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.

BCS Part 2: A Brief Look into a Botswana's Diamond Economy and Trade

Through fiscal discipline and comprehensive financial management, since gaining its independence in 1966, Botswana has consistently be able to maintain overall economic success. This has allowed Botswana to build one of Africa’s strongest modern day economies and transform itself from one of world’s poorest countries to a middle – income country with a GDP per capita of US$16,400 in 2015 (Central Intelligence Agency (CIA), 2016).  According to S&P Global, one of the world’s three largest credit – rating agencies, Botswana has a stable A- credit rating which is the best in Africa (S&P Global , 2011). Botswana has a strong economic platform and despite experiencing fluctuations in economic activity, they have been able to maintain stable and consistent values across various economic measures.

Botswana has been able to maintain one of the world’s highest economic growth rates since independence and in 2015 Botswana’s GDP was valued at US$14.41 billion which reflected a 1% increase in GDP from the previous year. Over the past decade Botswana has maintained an average GDP growth rate of approximately 5%, which has been one of the fastest in the world, and therefore ensuring economic stability and a quick recovery from the 2008 Global Financial Crisis (The World Bank, 2014).

 As a result of an aggressive response by the Botswanan Government to the GFC, Botswana was able to achieve a GDP growth rate of 8.56%, its second highest level of GDP growth since 1999. To counter the adverse effects of the 2008 recession, Botswana’s government implemented a few strategies aimed at keeping aggregate demand and employment high.

This included financial support to some private companies to keep jobs and investments, which came in various forms, including subsidies granted to 35 companies in the textiles industry. Others were also given loan guarantees for capital costs and plant upgrades, while the government also launched budgeted infrastructure projects as part of the stimulus. The government also specifically targeted corruption to prevent the waste of resources and cut expenses relating to travel, vehicles, office furniture, training and workshops. The table above shows all the major projects which the government planned as part of their response and although some were suspended most were fully implemented and contributed to the overall economic recovery of Botswana’s economy (Ntsosa, 2011). 

The funding for this stimulus came from a US$1.5 billion granted by the African Development Bank (AFDB). The loan’s goals are “to support the implementation of the Government’s 2009/10 budget aimed at alleviating the negative impact of the global financial and economic crisis on Botswana’s economy. It will fill part of the budget deficit (13.5% of GDP). Its goal is to create competitive conditions for accelerated private sector growth, economic diversification, and poverty reduction. The program focuses on the following key areas of reforms (i) promotion of privatization and Public-Private-Partnership (PPP) initiatives, (ii) Improvement of competitiveness and trade, and (iii) improvement of financial sector governance and strengthening of the regulation of nonbank financial institutions” (Page v, AFDB, 2009).

In addition to Botswana’s government response the Bank of Botswana, in aim of encouraging exports, swiftly lowered interest rates in response to lower global inflation rates allowing for the depreciation of the Pula against currencies of major countries (Ntsosa, 2011).

In transitioning to a focus on Botswana’s exports, imports and overall trade balance, the government of Botswana has maintained a stable and healthy current account balance. This is reflected by Botswana’s strong trade balance in 2006, three years before the Global financial crisis and the positive, stable trade balance which they have upheld since 2013, after recovering from the GFC.

(Honde & Fitsum, 2015)

In 2015 Botswana’s GDP growth rate fell -0.25% which was the first time since 2008 that it had reached a negative value. Economists believe it was due to the drop in global luxury goods market which had a heavy impact on the Botswanan economy as diamond exports account for 20.8% of total GDP. In October 2015, president Ian Khama revealed a stimulus plan which would boost the country through agricultural production, construction, manufacturing and tourism development (Central Intelligence Agency (CIA), 2016). In 2016 Botswana entered its fourth consecutive year of drought and export diversification is an aspect of Botswanan trade which still needs to be addressed. According to 2012 statistics provided by the OECD Botswana’s export composition is as shown in the graph below (OECD, 2013). 

Botswana’s export composition shows that the government’s ambition of growing their tourism industry to a sector of high GDP and export value, has yet to become a reality.

Most of Botswana is covered by the Kalahari desert and therefore has an extremely dry and arid climate making access to water one the country’s biggest challenges. This limited opportunity for farming explains why Botswana’s agricultural sector only accounts for approximately 3% of the country’s GDP. Despite this, Botswana has taken measures to ensure further growth in their Diamond industry by signing a ten – year deal with major international diamond company, Da Beers, in 2012. Da Beers agreed to move its rough stone sorting and trading division from London to Botswana’s capital Gaborone in 2013 with the aim of move geared towards supporting the development of Botswana’s already large and fast – growing diamond industry (Central Intelligence Agency (CIA), 2016). 

Sources

Central Intelligence Agency (CIA). (2016, November 03). Library: The World Factbook. Retrieved from https://www.cia.gov/Library/publications/the-world-factbook/geos/bc.html

Honde, G. J., & Fitsum, A. G. (2015). UNDP in Botswana. Retrieved from United Nations Development Programme (UNDP): http://www.bw.undp.org/content/dam/botswana/docs/Publications/Botswana%60s%20GDP%202015.pdf

Ntsosa, M. (2011). The Impact of the Global Financial Crisis on Botswana Economy. Asian-African Journal of Economics and Econometrics Volume 11 , 45-63.

OECD. (2013). OECD Investment Policy Reviews: Botswana. Retrieved from https://www.oecd.org/daf/inv/investment-policy/IPR_Botswana_Oct2013-Summary.pdf

S&P Global . (2011, November 23). S&P Global Ratings. Retrieved from S&P Global : https://www.standardandpoors.com/en_US/web/guest/ratings/entity/-/org-details/sectorCode/SOV/entityId/350287

The World Bank. (2014). GDP Growth Rate. Retrieved from http://data.worldbank.org/country/botswana