The external context for framing of the 2025/26 budget is getting very complicated. In Treasury documents, including the Economic Survey, global economic conditions are usually summarised in a section referred to by the neutral sounding phrase ‘external scene’.
In the current ‘scene’, US President Trump’s tariff war is in full gear. Its stated primary purpose is to bring US manufacturing back home by reversing decades of off-shoring, a practice that accelerated with globalisation.
Here is a bit of history. In the 1980s, US firms were looking for lower production costs, particularly cheaper labour. They found both in Asia. Components could now be made in multiple locations, depending on cost efficiencies, and then assembled similarly.
The 1990s hastened the process, making supply chains global. The Soviet Union had fallen, China was opening up, creating special economic zones in Guangzhou and other areas, run on capitalist principles.
These zones became global manufacturing hubs. Leading US brands such as Nike would come to rely heavily on Asian supply chains, particularly China.
Above all, free trade was in the air. The North American Free Trade Agreement (NAFTA) was an early example. It established a free-trade zone in North America. Signed in 1992 by Canada, Mexico, and the United States, it took effect on January 1, 1994, immediately lifting tariffs on the majority of goods produced by the signatory nations.
Companies such as Ford and GM now opened manufacturing plants in Mexico. Others such as Boeing and Lockheed Martin began to buy parts from Mexico. It was renegotiated to the United States Mexico Canada Agreement in 2020.
Free trade and globalisation fit very well with another ideal promoted by the US – democracy everywhere. The market-oriented policies, centred around fiscal discipline came to be referred as the “Washington Consensus”, a term coined by economist John Williamson in 1989.
The consensus had one key promise. Prosperity would follow democracy and free markets! The proponents were wrong. In the US and Europe real wages stagnated, and for now out of work manufacturing workers, the standard of living plummeted.
Meanwhile the financial sector prospered – the result of high interest rates, worsening inequality. Globalisation and Its Discontents, penned in 2002 by the 2001 economic noble prize winner Joseph Stiglitz, is an early critique of globalisation, the Washington Consensus and the role of the IMF.
The author argues that the IMF's free market policies contributed to the 1997 Asian financial crisis, the 1998-2002 Argentine great depression and the low levels of development in sub-Saharan Africa. These policies include fiscal austerity, high interest rates, trade liberalisation, free capital markets and privatisation.
Back to the current ‘scene’. The US started with Canada and Mexico in February, imposing 25 percent tariff, and an additional 10 percent for Chinese goods.
Canada responded in kind, imposing a 25 percent tariff on certain US goods. In the most recent round on April 2, the US imposed 10 percent universal tariff across all imports.
It further announced targeted tariffs of up to 50 percent, arguing that they are reciprocal to the degree of trade restrictions and barriers that US goods face in the different countries. Finally, all foreign-made automobiles will attract a 25 percent tariff.
China has responded with a 34 percent retaliatory tariff. The Europeans are debating 25 percent. The US has warned it may up the tariffs against China to 50 percent.
Every shade of economist and expert is warning of global recession. They fear that inflation will rise sharply, and trade will collapse. And everywhere, financial markets are in turmoil, with the S&P 500 losing as much as 20 percent from its previous high.
Kenyan exports to the US were valued at the $737.3 million in 2024, a 17.5 percent decline from 2023. The 10 percent tariff will worsen the decline.
A rise in inflation globally will mean a return to high interest rates in the US. This will make it more difficult for the Central Bank of Kenya (CBK) to accelerate current efforts to reduce commercial lending rates, and spur growth in credit to private sector.
That will be most unfortunate because early data suggests a modest improvement in output in quarter 1, 2025. The Stanbic Bank Kenya purchasing managers’ index rose from 50.6 in February to 51.7 in March.
Readings above 50 indicate improving business conditions. The March reading indicates a stronger improvement in business conditions.
It is the highest since May 2024, and above the series average of 51.2. Improved access to credit will reinforce this recovery, while a return of high interest will mute it.
The writer is an economist and partner at Ecocapp Capital. He is also the chairman of KRA and former governor of Laikipia County.
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