Macroeconomy Amid Trade War VI

Clashes of the titans in trade May prolong the struggling state.

Export is another area that is highly likely to be influenced by the trade tensions between the USA and China. Bangladeshi RMG export to the USA witnessed negative growth in the last quarter of 2023. Fed's ongoing policy rate hike played a role to a great extent in this negative growth apart from other factors like monetary tightening in Bangladesh. RMG,jute,leather, fish and home textiles are top export performers for Bangladesh. Already trade tensions between the titans eroded market share of RMG export to the US market. Bangladesh's competitors like Vietnam has managed to increase its share in the US market in recent years. As part of monetary and fiscal tightening policies, govt slashed various subsidies, raised taxes including source tax and made import policies stricter. In addition, downgrade of Bangladesh's credit ratings by credit rating agencies has made it difficult for Bangladesh to avail trade credit from foreign countries. Only good news for the export sector is that it is going to see more depreciation of Taka. The trade tensions may bring opportunities.Back in the first round of trade tensions under Trump presidency,ADB forecast that Bangladesh would bag extra $400 million.(source:"ADB:Trade War To Generate Additional $400 Exports For Bangladesh",Dhaka Tribune,March 06,2019.Link: https://www.dhakatribune.com/business/170512/adb-trade-war-to-generate-additional-400m) If trade tensions are intensified again, we may see Bangladesh may join new regional blocs and form FTA. Joining RCEP and free trade agreement with China may increase both FDI and our exports. This kind of arrangement narrows the gap in competitiveness between us and our competitors. In 2022-23,our total export was $43.57 billion. Now let's see what the macroeconomy will look like adding the export sector under different scenarios.

Exports: More than $43.57 billion

Fed funds rate: 5.33%
Chinese policy rate: 3.45%
More exports will ease the pressure on dollar demand. As the contractionary monetary policy is in place, import is subdued. So both the trade balance and current account balance will be positive and both will increase overtime. Despite the export growth, timely repatriation of export earnings is not guaranteed. It is because dollar returns are higher abroad. Depreciation of taka will be lower or no depreciation if growth of current account surplus continues for over a year. Inflationary pressure will be lower. However, whatever dollar will come to the country will be spent to pay foreign debt. Less private sector credit and subsidies for the exporters. Exporters have to rely on foreign credit if available. Credit in yuan,yen and rupee will be available for exporters. Forex reserve will improve. Contractionary policy may not be prolonged.

Fed funds rate:More than 5.33%
Chinese policy rate: Less than 3.45%
Pressure on dollar demand will be eased but significant amount of export earnings will remain abroad due to high returns on dollar deposits. It is not certain whether there will be a trade and current account surplus. Government may hinge on domestic borrowing to meet the revenue shortfall. Depreciation is needed. Policy rate hike is needed to ease the inflationary situation. Forex reserve improvement will be relatively lower. Contractionary policy will be longer than previous scenario. Private sector credit to exporters will be lower than previous scenario. More dependence on foreign credit for export expansion.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
Ideal situation for economic recovery. Chances of repatriation of export earnings are higher, reaping the benefits of high exports. Depreciation is not needed. Trade surplus and current account surplus will improve the forex reserve situation. Both dollar and other currency credit will be available at affordable terms.

Exports: Less than $43.57 billion

Fed funds rate: 5.33%
Chinese policy rate: 3.45%
We may witness both trade and current account deficit. Large depreciation is needed. More policy rate hikes are likely to happen. Government and private sectors may have to borrow from abroad at stricter terms. Budget deficit may widen. External debt position may worsen. Contractionary policy will be long compared to previous scenarios.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
Trade and current account deficit will be larger than previous scenario. Forex reserve situation may deteriorate. More policy rate hike and depreciation are needed to tackle the situation. More borrowings from abroad. Contractionary policy will be relatively longer compared to previous scenarios.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
There may be trade and current account deficits. This scenario may not guarantee recovery. Nor does it guarantee improvement in forex reserve. However, deterioration of forex reserve may not be worse than previous scenario. Good news is foreign credit will be available at affordable rate.Contractionary policy will be relatively longer than the scenario of export more than $43.57 billion .