A BRIEF ANALYSIS OF THE IMPACT OF US-CHINA TRADE WAR ON SI ECONOMY – Solomon Star News

By Martin Baddeley Housanau

(an Economist by profession)

The US-China trade war has had multifaceted and wide-ranging effects on the regional and international trade and investment dynamics, and the Solomon Islands—a small Pacific Island nation classified as an LDC or Least Developed Country — is no exception. While its direct exposure to the trade tensions is limited due to its small economic size, the indirect effects largely through China’s shifting economic strategies and regional influence could influence its economy in the short, medium, and long term.

Solomon Islands as an LDC must take all precautionary measures to cushion and ease the effects of the trade tensions on the economy. As a Nation, we must prepare ourselves to face head on the impact of this trade war in terms of taking advantage of the opportunities, whilst at the same time to mitigate the risks exerted. This is a delicate situation that will continue to deteriorate as the rivalry continues to intensify in the Pacific region. Therefore, Solomon Islands must consolidate an appropriate policy mix and not to be careless in positioning itself aptly. 

The present trade and investment relationship between US-Solomon Islands remains small but strategically growing as Washington seeks to counter China’s influence. Whilst China dominates economically, the US is increasing diplomatic and aid-based engagement, with potential for future investment in fisheries, infrastructure and renewable energy. However, it was evident that China’s trade and investment in the Solomon Islands have expanded dramatically since 2019, through the PG2023 infrastructure funding of the sports stadiums and other facilities, making it the country’s most important economic partner other than Australia, US and its allies. For now, China is the biggest trading partner with Solomon Islands as well in terms of imports and exports, thus, Beijing holds a strong economic foothold in the Solomon Islands.

The effect of the trade war on the Solomon Islands Economy is perceived on three fronts, from the short to medium and long term. This is appropriate for us as ordinary Solomon Islanders to comprehend the impact of the rivalry and its magnitude on the economy as it intensifies in our region. Thus, the short term is classified as 1 to 2 years from 2024 to 2025, the medium-term impact is classified as from 3 to 7 years from 2026 to 2032 and long term is classified as from 7 to 15 years from 2033 to 2040. Thus, one could imagine the potential long-term impact of the trade war on an LDC country such as Solomon Islands.

The initial perceived front is the likely impact of the trade war in the Short-Term for 2 consecutive years from 2024 to 2025 would mostly the indirect effects including more Chinese investment and trade opportunities for Solomon Islands but with sustainability risks, coupled with increasing aid and attention for Solomon Islands as well from the US/Australia regarded as geopolitical benefits.

Firstly, trade diversion effects for Solomon Islands exports (mainly timber, fish, and agricultural products) are largely destined for China, which has increased its dependence on alternate suppliers due to US tariffs. This will result in increased Chinese demand for Solomon Islands’ raw materials (e.g. logs, tuna) as China seeks non-US sources. On the other hand, if global demand declines due to trade war spillovers, will consequently reduce commodity prices, thus decline in export revenues.

Secondly, aid and investment flows from China has been expanding into the Pacific together with Solomon Islands through infrastructure investments (e.g., stadiums, ports) and soft loans. The trade war may result in China accelerating its focus on the Solomon Islands (which switched diplomatic recognition from Taiwan to China in 2019) as part of its Belt and Road Initiative (BRI).

Thirdly, the currency and Inflation pressures from the trade war could weaken the Chinese yuan (CNY), resulting in the Solomon Islands’ imports from China (a major supplier) could become cheaper, that will ease inflation. However, a stronger USD (if the US Federal Government revalue its currency amid trade tensions) will increase fuel prices and imported goods.

The next perceived front is the likely impact of the trade war in the Medium-Term for a 3 to 7-years period from 2026 – 2032 would most likely to have deeper structural and strategic consequences for the Solomon Islands, influencing its economic path and geopolitical arrangement.

Firstly, the Solomon Islands geopolitical realignment and economic dependence on China may deepen economic ties with China as the US and Australia push back against Beijing’s Pacific expansion.  The potential risks may include debt dependency (if the present loans portfolios are not managed well) and potential decline or loss of our traditional Australian and New Zealand market access if geopolitical tensions intensify.

Secondly, fisheries and logging sustainability concerns in the likely event that China’s demand for timber and fish may lead to overexploitation, harming long-term environmental and economic sustainability. However, Solomon Islands could face export restrictions should the EU/US impose stricter regulations on unsustainable logging and fishing

Thirdly, Solomon Islands must be cautious and be sensitive in its infrastructure development funding negotiations and arrangements to enable reliable debt servicing. This is critical for Solomon Islands to boost domestic employment and connectivity, whilst sustaining its financial stability and sovereignty. The medium-term impact depends entirely on whether Honiara can effectively negotiate a secure path-or gets dragged into a new Cold War in the Pacific.

The last perceived front is the likely impact of the trade war in the Long-Term for a period of more than 7 to 15-years from 2033 to 2040 would profoundly restructure the Solomon Islands economic, political and environmental future should the US-China trade war and deliberate rivalry continued. The choices made today will define whether the Solomon Islands emerges as a resilient Pacific nation – or a casualty of the new Cold War.

Firstly, structural shifts in the economy may result in the event that Solomon Islands become more integrated into the Chinas economic sphere, reducing diversification if China continues to dominate trade and investment. This is a huge potential for Solomon Islands to attract manufacturing and processing industries in fish canning and timber processing if China relocates some production to avoid US tariffs.

Secondly, climate change and trade war collaborations from the US-China trade war could slow global climate cooperation, worsening climate susceptibility for the Solomon Islands resulting in rising sea levels, cyclones, other natural disasters. However, if China invests in renewable energy (e.g., solar), it could help alleviate climate risks.

Thirdly, geopolitical disintegration risks may result in disrupting trade and aid flows for Solomon Islands in the event that the Government may face pressure to “choose sides”, if the US-China tensions escalate into a Cold War-like divide and rule in the Pacific Region. This may also result in Australia, US and its allies’ escalation in counter-investment such as the Pacific Step-Up initiatives to balance China’s influence in the Region.

The Solomon’s has so far leveraged its position strategically since forging diplomatic relations with Beijing in 2019. However, we must be cautious of the current prevailing conditions as the tension progresses. Thus, the key considerations are that the short-term likely net benefit from increased Chinese demand for commodities, but vulnerability to global demand shocks. Whilst the medium-term risk of over-reliance on China, debt stability, and environmental degradation. 

Additionally, the long-term potential risks are for deeper China integration, as well as Australia/US aid driven for geopolitical and climate mitigation. Solomon Islands should now be focusing in diversifying its trading partners such as strengthening ties with ASEAN, and Middle East, whilst ensuring sustainable resource management, avoid overexploitation, and negotiating favorable loan terms with donors and international financial institutions to enhance debt stability.  

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