SA’s ever-closer ties with Russia jeopardise R60bn in annual exports to US under Agoa deal

[Nat Quinn]

South Africa exports an enormous amount of goods to the US annually – including vehicles, aluminium, chemicals, fruit, wine, ferroalloys, and even ice cream and edible ice. But now its privileged access via the Agoa deal could be at risk amid allegations that SA’s stand on the war in Ukraine is contrary to America’s national security or foreign policy interests.

South Africa stands to lose up to R60-billion a year in exports to the US if it forfeits its privileged access to the US market under the African Growth and Opportunity Act (Agoa) because of its ever-closer ties with Russia.

That was roughly the value of goods SA exported to the US under Agoa in 2022, according to US figures. About half of that was in motor vehicles – many of them high-end Mercedes-Benzes and BMWs – and about R8-billion was in agricultural products, much of it citrus and wine. Jewellery was another major export.

In 2022, SA exported about R275-billion in goods to the US, of which about 21.6% – or R59.59-billion – entered the US under Agoa, which provides duty-free access to eligible sub-Saharan African countries. Thirty-five of those are currently eligible. Countries can be removed for:

• Human rights abuses, including waging war, for supporting terrorism or for raising unacceptable barriers to US trade.

• Or for acting contrary to America’s national security or foreign policy interests.

It is the latter which could cause SA to be removed from Agoa, as many US legislators regard SA’s warming ties with Russia – including its alleged sale of weapons to Moscow – as undermining US national security interests.

Read more in Daily Maverick: Ukraine President Zelensky warns Ramaphosa against selling arms to Russia

Calculating precisely the financial loss of being cut out of Agoa is difficult. For example, the tariff benefit of Agoa for exports of autos to the US is about 10%, which means that if we lost Agoa privileges, US importers of our cars would have to pay an extra R3-billion or so for them.

This might price our cars out of the US market.

And as Donald MacKay, CEO of XA Global Trade Advisors, points out in his latest blog, even if the motor manufacturers were stuck with South Africa as the location of their assembly plants in the short term, “when those new model investment decisions need to be made, this will be a factor in their decision making”.

That would cost us a lot of jobs.

Trade statistics are notoriously hard to reconcile for various technical reasons relating to the point of calculation, exchange rates etc. So, MacKay’s calculations of South Africa’s exports to the US under Agoa come in much lower than those of the US.

He totals exports to the US under Agoa in 2021 at R22.870-billion and in 2022 at R27.904-billion.

Of the 2022 figure, he says vehicle exports represented over half, at R15.320-billion; aluminium was next largest at R4.208-billion; then chemicals at R2.346-billion; fruit at R1.447-billion; wine at R802.48-million, ferroalloys at R611.89-million and – perhaps surprisingly – “ice cream and edible ice” was next, at R519.48-million.

But according to US statistics, last year our total exports to the US under Agoa jumped by more than 50%, from R39.575-billion to R59.59-billion.

In both years, SA enjoyed a healthy trade surplus – R191-billion in 2021, though declining to R150.89-billion in 2022.

Agoa clearly contributed a large part of those surpluses since it gives SA duty-free access to the US market without requiring SA to reciprocate.

SA exported just more than R30-billion in vehicles to the US under Agoa, according to US figures.

The high volumes of automobile exports to the US under Agoa are an important contributor to SA’s surpluses. Manufactured goods add value to raw materials and this added value boosts our export revenues.

By contrast, South Africa consistently runs a large trade deficit with China, its largest single trading partner. Last year, that deficit was about R177.89-billion, up from over R94-billion in 2021. That is because we mostly sell raw materials to China and mostly import manufactured goods.

The relatively high component of manufactured, value-added goods in the basket of SA exports to the US (and also to the European Union, incidentally) also means that trade with those countries is creating more jobs and helping to boost industrialisation in SA.

SA is, rather ironically, due to host the annual Agoa forum later this year, probably in November. It was originally due in September but the US didn’t want it to be held so soon after SA hosts the BRICS summit in late August – especially if Russian President Vladimir Putin is scheduled to be there.

Agoa is due to expire in 2025 when the US Congress will have to decide to either renew it or terminate the whole programme. As things stand, it seems likely to be renewed. But it’s not so clear that SA’s participation will also be renewed.

SA’s participation was already a little doubtful because we are Sub-Saharan Africa’s most industrialised economy, and Agoa is really intended to uplift poorer countries. Seychelles and Equatorial Guinea have already been “graduated” for being too well off.

The Russian imbroglio could push us over the edge.

And depending on how the quarrel with the US over SA allegedly selling arms to Russia is resolved, South Africa could theoretically even be removed before the 2025 overall Agoa expiry date, through an “out-of-cycle review” – in much the same way that SA was provisionally suspended from some Agoa benefits in 2015 after slapping extra import duties on US meat.

“SA is standing blindfolded on the edge of a precipice,” MacKay writes.

“Our trade with the US, EU and UK accounts for 36% of our total exports. If the US pulls the trigger on an out-of-cycle review, we could lose a lot more than our car exports to America.”

Peter Attard Montalto, an economist at Intellidex, sees the indirect impacts of possibly losing Agoa as likely being larger than the direct losses.

“Highly targeted sanctions against involved individuals or, say, (arms manufacturer) Denel, would have limited economic impact (and the US has sanctioned SA individuals before) but would dent sentiment and likely reinforce the additional risk premia now in markets overall.”

He adds that sovereign-level sanctions – against the whole government – are very improbable as they would require proof of “a grand Cabinet-authorised conspiracy to arm Russia, which is not what is alleged here. It is only that type of very broad-based sanction that would see a meaningful impact on the economy, and is just not how Ofac works in anything but the most extreme scenarios.”

Ofac, the Office of Foreign Assets Control, is the bureau that administers US sanctions.

“Agoa’s direct benefits are about 0.7% of GDP, which, in terms of a balance of payments deficit expected this year of about -2% of GDP, is meaningful – though the overall direct GDP benefit is not huge … it is in more labour-intensive industries and industries with long and integrated high local content and labour absorptive supply chains like vehicles and agriculture,” Montalto says.

“This is why we would estimate the addition of both indirect and direct impacts might come in at about double this level. We should, however, remember that only about 25% of exports to the US are Agoa products and trade would not stop – it would simply be hampered and get more expensive for American importers and more challenging for SA exporters.

“Again, the sentiment impact in particular of this, as a sign that relationship is worsening, would be more the issue here, with broader impacts than the direct impact.”

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