Is it worth antagonising the US with Russia and China relations?

First Published in Business Day on   February 27th, 2023   |   by   Gracelin Baskaran

Is it worth antagonising the US with Russia and China relations?
Ruby-Gay Martin

Bringing the trade partnership with the US into peril could have dire consequences for SA

In the middle of an energy crisis and greylisting, SA could do without antagonising one of its biggest trade and investment partners.

When SA welcomed the Russian warship Admiral Gorshkov — with the Kremlin’s pro-war symbol, the letter “Z”, on prominent display — it sparked a new diplomatic crisis with the US that could have profound economic consequences.   

This past week the US Congress introduced a resolution to reconsider its relationship with SA. House Resolution 145 opposes SA’s hosting of military exercises with Russia and China and calls on the Biden administration to “conduct a thorough review of the US-SA relationship”.

You have to wonder: is it really worth it? And if so, for whom, and for what? Ahead of the first democratic elections in 1994 Nelson Mandela authored an article for Foreign Affairs outlining the ANC’s foreign policy stance and how it wanted to engage on the international stage: “Our belief [is] that human rights should be the core concern of international relations.”

This was a commitment to principled foreign policy and a rejection of the undiluted pursuit of self-interest. Russia’s behaviour has been the antithesis of this human rights commitment. So does a closer relationship with Russia advance SA’s economic interest? Does Russia offer SA something that provides reprieve amid the hardships, bearing in mind that the country’s growth rates that exceed 3% between 2010 and 2020 and a lack of investment has driven an unemployment rate in excess of 30% throughout that period?

And it’s not national interest either. Russia contributes less than 0.5% of SA’s international trade. Its total investment in SA remains a measly $1.5bn. SA’s decision to strengthen its alliance with one pariah state — Russia — and another that’s likely to become one due to its support to Russia and impending efforts to annex Taiwan (China), is likely to be of consequence for two things SA needs most: trade and investment.

Whether passed or not, House resolution 145 lays the foundation for economic levers the US can use in future.

In 2000 US president Bill Clinton signed the African Growth & Opportunity Act (Agoa), which gave African countries a competitive edge by providing unilateral duty-free exports for 6,500 products from Africa to the US.

Throughout the life of Agoa it has been leveraged as a tool to support human rights. In recent years Cameroon, Guinea, Mali, Ethiopia and Burkina Faso have experienced a loss of benefits on the back of shortcomings. Some suspensions had larger economic consequences than others: Guinea and Mali exported little to the US — less than 1% of total exports — so the fallout was limited. Ethiopia, on the other hand, took a far larger hit as the US was the second-biggest importer of Ethiopian goods. The loss of Agoa benefits triggered large-scale divestment within weeks.

Under the circumstances American senators are, with good reason, asking why SA should have preferential trade terms with the US when it’s de facto supporting a wartime enemy and perpetrator of human rights atrocities.

SA would, in absolute terms, be the biggest loser on the continent if it lost its Agoa benefits. SA is the largest African exporter and has the most diversified export range, sending goods from 11 sectors to the US. Exports are primarily concentrated in minerals and metals, transportation equipment, chemicals, agriculture and an array of manufactured goods.

Five years ago it would have been a fair question to ask whether the US might turn a blind eye given its need for commodities produced by SA, including manganese, platinum and chromium. But if we’ve learnt anything from Russia’s natural gas saga it is that the US is willing to take a hardline human rights stance, even if it’s an economic inconvenience.

Beyond Agoa, bringing the trade partnership into peril could have dire economic consequences. SA Revenue Service data shows that in December the US was the biggest importer of SA goods.

The trade implications may be mirrored by the EU given that it and the US have largely moved in policy sync as it relates to Ukraine. SA is also a beneficiary of the Southern African Development Community-EU Economic Partnership Agreement, another preferential trade programme.

At a time when SA is aiming to grow its exports and explicitly seeking out new trade partners to line up off-takers for ramped-up production, upsetting existing trade partners is ill advised.

The US is the biggest source of foreign direct investment in SA — valued at $7.6bn. Roughly 600 American employment-facilitating businesses operate in SA.

The arrival of the Admiral Gorshkov signalled that SA was willing to face potential divestment and future deterrence to new investment. Would you bring long-term investment into a country that’s been severely sanctioned by most major economies and suspended by the Financial Action Task Force (FATF)?

It was short-sighted, at best, for a country that’s gone to great lengths to attract foreign direct investment and prided itself in being an export-led economy. It was also short-sighted, considering that SA knew FATF greylisting was imminent. Yet still, it took a well-planned economic gamble.

Within a week of the Admiral Gorshkov arriving SA was formally and independently identified as a threat to the international financial system by the FATF, bringing inevitable consequences on trade and transactions with other countries. It became the second Group of 20 nation to be greylisted. This means future investment challenges will extend to the rest of the world.

By 2021 there had been enough research to show that greylisting had a big impact on a country’s capital flows — an average of -7.6% of GDP, though this varied by flow. Additionally, on average foreign direct investment inflows declined by 3%, portfolio inflows 2.9% and investment inflows 3.6%. SA’s recent foreign policy behaviour and energy crisis is likely to amplify the impact.

It’s a credible argument that the historical support to the liberation struggle during the apartheid era by the Soviet Union and China has played a hand in how things have played out. But it’s certainly worth rethinking SA’s approach given the economic consequences that are hanging over our heads at a time when the country has little economic resilience left.

SA needs to start thinking long term. A future of economic growth and prosperity cannot come when intertwined with the status of global pariah. History won’t look favourably on this one.

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