Ghana’s stake in the US – China trade war

The shots continue to be fired in what increasingly looks likely to deteriorate into a full-blown trade war between the world’s two biggest economies. Onajite Sefia examines how the situation can impact on the Ghanaian economy.

A third world war has for decades been a favourite subject for military fiction writers such as Tom Clancy and Sir John Hackett. Invariably, those fictional, futuristic accounts have always imagined it to be a physical war between East and West and with the profound changes in the global geo-political structure over the past quarter of a century, the likelihood of such fiction becoming reality is behind the horizon.

Now however, a replacement scenario is unfolding; one which no one could have seen coming even a couple of years ago – a third world war where trade policy and import tariffs are the weapons of attrition rather than military aircraft, naval warships, tanks and soldiers. And China has replaced the hitherto Soviet Union as the primary force facing down the United States.

While this is actually an overly dramatic representation of the gradually intensifying trade war between America and China, it is nonetheless a war with potentially global impact and global dominance as the ultimate prize.

Last week, President Nana Akuffo Addo warned of possible consequences for the Ghanaian economy from the ongoing fray. Already Ghana is having to cope with external pressures caused by the US Federal Reserve Bank’s ongoing interest rate hikes which are strengthening the dollar and consequently forcing emergent market economies local currencies downward in value. Although the cedi’s depreciation so far this year is much smaller than that for many other emerging market economies, most notably Argentina and Turkey among several others, its effects in Ghana are magnified by the levels of its import dependence of both goods and capital. President Akuffo Addo’s discomfort with regards to the possible effects on Ghana of the growing trade dispute between the US and China is intensified by the knowledge that the evolving turn of events is completely outside the control of state economic managers in Accra.

Negotiators from both the US and China are still making frantic efforts to head off a full blown trade war between the world’s two biggest economies in the knowledge that it would do immeasurable damage to the global economy.

However, most analysts fret that those efforts will come to nothing because the main protagonists on each side are using it to divert attention away from domestic political failings and therefore find the growing face off to be politically expedient.

On the one side, American President Donald Trump is using China as a counterfoil to regain the support of erstwhile loyalist blue collar voters who have been disappointed by his failure to curb illegal immigration and to build the wall on the border with Mexico, both of which he had convinced them are responsible for their not having much better incomes and consequent living standards.

On the other side, Chinese President Xi Jinping is using America to garner dwindling support for state domination of China’s polity, which manifests in the form of government’s manipulation of the economy and lack of popular democracy.

But even as Ghanaians alongside the rest of the world, worry over the global fallout of a full-blown trade war between the two, they are also looking to see whether there are any potential advantages up for grabs.

There are, but those potential advantages also carry possible draw backs. This means Ghana will have to think strategically in its efforts to exploit them.

The most obvious potential lies with soya beans export. As part of its first wave of retaliatory measures to Americas imposition of 25% and 1O% import tariffs on steel and aluminum respectively, a move clearly targeting Chinese exports, China imposed 25% import tariffs on soya beans exported from the US. This is one of the biggest retaliatory measures taken by China against the US so far.

China is the world’s biggest buyer of soya beans, importing about 6O% of the volumes traded internationally, which it uses mainly for animal feed, while sorghum is the third largest cereal grown in the US. This has made for vibrant trade between the two – in 2O17, the US sold US$32.9 billion worth of soy beans to China, thus being the latter’s second largest source of supply after Brazil.  However, even prior to the new import tariffs imposed by China, American soy beans farmers were already operating at thin profit margins and so the new tariffs will render them price uncompetitive.

As with wars of all types, whether military or economic, each move by each protagonist, causes troubles for both sides; the new import tariffs will create supply problems for China’s livestock industry as well as for American farmers. The most obvious alternative source of supply is Brazil, the world’s leading exporter of the grains, but China already buys 75% of that country’s production which is already running at close to full capacity. Another alternative is Argentina, the world’s third largest exporter, where soy beans accounts for 17.5% of its total exports but a prolonged drought has curtailed its capacity to significantly expand production.

Ghana, on its own part has major capacity to expand production of raw soy beans, particularly from the three northern most regions. The country currently only produces 5O,OOO metric tons  but has the capacity to expand cultivation several times over at short notice since it is not capital intensive, does not have complex storage requirements, and is not easily susceptible to disease and pests. However, most of the local demand is for processed, rather than raw soy beans and typically, domestic processing capacity is severely limited, forcing the country to import large volumes of processed soy for its own livestock industry to feed on.

The imminent supply shortage facing China as a result of its trade dispute with the US now offers a huge export market for raw soy bean exports. While increased cultivation is not a short term process, all Ghana needs to do before the newly ignited trade imbroglio between China and the US is resolved, is to get its foot in the door to China’s economy; even after the issues with the US are resolved, whatever supply contracts entered into with Ghana would remain in force and China, having learnt from the ongoing trade dispute. would be only too happy to remain less reliant on American exports of the grain. It is instructive that a few years ago, a Chinese businessman, William So, made business news headlines in Ghana with his efforts to get the country to significantly increase its raw soy bean export capacity, this with a view to securing a new supply source for export to his home market.

However there is a downside to this – successful expansion of raw soy beans exports by opening up the vast Chinese market, could all to easily divert attention and efforts away from striving to increase Ghana’s domestic processing capacity.

While this is a purely economic issue, the wider opportunities available to Ghana resulting from the ongoing trade war, are more geopolitical. China has been seeking to secure increased natural resources from Africa, Ghana inclusive, for the past decade, using substantial foreign aid as a bait for securing production and sales agreements across oil, solid minerals and agricultural produce alike. It is instructive that China has, over the past year, regarded the Trump presidency in America as a great opportunity to win international trade market share from its rival and the new trade dispute has made this objective a strategic imperative.

Ghana itself has been seeking stronger economic ties with China for more than a decade now and that country’s approach to trade relations as a tool to increase productive capacity, such as the proposed use of Ghana’s bauxite as leverage for Chinese investment in economic infrastructure has greater appeal to the President Nana Akufo-Addo administration than the foreign aid assisted demand management policies recommended by the West.

Thus China’s ongoing dispute with the US, which opportunely has come in the wake of President Trump’s derisive description of African nations as “shithole” countries, presents an opportunity for Ghana to replace the West with China as its leading economic partner.

It is instructive that over the past year or so China has been more aggressive than usual in committing to support government’s initiative. A 2.5 billion commitment to providing factory infrastructure and equipment under suppliers’ credit terms for investors under government’s flagship one district one factory initiative is now being followed by concerted efforts to move forward 12-billion-dollar initiative to provide public infrastructure in exchange for bauxite mining rights.

However, Ghana will have to tread this path with extreme caution for two reasons. One is that China is indeed guilty of what Trump calls “economic aggression” in its relationships with other countries. Indeed, the US$375 billion trade deficit with China that the US incurred in 2O17 – which Trump wants reduced to US$1OO billion a year in order to end the trade dispute – is largely the result of coercive technology transfer and intellectual property acquisition by China, coupled with anti free market subsidies to its state owned enterprises and its refusal to open up key sectors of its economy, most notably financial services, to foreign competition. If Ghana adopts China as its main trade and investment partner, it should be ready to play by rules not covered by the World Trade Organization’s framework for international trade, but which give China undue advantage.

It is instructive that Ghanaian private sector chieftains are already voicing their concerns as to the likely bilateral trade policy induced increase in Chinese consumer goods exports to Ghana under a closer economic relationship between the two countries, which inevitably would be at the expense of domestic manufacturers. China’s dexterity in extracting maximum gain from its business deals with African emerging market economies is being illuminated ion Ghana by the ongoing Star times sports broadcasting. imbroglio

The second worry is that although the European Union countries – with which Ghana does even more business than with the US itself – do not particularly like Trump’s isolationist economic policies, they agree with his handling of what they agree is China’s economic under handedness. This means that Ghana’s shift towards China could put it at odds with its traditional closest economic allies, a situation that confirms that the China – US trade imbroglio is indeed a “world war.”

Indeed, even as Ghana seeks to maximize the potential advantages being generated by the growing trade dispute, it will need to ensure that it does not openly side with the ultimate loser, a strategy necessary for every nation that gets involved in a world war of any sort, whether military or economic.