Unilateral trade preferences beginning to lose clout

When it comes to the future of US-South Africa relations, the debate has been dense: multilateral convenings, trade agreements, and political alliances. But little has been said about South Africa’s critical comparative advantage in this situation.

Last week, a group of bipartisan US policymakers wrote a letter to President Joe Biden, Ambassador Katherine Tai and National Security advisor Jake Sullivan requesting punitive measures be applied to South Africa for alleged support to Russia.

In the first instance, the letter requests the African Growth and Opportunities Act (AGOA) Forum, currently slated to be held in Johannesburg later this year, be hosted elsewhere. More subtly, it interrogates the merit of continuing SA’s AGOA benefits beyond 2025.

Regardless of where you fall on the substantive content of the letter, it brings an important question to the forefront: are unilateral trade preferences adequate leverage to motivate geopolitical decisions?

Less so today, then 15 years ago. The African private sector was nascent, international aid was the prime form of engagement, and preferential trade agreements essentially functioned as industrial policy. But that was before the world realized the criticality of what we now call “critical minerals.” And before African countries realized how powerful the earth under their feet was.

There’s no disagreement that South Africa benefits from preferential access to the US market through AGOA, particularly in labor-intensive sectors such as automotive components and machinery manufacturing. But the contribution to the export is small, amounting to just 10.3% of goods sent to the US.

The real jackpot sits in the platinum belt. In 2021, South Africa exported $6.98 billion in platinum to the US. Half of all exports to the US were platinum. South Africa has two distinct benefits here: first, it has a near-monopoly on the platinum market, with nearly 90% of the global share. Second, it benefits from the fact that the two other countries who have relatively small platinum reserves are both pariahs on the international economic stage – Russia and Zimbabwe.

In essence, if you want platinum, it has to come from SA.

Then there’s manganese. My column last week highlighted a few need-to-know’s about the metal: first, it’s impossible to make steel without manganese; second, it’s not substitutable; and third, South Africa sits on over 70% of the world’s ore reserves.

Thus far, the US has managed to sidestep relying on SA’s manganese.  Between 2017 and 2020, the US imported 67% of its manganese from Gabon and 18% from South Africa. From a mining investment point of view, it’s unlikely that we’re going to see an overnight boom in SA given the state of Eskom and Transnet.  But SA’s manganese will remain in the purview of both investors and governments looking to build supply chain security. The world needs manganese and SA has the biggest supply of it. A broader critical mineral export ban would be crippling for the rest of the world.

I’ll circle back to my original question now: are unilateral preferences adequate to motivate geopolitical decisions? I’d fall short of providing a binary answer – but I would say they are certainly losing their clout as resource-rich countries quantify the value of what’s underground.

Mineral resources are equalizing the playing field. The key benefit that US and EU policymakers have had in their favor is the size of their market – gaining access to these large markets has been a significant benefit to developing countries. But the presence of critical minerals has left international investors vying for the attention of policymakers in African and Latin American countries.

Commentary from Johannesburg has overwhelmingly been concentrated on the fact that SA is going to get their kneecaps kicked out from underneath them if/when AGOA gets pulled for SA’s erratic behavior.  

It’s more complicated than that. To validate their argument, a loss of AGOA benefits will be a market signal that can contribute to a decline in business confidence, increase financial outflows, further extend currency depreciation (thereby increasing the import bill) and damage the Republic’s fastest growing trade relationship (between 2016 and 2021, exports to the US rose 139%).

But the debate is missing the fact that the majority of SA’s exports to the US are critical minerals, which neither go through AGOA nor have a shortage of buyers if the trade relationship sours. Supply and demand dynamics are in favor of SA - 2023 is the first year in many that there will be a global platinum deficit, and some forecasts suggest this could increase by up to 1.5-million ounces in 2024 — a tripling of this year’s deficit. Recycling and the circular economy won’t be able to meet that deficit and the world can’t afford to lose SA’s production. Similar story for manganese.

Unilateral trade preference programs don’t carry the same punitive weight for economies like SA that they do for Lesotho or other small economies. It’s indisputable that a loss of AGOA would carry broader economic ramifications and adversely impact competitiveness for sectors such as automotive manufacturing. But in its current form, a small share of total exports to the US goes through AGOA.

Other countries with AGOA preferences are flexing their critical minerals muscle. Just last week, Namibia banned the export of unprocessed lithium and other critical minerals. Should AGOA preferences, which keep the beef sector competitive, be rescinded? Something worth considering.

AGOA, which has been in effect since 2000, is up for extension in two years. Further discussion is warranted to assess how critical minerals can be incorporated, not just into AGOA, but the broader economic diplomacy space. It could include a combination of investments, trade treaties and technical assistance.

For now, SA’s rich supply of critical minerals are the mainstay of its export basket and can provide a barrier of economic protection.

This is an extended version of the essay printed in BD.  Please see next week's column for part 2!