South Africa can win with Trump tariffs

South Africa has several competitive advantages it can lean into to avoid the worst effects of US President Trump’s tariffs on imports into the world’s largest economy. 

These competitive advantages include exporting crucial minerals to the US, particularly platinum group metals and manganese, and a dominant position as the most developed economy in Africa. 

This is feedback from Osagyefo Mazwai, an investment strategist at Investec Wealth and Investment, who outlined the potential impact of Trump’s tariffs on South Africa. 

Mazwai explained that the average South African will likely face an increasingly challenging consumer environment in the coming weeks and months due to increased VAT and bracket creep. 

This will be compounded by the impact of additional tariffs on South African exports to the US, effectively nullifying the benefit of the African Growth and Opportunity Act (AGOA). 

Mazwai said this holds true even during Trump’s 90-day delay in implementing the additional 30% tariff on South African goods, with the across-the-board 10% tariff still in effect. 

The combination of the policies will likely increase the costs of goods and services or lower corporate margins. 

Mazwai warned that this may lead to economic stagnation or slowdown worldwide, increasing the risks of a global recession. 

The recent selloff in global equity markets and subsequent rallies are evidence of how tariffs can influence inflation and consumption. 

This is premised on the idea that incomes will likely grow at a slower pace than goods inflation if the tariffs are implemented and that tariffs will increasingly erode the capacity to consume. 

This can lead to profitability issues for corporations due to pressures on revenue and rising costs that can ignite an unemployment problem.

More concerning for South Africa specifically is the effective suspension of AGOA benefits due to the 10% tariffs, with particular consequences for the agricultural and automotive sectors. 

Of particular concern is how these targeted tariffs may impact youth unemployment in these sectors, which typically value youth as they are able-bodied over experience.

How South Africa can win 

Mazwai said that South Africa must leverage its competitive advantages to either negotiate with the Trump administration or minimise the impact of elevated tariffs on its exports to the United States. 

Chief among these are the country’s critical minerals, which have, so far, been largely spared from the tariff increase and do not fall under AGOA. 

Critical minerals such as the platinum group metals and manganese make up around 76% of South Africa’s exports to the United States. 

Thus, South Africa is already relatively cushioned from the Trump administration’s trade policy as tariffs have not hit these exports. 

The exemption of these minerals from the tariffs is evidence of how trade development over time has resulted in each country primarily being concerned with producing what a country does best and importing what it doesn’t or can’t.

South Africa should take this fact into account and focus on what it can produce better than anyone else rather than spending resources trying to make uncompetitive industries globally competitive. 

Another advantage South Africa has is its reduced reliance on exports to the US, with the rise of China as an export destination over the past two decades. 

While exports make up over 30% of South Africa’s GDP, exports to the United States only make up around 9% of the value of the country’s exports. 

Therefore, if the US were to halt imports from South Africa, this would be attributable to around 2.7% of GDP, a significant number. 

With a significant portion of our exports to the US exempt from tariffs and the imposition of 30% tariffs on the rest, the direct risks to economic activity are negligible, at between 0.1% and 0.25% of GDP. 

The subsequent revision to a rate of 10% reduces this risk to GDP and its broader secondary effects on employment. 

However, Trump’s trade war with China could significantly impact South African export demand, which could have a major impact on the local economy. 

At the time of writing, US tariffs on China had been increased to 245%. Also of concern is the impact of US tariffs on our other key trade partners and the indirect impact on South Africa. 

The EU (about 20% of South Africa’s exports) is also vulnerable, though it was included in the group that saw its tariff reduced to 10% for 90 days. 

Should demand for our goods and services in China and the EU fall, South Africa’s trade balance and the profitability of domestic companies would be negatively affected.

Mazwai suggested the below actions that South Africa could take to ensure its products remain competitive globally –

• Decrease prices to offset the impact of tariffs and remain competitive. This will result in reduced margins for South African companies. 
• Introduce subsidies for negatively impacted industries. This is unlikely, given South Africa’s poor financial health. 
• Access new markets where prevailing export prices are acceptable and competitive, particularly in Asia and the Middle East. 

Mazwai also said that South African companies could, relatively easily, circumvent tariffs on their products by rerouting goods through Mexico, Canada, and other countries that have more favourable trade terms with the United States.