What does protectionism mean for African economies?

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Jameel Ahmad | FXTM

We’ve seen fallout from the West hit African economies hard in the past. The subprime mortgage debacle and resulting 2008 financial crisis left the banks relatively untouched, but exports, tourism and foreign investment all took a hit, as did assistance from developed nations. The result was unemployment and poverty. Could the West, with protectionist agendas and a looming trade war, hurt African economies? Jameel Ahmad, FXTM’s Global Head of Currency Strategy and Market Research, shares his view.

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Globlisation and Africa

Post-war, when globalisation was vogue and developed nations embraced free-trade, poorer economies were regularly rebuked for their domestic focus. Ethopia’s closed economy and Zimbabwe’s protectionist policies saw them internationally blacklisted as undesirable business environments.

And yet, globalisation also created obstacles to the continent’s economic growth. The EU’s Common Agricultural Policy (CAP), for instance, was designed to increase the competitiveness of European produce and stabilise global markets. It had a huge impact on commodity markets and greatly benefited EU producers, but reduced the competitiveness of African beef, sugar and maize in the global marketplace. Would African economies have fared better going it alone?

Tariffs and Trade Wars

President Trump shocked the world in early March when he announced plans to impose a 10% tax on aluminum exports and a 25% tariff on steel imports. Both the EU and China threatened retaliations almost immediately, heightening market fears of a trade war. Simmering discord between three major economies has set markets on edge, and the Dow Jones has fallen more than 2.5% since the tariffs were first suggested. European, U.S and Asian stock markets are also feeling the pinch.

Africa, relatively isolated from the machinations of the financial markets, might not yet feel the ill effects of Trump’s tariff proposal, but the continent stands to lose far more than most should a trade war become a reality. Last year was the first since 2008 that the world’s key economies advanced at a similar pace; a trade war would likely end this positive economic growth.

The demand for African resources is driven by global growth and, as such, is essential for the continent’s economies. As the largest buyer of African commodities, the Chinese economy is of particular importance — its growth is tied to Africa’s. If China gets caught up in a trade war with the U.S, African exports will likely suffer.

Globalisation vs. Protectionism

A switch from globalisation to a protectionist agenda might grab the headlines and rock the markets, but the two approaches are more similar than they seem. Both standpoints are driven by self-interest — governments pursue free trade for the benefit it offers their economy, not their neighbours’, and the same is true of trade tariffs and embargos. Where globalization differs is that it drives international growth, which in turn fuels expansion of African economies. If the protectionist agenda wins and a trade war becomes a reality, all of the world’s economies will suffer, Africa’s among them.