For Nigeria, the biggest problem is not that our porous borders mean we may not be able to keep a riot of cheap imports out of the economy. Come to think of it, we might then be importing disinflation, which will ease the current pressure on consumer wallets, although wags will argue that this will be at the expense of domestic productivity. Nor would the problem of the local economy be that we would struggle to find markets for our main export earner — crude oil.
In the end, the new Trump administration implemented its campaign promise to impose tariffs on its major trading partners: 25 per cent in the first instance on both Mexico and Canada (effective date for which is now put forward for another month, as Canada and Mexico take steps, respectively, to staunch the flow of fentanyl into the United States — the proximate reason for the tariffs); and 10 per cent on China (in addition to existing tariffs imposed by the Biden administration).
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The IMF, for one, thinks it is too early to gauge the full impact of these decisions; but one thing is without doubt: The levels of uncertainty in the global economy are up. And to the extent that businesses hold off investing the more uncertain their operating environment is, it is a safe bet that none of these is in the global economy’s collective interest — if, at all, any is in the US’ increasingly narrow description of its interests (although, truth to tell, the US is less dependent on global demand than most countries in the world are on US demand). At which point, the US administration’s justification for each tariff regime is far less important than the fact of each regime having been put in place.
Worse, the European Union still awaits its own share of tariffs, and Japan will need to force its trade surplus with the US below last year’s $68 billion, if it is to avoid tariffs being slammed on its exports (for context, China’s trade surplus with the US, last year, stood at $340 billion).
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Unsurprisingly, the consensus in the markets is that a tariff war between the US and any of its trading partners (talk less of all of them as proposed by Mr Trump) will hurt the world economy, both through its effect on trade and then business investment, and through both to global output growth. The dynamics of a tit-for-tat imposition of tariffs worldwide are far more nuanced though. For the US, there is simply the general uncertainty that is the call sign of the Trump administration and its potential effect on investment. Higher prices in the US from elevated import prices and a scarcity of both inputs and basic goods is another downside risk. As is the pass-through effect of this on the domestic cost of funds — the Federal Reserve is expected to raise the Federal Fund Rate as prices begin to rise.
In this circumstance, a combination of more public sector borrowing and higher lending rates in the US will be responsible for the sucking sound we will all eventually hear as capital drains out of the rest of the world back to the US — at least in the initial phases of the war we appear headed into.
The initial tariff announcement led to an increase in the greenback’s exchange rate against major traded currencies. Additionally, US stock markets strengthened while bourses elsewhere experienced declines. One factor contributing to the improved market performance in the US was the anticipated impact of a lower tax regime on the bottom lines of businesses. However, a lower tax take, particularly if not offset by increased revenues from higher tariffs, could negatively affect the public sector’s borrowing requirements and overall economic performance.
In this circumstance, a combination of more public sector borrowing and higher lending rates in the US will be responsible for the sucking sound we will all eventually hear as capital drains out of the rest of the world back to the US — at least in the initial phases of the war we appear headed into.
Would China be a force for good? Already, domestic demand there is at levels that do not support current levels of business investment, manufacturing output, or the government’s targeted growth rates. Importantly, the Chinese government has fiscal room to try stimulate an uptick in consumer spending. One widely-expressed concern is that in response to a more insular US economy, China will look to export the excesses from its manufacturing activity to other (that is non-US) economies. This raises the spectre of countervailing tariffs by those economies (the EU, for one) that can afford to impose them. This poses additional headwinds against global output performance, as it were. For the rest of the world, therefore, the outlook from the outbreak of a trade war on the scale predicted by the incumbent US administration’s most recent activity is exceptionally dire.
Among the five indicators we typically use to assess the local economy’s performance, crude oil prices are likely to perform poorly in the current climate. Should the global economy decelerate significantly, as many analysts predict will occur if a tariff war ensues, the global demand for both fuel and lubricants would decline. Consequently, the Federal Government’s projections for oil prices this year already appear overly optimistic.
For Nigeria, the biggest problem is not that our porous borders mean we may not be able to keep a riot of cheap imports out of the economy. Come to think of it, we might then be importing disinflation, which will ease the current pressure on consumer wallets, although wags will argue that this will be at the expense of domestic productivity. Nor would the problem of the local economy be that we would struggle to find markets for our main export earner — crude oil. It is, instead, the bother from that sucking sound as capital flees marginal economies across the world in search of both the relative stability of the US and the higher yields that we think Trumponomics will lead to there — at least initially.
Among the five indicators we typically use to assess the local economy’s performance, crude oil prices are likely to perform poorly in the current climate. Should the global economy decelerate significantly, as many analysts predict will occur if a tariff war ensues, the global demand for both fuel and lubricants would decline. Consequently, the Federal Government’s projections for oil prices this year already appear overly optimistic. More concerning, however, is the potential impact on capital inflows into the country when global financial portfolios shift towards dollar-denominated assets, causing capital flight. A stronger US dollar and rising interest rates will exacerbate this effect.
The only advantage that the domestic economy has in all of this is the significant headroom before these secondary effects begin to kick in. The challenge for our policymakers and planners is, therefore, to design domestic policies that ameliorate the forthcoming shocks. Right now, no such policy mix best recommends itself than enhancing the economy’s flexibility — its ability to swiftly and effectively respond to internal and external demand and supply shocks — and resilience (the depth of buffers across sectors to absorb shocks that cannot be immediately addressed).
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
