The US vs China trade war could affect your pocket

The United States and China have waged a trade war in the last one year, but the battle has turned hotter in the last one week. US President Donald Trump has decided to impose more tariffs on Chinese goods. A tariff is a tax imposed on goods that are either exported or imported out of a country. Chinese goods imported into the US, will become more expensive.

China has also retaliated with tariffs on some US goods imported into the country. In addition, it has devalued its currency against the US dollar. This would make exports more attractive for its citizens. While this may all seem like events happening at a distant place, the tussle between both countries affects Nigeria (and Nigerians) in several ways.

Lower Federal Government revenue

China is the largest consumer of crude oil in the world. The United States is China’s biggest market for finished goods. If China produces fewer goods, it will need a smaller amount of crude oil. A drop in the demand of crude oil, will lead to a drop in the price of crude oil. Crude oil is currently trading a bit below the $60 mark, which the government has based its budget on. If the price drops to $50 as some analysts fear, the government will cut down on some of its spending.

Exchange rate

Government to an extent relies on the dollar earnings from crude oil to keep the exchange rate stable. Foreign investors also buy federal government securities, due to higher interest rate, and a stable exchange rate.

If the government’s dollar income drops, it may be forced to devalue or shift the exchange rate lower. If foreign investors, feel this would happen, they may decide to sell the federal government securities they own, and leave with their dollars.

How it affects your pocket ?

A devaluation of the Naira, means a lot of the goods and services with a dollar component, will be more expensive. Almost everything consumed in the country, has a dollar component.

The Central Bank of Nigeria (CBN) could also decide to increase interest rates, to maintain the interest of foreign investors, in its securities.

What should an investor do ?

The average retail investor can decide to increase their dollar holdings. In the event of interest rates rising, they can also increase their treasury bill and mutual fund holdings.