Macroeconomy Amid Trade War V

Clashes of the titans in trade May bring the happy state.

Trade tensions between the two major economies shrank global growth in the past. According to IMF, decline in global economic growth was 0.30%. It definitely decreased demand of goods globally. Agricultural outputs concern us a lot as their price levels influence the inflationary pressure at home. In the past, soybeans and soybean related products were subject of trade sanctions. If this time another round of tariff imposed on soybeans and agricultural products, then their demand in major consumption center like China will decrease. But China will substitute its demand for American soybeans with Brazilian soybeans. Soybeans or soya meals are extensively used in making fish feed and poultry feed. Fall in prices of soybeans means fall in prices of poultry feed and fish feed. Consequently, keeping the cost of fish farming and poultry farming low results in low prices of fish and poultry products. On the other hand,Brazilian soybeans may see a demand spike. In general, food inflation will be low if trade tensions push down the price levels of agricultural products. Recent Saudi decisions of paying oil prices with other SDR currencies will play a role in easing the inflationary pressure in the low income countries. Because the countries will be able to get credit in Yuan at 3.45% or Yen at 2% from other wealthy countries or multilateral donor agencies to pay the oil bill, significantly lowering their dependence on dollar credit at 5.33%. Relying on other currencies to pay oil bill will discard the need of borrowing from domestic sources to pay interest and loans taken in dollar. Domestic borrowing often results in printing money and thereby aggravates inflation.

So far this depiction discussion limits to a situation where inflation rate is 9.89%. Now let's see what the macroeconomy will look like when inflation is more than 9.89% and when it is less than 9.89%.

Inflation: More than 9.89%

Fed funds rate:5.33%
China loan prime rate: 3.45%
In this scenario, we may not reap the benefits of low prices of agricultural products like soybeans in the international market. High inflation may eat away the resulting price reduction and domestic prices may not translate the global price reduction. Domestic policy rate will continue to rise. Contractionary policy will be longer. Depreciation will be larger. Pass-through effect on inflation will depend on the domestic production of food grains and exports.

Fed funds rate: More than 5.33%
China loan prime rate: Less than 3.45%
It will make the cost of living really hard. No benefit gain resulting from low prices of soybeans amid trade war. Inflationary pressure will be higher than the previous scenario. More borrowing of currencies like Yuan and Yen to pay the import bills particularly crude oil bills. External debt position may worsen. Delay in repatriation of export dollars. Depreciation of taka will be larger than previous scenario. Contractionary monetary policy will be prolonged. Economic recovery will be delayed.

Fed funds rate: Less than 5.33%
China loan prime rate: Less than 3.45%
Despite the high inflation at home, chances are there that international low prices of soybeans may translate into lower food prices. Because cost of borrowing will be lower than the previous two scenarios. More LCs will be opened. Depreciation will be less than earlier two scenarios. Contractionary policy will be shorter than the two scenarios but a bit longer than any other scenarios because of high inflation.

Inflation: Less than 9.89%

Fed funds rate: 5.33%
China loan prime rate: 3.45%
In this situation,we may reap the benefits of low soybeans prices at the international market due to trade war. Domestic policy rate may stop. Climbing cost of living will come down. Large depreciation is not needed. Contractionary policy will be shorter than the scenario of more than 9.89% inflation.

Fed funds rate: More than 5.33%
China loan prime rate: Less than 3.45%
Cost of borrowing will decide whether we may benefit from the resulting low prices of soybeans. Relatively less borrowing of other currencies compared to the scenario under more than 9.89% inflation. Depreciation of taka will be less than the scenario of more than 9.89% inflation. Contractionary policy will be relatively shorter.

Fed funds rate: Less than 5.33%
China loan prime rate: Less than 3.45%
Ideal situation for economic recovery. Discarding early the contractionary policy. No large depreciation of taka. Low agricultural products' prices at the international market will be fully translated into domestic prices of food amid trade war. Both domestic investment and FDI will increase as cost of borrowing will be low. Foreign credit including dollar credit will be available for both the public and private sectors.