Donald MacKay on SA foreign policy: Impact of AGOA is overstated, neutral stance in SA’s best interest

In an insightful analysis, Donald MacKay challenges the prevailing notion that South Africa’s pro-Russia stance poses an imminent risk to its economy. While acknowledging the negative consequences of such alignment, MacKay argues that the immediate impact on trade, particularly through the Africa Growth and Opportunities Act (AGOA) with the United States, has been overstated. With a closer examination of AGOA’s significance and the complexities of South Africa’s trade relations, MacKay highlights the need for a more nuanced understanding of the risks and emphasises the importance of a neutral foreign policy to safeguard the nation’s trade interests in the long run.

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The risk of losing AGOA is smaller than anticipated

By Donald MacKay*

The Bloomberg article by Stanlib’s Ndihuvo Netshitenze materially overstates the risk of South Africa’s stance on Russia. I have been quite outspoken that our pro-Russia stance, aka non-aligned, is harmful to our economy and if anything my view on this has strengthened, but it’s important to value this problem correctly. I too have been guilty of overstating the risk by simply comparing the value of our exports to the USA and the EU, versus Russia and concluding if SA continues to support Russia we will lose our exports to the West.

South Africa exported about R188 billion to the USA in 2022, of which R62 billion (33%) was under the Africa Growth and Opportunities Act (AGOA) and R126 billion received no preferential treatment. In the short-term our trade under AGOA, which is still 13 times our total exports to Russia (R4.6 billion), is most vulnerable. It’s vulnerability derives from how AGOA works. AGOA is an overtly political piece of US legislation, not a trade agreement, designed to use access to the US market as a carrot to incentivise behaviour which favours the US. There is nothing inherently bad in this idea, but it does mean that if a country adopts a stance which directly oppositional to US interests, the US President can withdraw all or part of their AGOA benefits. The country impacted doesn’t have a say in this, which is why AGOA as a political tool is so powerful.

Read more: SLR on AGOA: US-SA tensions, self-interest and geopolitical power dynamics

There are four important considerations when contemplating AGOA as a lever the US can weaponise against South Africa. Firstly, when AGOA was drafted, the US didn’t give duty-free access on products which are essential to its economic interests, so pulling this lever would have minimal impact on the American economy. Secondly, the USA has some of the lowest import duties in the world, so a duty preference on a low duty is inconsequential anyway. Thirdly, the US has a low trade dependency, with trade contributing 25% to GDP, compared to 56% of South Africa. North America is the only integrated economic bloc in the world that could significantly withdraw from global trade and still have a fairly healthy economy and most of that 25% is made up of trade with Mexico and Canada. AGOA therefore matters only to the beneficiaries of AGOA. Fourth, five companies utilise 48% of all AGOA benefits, so any meaningful action against SA using AGOA stands to ‘seriously’ impact only five companies.

This AGOA benefit has been built up in the public’s mind (I’m accidentally guilty here too), to equate losing AGOA to losing R62 billion worth of exports. This is wrong. The benefit we receive under AGOA is how much cheaper these exports are because of the preferential access and the answer is about R1.9 billion per annum, of which R859 million would directly accrue to the importers from these five companies. This does not imply that we should simply ignore the threat, but it does imply that we are overvaluing the short-term risk.

Our trade with the EU is more complex, but also harder to disrupt, because most of it is done under the Economic Partnership Agreement (EPA) with the EU, which is a trade agreement. The EU cannot unilaterally remove our benefits, not least, because there are five other countries who also participate in the agreement.

Read more: US lawmakers request AGOA summit venue shift away from SA amidst Pro-Russia concerns

The long term risks

None of this however, diminishes the long-term risk, which I think we’ve significantly undervalued. No matter how the war in Ukraine ends, Russia will remain a global pariah state for a long time and the stink of this war will cling to their supporters for an equally long time. The countries clustering around Russia, such as North Korea, Iran, Venezuela and Eritrea, offer us little in the way of markets, or inputs into our value chains. China, of course, is an exception and is an important market for our minerals, but this is unlikely to change. China, unlike the US, is a lot more dependent on trade, despite its size (37% of GDP) and also on critical items such as food and energy, rather than iPhones. It will keep buying from South Africa, because its options are limited. China will feel pressure if it continues to behave badly around the loans given to around a dozen ‘allies’ – mostly poor countries, who took on too much debt on bad terms, It will definitely feel pressure from its ‘foes’ – mostly the developed world, who its dependent on to sell its goods to.

Read more: ‘We can do it – we’ve done it before’: Kevin Lings says path to SA economic rebound lies in using past lessons

BRICS is not an alternative to the West

BRICS doesn’t solve this problem, because trade within BRICS is really between China and India and that happens on very unhappy terms. China, with its myriad of subsidies is viewed by India as a predatory trade partner and India is close enough to China to not benefit from the protection granted by long supply chains. On the security front, China and India are hardly closely aligned, with India being a member of the Quad, an informal, but very important security alliance set up specifically in response to the growing military power of China. Other than Russia, China and South Africa being anti-American, there is very little binding South Africa to BRICS or BRICS members to each other.

The endless chatter around a BRICS currency is nothing more than a fever dream. In 2013, China and India signed a currency swap agreement, allowing the two countries to exchange Yuan for Rupees and vice versa. In 2015, China exported $1 billion worth of goods to India, but then refused to take the Yuan as payment, instead wanting to keep the money in India, to help finance Chinese investments in India. If this could not work, there is no reason to think it could work on a larger scale.

South Africa will be dependent on trade with the West for a long time to come. As the world slowly de-globalises, countries with high trade dependencies need to look very carefully at how they set their foreign policy. It is not possible to swop our trade with the US and the EU, for Africa, if for no other reason than there is insufficient demand in Africa to accommodate the volume and variety we trade with the West. South Africa needs to actually be neutral, in behaviour and word, to not be trampled by the elephants as they fight.

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*Donald MacKay is the Chief Executive Officer of XA Global Trade Advisors

This post appeared first on XA Global Trade Advisors and is republished with permission