Covid-19 Watch

South Africa amid rising global trade tensions

Globalization brought countries closely integrated and with it, peace, and prosperity to most humans. Before COVID19, infectious diseases killed less people than old age, famine became more localized to warring areas, people live longer and standards of living improved. Scarcity got replaced by abundance.

But globalization, unlike anti-colonialism or nationalism, also entails giving up controls of trade and capital/financial accounts and thus losing some control of national sovereignties. Writing in ‘Globalization and its discontents, Joseph Stiglitz (2002) define globalization thus:

“Fundamentally, it is the closer integration of the countries and people of the world which has been brought about by the enormous reduction of costs of transportation and communication, and the breaking down on artificial barriers to the flows of goods, services, capital, knowledge and (to a lesser extent) people across borders”.

In essence, globalization has three components: Firstly, the economic featuring free trade, global integration, and low tariffs with the World Trade Organization (WTO) setting the rules of the game. Secondly, the political featuring peaceful relations, multilateral cooperation, international laws, and institutions with the United Nations (UN) as the responsible overarching body. Lastly, personal movement and immigration.

All three elements of globalization are under threat: global trade tensions are high, warring countries abound and immigration has become a global hot issue. Facing mounting socioeconomic challenges and pointing fingers at others for domestic problems, countries are imagining various ways to regain control of their national sovereignties. Countries are becoming nationalistic.

Globalization nearly came unstuck for the first time during the World War I but was reconstituted and restructured to prevent further crises. The current threat to globalization first came to a head in 2016 with the Brexit vote. Then the election of Donald Trump as the 45th President of the United States led to heightened trade or tariff wars with China. Trump’s reelection could lead to a doubling down on tariff wars with ‘unfriendly countries’ as his current election slogan ‘Make America Great Again (MAGA)’ takes center stage. So far, however, globalization is holding on well as total trade has more than recovered from the COVID-induced slump. This is part because nearshoring and friendshoring, not just insourcing, are among the strategies to deal with supply chain challenges that emerged after the reopening of the global economy after COVID19 and onset of the War in Ukraine.

Rising global trade tensions are deeply rooted in the feeling, real or perceived, of loss of competitiveness and diminishing geopolitical and economic significance. For the United States, the rise of isolationism and nationalism can be traced to the growing stature, competitiveness, political and economic influence of China. Ever since readmission into the world economy, China adopted an internally designed ‘gradualist approach’ to global integration, which served its export-led growth remarkably, threatening the unipolar world order dominated by the United States

The US-China tariff wars are however just the tips of the iceberg.

South Africa beneath the surface

South Africa was and is not immune to the feeling of loss of competitiveness with dire socioeconomic consequences. The country’s challenges have been long in the making, made worse by the long period of deindustrialization. To arrest further declines and reignite the economy, the government developed a Reimagined Industrial Strategy (RIS) in 2019. Aligned to this strategy, the government further developed masterplan guide and a toolkit to guide co-development of the sectors’ masterplans by the tripartite partners of government, business and labour. So far, eight masterplans have been co-developed with 20 more in the pipeline. These master plans, like Operation Vulindlela, are to remove inhibitors to growth of the target sectors. One underlying theme among many of them is the promotion of local industry through insourcing, and commitment by business to procure locally. While countries such as the United States are also embarking on nearshoring and friendshoring, South Africa is intently focused on insourcing.

So far, the masterplans are proving successful, leading to creation of much needed jobs. For instance, the Retail–Clothing Textile Footwear Leather Master Plan led to creation of 26 000 jobs while the Sugar and Poultry Masterplans led to significant decrease in the volumes of imports, creating spaces for the domestic industries to grow or stabilize. As a regional hegemon, successes with insourcing imposes costs on the neighbouring countries in the South African Customs Union (SACU). These costs can the form of either high unemployment or high private debt. There is also a feedback loop to South Africa through immigration.

South African Customs Union

The South African Customs Union (SACU) is a centenarian, established in 1910 and composed of Republic of Botswana, the Kingdom of Lesotho, the Republic of Namibia, the Republic of South Africa and the Kingdom of Swaziland (now Eswatini). The combined Gross Domestic Products (GDP) of SACU was estimated at R7.3 trillion in 2022 with a population of 69.7 million. Intra-SACU trade amounted to R472 million over the same period or 6% of the combined GDP. In all dimensions, South Africa is dominant and a hegemon. Further, South Africa is the only country in the Union that consistently maintains trade surplus with the rest of the member countries. Eswatini maintains a somewhat balanced trade while the other three maintains trade deficits with South Africa. It is these other three trade deficit countries imposing import bans on South Africa’s produce. Ala, the US, busy trade-blocking China, also maintains a persistent trade deficit with the country. In his opening remarks to the official talks with President Xi Jinping on the occasion of South Africa state visit to the People Republic of China to attend the 2024 Forum on China-Africa Cooperation (FOCAC), President Ramaphosa stated “…as South Africa, we would like to narrow the trade deficit and address the structure of our trade.” Therefore, South Africa, along with the US, Namibia, Lesotho, Botswana and others are concerned about persisting trade imbalances.

Under free market conditions as articulated in the SACU agreements, success of the masterplans should lead to worsening trade imbalances within the Union in favour of South Africa.

One of the objectives of the SACU Agreement of 1969 is to encourage the economic development of the less advanced members of the Customs Union, diversification of their economies and ultimately, economic convergence. Worsening trade imbalances impose either economic costs (rising unemployment) or financial costs (higher private debts) on the trade deficit countries. Being poorer than South Africa, unemployment will be the price to be paid by the trade deficit countries within the Union.

It is in this context that bans on imports of agricultural produce from South Africa by Botswana, Lesotho and Namibia should be understood. Unfortunately, however, regional trade is disintegrating at a time when the African Continental Free Trade Area (AfCFTA) held so much promise for the economic development and convergence on the continent.

In closing, the current global trade tensions have not led to deglobalization, but rather re-globalization characterized, in part, by nearshoring and friendshoring. But can trade tensions within SACU be defined in similar terms or amounts to de-regionalization?

Disclaimer: The views expressed in this article is solely that of Independent Agricultural Economist Robert Matsila, and does not necessarily reflect the views of Mzansi Agriculture Talk, his employers, or other associated parties.

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