a recession, the magnitude of which is difficult to predict at this time. A global recession can squeeze our merchandise exports and, more particularly, our exports of services such as tourism and financial services, to the whole world, not just the US. These impacts will be amplified by uncertainty and the varied responses of affected countries.

Finally, the impact of the escalating trade war on inflation is unclear. On the one hand, fears of a global recession have sent oil prices plunging. The Brent crude has fallen by 20% since 1^st April, and this trend is likely to continue in the weeks ahead. On the other hand, tariffs will raise domestic prices of imported goods in the US while retaliatory tariffs will fuel inflation in the countries imposing them.

Whether global inflation will rise depends on how surplus production, if any, is dealt with. If affected countries cut back production in response to higher tariffs in their export markets, prices may rise globally. As a price taker, Mauritius may experience a higher degree of imported inflation. In short, the risk of stagflation – an unpleasant combination of recession and inflation – remains real.

* While the countermeasures of other countries in response to Trump’s tariffs will significantly impact the global economy, are Mauritius’ current trade partnerships sufficiently diversified to shield our highly trade-dependent economy from major disruptions in global trade routes or tariffs?

I believe our export markets are fairly well diversified. The US is our fourth largest market after France (including Reunion), South Africa and UK. Other European countries (such as Spain, the Netherlands and Italy), Madagascar and Kenya and, to a lesser degree, India, are also important buyers of Mauritian goods.

However, diversification, whether in terms of products or markets, can never be enough for a small country. The rise of south-south trade represents an opportunity to turn more to emerging countries and reduce our export dependence on a few developed-country markets. Mauritius should leverage on recent FTAs with Africa, China, India and the UAE to further diversify its export markets.

* Given our mounting public debt, and in comparison to Singapore’s strategic reserves and widely recognized institutional resilience, how constrained is Mauritius in its ability to both weather a potential global trade war and respond with economic support packages should external trade shocks affect local jobs and businesses?

The new government has inherited a fragile economy, the true scale of which was revealed by the ‘State of the Economy’ report. The report brought down the GDP growth rate for 2024 from 6.5% to 5.1%, with latest estimates from Statistics Mauritius pinning it down to 4.7%. The debt-GDP ratio is also above the 80% ceiling. Mauritius narrowly escaped a credit downgrade by Moody’s, which has exhorted the government to implement a fiscal consolidation plan over the next 12-18 months, which it will be watching keenly. All this means that the government has limited resources at its disposal to face a major economic shock.

Luckily, however, the unfolding trade war will not degenerate into an economic crisis of the same scale as the Covid-19 pandemic. Nevertheless, these crises highlight the urgent need for an emergency fund that could come in handy during rainy days. I was hoping that the MIC could serve this purpose as a sovereign fund. Unfortunately, most of its capital has been squandered, and its future is uncertain. Hopefully, the government will treat any income from the Chagos deal as a windfall and set it aside in a sovereign fund.

 * Given the existing economic challenges in Mauritius, how can the newly elected government mitigate the direct impact of Trump’s trade war on key sectors like tourism, textiles, and financial services?

 In the short run, it will be difficult to mitigate the direct and indirect impacts on these key sectors. In the case of textiles, Trump’s reciprocal tariffs have nullified the trade preferences available to African countries under AGOA. However, AGOA is slated to expire in September 2025, and will, in all likelihood, not be renewed – at least, not in its current form. Thus, the tariffs may have moved doomsday closer by a few months. But the indirect effects of the ongoing trade war on key services exports may be harsher.

Government support may be crucial in the clothing industry and in the hospitality sector, where many businesses are small and many jobs informal and precarious. Such support could take the form of wage assistance to employees and financial support to struggling enterprises. With resources running low, I believe the government will have no choice but give recourse to domestic borrowing on a temporary basis. Drawing on the central bank’s reserves could also be an option – absolutely the last resort –, provided that the government commits to returning the funds once the economy is out of the woods.

Finally, policy measures such as lower interest rates, concessional credit and moratorium on loan repayment, and fiscal stimulus packages, including tax credits and investment subsidies can help distressed enterprises navigate the crisis. Targeted social spending can further support vulnerable households.

Over the long run, the government should step up efforts to foster economic resilience through innovation and industrial diversification, including into modern services, boost export competitiveness, and enhance food security.* Isn’t it going to be tough for the newly elected government to balance the need to support the economy during a trade war with the existing challenge of rising public debt?

Yes. But let us not forget that the previous government abandoned the debt ceiling of 65% of GDP during the pandemic year of 2020. Had it not been for a medium-term cap of 80% recommended by the IMF, our debt, already dangerously high, might have spiralled out of control. Hard times call for tough measures. Although the new government is committed to debt sustainability, it should resort to debt financing if the situation so demands, assuming that this is a temporary measure.

* What fiscal and monetary strategies would you suggest the government to implement to counter the economic effects of Trump’s trade wars and maintain fiscal stability?

First of all, unlike several other countries, Mauritius has not retaliated, and it should not. Our docility was ‘rewarded’ with a lower punitive tariff of 10%. Trade theory teaches us that, for a small country, free trade is the best policy irrespective of what other countries are doing. Mauritius is an open economy with low tariffs and a stable trade policy grounded in WTO law. This should continue.

Having said that, the policy measures needed to deal with the trade war and maintain fiscal policy aren’t very different from the ones needed to support affected sectors, as discussed earlier. I believe economic policy should be geared towards supporting consumption, production and exports as the trade war rages on. Inflation should be a lesser concern. This means that both monetary and fiscal policies should be expansionary.

The central bank of New Zealand was the first to slash policy rates to deal with the unfolding crisis, and others are expected to follow. The Bank of Mauritius cannot be an exception. If the current crisis deepens, the Bank should cut back the key rate to boost consumption and investment. The Bank can also spearhead a coordinated response by commercial banks to help distressed companies through debt rescheduling, interest relief and enhanced credit facilities.

The government should start putting together an emergency fund by compiling unutilized budgets and surpluses, if any, in special funds. Falling oil prices could lead to a substantial windfall if retail prices are held constant. This should boost the government’s financial capacity, albeit temporarily. The emergency fund, which could be topped up by domestic borrowing and, exceptionally, drawing on the Bank of Mauritius’ reserves on the condition that this loan is paid back in the future, can help support workers and companies impacted by the tariff war. The government can also provide tax relief and fiscal incentives to boost private investment while targeting its own spending to priority sectors.

* Given the challenges of global trade uncertainty, how can the government effectively attract foreign investment and stimulate economic growth?

Foreign investment, including FDI, is likely to fall as the trade war intensifies and uncertainty persists. There is little that the government could do to appease investors in such times other than sticking to business-friendly policies and avoiding measures, such as tit-for-tat tariffs, that could escalate the trade war.

History shows that the toughest reforms have often been undertaken at the peak of economic crises. So, as the world’s biggest traders are busy fighting a tariff war, Mauritius should continue chipping away remaining regulatory barriers to make its business environment more attractive to foreign investors and ready to seize the opportunity when the tides turn.

* What long-term strategies should the newly elected government in Mauritius implement to build economic resilience against future global trade disruptions, particularly those stemming from U.S. trade policies?

Under President Trump, US policies are likely to remain unstable and erratic. Mauritius should reduce its dependence on the US market for both exports and imports. The good news is that such dependence is currently not so high. With AGOA preferences set to expire in September 2025 and unlikely to be renewed beyond that date, Mauritius should already be looking for alternative markets for goods that it has traditionally exported to the US – primates, garments, industrial diamonds, sugar and fish products. This should not be a major problem for most of these products, except perhaps live primates. But since the sharp increase in the quantity exported of primates recently caused a political stir, and some animal rights and religious groups continue to protest against the practice, won’t a fall in exports of primates be a welcome fallout of Trump’s trade war?

* Regional trade agreements like the African Continental Free Trade Area (AfCFTA) can play a crucial role in mitigating negative effects and fostering economic resilience. Have we done enough in that direction?

 Mauritius is very much a regional player. In 2024, Africa took one-third of our merchandise exports and supplied 12.5% of our imports. Specifically, South Africa is Mauritius’ second most important export market and the fourth source of our imports after China, India and the UAE. Crucially, South Africa is a major supplier of food products to Mauritius.

Mauritius participates in several regional blocs in Africa, notably SADC, COMESA, IOC and, most recently, the AfCFTA. The AfCFTA came into effect on 1 January 2025 but hardly made any noise. Perhaps the timing wasn’t right, given that most economies were reeling from the impacts of the pandemic. However, four years on, the AfCFTA remains a mystery. Most of Mauritius’ trade with South Africa, for example, continues to take place under SADC. One reason for this is that the AfCFTA rules of origin remain to be finalized while negotiations are ongoing on other issues (e.g. e-commerce and IPR).

The AfCFTA could be a significant opportunity for Mauritius to diversify its export markets away from traditional partners like the EU and the US towards regional partners, such as South Africa, Madagascar, and Kenya. Mauritius should vigorously pursue the full operationalisation of the AfCFTA by concluding pending negotiations and diffusing it among exporters. In the meantime, Mauritius should seek to expand its trade with Africa through SADC and COMESA. The Covid-19 crisis highlighted the dangers of relying on remote markets for basic commodities when supply chains are disrupted. Mauritius can look to Africa as a partner in its pursuit of food security.

 * At the end of the day, what could be depressing is the fact that much that has been suggested by independent economists or announced in official speeches – like the diversification of our export markets, introduction of structural economic reforms, building of new economic pillars, etc. – has remained mere rhetoric for a long time. Is it possible for us to move beyond rhetoric and actually implement the necessary economic changes?

Indeed, that should be the challenge facing the current government. It should break away from the lethargy that characterized the previous regime, which had a reputation for making big announcements that were seldom followed through. The country has failed to develop any new economic pillars in the past ten years. Economic reforms have been put on the backburner and digital transformation is long overdue, as highlighted by the recent Audit report.

Resilient economies are those that have achieved a high degree of structural transformation, are well diversified, and can adapt to disruptive technologies and climate change. Mauritius clearly has much to do on all these fronts. The new government was propelled into power by a populace eager for change, and change was a central focus of the Alliance du Changement’s political agenda. The government has a responsibility to deliver the much-promised change, and since taking office in November 2024, it is putting in place the policies, mechanisms and institutions to make it happen. The adoption of Programme-Based Budgeting is a key example. Let us give them some extra time.

Mauritius Times ePaper Friday 11 April 2025