While a trade war theme is expected to remain in play periodically, the global economy will continue to tread along a relatively stable path. However, the haphazard diplomacy, which has characterised the Trump tenure thus far, will not vanish.
Amidst the current hype around the prospect of a global trade war, there has been remarkably little analysis and commentary regarding Africa’s position in this equation. After all, the US and China are two of the largest investors in the continent, and China is the biggest trading partner for some of the continent’s most significant economies, including South Africa, Nigeria and Ethiopia. So, whilst Africa comprises a mere 2% of global trade, US-China and US-European trade tensions are of direct relevance to the continent.
Although the continent comprises a seemingly insignificant proportion of global trade, it is not completely immune from the fallout. Indeed, the effects of an escalation will be pronounced, and will potentially have significant second and third round effects on many economies which are already vulnerable and feeling the pinch of the current emerging market sell-off.
In this context, investors and analysts alike are confused as to what it all means.
It is important to filter through the bluster and understand exactly what Trumponomics is about. Essentially, there are two dimensions to Trump’s economic policy — broadly defined as “Good Trump” vs. “Bad Trump.”
“Good Trump” is what financial markets love; it is what has caused the Dow Jones Industrial Average to reach dizzy heights in 2017, with 71 historic record closes and a 5,000 point climb in a year for the first time in history. It entails a pro-business orientation, featuring tax cuts and deregulation. Together with a fiscal stimulus, this will catalyse a growing economy which will create an ongoing virtuous cycle. At least, this is what markets have believed — discounting the political shenanigans and chaos in the White House throughout the course of last year.
Yet this agenda must be juxtaposed against “Bad Trump”. This refers to the insular America First policy, manifesting itself in a series of protectionist measures. From the ongoing imposition of tariffs on imports, to public disputes with key allies such as the European Union, Twitter attacks on American companies seen as unpatriotic, and the withdrawal from global institutions like UNHCR — this sharp deviation from traditional US diplomacy has led to fears that the “Good Trump” scenario will be derailed. Indeed, if not managed carefully, it threatens to have grave economic consequences such as the catalysation of trade and a series of currency wars which will amplify the imbalance in the global economy. Of late, it is this impulse rather than the former that has dominated global financial markets.
Of course, these policies are contradictory. One is confidence and growth inducing, and the other is confidence and growth sapping. It is no wonder then, that Trump’s economic policies have been described as both the biggest upside and downside risk to the global economy. Which of these competing tensions will emerge as the dominant one, or whether they can in fact co-exist, will now be key in determining the fortunes of both the US and global economy.
The second question to ask is whether this is merely theatre or a legitimate threat. With the midterm elections approaching and the US economy in relatively sound health (growth at north of 2% and close to full employment), President Trump may feel that he has sufficient leverage to fire the first volley in this spat.
If President Trump’s bold proclamation that “trade wars are easy to win” is anything to go by, then his political calculus may be that the US will be the least badly affected in the event of any trade escalation. Given China’s internal economic pressures, and the fact that it is heavily dependent on the US for adequate growth and job creation, it will also be keen to avoid a trade war with its “very best customer.”
It is, therefore, in nobody’s interests to see a series of tit-for-tat retaliations and dramatic escalation from the status quo. But if Trump, by virtue of his relative leverage, can extract some concessions (even cosmetically) from this diplomatic sparring, this will allow him to portray himself as a strong leader who has gotten one up on a mighty rival. In politics, perception matters.
Second, there may be some method to his madness. There is a degree of precedent of a hard-line stance being adopted, only for it to be moderated at a later stage. North American Free Trade Agreement (NAFTA) is a clear example of this approach, with the rapprochement of recent months indicative of a more pragmatic policy orientation. Recent rhetoric around the Trans-Pacific Partnership (TPP) also suggest a similar trend, which may well be replicated with China if recent overtures are anything to go by. Ideally, this would happen before the summer recess.
For investors, this is a bizarre set of circumstances which complicates decision making. Rohitesh Dhawan of Eurasia group notes the paradoxical nature of the current state of play: “It is an almost unbelievable situation where the economics have not looked this good in a decade, whereas the geopolitics have not looked this bad in four decades. You’d have to go back to the Cuban Missile Crisis to think of a time with the potential for such geopolitical tension.”
In light of such confusion, what is the appropriate way to think about this issue? Stripping away all the noise, it is unlikely that a full-blown escalation will occur and instead we will see a case of political theatre, where after a “grand bargain” will be reached. So, while a trade war theme is expected to remain in play periodically, the global economy will continue to tread along a relatively stable path. However, the haphazard diplomacy which has characterised the Trump tenure thus far, will not vanish.
There is of course a risk that the base case develops into a worst-case scenario. Then what?
Although the first order effects on Africa are minimal since very few African countries produce or export significant quantities of steel and aluminium, the second-round effects are more severe. Indeed, as Talitha Bertelsmann-Scott, of SAIIA observes in reference to growing tensions between the US and China, “When two elephant’s fight it is the grass that suffers.” In this case, emerging markets and Africa will be hard-hit by the fallout.
For African economies there are three key factors to watch: the outlook for the dollar, the impact on commodity prices, and any interest rates in the US. These factors will determine how and to what extent this affects global outlook and in turn their economic fortunes.
Ultimately, increased uncertainty around a global trade war will trigger a panic in financial markets. The current Goldilocks economy — not too hot, not too cold — will come to an abrupt end. Increased anxiety around the scale and magnitude of the tariffs and subsequent retaliations could trigger a flight to safety and a sell-off in emerging market and higher risk assets. With weak balance sheets and narrow revenues bases, many African countries are particularly vulnerable to a violent sell-off. Contagion would spread quickly, with implications for currencies and bond markets, which could result in a spike in their debt servicing costs. Already, countries like South Africa and Zambia have felt the pinch in recent weeks. Since the end of March, African Eurobonds, local-currency debt and equities have posted worse returns than those for emerging markets as a whole. And since April, the South African Rand has lost 13% of its value, while other African currencies have depreciated over 5% on average during the same period. Meanwhile, rates on Eurobonds issued by African governments have climbed to 7.6 per cent, around 200 basis points above where they were in January, according to Standard Bank Group Ltd — a far cry from 2017’s robust performances.
Then of course, there is the trade perspective to consider.
Yvonne Mhango, Africa economist at Renaissance Capital, expects SSA to feel the most immediate and deepest impact via the trade channel. “We are already seeing a slowdown in financial portfolio inflows, as the prospect of a global trade war has resulted in investors exiting emerging and frontier markets, and seeking safe haven assets. Eventually growth will feel the dampening effect of a slowdown in trade, particularly in the countries that export energy, metals and minerals.”
Critics also point to the latest textile spat with Rwanda over used clothes as a precursor of what to possibly expect if US trade diplomacy takes a more aggressive turn, consistent with its global position.
In a purported bid to protect domestic textile industries from what they perceived to be disruptive dumping policies by American traders and to preserve the dignity of local citizens, Rwanda banned imports on second-hand clothing. This, however, was in violation of the African Growth and Opportunity Act (AGOA) agreement — which advocates for the elimination of tariffs and other price-related and regulatory barriers to trade between the US and signatory African states.
How this issue is now resolved could set the tone for US-Africa trade relations. Speculators argue that AGOA, which thus far has had strong bipartisan consensus and has for years formed the cornerstone of US trade policy to Africa, could now come under scrutiny. Given how insignificant trade with Africa is in the greater scheme of things (approx. 2% of US trade), and the fact that it has been legislated till 2025, this seems implausible.
Yet, the Trump administration, with its “return on investment” philosophy and unconventional approach to diplomacy, may now feel aggrieved and calculate that the US is not deriving enough value from Africa to maintain these preferential trade agreements. In this scenario, Africa may then emerge as a new arena for a trade war, which would certainly have negative ripple effects.
From a real economy standpoint, any escalation would see a reduction in global trade and consequently global demand. A weaker US and a weaker Chinese economy would weaken global supply chains, which would result in slower global growth, and in turn affect commodity prices — upon which Africa is hugely dependent.
Mhango observes that “the global trade war is already softening Chinese exports. Chinese exporters reported a decline in in new orders in June, ahead of 6 July when the US will impose tariffs of 25% on $34 billion of Chinese imports into the US.” Once again this would be bad news for Africa. With few policy levers left to pull and many countries already in the IMF casualty ward, this outcome would puncture any nascent signs of a recovery.
The stark reality is that in a global trade war, there are no winners, only losers. The magnitude of losses depends on how many rounds this lasts and how deep the retaliatory measures will be. In any event, African countries will suffer for the very reasons outlined above.
But what should African policymakers do in this scenario?
Ironically, as the rest of the world looks inward, Africa is looking to buck this trend via regional integration and increased co-operation. The adoption of the African Continental Free Trade Agreement (AfCFTA) in Kigali was an encouraging step in the right direction and demonstrated a willingness for leaders to craft African solutions to African problems.
That said, the proof will be in the pudding. The goal of creating the largest free trade zone is undoubtedly a positive one, but it is still aspirational.
The reality is that African most countries have very little control over the external environment and have limited policy flexibility, given their strained balance sheets and narrow revenue bases. Therefore, to limit the fallout, they need to prioritise measures that fall within control.
More specifically, sensible strategies would require a doubling down on sectors that are less dependent on the unpredictable trade actions of the US and China and seeking out new and diversified trade and investments sources. However, amidst the substantial risks from a global trade war, lie windows of opportunity. The US will need to find new suppliers for goods previously imported from the US or Europe, whilst China will be looking to find new markets for production that was destined for the US. Even if African countries capture a small portion of this dislocation by being alert and responsive, the upside could be significant.
Neither of these solutions are easy or simple, but in the face of growing headwinds and well-documented structural imbalances, there is no room for complacency.
For African policymakers, the smartest strategy is therefore to “prepare for the worst and hope for the best.” This requires clear and coherent policy formulation, improvements in the ease and cost of doing business, greater integration — both on a regional and continental level. The prioritisation of strategically important sectors that exploit the windows of opportunity emerging as a result of the trade war will also be essential. Failure to do so will not be pretty.
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Ronak Gopaldas is director at Signal Risk an African risk advisory firm. His work focuses on the intersection of politics economics and business on the ...Read More +