by Peter Draper | May 6, 2019 | Blog
To properly appreciate the implications of unfolding international economic conflicts centred on the US it is necessary to start with correcting a misnomer: “trade wars.” This popular media term conceals more than it reveals; a more accurate but less appealing term is “investment, technology, security, and trade wars.” This encompasses the objectives of forcing US companies to invest at home rather than abroad, especially in the US’ pre-eminent “strategic competitor”, China; re-asserting control over US origin technologies, both in markets where they are deployed and protecting them at home especially vis-à-vis China; as well as the use of trade and investment instruments to achieve these objectives. Overall, President Trump’s approach to trade could be summed up as “geo-economic” which, together with his strong emphasis on the balance of trade, means mercantilism with modern characteristics.
China finds itself in a deteriorating domestic economic growth scenario, in part fuelled by US trade actions, but mostly owing to the export miracle having run its course. Not surprisingly, global financial markets are skittish, and increasingly focused on how the US-China economic relationship plays out. Chinese leadership under President Xi Xinping is unlikely to bend too far in the face of US unilateralism.
For the same reasons and more, there is substantial uncertainty over the future of the global trading system. These tensions are most manifest in the WTO, which faces an uncertain future given US threats to withdraw from the organization while blocking appointments to the Dispute Settlement Mechanism’s Appellate Body, thus threatening to paralyze trade disputes resolution.
What strategic responses are emerging?
While each country has its peculiar development challenges and trajectories, some generalizations are necessary. Overall, Africans remain dependent, to varying degrees, on exports of commodities, rendering their terms of trade subject to the vagaries of commodities cycles. While many things determine commodities cycles, economic growth in key demand centres, notably China but also the EU, US, and Japan, remains critical. Therefore, in the short-term, the growth slowdown currently taking shape is of concern and underscores the longstanding African objective to diversify out of primary production and into manufactures.
In the medium-term, the technological forces reshaping global production patterns threaten both continued reliance on commodities exports and diversification into labour-intensive manufacturing. Materials science and genetic modification offer the prospect of replacing some exported commodities used in the production of industrial goods and food products. Technologies such as 3D printing are propelling on-shoring of manufacturing into developed countries, a trend exacerbated by US trade and investment policies, and can potentially change the geographic distribution of value chains at a time when Africa’s “moment” to grasp a share of labour-intensive value chains relocating out of China has arrived.
To compete in the modern “Fourth Industrial Revolution,” the world economy requires strong, smart, adaptive institutions, and significant resource investments mobilized through flexible state-private sector partnerships extending to regulatory environments. Unfortunately, the African political economy generally cannot be characterized as such. Rather, deep-seated governance challenges and weak domestic private sectors characterised much of the African continent.
The Regional Integration Drive
Given the small economic size of African markets, the consolidation of regional economic communities (RECs) across Africa is to be welcomed as this could boost the continent’s growth potential. And, at least in intention if not always in action, RECs have developed corresponding market integration plans, which various donor countries but particularly the EU, are supporting through official development assistance (ODA). This offers the prospect of pooling resources to build cross-border connectivity and infrastructure, thereby alleviating domestic resource constraints.
Moreover, the RECs are increasingly consolidating and integrating amongst themselves. This has culminated in the ongoing negotiations to establish the African Continental Free Trade Agreement (AfCFTA). The primary objective of the AfCFTA is to double intra-African trade. A secondary objective is to harmonize African trade arrangements and institutions in order to enable trade to flow and be governed more effectively. This is reflected in the ambitious goal of establishing a single African common market and continental customs union.
It is widely hoped that achieving the objective of doubling intra-African trade in goods will promote industrialization on the continent, since it will require the establishment of cross-border value chains in various sectors, thereby promoting a larger and more sophisticated range of investments, including in various services. While the AfCFTA has achieved significant momentum, the jury is still out regarding its market access content.
Africans and the WTO
Africans have a clear interest in preserving the WTO, even while they may chafe at its perceived inadequacies and injustices. It is a truism that the WTO is a rules-based trading system that offers stability and predictability in relation to the conduct of cross-border economic relations while constraining the large trading powers from engaging in unilateral actions. Africans also have some influence on how the system shapes up, not least over its development content, given the institution’s consensus decision-making modus operandi.
However, African negotiators continue to cling to the fiction that the Doha round, long dead, is the core of the WTO’s work program, and use lack of progress on it to block initiatives by developed countries. This has contributed to the US’ frustration with the WTO and consequent resort to unilateral actions. A WTO without the US would be highly detrimental to the multilateral trading system, so Africans must seriously engage with US concerns, much as they perceive the US does not take their own concerns seriously. In part, this means supporting the various smaller group, or plurilateral, negotiations underway such as e-commerce, or at least not blocking them by recourse to the consensus convention.
Key External Trade Partners
Since the darkening skies on the international trade relations front are substantially emanating from the direction of Washington, it is appropriate to begin there. Africa has historically been at the bottom of US foreign policy priorities, as well as the object of ODA, unilateral trade concessions, and particularly the African Growth and Opportunities Act (AGOA). Currently, it is not clear how Washington views a key source of development finance and technical assistance to Africa: The World Bank. The recent sudden resignation of that institution’s former President, Dr Jim Young-Kim, and subsequent appointment of a senior Treasury official regarded as hawkish in relation to US involvement in international development finance has left many guessing as to US intentions. Furthermore, the Trump Administration is strongly in favour of bilateral trade “deals,” and has announced its intention to pursue this approach with African countries, starting with a to-be-designated pilot country. This has led to concerns that the US may rescind AGOA, either selectively for countries that displease Washington, or wholesale. My view is that the Trump Administration is simply hastening a recalibration process initiated by the Obama Administration, and Africans need to accept that the future will be reciprocal and less ODA-driven.
However, there are several offsetting factors. First, the US trade and investment footprint in Africa is relatively insignificant compared with China and the EU. Second, it is difficult to imagine the US ultimately seeking to replicate the EU’s fraught experience of negotiating free trade agreements with all of Africa via various REC configurations (and beyond). Third, the US has already announced its intention to re-engage with the continent in order to counter China’s growing influence there. So, the “strategic competition” between the US and China will impel the US to offer more concessions to Africans, who could benefit from playing the large players off against each other.
China is now deeply entrenched at many levels and in multiple countries across the African sub-continent. While its core focus has been on resource extraction and associated ODA of sometimes questionable provenance and purposes, China’s presence has largely been welcomed by African elites, not least since China is regarded as a friend without a colonial past that does not impose difficult conditions or ask testing governance questions when extending its assistance. Nonetheless, China’s trade and investment relations with Africa have attracted their own controversies, from allegations of neo-colonialism via land and resource acquisitions, through questionable loan and aid deals, to the impacts of the expanding diaspora of Chinese traders on African retailers.
Concluding Remarks
The factors shaping the “trade wars” are structural, not cyclical, and likely to endure into the medium term. The US-China “strategic competition” is fundamentally geo-economic, and will drag other key trading powers, notably the EU, into its vortex. Since these three trading powers are the most consequential from an African trade and investment relations perspective, how this economic power triangle resolves itself matters enormously. However, there is very little that Africans can do to influence the course of the contest, which means they need to focus on what they can control, and leverage what they can from the three majors towards that end. Building regional economic integration via the AfCFTA and its core constituent RECs is largely within Africans’ control. However, more needs to be done to ensure that meaningful market integration and regulatory frameworks are established.
by Peter Draper | Feb 6, 2018 | Blogs
Authors: Peter Draper and Lesley Wentworth
The ‘Africa Rising’ phenomenon – part myth, part marketing campaign – has faded along with the hype of the commodities super-cycle, which had been pivotal in raising growth rates, FDI inflows and exports in Sub-Saharan African (SSA). Does this signal the end of the road for those doing business on the continent? Our view is that there are still opportunities for intrepid companies willing to negotiate their entry strategies.
There is no simple recipe for exporting to SSA markets. Much depends on the size of your company, the sector you’re in, your general experience with exports, and your risk/reward calculus. Nonetheless, here is a general approach to accessing SSA markets that can be tailored to your specific circumstances.
First, it is important to appreciate that SSA consists of emerging markets often characterised by “institutional voids”, or the absence of formal intermediaries, regulators, contract-enforcers and correction mechanisms. In this space, informal institutions step in to fill the gap. This means that personal connections, opaque power arrangements, tacit understandings, culture, and more, loom large. For those accustomed to industrialised countries, where the rules of the game are clear and enforceable, this may be challenging.
Furthermore, with a few exceptions SSA countries are also “frontier” markets, characterised by different combinations of risk – which could include corruption, arbitrary rules, and faltering democratic rule and economic prosperity.
Therefore, a good political economy assessment of potential target markets is the essential starting point. This requires two levels of market research – political economy risk assessment, and a market scoping exercise. Arising from these two types of analyses, and based on your company’s trajectory, a comparative risk/reward calculation of alternative markets is possible.
Once the target(s) is (are) selected, then scoping of market entry issues is required. Ideally, this should be a combination of desktop research, and in country visits.
Regarding the desktop research, there are many databases and comparative indices that can be used, but each has its own peculiarities and limitations, so a “caveat emptor” approach is required. Some key things to look for include: the business environment (ease of doing business); formal and informal barriers to trade (trade agreements; customs requirements; standards; health issues; corruption levels; etc.); logistics issues (costs; physical and institutional infrastructure; capacity; etc.). Much is contingent on the country being analysed and the product being exported, so it is important to know which sources to consult.
Armed with this desktop picture, the next stage is to visit the target country. Given the prevalence of institutional voids, it is important to spend time there, and engage with as many relevant people as possible, especially local business people and foreigners operating in that market. It is also important to note that setting up meetings can be a haphazard affair. Often emails and phone calls are not returned, and meetings don’t start on time if they happen at all. Patience is a key watchword in some countries, combined with cultural sensitivity and adaptability.
Once in-country visits are concluded, an entry strategy needs to be formulated. This obviously needs to be tailored to the potential destination, and cookie cutter approaches should be avoided. We like to think of this as “negotiating market entry”.
Indeed, negotiations will take place at many levels, some formal, some informal. The key mental framework is that you will be navigating “frontier” circumstances and “institutional voids”, meaning that adaptations en route are inevitable. Nonetheless, common issues will arise: Do you need a local partner? If so, how do you choose that partner? Can the partner be relied upon? What resource commitment do you need to make, factoring potential risks into account? And so on.
Underlying these risks is the critical need to look out for potential minefields, for example: local gatekeepers (ask McKinsey about Trillian Capital); domestic powerbrokers (entrenched incumbents that could make your entry difficult); potential backlash from locals (for example resenting a South African “infiltration”); etc.
This means that – and depending on the scale of the firm looking to enter and its potential exposure – pre-designing a “stakeholder influencing” strategy may be required. We don’t have Bell-Pottinger in mind here, rather a benign approach to working with domestic stakeholders to ensure greater receptivity to your presence in the market. This could mean committing resources to CSI activities for example, or supporting local business associations, or running a sustainability initiative.
In conclusion, proceed with caution. And good luck!
by Peter Draper | Sep 22, 2017 | Blog, Publications
Sustainable development is increasingly becoming mainstream in trade agreements. The past few years have seen a significant upsurge in the inclusion of sustainable development provisions (SDPs) in regional trade agreements (RTAs), particularly in deep-integration RTAs – i.e. those seeking commitments beyond WTO obligations. There has been interest in using RTAs as building blocks towards the multilateralisation of SDPs.
Trends in sustainability provisions across RTAs
A plethora of RTAs we reviewed, concluded by Canada, Australia, Canada, Chile, the European Free Trade Association (EFTA), the EU, Japan and the US, have included SDPs. However, the levels of incorporation of SDPs differ, with some RTAs containing more comprehensive measures than others. Some RTAs just pay homage to sustainable development with no real commitments undertaken.
On balance, incorporation tools have over time undergone a substantive transformation away from mere dialogue provisions towards comprehensive SDPs in preambles, general exceptions clauses, dedicated chapters, incorporation in other chapters, side letters, and side agreements.
Despite this trend of incorporating comprehensive provisions into deep-integration RTAs, there is still no consensus to create binding provisions subject to dispute settlement in RTAs, with the partial exception of the Trans-Pacific Partnership (TPP). Of course, there are some exceptions that always create binding obligations, notably in US RTAs since the North American Free Trade Agreement (NAFTA). Nonetheless, the absence of binding commitments subject to dispute settlement may indicate that most states prefer a soft law approach to sustainable development issues. These soft law provisions take the form of cooperation mechanisms, consultation requirements, enforcement mechanisms, and reaffirmation of international standards.
Some RTAs have gone beyond soft law provisions to incorporate investor-state dispute settlement (ISDS) which creates another platform to resolve disputes, notwithstanding the controversy surrounding them. Most prominently, a new Investment Court System for dispute settlements is being established under the Comprehensive Economic and Trade Agreement (CETA), partly with a view to enhance the enforceability of SDPs.
Another trend concerns the provisions addressed in RTAs, where provisions broadly address similar social and environmental issues. The main social issues addressed include labour, transparency, and political participation. The main environmental issues include protection of the marine environment, ozone layer, and fisheries. The EU goes a step further to include a specific provision on human rights; but this still remains a challenge for other countries, most of which shy away from explicit human rights provisions. As a result, human rights provisions are only incorporated under other chapters, such as the labour chapter.
Furthermore, the standards in relation to labour and the environment are similar across RTAs. RTAs refer to similar international instruments such as the International Labour Organization (ILO) Declaration and the Montreal Protocol.
Overall, the incorporation of sustainable development into RTAs is far from complete, with many obstacles remaining. Against this backdrop, what are the prospects for multilateralising RTA SDPs?
Multilateralisation of sustainability provisions
Some SDPs are amenable to a multilateralisation process. The degree of similarity in the channel of incorporation, issues addressed (social and environmental), and enforcement mechanisms among some RTAs, notably those concluded by Canada, the EU, and the US attests to this.
While a critical mass of developed countries has adopted and continues to adopt SDPs, there has been unwillingness by developing countries to include SDPs in RTAs, though there are exceptions such as Chile. Many developing countries are wary of taking on SDP commitments that could impose rigorous obligations on them, or obligations they are not prepared to accept. Given the broader challenges with negotiating multilateral deals in the WTO, this does not bode well for multilateralising SDPs.
Despite these challenges, the quest for multilateralisation continues to grow. Possible avenues include:
- the extension of existing RTAs to willing non-parties to the overall package, thus widening the circle;
- regional consolidation, creating one larger RTA by combining two or more existing RTAs, for example the Tripartite Free Trade Agreement (TFTA) in Africa;
- a convergence of key SDPs through plurilateral agreements negotiated amongst a critical mass of countries in the WTO; and
- the WTO gradually adopting new substantive provisions or negotiating a new agreement like the Trade Facilitation Agreement (TFA) and ratifying it progressively.
In considering all these options, the WTO’s work programme on trade and sustainable development could be used as a basis to promote the extension of deep RTAs containing sustainability provisions.
Looking ahead
While important building blocks have been erected at the regional level, the multilateralisation of SDPs in RTAs is critical. It would ensure, among other things, uniform application of the provisions, which would facilitate the advancement of the UN Sustainable Development Goals. Work already done at the RTA level gives us ground for cautious optimism. With political will, more RTAs could be persuaded to join the bandwagon leading to greater acceptance and eventual multilateralisation of sustainable development provisions.
This article is derived from the paper Sustainability Provisions in Regional Trade Agreements: Can they be Multilateralised?
Peter Draper, Nkululeko Khumalo, and Faith Tigere are respectively Managing Director, Senior Associate, and Researcher, Tutwa Consulting Group.
In March 2017, ICTSD and the Inter-American Development Bank (IDB) organised a dialogue on sustainability provisions as part of the RTA Exchange project.
by Peter Draper | Aug 25, 2017 | Blog, Publications
Closer economic integration is a prescription frequently advocated for the African continent, and enthusiastically endorsed by politicians and business alike. Accordingly, the continent does not lack integration schemes, generally dubbed ‘Regional Economic Communities’ (RECs) – 14 all told. Frequently countries are members of two RECs, occasionally three (Swaziland comes to mind). If enthusiasm was a guide, all should be well on the regional economic integration front in Africa.
Yet all is not well. Compared to other regions of the world, intra-Africa exports, at approximately 18 percent of total exports, lag considerably. By contrast, intra-European Union exports are around two thirds of total exports, whereas East Asian and North American levels hover around the 50 percent mark. Why is this the case? Should we be concerned about it? And will the Continental Free Trade Agreement fix the ‘problem’?
Why is intra-African trade relatively low?
The short answer is, because African economies typically do not produce much beyond commodities, and those commodities are typically exported out of the continent to the developed world, China, and a few other dynamic emerging economies such as South Korea.
Contrast this pattern of trade with that centered on China; the ‘workshop of the world’. This is where final assembly of mostly labour-intensive, low wage manufactured goods takes place, typically for export to third markets and particularly developed countries. At the top end of manufacturing value chains developed countries such as Japan, Germany, and the US, are dominant, with their firms being the ‘bosses’ of value chain governance across the spectrum of goods production. Those value chains are spread out across the world, incorporating China and select production centres, with coordination taking place at corporate headquarters.
In this broad picture, African economies do feature, but mostly at the origin of many value chains, in other words supply of the raw materials – agriculture and minerals – that are transformed into intermediate products in the more technologically-advanced economies and subsequently shipped around the world to feed production of parts and components, for final assembly in China or other select locations. Exports of commodities consequently dominate African trade statistics, and so we should not be surprised to find that recorded levels of intra-African trade are low.
There are three mitigating factors in this structural dynamic, neither of which is captured adequately by official statistics. First, a substantial amount of unrecorded, informal, trade takes place across some African borders. Since the trade is informal – mirroring the central role that informal commerce plays within many African economies – it is not amenable to capture in official statistics. However, it is unlikely that African production drives this informal trade; rather, much of it is based on imported products, or products manufactured in the regional production hubs: South Africa, Kenya, Egypt, and Nigeria.
The existence of these hubs, or gateways, points to the second factor, which is the emergence of regional value chains centered on select economies. South Africa, with its comparatively diversified economic base, looms particularly large in this story, which explains the dominance of South African companies in the intra-African investment story. But regional ‘champions’, to use the Boston Consulting Group’s terminology, from the other hubs are increasingly part of the picture. As intra-African investments grow, so regional value chains will spread, and trade will commensurately increase.
The third point is that a number of African economies are specialising in various niches of the services sector. South African telecommunications companies, Kenyan information technology startups, and Nigerian banks come to mind, for example. Rebasing the Nigerian GDP level relied substantially on measuring this sector, and largely explains why that economy was briefly considered the largest in Africa. However, services trade is notoriously difficult to measure. Who knows, for example, how much digital trade Kenyan IT companies are responsible for? Nonetheless, there is considerable intra-African services trade, and as regional value chains extend their reach so the services on which many of them depend will also grow and cross borders.
Should we be concerned?
From the foregoing, we do not need to be unduly concerned. The main reason intra-African trade levels are low is because African economies are structurally linked into the global economy as providers of raw materials. The positive developing stories are not being properly told, and are difficult to measure.
However, there is no room for complacency. Governments, working with the private sector, can and should do much more to promote intra-African trade and investment. Report after report highlights the generally dismal environments for conducting business, relative to emerging market peers. Poor governance more generally remains a major obstacle in the path of building knowledge-intensive industries that would move countries up the value chain. And individual markets remain small and fragmented, considering which enlarging the market would allow for economies of scale to justify larger investments in productive capacity.
Will the Continental Free Trade Agreement fix the ‘problem’?
The CFTA is a logical part of the solution to the ‘problem’. All countries on the African economy are engaged in the process to establish it. However, a free trade agreement on this scale (in terms of number of countries involved) was always going to be politically challenging. And so, it has proved to be.
At the heart of the issue is differing visions regarding the role that free trade and investment should play in development strategy. Some countries subscribe to a ‘facilitative view’ of cross-border value chains, whereby trade and investment access should be liberalized and regulatory environments strengthened, to allow companies to move goods, services, and people across borders while ensuring their investments are protected. Others subscribe to a ‘restrictive view’, and advocate limited openings to protect domestic firms and workers, while obliging foreign companies to make more commitments to their markets using devices such as local content policies or looser intellectual property rights (IPR) protections.
Consequently, negotiations are on the ‘modalities’ governing import tariff liberalization, or level of ambition, that should govern the CFTA, are ongoing. At the time of writing it is not clear how services liberalization would be managed, owing to the same ideological differences visible in the goods negotiations, and so how ambitious the ensuing agreement would be. Nor does it seem likely that ‘behind the border’ regulations such as IPR will form part of the final mix.
Overall it is possible to conclude the CFTA although it may take much longer than the timelines announced by politicians. But given the differing perspectives on the place of trade liberalization in development strategy, it is likely that the agreement will not be ambitious. Therefore, and taking account of the structural factors that inhibit formal African trade integration, its impact on recorded trade levels is likely to be felt at the margin.
This article was first published in the NEPAD Yearbook 2017, available here.
Photo credit: World Bank Photo Collection via VisualHunt.com / CC BY-NC-ND
by Peter Draper | Jan 17, 2017 | Blog, News
January 17-20 marks the annual World Economic Forum gathering of the (largely western) globalised elite. Davos man faces a turbulent world in 2017. A selective listing of issues encompasses globally significant countries/regions in transition, notably Donald Trump’s impending US Presidency, Brexit, the European Union, Russia, China, Japan, the Middle East; and ongoing global driving forces, especially the “fourth industrial revolution”, cross-border production chains, the largely western backlash to globalization, and cyber warfare.
These times would test any government and country, but South Africa faces its own domestic challenges that in the best case will inhibit its responsiveness, and in the worst case exacerbate the domestic political impact of these global currents.
A backlash against economic globalization is the thread running through what some commentators are calling the crisis of the industrialized West. It manifests in rejection of economic, cultural, and political openness, particularly in the trade, immigration, and democracy terrains. It partly explains the rise of Donald Trump and his anti-trade openness, anti-immigrant, ostensibly anti-elite, agenda. It also explains part of the Brexit phenomenon, notably its anti-immigration component, although, unlike Mr Trump, the so-called “Brexiteers” are free traders at heart. And it explains the fault lines in the forthcoming, and highly consequential, French and German elections.
These trends coalesce into a progressive weakening of Western consensus on approaches to managing the global economy, as “the rest” rise to economic prominence yet do not yet possess the capacities to assume global leadership. Consequently, there is an uneasy interregnum in the management of global affairs, dubbed the “G-zero” world by the Eurasia group.
On the geopolitical stage there seem to be two clear winners from these developments: Russia, and China. Neither are friends of western free-wheeling democracy so, to the extent they benefit, other leaders with less liberal mindsets, such as in Eastern Europe, will be encouraged. To the extent that authoritarian tendencies are present in South Africa, they too will be encouraged, and perhaps reinforced via our membership of the BRICS grouping.
Russia stands to gain, geopolitically, from Mr Trump’s Presidency, although whether and to what extent this will materialise, given institutional and Congressional resistance to Mr Putin in the US, remains to be seen.
China looks likely to be the target of a concerted US trade offensive. At first sight this would harm China’s highly export-dependent economy, exacerbating domestic political tensions. However, President Xi Xinping has one eye firmly fixed on the Chinese People’s Congress scheduled for the final quarter of this year, at which he is keen to cement his hold on power and, perhaps, launch a new wave of economic reforms necessary to address mounting domestic economic challenges by rebalancing the Chinese economy towards domestic consumption. Compromise with the US could be interpreted as weakness, and will consequently be relatively low down his radar screen.
As many globally minded leaders recoil from Mr Trump’s inward-looking trade and investment policies, so new global leadership will be sought, and China has already signaled its willingness to fill the potential void. Depending on how China comports itself in its East Asian region, this dynamic, coupled with Mr Trump’s general scepticism of the US military alliance system, could lead to a rebalancing of political power in that region, provoking Japan into action, with unpredictable consequences. Throw in the volatility associated with North Korea’s erratic leadership and it is clear that tensions in the East Asian region – the crucible of the twenty first century – will sharply ratchet up this year.
These dynamics highlight what is at stake at the global level: the future of the Post World War Two Liberal International Economic Order. Given domestic resistance Mr Trump is unlikely to tear up the multilateral institutional arrangements crafted over more than seventy years by successive US Presidents. However, from trade, through climate change, to Western security, he is likely to at least disrupt them, if not overturn them.
The more his destructive instincts are brought to fruition, the more erstwhile critics will come to appreciate just how crucial these institutional arrangements have been in maintaining international peace and security amongst the great powers (and therefore for the planet), and just how they have anchored post World War Two economic growth and development.
Which is not to deny the many problems they contain, such as locking in distorted agricultural trade regimes. However, to the extent that “the rest” depend on Western markets and investment, the gathering western backlash against globalization will compromise the developing world’s economic prospects and compel them to diversify their trade interests by setting up, or strengthening, parallel governance structures, particularly at the regional level. In this light, while the prospects for Africa’s grand trade project, the Continental Free Trade Agreement, are not great, they may receive a fillip.
Overall, the world seems set to take a ride down the roller coaster of deal making based on raw power politics, away from the more genteel power politics, buttressed by international rules and institutions, which we are used to. In this, mercantilist, world we are heading into, the wielders of cyber warfare will thrive, and their actions will exacerbate already inflamed nationalist passions and illiberal reactions.
Where can South Africans look to for hope in this gathering gloom? Notwithstanding the backlash against globalization, the most positive integrative forces, especially technological change, are likely to retain much of their potency. However one, cross-border production networks, is already under substantial attack in the US while the other, the information technologies that underpin the “Fourth Industrial Revolution”, are principally to blame for the populist phenomenon that gave rise to Mr Trump and show no sign of abating.
The first is more relevant to us. In case South Africans have not been watching, President-elect Trump is engaged in a twitter war with the international motor industry, threatening “border tax adjustments” if they relocate production to Mexico (today, tomorrow it could be SA). This pressure is likely to intensify, with the US Treasury expected to designate China, Japan, and perhaps Germany, as “currency manipulators”, justifying additional border tax (import tariff) adjustments in the form of countervailing duties.
Retaliation is certain, but the extent and contours are unpredictable. Global uncertainty, characterised by outbreaks of trade wars, increasing national security contestation, hostility towards “them”, and an increasingly fraying institutional fabric, seems set to increase.
The already fragile global economy is likely to suffer in this environment, notwithstanding frothy financial markets punting on Reaganesque supply-side economic policies emanating from Washington. Sooner or later the political, and economic, limitations, as well as contradictions, inherent in the emerging Republican economic policy package will become apparent. If there is one thing that markets do not like, it is uncertainty. Unpredictability corrodes investment confidence, particularly of the real economy type.
Therefore, after the initial euphoria of Mr Trump’s first one hundred days, it is likely that a reality check will set in and, if accompanied by highly conflictual trade and investment relations, investment plans will be recalibrated, with a view to shortening supply chains so as to minimise the risk of policy or security induced disruptions. The search for premium business environments that stand better chances of maintaining good relations with the US will intensify.
As the Trump administration warms to its task of blocking Chinese economic expansion, and China retaliates, countries will increasingly be placed under pressure to choose sides. It is very difficult to see the Trump Administration, with all the prejudicial baggage he brings, winning this contest for hearts and minds in South Africa.
When the ANC dominated our politics like a colossus these geopolitical tensions, while present, were quite manageable. Now, as political power within the governing alliance, but also in the country, is more contested, the foreign policy terrain has become more fluid and may also become more politicised. The Tshwane Mayor’s recent Taiwan foray consequently assumes more significance.
The US, and the West, have generally been convenient, if historically-deserved, targets for various tripartite alliance factions even as the economy depends on Western markets for our value added manufactured goods exports, and Western investment to drive economic growth more broadly. “White monopoly capital” in South Africa, with its obvious western linkages, is a natural extension of this safety valve, and so more anger will be directed towards it, particularly the Davos elite, by factions of the tripartite alliance as the ANC’s succession battle intensifies. Depending on who wins, there could be serious legislative consequences for the private sector, both domestic and foreign, operating in South Africa.
Therefore, the “investment strike” by South African business is likely to continue until the succession dust settles, and will compound the negative international environment to deliver structurally slower, and perhaps negative, growth this year. With ratings agencies poised to deliver downgrades, the time to fasten seatbelts – again – is upon us.
Article originally published on BusinessDay Live, 13 January 2017. Please note that a premium content paywall might be in effect.
Photo credit: World Economic Forum via Visual hunt / CC BY-NC-SA
