Brics promises an investment boom
SA punches above its weight as it prepares to host summit of emerging giants
● South Africa can expect a windfall from this week’s Brics summit as China prepares to ramp up investments to bolster its position as the country’s largest trading partner.
Ahead of the summit, President Cyril Ramaphosa will on Tuesday host Chinese President Xi Jinping in what is likely to be South Africa’s most important foreign policy and investment week since he took office in February. Russian President Vladimir Putin is also expected at the summit.
The Brics nations are Brazil, Russia, India, China and South Africa and together they comprise 40% of the world’s population and a growing proportion of world trade. By the end of 2017 the collective size of the four largest of the bloc’s economies was valued at $19-trillion (about R256-trillion).
Brazil, Russia and South Africa are in low economic growth troughs but with China and India powering ahead, the bloc is expected to overtake the Group of Seven (G7) by size of economy by 2035, according to Jim O’Neill, the former Goldman Sachs executive who coined the term Bric in 2002. His formulation excluded South Africa, which was added in 2010 when the countries formed themselves into a political bloc.
O’Neill said in May “. . . almost since the day the political leaders agreed to invite South Africa to join them to make their club Brics, South Africa has been disappointing. Frankly, I wouldn’t have made that decision because even if South Africa had enjoyed strong GDP growth, it is never going to be an especially large economy as it doesn’t have a lot of people. Even if it enjoyed enormous productivity growth it would never get to the size of the top 20 economies of the world.”
International Relations and Cooperation Minister of Lindiwe Sisulu told Business Times that South Africa had earned its place at the table. “Brics is not a coming together of major economies but rather a grouping of like-minded countries of the South seeking to work together to positively impact on creating a more equitable and inclusive world order as well as addressing common challenges confronted by all partners of the global South,” she said. “South Africa is an integral member of Brics and seeks not only to advance its own interests but also those of the African continent.
“South Africa has deepened and expanded trade significantly with all Brics countries and has seen significant investment flows from Brics partners. In partnership with Brics we can meet and expand president Ramaphosa’s target [of R1-trillion in investment over the medium term].”
O’Neill says “. . . at the core of Brics success stands China . . . its global relevance is not only dominated by China but very dependent on China. Indeed, who would care about BRI, or BRIS, without China?”
At $12.7-trillion, China’s economy alone at the end of 2017 was about twice as big as the other Brics economies together.
Chinese ambassador Lin Songtian said that South Africa could be developed as the bridgehead connecting Africa to the country’s Belt and Road scheme, a key economic and political development to rebuild and expand the old Silk Road. The initiative crosses all continents.
“Both China and South Africa regard each other as the strategic priority in its foreign affairs,” said Lin.
South Africa lies far from the plotted path of the Belt and Road initiative and its position as a bridgehead is a new development. China’s central planning has estimated that the world’s second-largest economy will import more than $8-trillion of goods over the next five years and that its foreign direct investment will grow to $750-billion over the same period. Even a tiny proportion of that reaching South Africa will help to stimulate growth.
Further Chinese investment in South Africa is likely in mining, agriculture, clean (or green) energy and tourism.
Last year, South Africa became the first country in the world to export beef to China and the country is interested in South Africa’s vast deposits of platinum group metals as well as gold, manganese and chrome. Mangoes, apples, plums, oranges, pears, grapes and cherries are big in China
Both China and South Africa regard each other as the strategic priority in its foreign affairs
Lin Songtian
Chinese ambassador to South Africa
and fruit and wine exports from South Africa are growing. Lin said China had invested $25-billion in South Africa and that 300 investment projects have helped create 400 000 jobs, according to its calculations.
“Last year China-South Africa two-way trade reached $39.17-billion, an increase of over 25 times from the early days of our diplomatic ties.”
But the trade is imbalanced, and South Africa sees it as an imperative to export more to China and ramp up tourist arrivals, which are counted as an export.
China is now one of the world’s largest investors in green energy, which is also the focus of the New Development Bank, the Shanghai-based Brics bank now making its first investments. China’s Longyuan Power Group has invested $5-billion in wind power in the Northern Cape and the Ji Dong development group has invested $220-million in a clean cement project called Mamba.
● US President Donald Trump’s protectionist policies are forcing South Africa to assess if membership of the African Growth and Opportunity Act, the US preferential trade programme for sub-Saharan Africa, still provides any benefit.
Trade and Industry Minister Rob Davies said in an interview with Business Times that South Africa’s ambassador to Washington, Mninwa Mahlangu, made submissions in the US this week on behalf of the Pretoria government.
South Africa’s steel, aluminium and automotive industries are waiting to see how US plans to hike tariffs will affect them.
Last month Washington imposed tariff increases of 25% and 10% respectively for steel and aluminium imports from Canada, Mexico and the European Union. It is due to complete an assessment of the automotive sector next month.
South African poultry producers, who have long been unhappy with imports of US poultry products, have threatened litigation to try to end tariff concessions on these imports.
Davies said: “Our ambassador made a formal submission to the US commerce department . . . He pointed out to them that we’re facing litigation from poultry producers because the poultry imports from the US have been linked to our continued participation in Agoa.”
He said the submission made it clear that if South Africa’s automotive sector did not get an exemption from the US tariff hikes “it would be very, very difficult for any kind of case to say that we hadn’t significantly and severely lost some of our Agoa preferences”.
“There are some tariff lines already on steel and aluminium that have been breached in Agoa. That issue will eventually find its way to court. We drew that to the attention of the US side as well,” Davies said.
The minister met with US trade representatives at the Agoa forum in the US last week where he again requested an exemption on behalf of the steel industry.
Agoa, initiated by president Bill Clinton in 2000, enhances market access to the US for about 40 subSaharan nations by eliminating import levies on more than 7 000 products ranging from textiles to manufactured items.
Asked if Agoa would continue to be of benefit to South Africa, Davies said the country was at the stage of making representations as to why it should not be included in the punitive tariffs on vehicles. “But if we were [included], the point we made is that it would take a big hole out of the value of Agoa to us. We will have to make an assessment.”
But Agoa still allowed for the export of South African components and finished products to the US, Davies said. “This is an ongoing discussion, which I’m sure will continue even next week in the Brics summit. We’ll have discussions with the Brics trade ministers on this.”
Last year South Africa exported close to R15.8-billion in automobiles and auto components to the US, according to the Department of Trade and Industry. It said passenger vehicles accounted for 93% of the total, and auto components 4%.
Auto sector exports are a significant contributor to South Africa’s total exports. Last year they were worth R164.9-billion, comprising 13.9% of South Africa’s total export earnings.
South Africa accounts for 0.4% of total US imports of automotive products. In 2016, automotive products constituted 80% of the South African goods exported through Agoa. The department fears job losses if manufacturers have to pay duties.
South African steel exports to the US account for less than 1% of total US imports and 0.3% of total US steel demand. These exports represent 5% of South Africa’s steel production, a sector that employs 7 500 people.
South African aluminium accounts for 1.6% of US aluminium imports. It is used in the US automotive, battery and aerospace industries.
Paolo Trinchero, CEO of the Southern African Institute of Steel Construction, said higher tariffs could cripple South African exports to the US.
“However, the lack of confidence in the local South African market continues to pose a much greater risk to the industry,” he said. “Lack of policy certainty and a significant reduction in government spend has had a significant impact.”
Trinchero said the industry continued to work on maintaining exports to other markets, particularly the rest of Africa. “South Africa cannot afford to lose any markets as the local demand is just too low. Ultimately profit margins are not sufficient when large tariffs are introduced,” he said.
Michael Ade, chief economist at the Steel and Engineering Industries Federation of South Africa, said the local industry would be starved of foreign reserves if the US imposed its tariffs on South Africa.
Ade said based on 2017 export data, US duties would directly cost South African exporters about R3billion for steel products and R474-million for aluminium products.
There are some tariff lines already on steel and aluminium that have been breached in Agoa. That issue will eventually find its way to court.
Rob Davies
Minister of Trade and Industry