Hidden threat to South African economy

South Africa’s deteriorating relations with the US and increased competition between the world’s largest economy and China pose a significant threat to the local economy that relies heavily on trade for growth. 

In recent years, geopolitical uncertainty has sharply risen, with global conflicts breaking out and increased economic competition. 

Stanlib chief economist Kevin Lings said this is very unhelpful for economic growth worldwide and in South Africa. 

At Standard Bank’s Democracy and Markets event, Lings said politics has become increasingly polarised in recent years. 

This is disastrous for global growth as the international economy fractures and trade declines, particularly between the world’s two largest economies – the USA and China. 

While these issues may seem distant from South Africans, they greatly impact the local economy due to its small size and extreme openness. 

Lings pointed out that over 60% of all GDP generated in South Africa involves imports and exports to some degree, making the local economy heavily reliant on global trade. 

This also makes the South African economy highly susceptible to international shocks. 

“When you are in South Africa in this environment, it is very difficult to manage your relations with major trading partners. You constantly get called on to pick sides, threatening trade and relations with major economies,” Lings said. 

In particular, deteriorating US-China relations pose a substantial threat to local economic growth as South Africa is stuck between the world’s financial powerhouse in the USA and its largest trading partner in China. 

Picking either side will have disastrous consequences for South Africa, costing the country billions in trade and potentially cutting off its access to much-needed foreign capital. 

“This is not good. We need both the USA and China as partners. South Africa has to play nicely with everyone as a small and open economy. This is a difficult line to tread but is possible with skilful diplomacy.” 

If South Africa manages to stay neutral, it stands to gain tremendous benefits from improved relations with both parties.

Efficient Group chief economist Dawie Roodt said souring US-China relations also threaten South Africa’s involvement in the African Growth and Opportunity Act (AGOA), which gives it preferential trade with the US. 

“I am quite positive that South Africa will remain on the AGOA platform in the short term and continue to benefit from it. Especially considering the political junction we are at,” Roodt told Newzroom Afrika. 

He explained that the US will likely make no major changes to this agreement before its national election in November. 

However, depending on who is elected in November, things could change drastically for South Africa. 

“I am afraid that if Trump is the next president, South Africa’s position in AGOA would not be secure. A volatile personality in the White House is definitely something to be concerned about.”

South Africa benefits immensely from preferential trade with the US, but its removal from AGOA will not make or break the local economy, Roodt said. 

The country’s removal does not mean losing access to the American market, but its exports will become much less competitive. 

“In the medium term, I am a little concerned about the possibility of a Trump administration. He will look at trade completely differently from Biden or Harris and perhaps impose import duties sporadically.”

While Trump may view South Africa and Africa generally as unimportant, it may get caught up in his conflict with China. 

China is South Africa’s largest single trading partner, and Roodt said it is far closer politically to the local government than the US. 

This may result in South Africa picking sides and moving closer to China, risking its trade with America and access to foreign capital, or it may just be collateral damage in a great power struggle. 

Either of these eventualities will have a significant negative impact on economic growth in South Africa and is something the country must avoid, Roodt said.