Global Trade Wars and the Nigerian Economy

Nume Ekeghe examines the likely impact of the ongoing global trade wars on the Nigerian economy

The escalation of trade tensions has sent investors scurrying for the sidelines, amid growing fears of an all out global trade war.
Reports by the UK Guardian that the United States President, Donald Trump planned to block Chinese companies investing in US tech companies and could also restrict tech exports to China has also heightened concerns over the expansion of the trade dispute.

President Trump last week threatened a 20 per cent tariff on cars imported from the European Union (EU) unless the bloc removes import duties and other barriers to US goods and the EU planned to retaliate, even as the union imposed tariffs on about $3.3 billion of American products in response to the US President’s barriers to imported aluminum and steel.

Cleatly, Trump’s latest salvo against the European auto industry further widened a trade war that he started with China early this year, raising concerns that the development could affect Nigeria.
Barely 10 years ago, a housing crisis in the US had raptured into what many economists labelled as the worst financial crisis since the Great Depression of the 1930s and it later hit the Nigerian economy causing a massive scale of destruction in almost every sector of the Nigerian economy.

Analysts React
Speaking with THISDAY, the Head of Research at Agusto & Co, Mr. Jimi Ogbobine said: “Firstly, in reviewing the current trade wars, we need to reflect on the words of Liam Fox (UK Trade Secretary) when he says that ‘nobody wins in a trade war, there are only casualties’.

“Nigeria is involved with trade with major actors of the current trade wars which include the US, China, EU and Canada. The current protectionist stance being pushed by the US will lead to higher costs of goods in the affected countries as these states impose retaliatory tariffs on each other.
“Thus, goods coming into Nigeria from the trade war states which might be affected by the tariffs, could become more expensive in Nigeria.”

On his part, the Managing Director/Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, said: “It is now a multiple trade war between the United States and several other countries. Now, the European union has imposed tariff on goods worth €2.8 billion, Canada is imposing tariff on goods worth 16.6 billion Canadian dollars, India is doing $3.4 billion and in all it is going to be about $50 billion.

Chukwu added: “What has happened is that the US president has actually triggered a trade war and on how it would affect Nigeria, firstly what would happen is that the economy is going to contrast or slow down as a result of this barriers, you could see a slow demand for crude oil.”

However, the analysts predicted more downsides of the development to the Nigerian economy.
Chukwu explained how it could slow down the global economy which might also hurt crude oil price.
He added: “It is basically oil that we export and if the trade war gets to the point where the global economy slows down, then the demand for energy resources would also decline and then that would affect the price of crude oil.

“Of course, anything that affects the price of crude affects our foreign reserves, our foreign exchange rates and possible, if it gets very bad it affects even inflation and other factors in the economy.”

He added: “The other aspect of this is in terms of the cost of goods and services produced globally. When tariffs are imposed on goods, the cost of those goods increase and that could also affect the cost of imported products into the country.

“So, we should also expect increase in a number of commodities we import. Items like vehicles, aircraft maintenance because these are largely composed of aluminium and steel.”
Continuing, he said: “We are already seeing a negative flow.

“A couple of weeks ago, until last week, we saw for three consecutive weeks that the reserve declined while the central bank was making efforts to meet the demand for foreign portfolio investors exceeding the country. We expect that to continue in the immediate.

“Another factor that the trade war could lead to is if it gets to the point where china decides to adopt the nuclear option; the nuclear option between China and the US could be a situation where china decides to sell down their holding of US treasury instruments then you are going to see a sharp increase of treasury bills or another government securities in the US that would lead to massive reversal of flow from emerging markets to the western countries,” he added.
But Ogbobine however, highlighted some of its advantages to the economy.

Ogbobine said: “There is also an upside for Nigeria. For instance, as China imposes retaliatory tariffs on US’s agricultural commodities, the Chinese will seek new markets for some of these products it imports from the US.

“Thus, states that are deemed to be more emollient towards trade with China could benefit from the search for new trade partners. This could lead to a boost in trade between China and such states.
“The Chinese will need to seek new markets for agricultural commodities like soybeans which imply there are significant upsides for Nigeria.”

Nevertheless, he noted that the trade wars “could stoke geo-political risks across the world.”
He added: “Countries like Nigeria which tend towards statist economic models and favour protectionist policies will view the current US stance as a stamp of approval on their conservative policy outlook.

“This could further reinforce the stance of the hawks opposed to the African Continental Free Trade Agreement (AfCTA). However, we must note that the world has become a more prosperous place in the last five decades due to free trade and globalisation.”

But the Director General of West African Institute for Financial and Economic Management (WAIFEM), Professor Akpan Ekpo noted that the ongoing trade tension, if allowed to continue, would affect Nigeria negatively. Ekpo said the development clearly has implication for trade in Nigeria.

He explained: “We know that our major export is oil and we import almost everything from China. So, if Chinese had to pay more to trade with the US, they will pass it on to us.
“So, Chinese goods in Nigeria may also go up and may result into what we partly call imported inflation.”

Owing to this, Ekpo said there was need for the federal government to continue to push for the diversification of the economy.
He added: “We must industrialise to fight what is happening between the US and China. We cannot continue to depend on the export of crude oil.

“We import virtually everything and don’t add value to anything. Granted we don’t have to manufacture the entire things we need, we can add value to some of our produce.

“So, from what is happening between the US and China, we should start to strategise on how to deal with this matter because Donald Trump is taking it very serious and same thing with China.”
According to the WAIFEM boss, what the US president did in terms of the trade tension “was to challenge liberalism.”

CBN Allays Fears
However, addressing concerns of likely capital flight, the Director, Banking Supervision Department, CBN Mr. Ahmad Abdullahi, the CBN is in a good shape to curtail any foreseen circumstances.

Abdullahi added: “The CBN understands the rise in US interest rate and its impact on the Nigerian economy, the trade wars and its impact also on the Nigerian economy, the tax cut in the United States and what it means for capital outflow for emerging economies like Nigeria.”

Continuing, Abdullahi said: “The CBN has enough arsenals. So, despite the mixed signals from the global economy and any likelihood of capital outflow, the CBN is prepared to deal with this situation and ensure stability.”