The Chinese/American trade war will present a very critical turning point among economies, with some economies being able to take advantage of the trade war as in any other form of war, and others being used as expendable ponds. Whatever lot falls on a country will depend on their positions and the policies of their economic management teams.
In 1872 the United States of America overtook the Great Britain, her colonial master as the world’s largest economy. This was precipitated on the foundation of a more robust economic system and inclusiveness. The United States of America by developing her manufacturing, technological and political systems to ensure value for money, and an egalitarian democratic system combined with effective formal banking and development banking institutions, saw these institutions assist in financing new innovations, inventions and enterprises. These enterprises and inventions on the other hand created the needed employment opportunity for the teeming youth who invariably contributed their quota to the national development, and the growth of the GDP.
The United States of America has held the position of the world’s largest economy up until October 2016. According to the figures from the IMF, China has overtaken the “U.S. as the world’s largest economy”, with what is described as an economy now worth £11 trillion. America presently falls into second place, for the first time since 1872. China also overtook the US in 2014 as the world’s manufacturing hub. These happened during the eight-year reign of President Barack Obama.
The outcome of the November 8, 2016 American Presidential election, whereby a billionaire businessman with no previous political antecedent was elected by the electoral college, as against a more experienced opponent, Hillary Clinton, who all pundits had expected to win the election, may not be unconnected with this change. The Republican presidential candidate, Donald John Trump, observed the gradual but consist drift in the lots of Americans, in which the best jobs were being taken to developing economies such as Mexico, China, India, Japan and a host of other countries, leaving the American manufacturing sector to deteriorate. In his campaign, he promised to make America great again, and marshalled a series of structural policy thrusts, which include:
1. To reduce the US Corporate Income Tax rate (the world’s highest) from 35 percent to 15 percent. This, experts expect to drive over $2 trillion back to the US;
2. To proffer an incentive to American companies returning to America by offering them a 10 percent corporate tax rate, as against 15 percent;
3. To introduce an import duty of 45 percent on all Chinese imports into the US, which he said would not be “willy nilly.”
Implications on U.S.-Chinese Trade Relationship
1. Imports from China to the US will be drastically reduced as the United States is China’s major trading partner;
2. As soon as it is implemented, this policy will see that Chinese products are no longer able to compete with American products;
3. There will be the exodus of US companies operating in China, as some of them will likely opt to return to the US. This is believing that all empirical studies showing that corporate tax rate affects location and localisation of companies are true;
4. A counter policy would evolve, as China will not allow itself to be taken for a ride; it will thefore not merely sit down and watch. The Chinese are expected to introduce counter policies as we saw in the first quarter of 2016 when their shares were on a free fall, and they introduced a circuit breaker aimed at halting trade any time the stock market fell to a certain point. When this policy did not achieve the desired objective, the Chinese economic management team introduced another policy which restricted the disposal of stock holdings to one percent per quarter, representing four percent disposal per annum. This policy trapped many US companies trying to sell off their holdings and move over to the US, and came on the heel of a US increase in interest rate from 0.25 percent to a 0.5 percent.
With all the proposed policy changes by the president of the United States, Donald John Trump, most importantly the introduction of the 45 percent tariff on Chinese products, the world will experience a full-blown trade war between the two largest economies on earth. It is therefore expected that emerging economies whose manufacturing sector are still very nascent will suffer more from this impending war.
The Effects of the Impending Trade War on Emerging Economies
1. The dumping of Chinese/American products on emerging economies: this will make countries like Egypt, Indonesia, South Africa, Malaysia, Nigeria, Angola, Algeria, Turkey, Brazil, Philippian, Argentina, Peru and Venezuela experience a very critical challenge in their manufacturing sectors. This will be occasioned by the influx of cheap china made products looking for other outlays. Chinese and American products will be sold in these places at less than what they are being sold in their respective countries, which will invariably affect the local prices of these products;
2. The further Yeunisation of less developed economies: in the past six years, China has signed currency swap agreements with the following countries – Argentina, Belarus, Brazil, Canada, ECB, Hong Kong, Iceland, Indonesia, Malaysia, Singapore, South Korea, Thailand, the United Kingdom, Uzbekistan, Tajikistan, with the latest being Egypt. It is believed that the Chinese government will make frantic efforts to develop additional currency swap deals with more countries to ease the importing of products from China to the detriment of the manufacturing sectors of other countries. In the short term, it is expected that these currency swaps will ease any US dollar exchange challenge faced by any of these economies but in the medium and long term the countries will be worse off, with the reason being that most of these economies are primary product (raw product) export and mono product dependent nations.
3. The increased deterioration of the macroeconomic fundamentals of emerging economies: it is projected that a lot of the countries importing easily from China or the US – depending on the trade master they wish to serve – will see their macroeconomic issues, such as interest rates, skyrocketing and unemployment rising as a result of the closure of some local industries. Also the inflation rate will be rising, sequel to uncontrollable import-led inflationary pressures and volatile exchange rates that are occasioned by the continued over dependence on imports, with non-commiserate export earnings.
4. The fall in commodity prices: the economic growth experienced by emerging market economies (EME) from 2013 to 2015 coincided with the growth in the Chinese economy. Again, the fall in the growth rate in China towards the last quarter of 2015 to early 2016 also saw a drastic fall in commodity prices in the international market which may continue till 2017. This may show a relationship between the Chinese economy and those of emerging economies that mainly export primary products. As soon this trade war begins, there will be a reduction or increase in production, depending on the strategy China decides to pursue. It is projected that a reduction in the production capacity in China will automatically result to a a fall in the prices of raw materials in the international market.
5. The decrease in Foreign Direct Investments. No economy can grow without an influx of FDI, as it assists in addressing foreign exchange issues and helping to stabilise the country’s reserves, which on the other hand helps to build investors’ confidence in an economy. We saw how the pledge on December 3, 2016 by SoftBank (Japanese) CEO Masayoshi Son to invest $50 billion in US is creating over 50,000 new jobs. More of these investments will likely flow to the US to the detriment of other economies, most specially the emerging ones that seriously need such funds.
6. The job losses and unemployment across economies: with the continued offshoring across many emerging economies and the resultant macroeconomic challenges facing them, job losses and unemployment are inevitable. Manufacturing sector jobs will be most hit. It will be surprising if there are newer jobs than retrenchments across many less developed economies, mostly on the African and South American continents.
7. The decrease in global growth/outlook: we saw how the decrease in oil and commodity prices in 2015 and quarter 1 and 2 of 2016 dragged the global economic growth lower to 2.6 percent in 2016 from 3.4 percent in 2015, as projected by the world Bank. Since the emergence of the BRIC bloc, China among others have been pushing global growth upwards, and any reduction in growth rate of the BRIC will also likely pull down global growth rate.
Policy Recommendations for Emerging Economies
1. All product standardisation organisations in EMEs should be restructured for effectiveness, as this will help to reduce the incidences of product dumping;
2. Future currency swaps with China should be conducted with due diligence. A holistic review of the agreements should be carried out before accenting to it. Currency swaps make import from China easier and should be seriously watched;
3. The macroeconomic fundamentals of each emerging economy should be addressed now. Countries should develop country specific fiscal and monetary policies to address inflation, interest rate, unemployment, exchange rate and economic rate;
4. Diversification of the economy. There has been a serious misapplication of the notion of diversification. Diversification should not be about replacing the export of one extractive commodity with another. Diversification should cut across most innovative, technologically driven exports of cost effective manufactured products;
5. Domestic policy, system restructuring and strengthening should be adopted, while land ownership, and ease of doing business across emerging economies should be looked into, with the aim of making the economy more conducive for FDIs;
6. Public Private Partnership (PPP) models should be sought out to replace loan stocks which have a way of encumbering future investments and development. PPPs should be used in financing and developing critical infrastructure. Foreign denominated loans should be avoided as much as possible, most importantly Eurobonds should be seldom used at this point.
There is no other time to be more proactive in the management of the economic lots of emerging economies than now, as there is a serious wave of global uncertainty. Globalisation has come to stay with its attendant regional and international challenges, making economies more vulnerable than before. The Chinese/American trade war will present a very critical turning point among economies, with some economies being able to take advantage of the trade war as in any other form of war, and others being used as expendable ponds. Whatever lot falls on a country will depend on their positions and the policies of their economic management teams.
Eziukwu Princewill, a development finance analyst, can be reached through firstname.lastname@example.org.