South Africa Set to Lose AGOA Trade Benefits

At the end of the first week of 2016, South Africa and the United States declared that a deal had been struck on a trade dispute following the resolution of technical issues related to animal health standards. However, the US President Barack Obama issued an executive order which would remove the benefits of duty-free access to South Africa agricultural exports starting on March the 15th in the case South Africa doesn’t comply with the US meat and poultry imports in accordance to the AGOA (African Growth Opportunity Act). The South African Department of Trade and Industry is confident that the presidential order will be lifted as soon as the first shipment of US poultry enters the South African markets.

South Africa Benefits from the US Trade Pact

South Africa benefited enormously from the AGOA act since adopted in 2000, as it was able to export more than 7000 products ranging from agriculture to manufactured items under a no import tax regime. One of the fastest-growing South African export products are the vegetable products which are up 549.4% since 2010 and have been the main contribution to the South Africa’s trade balance surplus.

This is a major issue as South Africa is already facing the worst drought in more than two decades and the cost of production is also raising which can seriously damage the triple-digit export growth rate of vegetable items. The agricultural good under the AGOA act accounted for more than 14% of total South African exports or about $154 million. Due to China slowdown, South Africa exports to its biggest trading partner fell by almost 40% in 2015 according to China’s customs office.

South Africa Trading Partners - Source: Bloomberg

South Africa Trading Partners – Source: Bloomberg

China’s needs for African oil, metals and minerals have fallen considerably and in part accounts for the aggressive Rand depreciation as the deflationary pressures from lower commodity prices has hit many of the emerging market currencies like the ZAR.

A weaker Rand in normal circumstances would have made South Africa more competitive in the global markets, as it boosts exports because price-wise it’s very attractive to buy from a country which has a devalued currency. However, due to subdued global growth and China economic slowdown has made the advantage of a weaker currency less useful in boosting export growth.

Despite the many challenges the South Africa economy has to deal with the exports of precious metals, such as Gold and platinum has surged 52% as in times of geopolitical and financial instability the demand for Gold surges. This made possible for South Africa to post a trade surplus of $115 million, which can be short-lived as the commodity super-cycle is over and the deflationary pressures should persist. Actually, the current account deficit has narrowed to 4.1% of GDP in 2015 from 5.4%. However, based on the market consensus, export volumes should remain under pressure due to the sluggish global growth and lower commodity prices while imports are expected to slow down as well due to consumer spending slowdown and subdued credit growth.

In order for South Africa to maintain a balance of trade, it needs to diversify its exports beyond China and focus more on growing trade relationship within the African continent, as well as countries like Australia or South Korea. South Africa already has a superior skilled workforce that it gives an advantage over the rest of Africa, but it needs to cut the cost of production and resolve its shortage of electricity in order to become more globally competitive.