Global trade faces uncertainty over tariff wars

Global trade faces uncertainty as escalating trade tensions and tariff wars cast a shadow over the outlook in 2025, according to a new report United Nations Trade and Development (UNCTAD).

This outlook, particularly affecting developing countries like Nigeria and its West African peers, is due to potential shifts in U.S. trade policies, increased industrial protectionism, and ongoing geopolitical frictions.

2024 trends

Throughout 2024, global trade trends continued to follow the gradual increase that began in the second half of 2023, according to the UN’s Global Trade Report.

During the last four quarters, trade growth in developing countries generally outpaced that of developed countries. However, this trend inverted in Q3 2024, with trade growth largely driven by positive trade dynamics in developed economies.

The UN reckons that moderating global inflation, stable economic growth forecasts and improving business activity point to continued positive momentum in global trade for early 2025. But this trend is expected to face substantial challenges

Shifts in United States trade policy

“Potential shifts in United States trade policy, and the increased use of industrial policies in many countries, are likely to negatively influence global trade growth,” the UN stated in the trade report, adding that the threat of renewed and expanded trade wars, following U.S. President-elect Donald Trump’s threat to impose tariffs on peers once he takes office, has sent ripples through the industry.

New tariffs might not only target geopolitical adversaries but also affect key trading partners like Nigeria, and might not be directed at specific products, but rather implemented more broadly.

At $3.4 billion in 2022, Nigeria is the second largest U.S. export destination in Sub-Saharan Africa, running a trade deficit of $177 million. “Tariffs could be affecting not only geopolitical adversaries but also key trading partners, particularly those with higher tariffs and significant trade surpluses with the United States,” the report said.

It reckons that even modest changes in United States tariffs will have substantial effects on global trade dynamics, given the United States’s role as a major consumer market and the “interconnectedness of cross-border value chains.”

Ripple effects of trade restrictions

“Unilateral and highly restrictive trade policies frequently prompt retaliatory actions creating a cycle of escalating trade barriers which may eventually involve also third parties,” the UN stated.

China, Canada and other economies threatened by tariffs from the U.S. have already geared up for a potential trade war. “Even in the absence of actual tariff increases, the mere threat of tariffs and possibility of retaliatory actions fosters a less predictable global trade environment, which can negatively impact not only international trade but also investments and overall economic growth,” the UN says.

For Nigeria, this could mean higher costs for its petroleum product exports, which are integral to global value chains, affecting not just bilateral trade but the broader economy.

Moreover, the global push towards environmentally friendly industrial policies might challenge Nigerian sectors like agriculture and oil, where compliance with new standards could be costly. UNCTAD predicts these measures will hamper international trade growth, particularly in strategic sectors crucial for Nigeria’s economy.

“A rise in trade-restrictive measures and inward-looking industrial policies designed to support the production of sustainable and environmentally friendly products is expected to negatively affect the growth of international trade, particularly in strategic sectors,” The UN said.

The dollar impact

Geopolitical tensions and United States policy shifts are expected to potentially lead to an appreciation of the United States dollar. However, possible interest rate cuts in 2025 could also weaken the dollar. This is critical for Nigeria, whose international transactions are dollar-denominated. While the dollar might strengthen due to these tensions, potential U.S. interest rate cuts could weaken it, adding uncertainty to Nigeria’s trade forecasts.

Lower shipping costs

In the second half of 2024 there was a reduction in demand for container shipping, as reflected by a significant decrease in the Shanghai Containerized Freight Rate Index. The UN says that while these indices indicate lower shipping costs, they also indicate lower global demand both for intermediate inputs and processed goods.

The reduction in shipping costs, while beneficial in lowering the expenses associated with imports, poses a complex challenge for Nigerian exporters. Nigerian businesses could face tougher competition in international markets, where buyers are more cautious with their expenditures.

Consequently, exporters in Nigeria need to explore new markets or diversify their product offerings to counteract the potential revenue drop that comes with lower global demand to capitalise on the cost benefits without compromising on profitability.