eBusiness Weekly
Bridget Mafusire and Beryl Kamanga.
The World Investment Report, 2019 highlights three main aspects that are critical to Foreign Direct Investment, these are (a) Climate action, (b) debt and (c) trade tensions.
The last in a three-part series, this article explores the aspect of trade tensions. The specific focus will again be on Zimbabwe, in order to highlight where it stands vis-à-vis the effect of trade tensions, and what improvements may need to be made in order to attract better FDI.
Nearly two years since the now infamous US-China trade war began, both countries have imposed tariffs on billions of dollars worth on goods. A classic trade war as it were, it all began with the accusation by the US against China for unfair trade practices and intellectual property theft. As China retaliated, the situation snowballed and is not protracted as the year draws to a close. While both sides agree that an amicable agreement taking into consideration, the end is not really in sight as a lot is still hanging in the air as at the time of writing this article.
What Trade Tensions?
The piqued interest in the trade war is not only because of the drama that the current US president brings to the table with him when interrogating the topic publicly (see @realDonaldTrumptweets), but is also rather (and more importantly) due to the potential threat that the war could have on the global economy.
Trade tensions happen when one country takes a retaliatory action against another by raising tariffs or placing other restrictions on goods from the opposing country. These tensions are usually as a direct response to some form of protectionist policy. The US-China trade dispute is a classic example of trade tension, which has morphed into a media-hyped trade war. In recent times, general references to trade tensions usually refer to that particular dispute. This article takes on a similar approach.
Protectionist policies are used by governments to balance trade deficit; that is when the value of imports is greater than the value of exports. These policies sometimes have a detrimental effect on trade between countries. Trade tensions among major economies usually have spillovers, externalities and several ripple effects on many other countries as highlighted by UNCTAD in its 2018 edition of Key Statistics and Trends in Trade Policy.
Trade protectionism has been used by many countries including Zimbabwe as a way of helping the nation recover from economic downturn. In many instances, the effect observed is, however, somewhat opposite of the expected thus causing further economic setbacks leading to a recession or sometimes even a depression. The main objective of trade barriers and protectionist policies is to protect a nation’s economic interests, its proponents cite better balance of trade and protection of local industries as its main advantages. The dangers of retaliation when a country adopts protectionist policies are, however, always lurking.
Exhibiting all the hallmark effects of protectionism, the US-China trade war is a great example of just how badly this may affect economies in the long run.
“…more than a year and a half into the biggest trade war in modern history, Mr. Trump’s approach has not yet produced the grand finale he hoped for. Instead, the president’s cliffhanger tactics appear to have made it even harder to bring complex trade talks to a close and exacerbated economic uncertainty across the globe.”
How Africa (and Zimbabwe) Is Affected
The World Investments Report states that trade tensions are a cause for concern. There are several ways in which African countries are negatively impacted by the US-China trade war. Below is a summary of some findings on the potential effects.
Inability to Fill Market Gaps
While various authorities hold differing views on the probable cost of the trade war, there is a general consensus that as most African countries are not competitive enough to replace US and /or Chinese firms, there is not likely to be any new opportunities arising to fill the market gaps created. From the outset, indications are that Africa in general is not set to directly benefit from the trade war save for South Africa’s wine industry.
The Africa Growth and Opportunities Act (AGOA) (go to www.agoa.info for more) provides market access to the US for sub-saharan Africa countries. In the event that these countries were to improve competitiveness, the AGOA provides a unique framework which allows them to trade freely with the US. Unfortunately, Zimbabwe is not a beneficiary of the AGOA and as such would not be able to make full use of any new opportunities created by the US tariff increases on Chinese products.
Development Aid and FDI
The global economic recession, which is a direct consequence of the trade war, will most devastatingly affect Africa due to its dependence on aid and FDI from the developed world. Zimbabwe’s 2020 National Budget Presentation shows that sizeable proportions of the country’s aid comes from the USA, and China. The ability to sustain the aid and the long term borrowing that development partners were bringing to Zimbabwe will most likely be severely affected as economic recession hits the first world and China. According to recent reports from the second half of the year, the trade war has now deteriorated to a currency war and the potential ripple effect has already been felt as stock markets weakened and the indicators of a recession started showing.
For Zimbabwe, hopes of increased inward FDI flows are pinned on some key deals announced in 2018. The World Investments Report records a small number of projects that resulted in fast-growing FDI flows for Zimbabwe and Uganda, but from an extremely low basis. The report is also hopeful of new investments such as the Sinosteel deal in the processing of natural resources as potential support in the industrialization process and a move up the value chain. More recent reports on this investment indicate that the exploration phase is complete for the construction of a gas to power project and an integrated petrochemical processing system.
While Zimbabwe still has a way to go in realising real benefit from the Sinosteel investment, its important to note that sino-zim relations are shaky at the moment owing to some concerns raised by China over the representations made in Zimbabwe’s 2020 National Budget regarding the extent of financial support extended to Zimbabwe, and possible mishandling of funds by the Zimbabwe government.
Depressed Commodity Markets
A key source of income for countries in SSA is commodity exports such as oil, cobalt, iron, and copper. Copper and cobalt markets have taken a plunge on the London Stock Exchange, as these essential materials for smartphone batteries have been affected by the tariff increase imposed by the US.
As production slows down in China, its demand for raw materials from Africa also slows, thus causing a reduction in exports from Africa. Countries such as Zimbabwe, Angola, DRC and Kenya that have a significant amount of commodity exports to China are left vulnerable as commodity prices plunge.
The African Development Bank (AfDB) earlier in the year reported that the trade war will likely lead to a 2.5% drop in the GDP of resource-rich African countries in the next three years. As Zimbabwe desperately needs foreign currency, the continued downturn in commodity prices is worrisome. Statistics from August 2019 show that over 50% of Zimbabwe’s exports are minerals, with gold, ferro-chrome and nickel ores making up the bulk of mineral exports. Zimbabwe is fairly safe in this regard as analysts generally concede that with the ongoing US-China trade war, the fears of a global economic recession have prompted investments to move more towards the safe haven assets including precious metals such as gold and platinum. The price of nickel also rose amid speculation of a rising demand in car manufacturing industries. All in all the commodity prices do however remain a concern for Zimbabwe given its general volatility and currency troubles.
Dumping
The potential for China to dump its products very cheaply into Africa is a real threat basing on an arising need for replacement markets as the US’s stance on increasing tariffs remains. While China and the US are well versed in making anti-dumping investigations, a similar threat for African countries may not so easily be investigated.
For Zimbabwe, an assessment of the legal framework for anti-dumping shows that there is need for a complete overhaul in the current legislation, as it does not sufficiently cover effective means of investigating dumping. Furthermore, this assessment finds that while the current legal framework does meet WTO requirements, it also lacks in creating certainty in the market, and allowing transparency.
The need to review local capacity in anti-dumping and counterveiling charges is a serious cause for concern, and could indeed be a key contributor to the continued downward spiral of meaningful activity in the manufacturing sector.
In Conclusion
There appears to be a mixture of opportunity and harm coming Africa’s way, so far it analysts have predicted more harm than opportunity.
In general, as the trade war is likely to cause economic recession, which will have a direct impact on the amount of FDI and aid that can flow to Africa. As a country that significantly relies on aid, and that desperately needs FDI, Zimbabwe will be impacted negatively.
The potential of China dumping cheap products into the African continent is very real. Zimbabwe needs to review its current legislative framework and to build the necessary skill set within its private and public sector.
