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.

Macroeconomy Amid Trade War IV

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

This depiction of macroeconomy amid trade war between the two titans continues. Before bringing few other factors into the sketch, it is pertinent to look at the means and counter means employed in this trade war. Tariffs and entry restrictions are identified as the key tools at the heart of this trade war. In addition, security reasons, rules of origin,legislation designed to achieve the desired goal are also employed.

• Section 301 of the US trade act of 1974,Entity list,Foreign Direct Product Rule (FDPR) and Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act allows US govt to impose tariff on Chinese goods and provides incentives to promote import substitution industry. CHIPS for America Act allows US authorities full control of technology used in semiconductor fabrication. That means the US can deny rights of using the technology to manufacture semiconductors to other countries.^{1 & 2}
• Rules of origin provision in regional trade agreement barred use of Chinese components in goods like automobiles.¹
• President trump imposed tariffs on Chinese washing machines,solar panels and electronic goods.¹
• China retaliated by imposing tariffs on soybean,cars,aircrafts,aluminium and pork.¹
• US put Huawei into Entity list and restricted it buying american parts and warned US companies buying equipments from it.
• In US states like Florida, purchase of agricultural lands,lands near military installations are planned to be prohibited.²
• Storing data of US citizens into Chinese servers is also prohibited.²
• Denying applications like TikTok on govt devices.²
• In Florida,schools are being instructed not to receive any gifts from China.²

Entry barriers and other forms of restriction exist long before the trade war. China does not allow X, Google,Amazon and Facebook in the country. US and EU do not provide certifications to aircrafts made-in-China to operate in their territories. This is not part of the tools designed for trade war. Rather,it captures the protectionist mindset of the two rivals. Despite being members of WTO,both countries use punitive/countervailing tariff( endorsed by WTO on the ground that partner country is using subsidies to an extent that could harm welfare of the greater consumers) to restrict entry of rival's goods.

Source:

1. China-United States Trade War. Link:https://en.m.wikipedia.org/wiki/China%E2%80%93United_States_trade_war
2. The China and American Trade War---Where Will 2024 Take It? Link:https://www.eezyimport.com/the-china-and-american-trade-war-where-will-2024-take-it/?utm_source=google&utm_medium=cpc&utm_campaign=21105015484&utm_adgroup=&utm_term=&utm_content=&gad_source=1&gclid=EAIaIQobChMIyPqO_47RhgMVZ6RmAh3ToAGIEAAYASAAEgKtjPD_BwE

Macroeconomy Amid Trade War III

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

Private sector credit plays a vital role in the growth of economy. Private sector makes good use of money. This year govt intends to borrow Taka 1.37 trillion from the banking sector. It will definitely shrink the flow of credit to the private sector. At the end of March 2024,private sector credit was Taka 1517.21 billion,registering a 10.49% growth. Whereas at the end of March last year, it was Taka 1553.69 billion,registering a growth of 12.03%(Source: Bangladesh Bank). Clearly, private sector credit in terms of absolute and relative size declined in one year. Less credit to private sector means less domestic investment, slash in domestic production. This piece sketches how the trade tensions between the US and China influence the macroeconomy by adding the private sector credit factor.

The first piece was written while keeping in mind the private sector credit was Taka 1517.21 billion. Let's see how the scenarios will look like when private sector credit is more than Taka 1517.21 billion and when it is less than Taka 1517.21 billion.

Private sector credit: More than Taka 1517.21 billion

Fed funds rate:5.33%
Chinese loan prime rate: 3.45%
It will depend on how the private sector credit will behave. If the money is laundered abroad then it will do harm. On the other hand, if it is invested back in the economy or is used to pay old debt then some vibrancy in the economy may be observed. More LCs will be opened, more capital machinery will be imported. Revenue earnings will be increased. NBR's revenue shortfall will be narrowed. Amid trade war, private sectors' access to domestic credit will grow. More Chinese credit will be on the table at affordable rate. Government may have to depend less on the banks in this situation. It may improve inflationary situation. No large depreciation is needed. However, private sector external debt may rise. And we may have to stick to contractionary policy for a long time.

Fed funds rate: More than 5.33%
Chinese loan prime rate: Less than 3.45%
In this scenario, chances of laundering of private credit are higher than before. Depreciation of the local currency is needed. Depreciation will be less than the default scenario. Because private sector will have access to more credit. More Chinese credit both for the govt and private corporations. Inflationary pressure will be there but it will be less than the default scenario since private sector credit will accelerate economic activities. However, rising policy rate in the West may slash consumption,affecting export growth of Bangladesh. If private sector credit is used in purchasing govt treasury bills ,then there is no productive use of private sector credit.

Fed funds rate: Less than 5.33%
Chinese loan prime rate: Less than 3.45%
This is an ideal situation for economic recovery. Inflationary pressure will be less. Policy rate hike does not need to be prolonged. Economic recovery will be earlier than any other scenarios. Both the Western and Chinese credit will be available. Western consumption will increase,boosting Bangladeshi export. FDIs will rise.

Private sector credit: Less than Taka 1517.21 billion

Fed funds rate:5.33%
Chinese loan prime rate: 3.45%
If private sector credit drops ,then economic activities will be slower. More depreciation is needed. More interest rate hike over a long period of time is needed to tackle the inflationary pressure. Private sector has to borrow more from abroad especially Chinese credit ,which will be in plenty. It will increase our external debt.

Fed funds rate: More than 5.33%
Chinese loan prime rate: Less than 3.45%
Large depreciation is needed to compensate the exporters. Trade deficit may grow. Long period of contractionary policy is needed to contain inflation. Private sector's dependence on foreign credit ,mostly Chinese,will be higher than other scenarios. Country's external debt position may worsen.

Fed funds rate: Less than 5.33%
Chinese loan prime rate: Less than 3.45%
Inflationary pressure will be less but more than the scenario under more private credit. Economic recovery will be earlier but take longer than the the scenario under more private credit. More foreign credit will be needed for the private sector.

Macroeconomy Amid Trade War II

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

In the previous piece ,I depicted a rough sketch on the macroeconomic situation amid a trade war between the US and China. Let's add few other factors to make the sketch a bit clearer. Here I start with adding the crude oil price. The previous piece is based on the assumption that crude oil price is $70/barrel. Now let's see what the scenarios will look like when the crude oil price is more than $70/barrel and when it is less than $70/barrel.

Crude oil price: More than $70/barrel

Fed funds rate:5.33%
Chinese policy rate: 3.45%

It will put pressure on existing import. It has the potential to worsen inflationary pressure. Continuation of policy rate hike for a long period. But tax revenue from oil import will rise. Depreciation is needed to make contend exporters. But depreciation of taka will also raise the revenue. Remittances from the Middle Eastern countries may rise.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
It will worsen the strain of import expenditure. As foreign credits will be hard to get, financing existing import expenditure will see an uphill task. Exporters' cost of manufacturing goods will also rise. More depreciation is needed than the previous case. Inflationary pressure will be higher than the previous scenario. Interest rate hike will be higher and continuation of this policy will be longer than the previous scenario. Revenue earnings from depreciation will be higher but import bill of oil and food grain and other necessary items will cast shadow over it. Remittances may be lower than the previous scenario. Part of the oil revenue may be invested abroad and the the rest will be invested in local domestic infrastructure project. Chinese credit/FDI bound to US may enter Middle East amid trade war. China financed infrastructure project in the Middle East may see less participation of South Asian work force.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
Less stress on import spending. No depreciation is needed. It will put pressure on revenue earning if NBR fails to meet its target. Remittances will rise. Most of the oil revenue from high oil prices will be invested back in the Middle East. More Bangladeshi workers may find jobs in these countries. Part of the money may be invested in Bangladesh, giving a sigh of relief to Bangladeshi private sector that heavily depends on Dubai and Singapore based banks for foreign credit.

Crude oil price: Less than $70/barrel

Fed funds rate:5.33%
Chinese policy rate: 3.45%
Less pressure on import spending on oil. It will help easing the inflationary pressure. Economic recovery will be early. However, less Bangladeshi workers may find jobs in the Middle East. No bigger depreciation is needed. Chinese investment in Bangladesh may rise.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
Depreciation is needed but less than the default scenario ($70/barrel). Inflationary situation will be better than the default scenario. China will be in a much more comfortable position to grab large share of EU market with weakened Yuan and low oil price. More Chinese credit and FDI for the Middle Eastern infrastructure projects may shrink the opportunity of Bangladesh workers. Less remittance flow than other scenarios. Money supplying measures by Bangladesh Bank will be less than the $70/barrel scenario. Chinese investment in Bangladesh will rise.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
More foreign credit and FDI will come to Bangladesh. Inflationary situation will be better than all scenarios described so far.Ongoing contractionary monetary policy will not last long. Economic recovery will be earlier than any other scenarios.

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Macroeconomy Amid Trade War

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

Bangladesh Bureau of Statistics (BBS) divulged that inflation again increased to 9.87% in May. It is highly likely to see another round of hike in policy rate in the next monetary policy statement. A 1% increase will make the policy rate 9.5%,narrowing the gap between current inflation rate and policy rate. Fitch ratings downgrade of Bangladesh's credit rating will make foreign credit harder for the public and private sector. Bangladesh Finance Minister is optimistic about getting the third instalment of IMF credit package. IMF in its last board meeting in May cleared credit package for Ecuador.

Things turn out to be difficult for the government. Revenue shortfall,dependence on domestic borrowing from banks,lack of foreign credit and FDI will cause further depreciation of taka against US dollar. Central bank's stated policy of containing the inflation rate to 7.5% may be prolonged and face serious hurdle in the wake of trade war between China and USA.

So far US federal fund rate is being stuck at 5.33%. Federal Reserve System has no intention to lower it as it sees inflation will take time to ease. Moreover, lowering the interest rate will raise the US treasury bond price,facilitating the process of ditching US treasury assets by govts not happy with US policies. Meanwhile Chinese policy rate is now 3.45% and it may go down further. It will make Chinese goods even cheaper. Let's draw a rough sketch on how the macroeconomic situation will prevail in the country given different policy rates in USA and China and trade tensions between the two countries.

Fed funds rate:5.33%
Chinese policy rate: 3.45%
If the current policy rates prevail and the countries engage in tariff and trade war, then Bangladesh has to further depreciate the currency since value addition condition to US-bound goods will also get tougher. However, special treatment to US cotton made garments may give some favor. But to meet the extra cost emanating from trade restrictions, Bangladesh has to depreciate its currency further to give the exporters some kind of favor. On the other hand, Bangladesh has to continue its contractionary policy for a longer period to mitigate the inflationary pressure.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
It will be hard to get foreign credit and assistance in US dollar. Dollar-based investment and return will be lucrative in the West and few will be reluctant to invest here where timely repatriation of profit is under scanner. Meanwhile, Chinese credit will be cheaper. Both the government and private sector will hinge on Chinese Yuan,easing the pressure on US dollar. Weakening of Yuan may increase Chinese share of EU export market, putting pressure on Bangladesh's export to EU. EU will unlikely to get tougher on China in the wake of a trade war in a bid to neutralize it against Russia. In this situation, taka has to be depreciated more than the previous scenario against the stronger US dollar and to stall the dollar flight. Amid tight monetary policy, the central bank may resort to money supplying measures,further worsening the inflation. More rise in policy rate and delay in stabilizing the macroeconomy. More reliance on Chinese credit and deepening trade ties between China and Bangladesh.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
It will help Bangladesh getting foreign credit in US dollar. Less pressure on forex reserve and taka. Ongoing monetary policy may go as usual and goals may be attained in the anticipated time. No large depreciation of taka is needed to make the goods more competitive. Easing of import restrictions on capital machinery may increase economic activity. Cheaper foreign goods/ingredients may ease inflationary pressure. Economic recovery will be early. This is an ideal case for Bangladesh as both the Yuan and US dollar credit will be available at an affordable rate in the wake of a trade war. Bangladesh may have to convert a significant amount of its US dollar assets into other IMF SDR currency or to procure gold if there is further unease in the relations between Bangladesh and USA.

Since access to foreign credit gets tougher for Bangladesh, Bangladesh has to prolong its austerity measures. In all three cases ,we see that Bangladesh has to continue raising policy rate and depreciating its currency. Likelihood of the occurrences of the cases would further depict a grimmer picture . Most optimistic scenario/case(the last one) for Bangladesh is less likely to happen. In a heated trade war,US will not lower the policy rate. The second one (worst for Bangladesh) will have a better chance to emerge than the first one. We have to further tighten our belt.

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