South Africa has a Trump tariff lifeline

South Africa might be spared the worst effects of tariffs on exports to the United States due to a more resilient Chinese economy, which is driving demand for its commodities. 

China is South Africa’s largest trading partner, consuming over 20% of its exports. This is in stark contrast to the United States, which consumes around 8%. 

Due to this imbalance, experts and economists have pointed to the impact of a trade war between the United States and China as a potentially much more significant drag on the local economy. 

South Africa appears to be avoiding this worst-case scenario, with the Chinese economy proving more resilient than expected amid United States tariffs on trade. 

Old Mutual Wealth’s chief investment strategist, Izak Odendaal, said one reason for the resilience is that companies stockpiled goods ahead of tariff announcements and have been selling off this inventory at pre-tariff prices. 

This offers only a temporary reprieve, however, as companies are expected to run out of these stockpiles before the end of the year. Only then will the true impact of tariffs be clear. 

One of the tariffs’ most notable impacts so far is the sharp decline in US imports from China, which fell to levels last seen during the pandemic. 

China’s exports were 7% higher than a year ago in July, which shows that it is increasingly resilient in the face of aggressive US trade policies. 

Before Trump’s first term, almost 20% of China’s exports went to the US. That number has halved, but Odendaal said China’s export machine remains in good health. 

Some of these point to a rerouting, or transhipment, of Chinese goods through other countries to the US, a practice the Trump administration is clamping down on. 

However, it also suggests that China has managed to diversify its export base, making it less dependent on a single market.

To underscore this point, Danish shipping giant Maersk upgraded its profit outlook last week, saying that strong trade growth in the rest of the world compensated for weakness in the United States. 

In a classic case of companies adapting to changing conditions, it reckons US tariffs might even be good for business as, given increased complexities, customers seek a one-stop shop for logistics needs.

China’s impact on South Africa

A more resilient Chinese economy is vital for South Africa, with it consuming a large share of its exports and being a significant investor in the local economy. 

Standard Bank’s chief economist, Goolam Ballim, explained to Daily Investor that the main threat to South Africa’s economy is the indirect effects of tariffs on growth and inflation. 

“We do see the transmission to South Africa as coming from more of an indirect channel, from the decline in global growth due to tariffs and greater uncertainty,” Ballim said. 

South Africa is a small, highly open economy, and it is heavily reliant on global growth to drive demand for its commodity exports and broader economic performance. 

If global growth slows, it is likely that South Africa’s economy will also fail to expand as much as previously anticipated.

This is where China’s role becomes increasingly important, as it is the primary driver of commodity demand and global growth. 

Ballim said a sudden weakening in the Chinese economy and its demand for commodities could spell significant trouble for South Africa and other African economies. 

This has the potential to push South Africa into a vicious cycle, but if things fall into place, it can also positively impact the country.

“Lower commodity prices from lower demand in China will result in a balance of payments shock to South Africa and other African economies,” Ballim explained. 

“A reduction in volumes and prices of commodities can result in weaker currencies due to this balance of payment shock. Weaker currencies lead to higher inflation that can trigger higher interest rates.”

“Through that, you get a sense of how low commodity prices and volumes can foster a vicious cycle of reduced exports, a weaker currency, high inflation, tighter monetary policy, weaker consumer spending, weaker investment appetite, and slower growth.”

This can also work in the inverse way, with stronger demand from China driving African currencies higher, resulting in lower inflation and faster economic growth.

Thus, positive news from the world’s second-largest economy is a boon for South Africa, potentially offsetting the economic impact of the United States’ tariffs. 

Standard Bank estimates that commodity prices over the next two years could rise by around 20%, with an emphasis on precious metals. 

Thus, there seems to be some level of support for commodity prices in the near term, which will boost the economic growth of South Africa and other African economies.