International trade is skewed against Africa and the US-China trade wars are a harbinger of bad news for the continent.
Africa’s contribution to international trade is minimal due to the disparate business tariffs imposed on produce from the continent.
The World Trade Organization (WTO) calculates that current trade costs for developing countries are equivalent to applying a staggering 219 per cent tariff on international trade.
For Africa to thrive, the continent must look to internal migration to boost development since cross-continent migration is imperilled by unfavourable conditions not only for businesses but also for migrants.
And to make it even harder, trade wars are topping the news agenda with the US and China currently locked in one that is threatening to affect the developing nations if the threats become real.
The protracted tensions come with pain for many African countries while any economic gain will favour countries whose economies are bigger and more advanced than African countries.
What triggered the US-China trade war?
The trade war started with the US instituting a 10 per cent tariff on imported aluminium and a 25 per cent tariff on imported steel from China.
China retaliated by announcing fresh tariffs on 106 US products worth USD 50 billion.
Brexit is the harbinger of what is yet to come, especially in Africa, determining how business is conducted going forward.
The ongoing trade tensions initially came to a head in early 2018 and the situation escalated in September 2018 when the US imposed 10 per cent tariffs covering about USD 200 billion of Chinese imports, to which China retaliated by imposing tariffs on imports from the US worth an additional USD 60 billion.
The 10 per cent tariffs were initially due to rise to 25 per cent in January 2019.
However, in early December 2018, the parties agreed to freeze the tariff increase until 1 March 2019.
What does the US-China trade war mean for developing countries?
A new study by UNCTAD titled Key Statistics and Trends in Trade Policy 2018 is looking at the repercussions of existing tariff hikes by the United States and China. It also looks at the effects of the increase scheduled for 1 March.
“Because of the size of their economies, the tariffs imposed by the US and China will inevitably have significant repercussions on international trade,” said Pamela Coke-Hamilton, who heads UNCTAD’s international trade division, as she launched the.
The study underlines that bilateral tariffs would do little to help protect domestic firms in their respective markets.
The study estimates that of the USD 250 billion in Chinese exports subject to US tariffs, about 82 per cent will be captured by firms in other countries, about 12 per cent will be retained by Chinese firms, and only about 6 per cent captured by US firms.
Similarly, of the approximately USD 110 billion in US exports subject to China’s tariffs, about 85 per cent will be captured by firms in other countries, US firms will retain less than 10 per cent, while Chinese firms will capture only about 5 per cent.
The results are consistent across different sectors, from machinery to wood products, and furniture, communication equipment, chemicals to precision instruments.
Will Africa benefit from the US-China trade war?
Despite trade diversion effects favouring third countries exports, overall, European Union exports are likely to increase the most, capturing about USD 70 billion of the United States-China bilateral trade. The trade is valued at USD 50 billion of Chinese exports to the United States and USD 20 billion of United States exports to China.
Africa will capture the least of these effects while Japan, Mexico and Canada will capture above USD 20 billion.
Although these numbers are not very large in relation to global trade valued at about USD 17 trillion in 2017, for many countries they represent a substantial share of export.
For example, about USD 27 billion of United States-China trade that would be captured by Mexico represents about 6 per cent of Mexico exports.
Substantial effects relative to the size of their exports are also expected for Australia, Brazil, India, Philippines, Pakistan and Viet Nam.
Bilateral tariffs and global competitiveness
Bilateral tariffs alter global competitiveness to the advantage of firms operating in countries not directly affected by them.
This will be reflected in import and export patterns around the globe.
Countries that are expected to benefit the most from US-China tensions are those which are more competitive and have the economic capacity to replace US and Chinese firms. Most African countries do not fall under this category except, maybe, South Africa.
While some countries will see a surge in their exports, negative global effects are likely to dominate.
A common concern is an unavoidable impact that trade disputes will have on the still-fragile global economy.
An economic downturn often accompanies disturbances in commodity prices, financial markets and currencies, all which will have important repercussions for developing countries.
Dollar-denominated debt more difficult to service
One major concern is the risk that trade tensions could spiral into currency wars, making dollar-denominated debt more difficult to service.
Another worry is that more countries may join the fray and that protectionist policies could escalate to a global level.
As protectionist policies generally hurt weaker countries the most, a well-functioning multilateral trading system able to defuse protectionist impulses and maintain market access for poorer countries is crucial.
In an interconnected global economy, trade wars are likely to have a domino effect beyond the countries and sectors targeted.
Tariff increases penalize not only the assembler of a product but also suppliers along the chain.
For example, the high volume of Chinese exports affected by US tariffs is likely to hit East Asian value chains the hardest, with UNCTAD estimating that they could contract by about USD 160 billion.
Source: The Exchange