Trade War Opens the Door for Emerging Markets

In the first two weeks of June the Trump Administration imposed a 25% tariff on steel imports and 10% on aluminum imports from Canada, Mexico, and the European Union, while slamming China with a 25% tariff on US$50 billion worth of Chinese products. These actions have sparked international uproar and retaliation from the affected countries. Within the past week the European Union have announced “rebalancing” tariffs on approximately US$3.2 billion worth of US products including steel, bourbon, peanut butter, corn, cranberries, and orange juice. China has also announced a 25% tariff of their own, worth a total of US$50 billion on 659 US products including soybeans, corn, wheat, pork, rice, and electric cars. Earlier in June Mexico didn’t stand down either announcing tariffs ranging between 15% and 25% targeting agricultural products including apples, potatoes, bourbon and pork, valued at a total of US$3 billion. Canada has also joined the party alongside Mexico imposing tariffs on steel, aluminum, maple syrup and more, worth a total of US$12.8 billion. Finally, while Russia has announced plans to retaliate, India has aligned with other nations on June 21^st announcing tariffs on 29 US products including apples, almonds, walnuts and steel worth approximately US$235 million. All these tariffs will have significant global impact as the prices of US products and imports will rise, potentially creating opportunities for emerging economies to fill the export gap in various markets.

                The soybean industry in one of the most exposed to upheaval, as tariffs impacts and regional droughts are creating major supply gaps within the industry. The United States accounts for 34% of the world’s soybean production while Brazil accounts for 30% and Argentina approximately 18%.

This has potentially led to a prime opportunity for Brazil, India, and other small players to increase production and take more market share. Together the USA, Brazil and Argentina account for 82% of world soybean production. Argentina might have been a player looking to increase soybean exports but has been recently plagued by damaging weather conditions. Unfortunately, major droughts in Argentina caused by a trough of low air pressure off the southeast coast of Brazil  have resulted in non – tropical climates which have inevitably brought drought. Some Argentinean farmers have seen yields cut in half while the nation has experienced a fall in soy production by 31% in 2017/2018.  Argentina has resorted to importing soybeans this season, seeing its highest imports from the US in twenty years, while also turning to nieghbor Paraguay. Thus, Argentinean prospects to increase soybean exports to gain market share are unlikely in the short term, as the nation firsts addresses domestic shortages. China is also a key player in the soybean industry, accounting for 60% of the world’s soybean consumption. Amid tensions with the US, the Chinese government has shifted its policy to encouraging a significant increase in domestic soybean production, but given the current scenario this might not be enough. While China consumes 60%, the country only produces 4% of the world’s soybeans, meaning it can only meet Chinee consumer demand for 7 weeks using domestic supply and are therefore forced to rely heavily on imported soybeans. Of the soybeans imported by China the USA accounts for 44% of imports and Brazil 45%. In April, before the tariff retaliations, US Soybeans imported to China were approximately US$403 whereas Brazilian soybeans were about US$414 per tonne. Forecasters predict that China’s 25% tariff on US soybeans could potentially increase US soybean costs to more than US$100 per tonne. Meanwhile, Brazilian soybean shipments to China will only be between US$15 and US$20 per tonne, making the possible overall cost of Brazilian soybeans, still approximately US$80 cheaper per tonne. These circumstances could heavily cripple the American market while firmly boosting Brazilian competitiveness. Therefore, Chinese tariffs and competitive Brazilian soybean prices sets Brazil in an ideal position to take advantage of the output gap, and potentially gain more market share.  

One of the challenges Brazil faces may be the extent to which its could increase production, but data from the rainforest monitoring organization Imazon has shown a huge increase and acceleration in between February and April 2018. These efforts are most likely in aim of clearing land for more farms and infrastructure to support the Brazilian agricultural industry. While this may be in favor of economic growth, these actions could have detrimental development and environmental consequences, as the Amazon rainforest is at a current deforestation rate of 17%. This is quickly nearing the predicted climate tipping point of 20% - 25% which could see catastrophic alterations in global climate patterns. Meanwhile, there are also other countries making small bids to increase their own market share within the soybean industry. Paraguay, the world’s 6^th largest producer of soybeans, accounting for approximately 3% of world production in 2016, overtakes Argentina for the first time this year as it looks to expand its influence and become a more regional player within the market. Furthermore, India has also approached China in its attempt to fill the global output gap after discussion at the fifth India – China Strategic Economic dialogue earlier this year. Chairman Rajiv Kuar of India told the Chairman of China’s National Development and Reform Commission, He Lifeng, that, “you import a lot of agricultural products, up to USD 20 billion or more…I was noticing that there are some tariffs you imposed on farmers' from Iowa and Ohio. Maybe India can substitute for soybean and sugar, if we could access those exports with all the due quality considerations to our farmers. That is very useful.”

By and large, given the market circumstances and the immense impact of global trade tensions and sanctions, smaller producers will become more active, but Brazil is in an optimal position to capitalize and substantially expand its soybean industry, agricultural sector and international trade ties which will ultimately leading to strengthening of its economy.

                In other markets, prospects are opening as well, as in the corn industry the EU could possibly be looking to Ukraine to fill the output gap. Ukraine is currently world’s 6^th largest producer of corn and Europe’s third largest supplier, and German agriculture research specialist, Wienke von Schenk, believes Ukraine could boost its position, as the EU looks to its markets amongst new tariffs. The past year has also seen the EU, the world’s 3^rd largest consumer of corn, turn to South African markets to satisfy their demand for the grain. Given the excess of 2017’s harvest size, excess supply led to lower prices, allowing the EU to import more South African corn than it in the past six years combined.

                Mexico is also revamping its corn sources as it is turning to Brazil for its corn imports. Mexico is the world’s 5^th largest consumer of corn and has already ordered 300,000 tonnes of corn from Brazil in 2018. This is a very small fraction of the 12.75 million tonnes Mexico imported from the US in 2017, but its five times more than the country imported from Brazil last year, and the capacity to expand remains strong. Even Alejandro Vazquez, head of Aserca, an agency in the Agriculture Ministry that promotes Mexican products, stated that Mexico should have searched for US alternatives many years ago, and that “Mexico was in a comfort zone….We didn’t need to go and seek these opportunities that we’re finding now.”

Russia is in a position to cash in on wheat exports, as tariffs hit the US and Chinese output drops an estimated 20% due to poor weather conditions over the past year. Russia is currently the world’s 3^rd largest producer of wheat (60 million tonnes), with China at number one (126 million tonnes) and the United States at number five (55 million tonnes). In further Russian favor, Indonesia, the world’s tenth largest consumer of wheat, has ramped up its imports of Russian wheat over the past year. Given the current conditions, the door is open for Russia while India, the world’s second largest producer of wheat, is looking for a slice of the pie as the sub – continent nation recently revised its forecast for 2018/2019 to 98 million tonnes, 3 million tonnes higher than originally expected.

Finally, the tariffs on US steel are starting to take effect as earlier this week, Harley – Davidson announced its withdrawal of some of its US based manufacturing. After experiencing a 6% fall in share price on Monday 25^th of June, Harley – Davidson said that it is going to increase production at its overseas facilities in India, Brazil, and Thailand. The company released a statement saying that the decision, “is not the company’s preference, but represents the only sustainable option to make its motorcycles accessible to customers,” in the EU and other overseas markets.

Summing up, Chinese tariffs on US soybeans have presented multiple opportunities within the industry for Brazil to fill an excessive output gap, while India attempts to capitalize by supplying China and smaller players such as Paraguay seek to increase their regional influence in the industry. The EU tariffs on US corn could possibly see the EU rely more heavily on Ukrainian exports while also venturing into overseas markets such as South Africa. The Chinese tariffs on wheat has seen Russia attempt to increase global wheat exports, whilst India has also ramped up production. Finally, Mexican, Canadian, EU and Indian tariffs on steel, are starting to take their toll as Harley – Davidson was one of the first companies to shift more manufacturing operations overseas to economies such as Thailand, India and Brazil.

Overall, the current tariffs, sanctions and market conditions are creating a situation in which the global supply market is vulnerable to change. If emerging markets prepare themselves and seize the opportunities at hand, they could be the unexpected benefactors of ongoing international trade disputes.

Nigerian Foreign Direct Investment: Acceleration and Threats

Nigeria’s history comprises of significant challenges leaving the nation to face civil war, poor governance, corruption, and terrorism. This has had significant consequences for not only their economy but specifically for Nigerian foreign direct investment (FDI). In the mid – 2000s the country saw a revelation concerning political stability and governance which, for the first time, led to substantial inflows of foreign investors. Today, Nigeria still confronts numerous challenges including the rise of terrorists groups like Boko Haram, but remains confident in their continuous effort to exert influence on the global economy. Foreign direct investment in Nigeria has experienced various fluctuations over the past 20 years but remains one of the country’s top priorities.

After gaining independence in 1960 Nigeria’s country and economy underwent high amounts of restructuring before experiencing the oil boom of the 70s which led to large investments by international corporations such Exxon mobile, Shell – BP, and Chevron[1].  Though despite reaching tremendous growth rates of above 25% in the early 1970s, Nigeria has unfortunately been cursed extremely with high levels of political instability and inadequate government and leadership. These insecurities within Nigeria have resulted in extreme levels of economic volatility which has led to low levels of foreign direct investment.

For the first time, through the course of the mid – 2000s, Nigeria experienced various transformations relating to better political stability, successful government reforms, and higher quality governance, which as represented in figure A[2], led to a large influx of foreign direct investment. In 1999, Nigeria ended sixteen years of military leadership as civilian rule was finally restored.[3] Nigeria went on to achieve its first ever peaceful transfer of civilian power in its 2007 general elections, marking the significant reduction in military intervention, which had plagued the country for 29 of its 40 years of independence, during the 20^th century.[4] Furthermore, in August of 2006, the Nigerian government agreed to terms of sovereignty over Bakassi Peninsula which had been disputed land with Cameroon for decades.[5] All these events within Nigeria contributed significantly to global perception of a politically stable nation which was one of the key factors leading to increased foreign direct investment throughout the mid – 2000s. Throughout the early – mid 2000s the Nigerian government also began to invest highly in the country’s infrastructure. Projects such as the Lagos Rail transit, which has had immense impacts on economic growth and development, had its official announcement of construction in December of 2003 and groundbreaking in 2008.[6] In addition to a new rail system, former president Olusegun Obasanjo created the national Integrated Power Project plan in 2004 which was designed as a solution to Nigeria’s long history of power challenges.[7] Despite certain delays in construction and high costs these infrastructure projects have shed a positive lights on the Nigerian government’s efforts and ability to improve infrastructure and therefore contributed to the influx of foreign direct investment.

            Throughout the early – mid 2000s, the Nigerian government also began to take more intensive anti – corruption measures. In September of 2000, The Independent Corrupt Practice Commission (ICPC) was established in aim of preventing and investigating corruption, educating the public on corruption and enforcing prosecution against offenders.[8] In addition, two years later in December of 2002 Nigeria launched, in further commitment to fight corruption, the Economic and Financial Crimes Commission (EFCC), whose duty was to investigate and examine all financial crimes and corrupt practices.[9] These agencies developed by the Nigerian government allowed for better monitoring and prevention of corruption, leading to lower investment risk and increasing foreign direct investment.

Finally, various government reforms concerning privatization, removal of subsidies, and deregulation allowed Nigeria to pursue more market orientated policies encouraging foreign direct investment. In 2005, the Nigerian government enacted the Electric Power Sector Reform Act (EPSR Act) which revolutionized the industry by ending the monopoly formerly controlled by government run Nigeria Electricity Power Authority (NEPA).[10] This reform highly increased market competition within the power sector, lowering the prices and further encouraging foreign direct investment. Furthermore, other reforms include the commencement of deregulation of the downstream sector of the Nigerian oil industry in 2002 in which various taxes and import duties were removed. Regulatory agencies such as the Petroleum Products Pricing Regulatory Agency (PPPRA) were also established in aim of achieving complete liberalization of the industry by 2003, which was later achieved. This resulted in the sectional growth of the oil industry through the optimal development of resource allocation and application, which reflected further positive signs for foreign investors.[11]  Thus, the various reforms and government actions have led to the highest and most successful inflow of foreign direct investment in Nigeria’s history.

            Despite the acceleration of FDI throughout the mid – 2000s, over the past five years terrorism has become a new threat to Nigeria and incoming foreign direct investment. In May of 2013, President Goodluck Jonathan declared a state of emergency in three states in the northeastern part of Nigeria, due to the rise of attacks carried out by the terrorist group called Boko Haram. Boko Haram attacks within Nigeria peaked between the years of 2012 and 2015 in which it carried out 746 attacks with a high of 270 in 2015, killing an approximate total of about 11,500 people.[12] This has resulted in significant negative consequences on Nigerian foreign direct investment. According to a study done by the World Investment Report 2013, Nigeria experienced a fall of 21.3% in foreign direct investment between 2011 and 2012.[13] Fortunately, most of Boko Haram’s attacks have been highly concentrated in the northern part of Nigeria, away from the financial center and capital of Nigeria, Lagos. Despite this the negative impact on the south remains high. Mass migrations of refugees from the north into the southern part of Nigeria has led to large increases in financial and psychological pressures for thousands, while also severely halting business operations throughout the country.[14] Over the past year, Nigeria has seen change, as combined efforts between the Nigerian army and international forces under the initiative of Nigeria’s most recent president Muhannadu Buhari, have yielded positive results in the war against Boko Haram. Fighters have retreated into the Sambisa Forest and in late 2016 reports claim that the last strongholds of the terrorist group were captured along with the rescue of 1,800 hostages.[15] There was also a presentation given by Nigeria’s new foreign minister of industry, trade and investment, Okechukwu Enelamah, in which he mentioned the issue of peace and security in Nigeria. Mr. Enelamah stated that, “Even though Boko Haram still is a threat in terms of individual sporadic attacks…they no longer occupy territory, or…[act]… like an alternative government or alternative group that has its own territory that it controls.” He continued, saying, “the country and we believe that it is a war that will be won and a war that we are winning.”[16] I believe that this information provides evidence that the control impact of the Boko Haram terrorist group has been significantly reduced over the past year. Despite this, the group still has not been fully eradicated and levels of political instability remain throughout the nation. Thus, foreign investors should on account of recent success of military coalition and government, once again raise investment interest in the Nigerian economy, but continue to proceed with certain levels of caution.

             The political instability, poor governance, corruption, the damage done by terrorism and the fight against Boko Haram, have seen significant progress throughout the mid – 2000s and over the past year. Thus, Nigeria has become highly desired amongst international investors on the global market and if to continue on this path will see a bright road ahead for foreign direct investment in the future.

Sources

---

[1] (Effoduh 2015)

[2] (World Bank 2016)

[3] (Hagher 2011)

[4] (Hill 2017)

[5] (BBC World News 2017)

[6] (Obiukwu 2014)

[7] (Onukwugha, et al. 2012)

[8] (Opara 2007)

[9] (Opara 2007)

[10] (Press 2005)

[11] (Maduekwe 2007)

[12] (Uhrmacher and Sheridan 2016)

[13] (TOCHUKWU 2013)

[14] (TOCHUKWU 2013)

[15] (Al Jazerra 2016)

[16] (Enelamah 2017)

1.