The US-China trade war and its impact on Africa

Company News of Monday, September 16, 2019

Source: goldstreetbusiness.com

2019-09-16

Protectionism is an improper term. The only people who are protected by tariffs, quotas and trade restrictions are those who engage in unprofitable and wasteful activity. Free Trade Is The Only Philosophy Compatible With International Peace And Prosperity – Walter Block

The gravity and scope of the trade war between the United States and China currently occupy a prominent place on the news agenda. This is serious enough for my son's Grade 5 students to discuss his impact on Singapore.

China's unfair competition strategy, leveraging US open markets while maintaining its own closed markets for US companies and products, as well as plant closures and job losses in the United States are the many reasons given to justify the trade war. An article by Forbes, published in January 2019, indicates that China's technological rise and its desire to dominate digital technologies may be an unofficial reason for the trade war.

Whatever the reasons, justifiable or not, the ongoing trade war will inevitably have significant repercussions on international trade and will most likely lead to a global economic recession. As a company with a significant commercial interest in Africa, I am worried, even fearful, of how the future of Africa will be shaped by this trade war.

A global economic recession would have dire consequences for Africa, as most countries depend on aid and foreign direct investment (FDI) from advanced countries. In the event of a global economic recession, aid to Africa will drop dramatically, thus reducing FDI. Low FDI translates into fewer jobs and less capital reaching Africa.

China's trade with Africa has increased tenfold since 2000 and has become the continent's largest trading partner. When tariffs are imposed on products made in China, the growth of African commodity-producing countries will be stifled.

According to the statistics of the General Administration of Customs of China, in 2018, the total volume of China's imports and exports with Africa amounted to US $ 204.19 billion, or an increase of one year on the other of 19.7%, thus exceeding the overall growth rate of foreign trade. period of 7.1%. Chinese loans to several African countries exceed one billion US dollars. If the trade war deteriorates China's capital surpluses, foreign exchange reserves will decrease, which will reduce aid to Africa, which will further affect African economies.

Due to Trump's protectionist policies, major African markets are collapsing. Stock markets in Nigeria, Kenya and South Africa were affected.

In an interconnected global economy, trade wars will likely have a domino effect beyond the targeted countries and sectors, which is exactly what is happening in Africa today.

Most African countries, with the possible exception of South Africa, are neither competitive nor able to replace US and Chinese companies and therefore can not take advantage of the trade war .

An economic slowdown often accompanies shocks in commodity prices, financial markets and currencies, which will have a significant impact on African economies. Central banks in several African countries are already facing a shortage of foreign exchange, which slows down imports. Tariff increases penalize not only the manufacturer, but also the suppliers along the chain. US imports of steel and aluminum by the United States directly affected the steel and aluminum industry in South Africa. In 2017, $ 375 million worth of aluminum and $ 950 million worth of steel were exported from South Africa to the United States. Nearly 8,000 jobs in the steel and aluminum industries are threatened unless new markets are found.

South African wine exporters, as well as fruit and nut producers, could see their business grow thanks to the 15% retaliatory tariff imposed by China on similar US products.

However, as yields are low, opportunities for exporters of local agricultural products across Africa would be limited. In the end, the disadvantage would be greater than the increase, mainly because of its impact on the manufacturing sector.

Most African countries rely on external loans to support their economies, many rely on commodity exports. Angola, Zambia, Congo, Sudan and Nigeria, which sell commodities such as oil, cobalt, copper or iron ore, will be affected. The US-China trade war is partly responsible for the decision of the Anglo-Swiss mining giant Glencore to close a cobalt mine in the Democratic Republic of the Congo and copper wells in Zambia, with the probable loss of about 4,400 jobs. According to the London Metal Exchange, the price of cobalt, a key material in rechargeable batteries used for smartphones and electric cars, rose from more than 90,000 USD per ton at the beginning of last year to around 28,000 USD per tonne.

In addition, a decline in China's demand for commodities will put pressure on the revenues of the African government.

The African Development Bank (AfDB) predicts that the trade war could lead to a 2.5% fall in the gross domestic product of resource-rich African countries in three years. In an article published on August 17, 2019 in the South China Post, the AfDB report on the African Economic Outlook for 2019 indicated that Africa was likely to be affected by the trade war, more than 60 % of its exports are destined for the United States, China and Europe. More than 70% of African imports come from these countries. While trade tensions can degenerate into currency wars and tighten monetary policies, African countries will struggle to service international debt.

China will be aggressive in finding alternative markets outside the United States. This could cause China to sell its products very cheaply in Africa to mitigate what it has lost in the United States.

There is a mix of opportunities and harms coming from Africa, more harm than opportunities. Harm comes from China's potential of dumping of cheap products on the mainland and a reduction in commodity exports due to the decline in Chinese demand. But there are also opportunities to close the export gap to the United States and even to fill some US commodity export deficits in China itself.

The trade war will surely have a ripple effect on African countries, as these countries are at the bottom of the supply chain.

The most positive consequence of the trade war is that it offers African policymakers and stakeholders the opportunity to redouble efforts in economic reforms and to create an environment conducive to investment to become part of global supply chain. Countries such as Côte d 'Ivoire, Ghana, Nigeria and Ethiopia should seize this opportunity. There is no time but the present.

Trade wars have global economic implications and this trade war is likely to last for some time. It can not be denied that African economies are a collateral damage in this war and this can potentially reverse the gains made in terms of economic growth and poverty reduction.