Africa nervously eyes US, China’s trade war

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AFTER a phony war stretching to his earliest days as United States President, Donald Trump fired off the loudest salvo yet in his trade battle with China last month.

Threatening to impose 10% tariffs on over US$500 billion of Chinese imports —from baseball gloves to badger hair, frogs’ legs to toilet paper — Trump reiterated his intention to dramatically narrow US trade deficit with its greatest economic rival.While Trump was cheered on by his base and protectionist forces in Washington DC, the verdict of the international economic community was scathing.

In a bracing statement, the IMF warned that a trade war could shave 0,5% off global growth by 2020, amounting to some US$430 billion in lost economic activity. EU leaders lined up to criticise their ally’s swing towards protectionism, particularly after suffering the indignity of US steel and aluminium tariffs.

With China promising an imminent battery of counter sanctions on US exports, the rest of the world nervously awaits further developments. For Africa, the prospect of an all-out trade war between the world’s two largest economies threatens to create a range of unwanted challenges.

An impact has been borne by emerging market currencies, with the South African rand retreating 1,4% against the dollar in the hours following the earlier unveiling of a US$200 billion tariff plan as investors rushed to the US dollar’s safe embrace. Despite enjoying a steady Gross Domestic Product recovery since 2016, sub-Saharan African economies are vulnerable to the downturn in global growth projected by the IMF.

Perhaps Africa’s most significant weakness lies in the intimate economic relationship that the continent enjoys with China. Because China is the continent’s largest trading partner — it purchased some US$75,26 billion of goods from Africa in 2017, a rise of 32,8% in a year — Africa’s commodity-reliant exporters remain uniquely sensitive to the vagaries of the Chinese economy, which the IMF expects to grow at a reduced rate of 6,6% this year.

Raw materials demand

Any further cooling of the Chinese economy brought about by future rounds of US tariffs could slow the flow of African raw materials, among them iron ore, coal, and platinum, to China’s vast industrial heartlands. In a reflection of the malaise, the Bloomberg Commodities Index, a measure of 26 raw materials, lost 2,7% in a week in July, the biggest fall since February.

Meanwhile, Chinese import growth, factory output and retail sales growth slowed in May, suggesting that businesses there are battening down the hatches in anticipation of further US tariffs. While the storm clouds are gathering, there may be a glimmer of optimism for African policymakers.

With tariffs thoroughly undermining the economic relationship between China and the US, both economies could seek a wider variety of suppliers for commodities and finished products as they seek to shut out their primary antagonist.

And Africa’s degree of separation from the commanding heights of the world economy could yet prove a blessing in disguise.

“As of yet, there’s not much evidence that the trade dispute between the two superpowers has had a big effect on Africa. Most economies primarily export raw, unfinished goods, which are unlikely to be targeted. The continent’s failure to integrate into global value chains is, in this regard, insulating it from potential problems,” says John Ashbourne, Africa economist at Capital Economics.

Nevertheless, Africa’s exporters could yet fall prey to the capricious nature of the US president. Disruptions to global supply chains with African links are likely. And while the continent has largely been sheltered from direct US sanctions thus far, Trump’s impact is being felt hardest in South Africa, where 25% steel and 10% aluminium tariffs were imposed earlier this year.

The South African government estimates that steel exports to the US represent 5% of national production, equating to some 7 500 jobs in the steel supply chain. Yet there may be further bad news to come for Pretoria. Trump’s threat to limit vehicle imports — a warning largely aimed at Europe — could have wide-ranging repercussions for South Africa’s successful automobile industry. The industry registered total export sales of vehicles and components of R164,9 billion (US$12,5 billion) in 2017, R18,8 billion (US$1,34 billion) of which went to the US.

“The country is already suffering due to tariffs on steel and aluminium,” says Ashbourne. “And its car industry would also be exposed to higher trade barriers in the US; 10% of its exports go to the country. There isn’t, unfortunately, much that Pretoria can do to reduce the vulnerability of its export-focused sectors.”
Retaliation?
As the challenges of the trade war mount, can Africa formulate an effective policy response? Given the partial nature of the threat — Africa is an unfortunate bystander rather than a primary protagonist in this trade tussle — the continent would do well to limit its public censure of the United States. Any attempts to retaliate against US interests, even following the direct imposition of US tariffs, are likely to bear a heavy cost.

Despite Trump’s evident antagonism to free trade deals, the US continues to abide by the African Growth and Opportunity Act (Agoa), a long-standing scheme offering African manufacturers tariff free access to the US market.

The South African government is wisely preparing to argue that Agoa should protect it from future US duties on vehicle and component exports.

Any threats to retaliate against the US could have dire implications for the protective umbrella of Agoa — far better to remind the US of its responsibilities under an act which it has long promoted. Against this troubling backdrop, perhaps the best that the continent can do is stick to the largely thankless, long-term work of diversifying the destination of its exports and moving away from an economic model reliant on either Chinese economic growth or the whims of the US government.

It may not offer the immediate satisfaction of a public rebuke to the US president, but such a strategy offers the best long-term chance of defying the protectionists and insulating Africa’s fragile economies from the egos of superpower antagonists. — africanbusinessmagazine.

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