International Trade: A Case Study of South Africa

International Trade: A Case Study of South Africa

Background Information

The Republic of South Africa (RSA) is found on the southernmost part in sub-Saharan Africa. The country boasts of a long coastline to the south stretching along both the Indian and south Atlantic oceans. With an estimated population of 60 million people, South Africa is the 24^th most populous country in the world, and the 25^th largest in land area (World Bank Group 34). More than two-thirds of the population is of sub-Saharan heritage while the rest is made up of European Indian communities. South Africa is politically stable with elections occurring regularly. The country is renowned for its apartheid political system that lasted until 1994 drawing global condemnation and international trade barriers. The last general elections were held in 2014 with the ruling African National Congress party retaining parliamentary majority as well as the winning presidential candidate. However, President Jacob Zuma was forced to resign in February 2018 over accusations of economic mismanagement of the country. South Africa scored 63 points on the Economic Freedom index ranking it the 77^th country in terms of freedom to do business. 

The World Bank ranks South Africa within the upper-middle income bracket of economy. The country has top ranked in economic development in Africa for decades. However, the strong economic growth of Nigeria coupled with economic slowdown in South Africa over the last ten years has meant that the two countries swap their positions (“South Africa Trade Indicators 2016” 1). South Africa is now the second and 34^th largest economy in Africa and the world respectively. It has the seventh ranking per capita income in Africa. In spite of recent gains, poverty and income inequality remain widespread in the country with 25% of the population living on less than $1.25 per day (“2016 International Trade Statistics Yearbook” 351). Still, South Africa is recognized as a middle power in global affairs maintaining strong regional as well as international influence. 

International Trade

International trade is very important to South Africa. The country’s trade and industrial strategy is shifting from the highly protective policies under the apartheid system of governance to the globally competitive environment with an emphasis on comparative and competitive advantages (Open Markets 1). For decades, South Africa faced hurdles in international trade because of sanctions placed on its government mainly arising from the racial discriminatory policies of apartheid regimes. International trade has dramatically improved since the end of apartheid with the combined imports and exports accounting for 60% of the GDP (Open Markets 1).

In 2016, South Africa exported total value of goods amounting to $103 billion while the imports were estimated at $77 billion leaving a positive trade balance of $26.9 billion. In the same year, the World Bank assessed the GDP of South Africa at $295 billion while the GDP per capita was evaluated at $13.2k (“South Africa OEC” 1). There is slow growth in the country’s GDP over the last 10 years with the country recording $273.9 billion in 2008. The narrow margin of growth is attributable to the global economic recession that occurred in 2008. Overall though, the positive trade balances of 26.9 billion compares favorably with a negative trade balance of $7.05 in 1995. Significantly, the positive trade balance is also related to the removal of trade barriers by international trade partners such as the World Bank, the European Union, and the United states (“South Africa OEC” 1). The removal of trade sanctions following the defeat of apartheid system of governance in South Africa gave the country new markets to export its varied products and impacted the foreign exchange. 

The mining industry represents South Africa’s largest export commodities. The country’s major export products in 2016 included gold, diamond, and platinum accounting for $20.7b, $10.9b, and $8.53b respectively. Other valuable export goods included cars estimated at $6.89b and coal briquettes at $4.57b (“South Africa Trade Indicators 2016” 1). On the other hand, South Africa’s major imports included crude and refined petroleum products at $6.54b and 3.1b respectively, industrial machinery ($10.2b), and cars at $3.49b. Crude petroleum products and industrial machinery represented over 14% of South Africa’s import goods in 2016. China has become a major trade partner with South Africa replacing the traditional European dominance in South Africa’s international trade. The Asian giant accounted for $18.6b worth of South Africa’s exports followed by the United Kingdom at $10b (“South Africa Trade Indicators 2016” 1). India and the United States are South Africa’s other major trade partners with a combined export market of $13.59b during 2016. In the recent past Saudi Arabia has emerged as an important trade partner with South Africa receiving commodities valued at $2.89b during 2016.

South Africa has imposed various trade restrictions to protect its domestic industries. All commercial imports and exports require custom declarations and the law requires that such commodities must be classified appropriately in line with the respective tariffs, if applicable (Edwards 15).  The law strictly controls the importation of motor vehicle in South Africa. Importers must acquire an importation permit that is only issued defined and specific circumstances. Import commodities must also reflect quality assurances as measured by the South African Bureau of Standards. The strictness of motor vehicle imports arises from the government domestic economic growth strategies that emphasize the central role of the local automobile sector. The sector is relatively in its infancy stage and the government has instituted protection measures against established international brands to give local manufactures a head start (Edwards 23). Other trade barriers in South Africa include port congestion, inefficient bureaucracy, anti-dumping rules, and overvaluations at the customs above the invoice figures.

South Africa has well established trade concessions with some of its established international partners. In 2015, South Africa and the United States agreed to a Tariff-Rate Quota (TRQ) to allow the import of 65,000 tons per year of bone-in chicken leg quarters free of the anti-dumping duties (Xolelwa 1). Other trade restrictions relate to importation of firearms, gambling machines and foodstuffs. Import quotas are applied on a range of products such as pesticides, petroleum products, and meat products. South Africa has a well established but complex import system. The revenue collection authority (SARS) defines nearly 90,000 import products that are subject to tariffs (Edwards 27). Any prospective importer must contact SARS to obtain the necessary codes. This process may take long accounting for some of the bottlenecks in South Africa’s importation process.  

South Africa has established several trade agreements with international trade partners. One of the trade partners includes the Economic Partnership Agreements (EPAs) with the South African development bloc (SADC), of which South Africa is a member. EPAs are trade agreements between the European Union and African, Caribbean and Pacific (ACP) partners engaged in regional economic integration processes (Xolelwa 1). The EPAs remain some of the most important trade agreement South Africa has established. Trade between the European Union and South Africa increased from $10.7 b in 2000 to $40b in 2016.

South Africa maintains strong bilateral trade ties with the United States. As a single country, the united was the second largest trade partner with South Africa, second only to China. The trade relations between the two countries revolve around two frameworks- the African Growth and Opportunity Act (AGOA) and the Trade and Investment Framework Agreement (Tifa) (Xolelwa 1). AGOA is a pact between the United States and the sub-Sahara African countries to establish mutually beneficial commercial ties between partner members. Similarly, South Africa has an established trade agreement with neighboring countries under the auspices of the Southern African Development Community (SADC). The group consists of 15 members, of whom 12 have agreed to duty-free trade between their borders.

South Africa joined the World Trade Organization (WTO) on 1 January 1995 and the General Agreement on Tariffs and Trade (GATT) in June 1948. Upon joining the WTO, South Africa has opened its market to international trade while gaining the same opportunities in the international market. The country assumed liberal trade practices as championed by the trade body in contrasts with the protectionist policy that was spearheaded by the apartheid South Africa which crumbled in 1994 (Edwards 57). The objective of GATT was to encouraged free trade, the same objective that the WTO aimed to achieve.

International Finance

South Africa’s current account deficit increased to $8.6b in 2017 from a surplus of $49m in 1960. Overall, there was a reduction in the net payment for services with gross payments exceeding gross receipts. The difference can be explained by the strengthening rand against other major international currencies. South Africa’s current account balance averaged a deficit of $2010 between 1960 and 2018. The best performance was a surplus which occurred in 1989 at $5.b while the biggest deficit was recorded in 2013 at $21.3b (“Current Account Balance” 1).

South Africa’s economy is vulnerable to massive movements in foreign portfolio into and out of equity as well as the debt markets. The major factor in major swings is partly due to the short notice allowed for the withdrawal of the funds in the highly liquid but equally resilient markets (“Current Account Balance” 1). The limited domestic savings means that the country is unable to sustain modest growth without significant foreign exchange movement into the country. The deficit on the current account equals the difference between the low savings (estimated at 14% of the GDP) and significantly high rates on capital expenditure (estimated at 19% of the GDP).

The overall performance in the international trade has been weak despite substantive depreciation in the local currency. Amongst a group of emerging economies, South Africa recorded the longest and largest devaluation in the local currency between 2011 and 2014. However, despite the reduction in relative prices, the exports increased at a very slow pace of 4% during the same period. In comparison, South Africa’s export reflects around 80% of the imports of its trading partners which is the lowest among its peers and BRICS group. Between 2008 and 2017, South Africa’s share of global export fell by nearly 15% (“South Africa GDP per Capita” 1). This reduction explains the widening current account deficit. The South African Reserve Bank has argued that the deficit is mainly due to soft commodity prices, frequent industrial action, and weaker external demand.

South Africa’s Foreign Direct Investment (FDI) fell 41% to $1.3 billion, due to an underperforming commodity sector and political uncertainty (“South Africa GDP per Capita” 1). Historically, the FDI inflows in South Africa are dominated by the mining industry followed by the service and manufacturing sectors. However, in the recent years, the banking and telecommunication sectors have played a significant role (“South Africa GDP per Capita” 1). Wal-Mart’s recent purchase of 51% stake in South Africa’s largest retailer Massmart for a reported $2.4b is an indicator of a vibrant retail market. There are major implications for the domestic economy; for consumers there will be product and price choices. On the other hand, the local firms will encounter new dynamics in outsourcing of commodities. Yet, there will be employment opportunities for workers. 

The management of currency in South Africa is governed by an act of parliament. The Act regulates how the South Africa Reserve Bank manages the issuance of bank notes and coins and control of liquidity in the market (Edwards 15). The South African rand has been volatile against the USD. For example, during the Asian financial meltdown in 1997, the rand depreciated by over 40% against the dollar. During the Global Financial Crisis of 2008, the rand was equally volatile depreciating by 39% against the dollar to 10.20 from a high of 7.33 in the pre-financial crisis period (Edwards 15). However, the rand rallied in the years after the crisis to recover the lost value. The volatility of the currency was further evidenced in 2015 when it lost 24.3% of its value against the dollar to close the year at 14.34.

South Africa has had a long relationship with the International Monetary Fund. The country signed an IMF loan agreement with the institution in 1993, a year before the country transitioned into a democracy. The newly formed government under the African National Congress walked away from a loan offer in 1994 fearing possible compromise of the sovereignty of the country (“Why South Africa Shouldn’t Turn to the IMF for Help” 1). Since then the country has had minimal commercial ties with the IMF fearing that the conditions imposed on developing economies by the institution are likely to hamper the growth of domestic economy as entrenching locally desirable government development policies. During the financial crisis of 2008, South Africa stayed away from IMF loan bailout relying on the resilience of its domestic market to withstand global recession. When the crisis hit, the country was emerging from a period of strong economic expansion (Michele 1). Despite the drop in growth, the country was able to withstand the external market shocks without the intervention of the international monetary fund.

Conclusion 

South Africa is experiencing economic slowdown. The country entered technical recession during the fourth quarter of 2017. The rate of employment is rising toward 30% registering one of the worst eras of economic development. Much of the degenerating economy was due to the political instability. However, a change in the leadership of the country and a strong economic performance in the first quarter of 2018 signals a change toward positive growth. The forecast for the country investment opportunities is positive.

Works Cited

2016 International Trade Statistics Yearbook. Department of Economic and Social Affairs. The UN Comtrade, 2017; pg. 350-353:  https://comtrade.un.org/pb/downloads/2016/VolI2016.pdf. [Accessed 7 August 2018].

Current account balance (BoP, current US$). South Africa. The World Bank. 2018; https://data.worldbank.org/indicator/BN.CAB.XOKA.CD?end=2017&locations=ZA&start=1960&view=chart. [Accessed 7 July 2018]

Edwards, L., Cassim, R., & Van Seventer, D. (2009). “Trade Policy in South Africa.” In South African Economic Policy under Democracy (Editors Janine Aron, Brian Kahn, and Geeta Kingdon). 

Michele, Zini. The Impact of the Financial Crisis on South Africa. World bank blogs, 2008; http://blogs.worldbank.org/africacan/the-impact-of-the-financial-crisis-on-south-africa. [Accessed 7 August 2018]

Open Markets. South Africa. 2018 Index of Economic Freedom, 2018: https://www.heritage.org/index/country/southafrica. [Accessed 7 August 2018]

South Africa. OEC, 2018: https://atlas.media.mit.edu/en/profile/country/zaf/. [Accessed 7 August 2018]

South Africa Trade Indicators 2016. World Integrated Trade Solutions. The World Bank Group, 2018: https://wits.worldbank.org/CountryProfile/en/Country/ZAF/Year/LTST. [Accessed 7 August 2018]

South Africa GDP per Capita. CEIC, 2018: https://www.ceicdata.com/en/indicator/south-africa/gdp-per-capita. [Accessed 7 August 2018].

Why South Africa Shouldn’t Turn to the IMF for Help. The Conversation, 2018; https://theconversation.com/why-south-africa-shouldnt-turn-to-the-imf-for-help-82027. [Accessed 7 August 2018]

World Bank Group. World development indicators 2014. World Bank Publications, 2014.

Xolelwa, Peter. Update on South Africa’s Trade Agreements. Thedti. 2017; https://www.thedti.gov.za/parliament/2017/Trade_Agreements.pdf. [Accessed 7 August 2018]