Could AfCFTA act as a relief measure to US-China trade war?

15 Jul 2019

BY PORTIA NKANI

Amidst the current hype around the prospect of a global trade war, there has been remarkably little commentary regarding Africa’s position in this equation. After all, the US and China are two of the largest investors in the continent, and China is the biggest trading partner for some of the continent’s most significant economies such as South Africa and Nigeria as well as small economies like Botswana.

Unlike usual, the continent has however not set aside to watch as things unfold in the global trade space. It has launched its dream to deliver on its long time promise of 1.2 billion person market.

For African policymakers including those from Botswana, the smartest strategy is seems to be “prepare for the worst and hope for the best”.

A local Economist who also works for Barclays Bank Botswana - Naledi Madala says trade war is a wakeup call to Africa. She said that the region needs to focus more than ever on the benefits of greater regional integration.

“The African Continental Free Trade Area Agreement (AfCFTA) holds a lot of promise for the African continent. If successfully implemented the AfCFTA will stimulate intra- African trade,” Madala said.

Madala indicated that, African economies are slowly recovering from the effects of the 2014/2015 commodity price crunch.

The uncertainty around trade has weighed down significantly on global growth leading to institutions like International Monetary Fund (IMF) revising down their expectations for global growth to 3.3 percent.

“Consumers and businesses are increasingly feeling the impact of these tariffs as they weigh on household spending and investors decisions, exerting downside pressure on growth. In response to slowing growth, global policymakers continue to ease monetary policy, particularly in emerging markets where several central banks have moved to cut interest rates in order to support growth,” shared Madala.

On the other hand, through the AfCFTA, African nations seem to be sending out the right signal at the right time.

However, despite the celebratory mood, pundits maintain that intense negotiations are likely to continue behind the scenes with numerous key issues, including setting common criteria to determine rules of origin for traded products.

The AU estimates that implementing the AfCFTA will lead to a 60-percent boost in intra-African trade by 2022. Today, African countries trade only about 16 percent of their goods and services among one another, compared to 65 percent among European countries.

In the meantime the trade disputes between China and US however is still regarded as a downside risk for Sub Saharan Africa countries which are still highly dependent on extractive industries and exporting raw materials to both economies.

Hanan Morsy -a senior official at the African Development Bank (AfDB) says persisting trade tension between the US and China could shave 0.7 percent from Africa’s GDP in 2019.

She was speaking after the release of the bank’s African Economic Outlook 2019 report, which said the continent registered growth of 3.5% in 2018, and was expected to grow 4% in 2019. This is higher than most regions of the world but still insufficient to address persistent fiscal and current account deficits and “unsustainable debt”.

The ongoing trade battle between the US and China could "have a negative impact of 0.7% of GDP from Africa. This impact will be through lack of trade and investment flows.

“AfDB in particular expects a noticeable impact in the tradeable sectors, including export commodities like minerals, oil and food-related products,” said Morsy.

Chinese Ambassador to Botswana Dr Zhao Yanbo who calls this as trade bullying by the US, firmly believes that cooperation based on equality and mutual benefit is the right way to go. “As is known to all, there is no winner in a trade war. Trade bullying practiced by the US goes against the trend of the times and is doomed to fail, he said as he expressed through his column in the Telegraph newspaper a fortnight ago.

He further said that; the US is undermining the authority of the multilateral trading system, moves to threaten the global economic growth and moves to disrupt global industrial and supply chains of which both China and US are links in global industrial supply chains.

Despite a sluggish world economy, China’s financial resource is still one of the largest contributing over 30 percent growth to global wealth. Its investment in Africa has skyrocketed in recent years from $7 billion in 2008 to $26 billion in 2013, to now $60 billion.

What Botswana stands to worry about is that, already we have seen weakening De Beers’ diamond sales over the first half of the year on the back of global macroeconomic uncertainty. This is a major source of concern for Botswana because the country is highly dependent on diamond revenues. The diamond mining giant De Beers has recorded its lowest rough diamond sales cycle as the miner continues to struggle with declining sales.

The provisional rough diamond sales for the fifth sales cycle dropped to a 20-month low of $390 (P4.1 billion) – down 33 percent from 2018’s fifth sale of $581 million (P6.2 billion) and a 6 percent decrease from the fourth sales cycle of the year which netted $416 million (P4.4 billion). The decline was attributed to “the slow movement of lower value rough diamonds through the pipeline”.

The latest fifth sales cycle is the lowest of all June sales since De Beers started publishing its data in 2016, and the sight is usually a money spinner for De Beers, fetching $564 million in 2016 and $541 million the year after.

Bruce Cleaver, CEO, De Beers Group was quoted in his June cycle statement as saying, “while overall retail sentiment for diamond jewellery in the US remains solid, a more challenging environment in China and higher than normal polished diamond inventories in the midstream resulted in a cautious approach from rough diamond buyers during the fifth cycle of 2019.”