A trade war is a side effect of protectionism that occurs when one country (say country A) raises tariffs on another country’s (Country B) imports in retaliation for Country B raising tariffs on Country A’s imports commonly known as ‘tit-for -tat.’
Protectionism refers to government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition. In ordinary terms, a tariff is a tax imposed on imported goods and services.
Trade tension started this year when the United States of America President Donald Trump on July 6, imposed tariffs on 818 goods worth of $34 billion (Shs128 trillion) of imports from China. This move substantially escalated the US-China trade tension (trade war).
In retaliation to US’ move China announced a 25 per cent charges on $16 billion (Shs60.2 trillion) worth of US goods the move which is shaking the global trade arena because of its possible effect in global economy.
The US has already imposed $50 billion in tariff on Chinese imports including $16 billion and threatened to follow up with levies on further $200 billion of products.
Any impact on Uganda?
As a result, the trade tension between the world’s largest economy and the second largest world economy has caused a slowdown in global trade.
To find out the current trade tension between US and China could affect Uganda, Prosper magazine spoke to experts who gave their insights on the current situation.
Much as the impact of the ongoing US-China trade tension is not yet in full scale, there are risks associated as ‘potential vulnerabilities’.
The executive director of research Bank of Uganda, Dr Adam Mugume, said trade tensions between the USA and China may not have direct impact on Uganda.
“However, indirect effects are substantial. Global growth could slow down dramatically as a result of trade tensions and this could hamper Uganda’s economic growth,” he said.
Dr Mugume explained that China’s growth has been a major driver of global growth and should it slowdown as a result of trade war with US, this will slow down infrastructure finance and Foreign Direct Investments.
“… Uganda’s infrastructure expenditure is linked to financing from China and also FDI from China has been a major contributor to Uganda’s gross capital formation. This points to challenges Uganda could face if China was to be affected significantly by the trade tensions,” he said.
Statistics from China show that the trade volume with Uganda has reached $811 million while FDIs from China to Uganda reached $400 million.
China in Uganda
China’s financing in Uganda is also growing rapidly, targeting energy and transport sectors. The major projects signed with China Exim Bank in Uganda include: $1.4 billion and $483 million for Karuma and Isimba hydropower dams, respectively. This is in addition to the $350 million for the construction of the Kampala- Entebbe express highway.
The trade war which could affect China comes in before the China-Africa Summit in following the last one it had in Johannesburg (South Africa) Summit of Forum of China Africa Cooperation, during which Chines president announced 10 major plans to boost cooperation between China and Africa.
During the South African Summit decided to provide $60 billion of funding package which covers the areas of industrialisation agricultural modernisation, infrastructure, financial services people to people exchanges among others.
China Africa summit
The 2018 Beijing Summit of the Forum on China –Africa cooperation (FOCAC) which started yesterday and ends today, will discuss new developments in the Africa-China cooperation as well as the way forward over the trade spat between China and US.
Development economist and Makerere University lecturer at the School of Economics and Management, Mr Fred Muhumuza explained to Prosper magazine that the USA and China trade row would impact on Uganda indirectly as China will be looking for new markets.
In doing so, it will lower its tariffs for goods it is exporting to countries where there are low or no tariffs, something which will result into China dumping its products here.
“It will be dumping its products very cheaply into the Ugandan market to try and consolidate what it has lost in USA market. China is going to be looking for markets outside the United States more aggressively than ever. This will have negative impact on our local products and manufacturing sector since we may not have the capacity for trade protectionism here as the USA,” he said.
But why doesn’t Uganda have the capacity for trade protectionism?
Uganda is mainly a net importer so it cannot begin introducing high tariffs (protectionism) because that will make its limited exports attract high tariffs elsewhere.
Not only has the US announced tariffs on Chinese goods but in other countries’ goods as well. The US president announced on August 10 the doubling of tariffs on Turkey aluminum which will attract 20 per cent and 50 per cent on steel, a development which saw the Turkish currency Lira, depreciate against the US dollar by 20 per cent. Uganda trades with Turkey on bilateral basis.
Mr Onen said the tension between US and China presents both challenges and opportunities.
A look at threats and opportunities for Uganda from the United States of America and China trade spat.
“The trade tension presents opportunities for us and we can design a strategy to attract Chinese investors to Uganda and begin making textiles here for export. We can export these textiles to US under the AGOA arrangement because it will be treated by the US as Ugandan products,” he said.
Ambassador Onen said for Ugandan products to qualify under AGOA, they must have 35 per cent of value addition which is possible and it can reach 50 per cent if cotton was to be added.
The World Trade Organisation (WTO) said in January this year that in 2017, it witnessed strongest growth in world trade since 2011.
The WTO said global trade recorded its highest growth rate in six years in 2017, both in volume and value terms. Merchandise trade volume, as measured by the average of exports and imports, grew by 4.7 per cent, marking the first annual increase in excess of 3.0 per cent since 2011.
“The dollar value of merchandise exports rose by 11 per cent, to $17.73 trillion, while commercial services exports increased by 7 per cent to $5.25 trillion. Merchandise trade growth in 2017 was up sharply from 2016, when trade volume grew by just 1.8 per cent, the smallest increase since the financial crisis of 2008,” WTO said.
The WTO added: “Growth in trade volume was strong in 2017 despite trade tensions. In the first half of 2018, these tensions translated into a number of trade-restrictive measures being imposed, covering a wide range of goods and major economies. How these measures will affect trade in 2018 remains to be seen, but they risk triggering a cycle of retaliation that could be disruptive for global trade and growth.”
The director general of WTO Mr Roberto Azevêdo said in April in Geneva 2018 during a news conference: “The rising trade tensions we have seen in recent months could put the recovery in global trade at risk, with inevitable consequences for the wider economy which could reach far beyond those countries that are directly involved.”
In August, Mr Azevedo said trade expansion will likely slow further in the third quarter of 2018 according to the WTO’s latest World Trade Outlook Indicator (WTOI) released on August 9.
“The most recent WTOI reading of 100.3 is below the previous value of 101.8 and just above the baseline value of 100 for the index, signalling an easing of trade growth in the coming months in line with medium-term trends. This loss of momentum reflects weakness in component indices including export orders and automobile production and sales, which may be responding to the ratcheting up of trade tensions,” he said.
The IMF said the possibility for more buoyant growth than forecast has faded somewhat in light of the weak outturns in the first quarter in several large economies, the moderation in high-frequency economic indicators, and tighter financial conditions in some vulnerable economies.
“Downside risks, on the other hand, have become more salient, most notably the possibilities of escalating and sustained trade actions, and of tighter global financial conditions,” said the IMF.
Impact of Brexit
Searching for new markets. Mr Muhumuza said it only does the US-China trade war posing a threat to global trade but also the Brexit from the European Union because the UK will be looking for markets elsewhere outside EU.
As per the ongoing negotiations in Brussel with the European Union and the UK government on Brexit, the UK is supposed to leave the European Union in March next year.
Before that happens UK is stepping up its trade relationship with some African countries.
Last week, British Prime Minister Theresa May concluded her three-day visit in Africa in Kenya on Thursday to strengthen trade ties with African countries on bilateral basis to show its open business after Brexit.
“All those developments are going to change the global economy and global trade. Dumping is going to be an issue as well as increased protectionism and bilateral trade arrangements,” Dr Muhumuza said.
International trade between different countries is an important factor in raising living standards, providing employment and enabling consumers to enjoy a greater variety of goods.
In a telephone interview, the Permanente Secretary in the Ministry of Trade Julius Onen, said the current trade war between US and China will not impact Uganda directly because Uganda’s trade with China is very small. He revealed that China mainly imports goods from Uganda for domestic consumption such as coffee and simsim among others.
“However, for countries exporting raw materials to China, which China processes for export to other countries, will scale down their exports because China’s market in US will become small,” Mr Onen said.
Boosting China-Africa ties
Uganda is among the 20 countries on the African continent where China has massively invested.
It is no wonder that China is hosting more than 1,000 African representatives from over 600 enterprises, business groups and research institutions at a conference of Chinese and African entrepreneurs in Beijing.
The conference, the sixth since 2003 and officially known as the High-Level Dialogue between Chinese and African Leaders and Business Representatives, ends today as part of a series of conferences under the 2018 Beijing Summit of the Forum on China-Africa Cooperation.