Trade war and implications for Africa

Over the last few months, trade war, which is an economic conflict resulting from extreme protectionism, has taken several forms and targeted several products.

Triggered by the US Administration to address trade imbalances with its major trading partners, the government imposed tariffs on solar panels and washing machines earlier this year and subsequently a 25 percent tariff on steel imports and a 10 percent tariff on aluminium imports, with threats to impose several other tariffs.

Other countries retaliated, Canada, China, the EU, India, and Mexico in particular—which together accounted for 80 percent of the U.S. trade deficit in 2017—have imposed retaliatory tariffs on US products, with China, the EU and Mexico also filing complaints against the US at the WTO. 

In the month of July, the US Administration further escalated trade tensions by levying tariffs on US$34 billion worth of Chinese goods. China immediately retaliated with tariffs on US$34 billion worth of US goods leading to another threat to impose further duties on Chinese goods worth US$200 billion. The US has also threatened to implement a 20 percent tariff on cars from the EU, although, this latest threat appears to be somewhat abated following concessions by the EU to buy more US liquefied natural gas and soybeans.

The US is the largest market for EU car exports, amounting to US$41 billion in 2017, with Germany alone accounting for over half of this value. 

The US also took measures to protect its trade interests in Africa by suspending duty-free access to all AGOA-eligible apparel products from Rwanda. This followed the decision by Rwanda to follow through on an East African Community decision to outlaw the importation of used clothes and shoes across the East African region to boost industrialization and stimulate manufacturing production in member states.

The East African Community is one of the most important markets for the US used clothing industry. While the first threat could derail the new growth momentum in the EU after years of anaemic growth which followed the 2008 global financial crisis, the second could undermine ongoing efforts to deepen economic integration and promote structural transformation in East Africa. 

The specter of a trade war is raising global uncertainty and could derail the global growth momentum which has been broad-based. Already, the International Monetary Fund’s (IMF) World Economic Outlook cautions that rising trade tensions between the United States and the rest of the world risks lowering global growth by as much as 0.5 percent by 2020, most notably through trade and investment channels but also by disrupting global supply chains. In addition to a possible drag on global growth, the actions by the US to redress trade imbalances also hold significant implications for Africa.

China and the EU, which are the prime targets of US protectionist policies are also Africa’s largest trading partners, together accounting for over 44 percent of total African trade in 2017.

The impact on Africa could be especially pronounced given that the region has become heavily dependent on China in recent years.

For instance, IMF research analysing Africa’s increasing exposure to China has shown that a 1 percent decline in China’s domestic investment growth is associated with an average 0.6 percent decline in Africa’s growth.

The extent seems to be even more pronounced for resource-rich countries, especially oil exporters. Conversely, efforts by the US to redress trade imbalances may also present opportunities for Africa, as manufacturing companies, especially Chinese, could relocate to Africa to take advantage of lower labour costs and preferential access into the US market afforded by the African Growth and Opportunity Act.

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