The world’s two economic heavyweights, United States and China, have been at loggerheads over trade since the early days of Donald Trump’s presidency.
The trade tantrum, which is simply a ‘battle of tariff’, took another dimension two weeks back when China lowered the value of its national currency, Yuan, to the lowest level since 2008, following fresh US tariff threat.
The events unfold very quickly, and one could get dizzy trying to keep up with the latest. However you can catch up on all that has happened in ten minutes.
Need to correct trade deficit
President Donald Trump of US, worrying about his country’s balance of trade deficit and in a bid to revitalize the US economy and bolster local producers, introduced tariffs on most of its trade partners.
Balance of trade (BOT) otherwise known as net exports is the difference between the monetary value of a country’s exports and imports. A country has a positive BOT when it exports outweighs imports, and vice versa.
Imposition of tariff elevates prices of foreign goods, making them less attractive. This triggers consumers to switch to local products, and also help reduce cash going out of the economy in imports. This Trump is keen to achieve.
Tariff enforced
China is US’s biggest trading partner, and the American nation has the largest trade deficit exposure to the Asian giant.
Right from his campaign days, Trump accused China of unfair trade practices and intellectual property theft.
His flight to presidency hinged on a vow to checkmate unfair practices by China, with threats to apply stringent tariffs.
Trump has so far, enforced tariffs on products manufactured abroad, affecting its trade partners such as Canada, Mexico and the European Union, with China getting the biggest blow.
The war began around early 2018 when US imposed tariffs on all goods from, and four months later, China responded with tariff of about 25 percent on US products.
Until May 10, 2019, China was paying 25 percent tariffs only on $50 billion worth of goods and a lower 10 percent on $200 billion worth of goods.
Both leaders agreed to return to the negotiating table after the Group of 20 leaders met at Osaka, Japan nearly two months back, but trade talks fell through without a truce.
More tariff in offing
The war grew from bad to worse as Trump threatened to impose a fresh 10 percent tariff on additional $300 billion worth of Chinese goods, effective September 1, unless China gives in to his request.
If the threat works out, almost all imports from China including smartphones, consumer goods and toys among others that were previously exempted, will be taxed.
China reacted by weakening its national currency, Yuan, to the lowest level since 2008, and directed public enterprises to halt purchase of US agricultural products, and promise to retaliate further if Trump’s effect his threat.
Global growth at risk
The crisis has been a nightmare to global growth, which has been sluggish and precarious. Seeing the dispute escalating, the International Monetary Fund (IMF) revised its forecast downwards to 3.2 percent and 3.5 percent in 2019 and 2020 respectively, according to figures in its latest outlook.
The trade war in addition to Brexit-related uncertainty, threatening global technology supply chains and rising geo-political tensions continues to put threat on global economy.
Hot money dash out of emerging markets
Emerging markets (EMs) are not spared from the backlash of trade dispute as foreign portfolio investors pulled out capital worth $6.8 billion from EM between in the first six days of August, according to figures from Institute of International Finance.
A quarter cut in Fed’s benchmark index failed to trigger investor appetite for EM assets, as trade crises outweighed the dovish tilt of the US apex bank.
EM stocks and bonds have a taken beaten. A gauge of EM equities, MSCI EM index, have been on losing spree since July 24, trading below the 1, 000 index points.
Bond flows have weakened albeit as slower pace than equities, with Africa’s most developed country, South Africa leading the pack of net outflows with over $600 million last week.
Worry, more worry for Nigerian economy Oil prices, Nigeria’s major source of foreign exchange, have come under pressure following the trade crises, which seem to be transiting into a currency war.
Brent per barrel is trading below Nigeria’s benchmark price of $60, thereby raising concerns about the country’s ability to meet its N3.73 trillion oil revenue target to fund budget.
Analysts say if prices continue to trend downwards, the impact goes beyond lower oil proceeds, but could squeeze the country’s external position, weaken the naira and propel foreign portfolio investors to move their funds offshore.
The domestic currency is already feeling the pangs, trading at N363 per dollar on the Investor & Exporter (I&E) window, down from N360 sustained since the year started.
Stocks bleed, Yields under pressure
Renewed trade war mean more owes to Naira stocks that have lost some 13 percent year long. Rout on the Nigerian exchange might persist until the fiscal authorities come up with bold policy pronouncement to revive market.
The Federal Government bond market is trading on a relatively calm level, with bond yields on Nigeria’s 10-year tenor flat at 13.69 percent on Thursday.
However, if the trade war lingers and oil price remains weaker, appetite of foreign investors for naira debt may wane.
This may fuel selling interest on the notion that Nigeria might not be able to meet obligations, which could push bond prices lower and yields higher.
However, analysts at Zedcrest Capital, in a note to investors, said yields will remain pressured in near term, on weaker oil prices and renewed Open Market Operations (OMO) by the CBN.
