Trade wars | who wins?

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Chris Potgieter | Head | Old Mutual Wealth Private Client Securitiesmail me |


Amid an increasingly unstable geopolitical landscape, the looming possibility of a global trade war carries the risk of severe negative macroeconomic consequences, in that both the US and Chinese economies could begin to decelerate, triggering a world-wide recession.

On the flip side of this, however, the rise in trade tensions brings about a sense of investment opportunity with regard to the global food and agricultural value chain.

In times of global volatility caused by changing geopolitical factors, it is important to remember that there will always be winners and losers. Right now, for example, China is threatening counter measures by increasing tariffs on 106 US agricultural exports, including soybeans, which will likely play out in a way that handicaps some agricultural players, while benefitting others.

Looking at soybeans, specifically, the likely winners and losers, as well as the impact that potential trade shifts which play out as a result could have on South Africa. China is the second-largest market for US agricultural exports, of which soybeans have historically been one of the top agricultural products exported.

China’s announcement to introduce duties on these exports will therefore negatively impact the American farming community who historically export soybeans to China, while American food producers who use soybeans as an input for manufacturing other foods downstream in the value chain will benefit from this. Other winners with regard to this specific commodity would be countries such as South America, Australia and even South Africa, who are able to deliver soybeans to both the US and China.

Global trade war likelihood

While this is possible, it is, in my opinion, not probable.

It is important to remember that we’ve been here before. In 2009, the US raised tariffs on the import of tyres from China, to which China retaliated by introducing import tariffs on chicken feet – a delicacy in China that is otherwise wasted in America.

Subsequent to this, however, trade rebalanced. This is because excess supply will attract new markets, and unmet demand will result in suitable substitutes being established.

Who could benefit?

Substitution, is where South Africa stands to benefit most in all of this. South Africa can become a participant in the substitution of inputs, together with certain South American countries, such as Brazil and Argentina, as well as Australia.

Rounding up what this means from an investment perspective, geopolitics doesn’t necessarily have to spark uncertainty; it can also be viewed as an opportunity.

Given the current state of the global economic landscape, astute South African investors have the opportunity to invest in the various agricultural producers who stand to substitute production from either the US or China, as well as the broader food and agriculture value chain to the extent that food manufacturers can, in some instances, benefit from lower input prices.


 

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