A trade war is being stoked between the two largest economies of the world. The consequences will affect those who have had no say, including small countries. . . These events provide proof, if some were needed, that ours is an inter- dependent world. – President of Ghana, Nana Akufo-Addo
The above statement by the Ghanaian President, warns of the repercussions of the ongoing trade dispute between the United States (US) and China; a dispute that has been described as the commencement of “the largest trade war in economic history”. What are the issues? Since January 2018, the US and China have been at loggerheads concerning tariff placements on bilateral trade. The fall out began when China was accused of engaging in market distortions. The allegation being that China undermined intellectual property rights by leveraging on Foreign Direct Investment (FDI): by jointly partnering their local companies with other foreign counterparts to gain access, illegally, to privileged and relevant information for their technological development.
To severe China’s alleged unfair tactics, prevent intellectual property theft and technological transfer, and cut back massive trade deficit, the US introduced trade protectionist policies and imposed steep tariffs and investment restrictions on China. In April 2018, the US imposed $50 billion in proposed import tariffs on China, and subsequently increased the amount by an additional $100 billion. By the end of 2018, the US had levied a total import tariff of $250 billion against certain goods and merchandises made in China, with plans to impose a further 25% tariff on $325 billion worth of other Chinese goods in 2019. An effective ban was also placed on American companies doing business with Chinese telecoms company. Responding in kind, China raised its tariffs on American goods, from 5% to 10% on $60 billion worth of US products such as frozen vegetables and aircrafts, and announced a new round of tariffs on more than 5,000 products in May 2019.
With an unlikely early resolution, the escalating trade dispute could mark the beginning of a significant economic fallout between the two world’s largest economies. The economic showdown would impact global financial markets as already witnessed, deteriorate international trade relations, hit country-level and global economic growth, and largely introduce multiplier effects on other nations’ economies, particularly Africa which trades substantially with the two giant economies.
Context of Africa’s External Trade with China and the US
Africa remains a top trade destination for China and the US. China-Africa bilateral trade has risen at a very fast pace over the years, having surpassed the US in 2009, and emerged Africa’s second largest trade partner after the EU. China’s imports to, and exports from Africa rose from $40 billion in 2005 to $166 billion in 2011, and stands at US$204 billion in 2018. In the 2018 total, China’s exports to Africa summed US$104.91 billion, up 10.8% and imports from Africa were US$99.28 billion, up 30.8%. The product composition of Africa’s external trade with China also provide insight on the important magnitude of trade relations between the two countries. While Africa imports majorly machineries, electronics, textiles, and hi-tech commodities from China, China benefits from Africa’s huge natural resource potentials – from oil in Nigeria, coal in South Africa, to copper in Zambia- which are exported to serve the growing energy and other needs in China.
On the other hand, total trade between Africa and the US have vacillated in the last two decades. Trade amounted to $80.52 billion in 2005 and increased to $141.89 billion in 2008 before falling significantly to $86.73 billion in 2009 during the trade crisis that triggered about 50% shortfall in US imports from Africa. With a consistent fall in demand for imports from Africa since 2009, the US-Africa bilateral trade currently stands at $61.86 billion in 2018. However, the US still features as a top trade partner with Africa.
Apart from the massive trade relations, both China and the US hold significant positions in Africa’s investment sphere. While the African continent is witnessing China’s largess in form of concessions and explosion of investments including the Belt and Roads initiative, the US remains Africa’s largest investor as it retains the lead in Foreign Direct Investments (FDI) in Africa. Thus, with both countries of the view that they are strategic competitors, a trade dispute between them will affect their trade partners directly or indirectly.
How is the trade dispute affecting Africa?
It is inevitable that the US-China trade war will raise harmful consequences for economic growth and commodity prices, stock market and investments, exchange rate, and many other aspects in the African region. Here’s how:
- Some commodity exporting African countries are experiencing commodity price distress emanating from the U.S.-China trade war. The back-and-forth tariff ploys have triggered and contributed to drops in global prices of commodities such as crude oil. For instance, crude oil prices have been on a slight downward trend in recent weeks and risks being exchanged for as low as $45 per barrel if the dispute escalates. These developments hurt sentiments among oil producing and exporting countries like Nigeria, Angola, Algeria, and Libya, given that the potential externally-induced slowing global demand weigh adversely on domestic production and export levels.
- Export earnings may dwindle and the consequences could spill over to economic growth, given that many commodity-export African countries are single-resource reliant for export earnings. The extensive dependence on non-diversified export earnings is particularly evident in the proportion of commodity exports to China. For instance, 60% of Angola’s oil and mineral exports go to China; South Sudan gains 95% export earnings from its oil exports to China; and South Africa’s 2018 export to China amounted to $27 billion. Thus, a potential fall in export earnings, occasioned by persistent price distress and slowing demand, is expected to distort the region’s economic growth, and likely set the stage for a similar experience as witnessed during the commodity price crash in 2014. Accordingly, the African Development Bank (AfDB) has warned that the effects of the trade tensions could cause a 2.5 per cent reduction in GDP in resource-intensive African countries and a 1.9 per cent reduction for oil exporters by 2021.
- Another possible effect of the trade war is the potential need for replacement markets by either China or the US, for which Africa is the probable target. With the tariffs likely to create demand bottlenecks and slow exports in the two economies, diverting excess supply and exports to replacement markets may become imperative. For instance, China may want to divert excess supply of its export-tariff restricted goods (semiconductors, plastics, chemicals, railway equipment, and fridges) to Africa, given its expanding influence on the continent and bolstered image as Africa’s favored foreign partner. A similar replacement market initiative may be conceivable by the US. However, an issue with this is that these products could flood Africa’s markets given the ready-receptiveness to foreign-produced goods, thereby dwarfing the much-needed progress in Africa’s local production capacity and emerging manufacturing sector. Worse still, Africa possesses neither the political will nor the strong policy stance to provide its own protectionist policies against such initiatives.
How can Africa cushion the Immediate and Long-Term Effects?
Although the failure to resolve the ongoing trade war affects Africa in some ways already stated, it however provides the needed incentive for the continent to reduce trade inter-dependency. One way to do this is to boost its intra-regional trade relations, for which the Africa Continental Free Trade Agreement (ACFTA) serves as a great policy tool. The ACFTA entered into force on May 30, 2019 and if fully implemented, it will create a single African market for goods and services, covering an estimated 1.2 billion people with a combined GDP of over $2.5 trillion across 55 member states. With the reduction in tariffs, the ACFTA also has the potential to increase the share of intra-Africa trade to about 22% by 2022, up from the current near-stagnant level of about 17%. This share is set to almost double if complementary non-tariff barriers are lifted. While the potentials for intra-dependency are massive, fastening the pace of the region’s infrastructural and manufacturing sector developments is key to ensuring that the intra-regional trade objective stands achievable.
There is also a critical need to reverse persisting trends where the occurrence of any externally-induced commodity price shock paralyses economies in Africa. In this case, export diversification becomes a leveraging policy instrument given that many African economies are one-resource export dependent. For oil exporting countries, diversification is important as it allows to build resilience against external shocks and supports a shift from over-dependence to exportation of value-added commodities. On one hand, significant adverse growth effects caused by a fall in commodity prices would be limited. On the other hand, by diversifying, African countries can capitalize on the opportunity to provide competitive export items that can replace those imported by waring nations. Nonetheless, diversification relies on sustainable adherence to the call to strengthen productivity and improve commodity value-chain in Africa.
To avoid severance of trade ties between Africa and the two warring economies, there is need for an early resolution to the trade dispute.