By Adebayo Ahmed | Since President Donald Trump was declared the winner of the 2024 election in the US, most of the world started holding its breath, with the level of economic uncertainty inching up multiple notches.
Many—economists and non-economists alike—expected a perhaps more intense version of the policy environment of Trump’s first term, which was riddled with ad-hoc and sometimes unconventional policy pronouncements and reversals.
President Trump’s first set of economic policy announcements came last weekend, with 25% tariffs imposed on all goods from Canada and Mexico, and 10% tariffs imposed on all goods from China. The tariffs were ostensibly to stop the flow of migrants and fentanyl, and perhaps to close trade deficits that were "too large." The tariffs on Canada and Mexico have since been paused for 30 days to allow for negotiations between the respective parties. China has retaliated with tariffs of its own on specific US products, as well as lodging a complaint at the World Trade Organisation (WTO).
Although tariffs have been used throughout history to achieve various objectives, economists broadly agree that they reduce overall economic welfare. Tariffs increase prices for consumers and raise costs for producers who rely on imported inputs. As many Nigerians have observed firsthand, high tariffs also incentivise smuggling and other illegal activities that circumvent official trade channels. While a source of revenue for governments, tariffs can be regressive: they place a heavier burden on lower-income households who spend a larger share of their income on the affected goods.
In this instance, the rationale for the tariffs is not necessarily economic but that is even more problematic as it sets a precedent for the use of trade policy as an economic and political weapon. It reduces the trust in good behaviour that has been the “engine-oil” of international trade which has contributed to lifting billions of people around the world out of poverty.
The impact of tariffs on the contending parties has been well discussed, with the consensus mostly negative. But the question for Nigeria, and perhaps other African countries, is what impact the new trade policy environment will have on the domestic economies.
Fig 1: Nigeria's export partners
In terms of the direct risks to Nigeria from an increasingly trade-restricted environment, the potential is low. As at 2022, the US accounted for 6.95% ($4.4bn) of Nigeria's exports and 5.57% ($3.4bn) of Nigeria's imports. The trends are likely similar with current data. Although the US may technically have a trade deficit with Nigeria, the scale compared to overall US international trade is negligible. Given the diversity of Nigeria's export partners and the fact that most of these exports are petroleum-related, which could easily find alternative buyers, the risks of being directly targeted for trade restrictions and for those restrictions to be impactful are very small.
Fig 2: Nigeria's import partners
The indirect impacts are where there are risks and potential opportunities for Nigeria. An escalating trade war between the US and China (the two largest economies) and perhaps other economies will most likely lead to a slowdown of the global economy. Estimates by the Brookings Institution suggest that the US economy could slow by 0.32%, Canada by 3%, and Mexico by 3.14% if the planned tariffs and retaliations are implemented[1]. The Economist Intelligence Unit suggests a 10% increase in the effective tariff rate with China could slow GDP growth by 0.3%[2]. This slowdown in two of the largest economies will have cascading impacts across the world and will affect most countries, including Nigeria.
The first indirect impact will likely be on the price of crude oil, with prices lower than they could have been without the trade-induced slowdown. Given that crude oil and natural gas still account for 90% of Nigeria's exports, this will significantly affect foreign exchange inflow and subsequently government revenue. Although there might be downward pressure on fuel prices, the expected depreciation of the Naira from lower crude oil forex inflows will likely limit the potential for Naira-denominated fuel prices. How serious the impact of lower oil prices becomes depends on how significant the drop in prices of crude oil is.
The second indirect impact will likely come through an increase in global inflation due to a more restricted trading environment. The reality of global value chains means that many products depend on inputs from goods that cross international borders. A more restricted trade environment means higher production costs, which in turn leads to higher prices. These elevated prices could affect Nigeria through imported inflation, potentially worsening our current inflation challenge or at least slowing down efforts to reduce it. As experienced during the COVID-19 pandemic, disruptions to global supply chains can lead to higher inflation everywhere, even in places that may not be directly integrated into global chains.
Despite the risks from the increasingly fractious global trading environment, opportunities also exist. Regardless of whether the tariff wars materialise or not, most countries will likely want to reduce their exposure to any single nation and minimise the risk of trade dependence being used as leverage for other policy objectives. This presents opportunities for third-party countries like Nigeria to increase their participation in the global trade arena. Of course, the fundamentals remain necessary—we need to establish ourselves as a reliable and capable trading partner. Currently, we have not achieved this status in most sectors besides crude oil. But there is no inherent barrier preventing us from improving our position.
The coming years will likely bring significant changes to the global trading environment, with major economies potentially retreating behind higher trade barriers. For Nigeria, this presents a complex mix of challenges and opportunities. While the direct impact of trade restrictions may be limited, the indirect effects through lower oil prices and higher inflation could pose significant challenges to our economy. However, the likely reorganisation of global supply chains also presents a unique opportunity for Nigeria to position itself as an alternative trading partner, particularly given our strategic location and large domestic market. The key question is whether we can implement the necessary reforms and improvements in our business environment to take advantage of this shifting landscape. Success will require not just identifying these opportunities but also making the hard choices needed to transform our economy into one that can reliably participate in global value chains beyond the oil sector.
[1] https://www.brookings.edu/articles/trumps-25-tariffs-on-canada-and-mexico-will-be-a-blow-to-all-3-economies/
[2] https://www.eiu.com/n/the-impact-of-us-tariffs-on-china-three-scenarios/
