After the Bell: Isolating the US won’t be good for SA

Should President Cyril Ramaphosa maintain diplomacy and cordiality towards Donald Trump amid the US President’s slew of unfounded attacks on South Africa?

It’s a difficult question to answer, considering a potential diplomatic row between South Africa and the US won’t be one of equals. South Africa has a lot to lose, but could gain something if it embraces new trading partners and economic allies.

The developed world has thrown diplomacy out of the window to launch a coordinated and stinging response to Trump. 

Leaders of the European Union (EU), including, among others, France’s Emmanuel Macron and Germany’s Olaf Scholz, have banded together and stood up to Trump, threatening to retaliate against the US if the country’s 47th President targets their economic interests. The EU and its former member, the UK, are prepared to respond “firmly” if Trump makes good on his promise of imposing punishing tariffs against the bloc. Tariffs are taxes charged on goods imported from other countries. 

Tariffs and a potential trade war will hurt consumers on all sides, as imported goods will be more expensive.

The US imports economically significant and symbolically important goods from the EU, including vehicles (BMW, Mercedes, Audi, Volkswagen), wine and spirits, pharmaceuticals, aircraft and aircraft parts. Equally, the EU relies on goods manufactured by the US, such as barrels of oil, gas, Boeing aircraft and parts, semiconductors and microchips, among other goods.

Canada, Mexico and China have been more daring as they have imposed retaliatory tariffs against the US.

I doubt that Trump’s cascade of tariff threats has anything to do with teaching targeted countries a lesson because he believes they are not doing enough to stop illegal immigration or drug trafficking into the US.

The real reason has more to do with Trump showing off his power as he probably hoped that the targeted countries would plead with him and genuflect like most of his loyalists have done since he took up office two weeks ago.  

South Africa has also been targeted by Trump, who is scrutinising the country’s land reform and restitution programme. In response to Ramaphosa signing the Expropriation Act last month, Trump threatened to cut all US funding to South Africa. In a post on his Truth Social website, Trump said, without citing evidence, that “South Africa is confiscating land, and treating certain classes of people VERY BADLY”.

The response on social media was swift, with some people claiming that South Africa would survive and thrive without financial support from the US. The South African government argues that aid from the US constitutes a small fraction of South Africa’s overall economy or health service delivery programmes, constituting “0.11% of South Africaʼs GDP” or “17% of the country’s HIV/Aids programme”. 

Even a Cabinet minister (Gwede Mantashe) suggested a retaliatory move towards the US, urging South Africa and African nations to withhold their minerals from the US “if they don’t give us money”.

Isolating the US would not be a good move for South Africa and the rest of the African continent.

For South Africa alone, the US and its mighty dollar are baked into most aspects of its economy and how it interacts with the world. After all, the US dollar is considered the world’s de facto global currency, owing to the US’s mature and still-powerful economy. 

Wild swings and volatility in the US dollar/South African rand exchange rate, as seen on Monday after Trump’s incendiary land remarks, make South Africa vulnerable in terms of its economy and public finances.

Since Trump’s inauguration on Monday, 20 January, the rand has weakened by 3% against the US dollar. If this pattern continues, it will be difficult for South Africa to pay back the dollar-denominated debt on its books.

South Africa’s government regularly borrows from multilateral development banks and international financial institutions in foreign currency — mainly US dollars and euros — to meet debt repayments, and also fund local service delivery programmes. According to National Treasury documents, about 10% (or R594.4-billion) of the government’s gross debt of R5.95-trillion this year is denominated in foreign currencies (including the dollar).

A R1 change in the dollar/rand exchange rate adds R29.6-billion to the government’s debt and R8-billion in interest obligations. This increased expenditure will leave little money for spending on goods and services in hospitals, schools and police stations, and pro-growth and investment infrastructure projects.

Multinational companies based in South Africa are also affected, especially if they want to effect cross-border payments in foreign currency. Companies, especially local banks and mining companies dealing with volatile commodities, are exposed to a globally recognised payment system called Swift. This payment system is used by more than 11,000 banks and financial institutions worldwide, and handles 42 million messages a day, facilitating trillions of dollars’ worth of transactions. 

What about the possibility of South Africa ditching the US and embracing its partners under the BRICS bloc (Brazil, Russia, India, China, South Africa and others that recently joined) for trade, investment and development? 

This level of integration would be complex to implement. The nations have been trying to boost trade with each other since the formation of the BRICS bloc in 2009 without much progress. This is because BRICS nations are vastly different; they differ in their policy deployment, GDP generation, currency management, interest rates and inflation policies. Increased cooperation and trade among EU countries is easier because they are similar in size and approach to economic policy.

So, South Africa, with its weak economy, high unemployment rate, constrained public finances and hunger for investments would struggle to cut economic ties with the US completely. 

Ramaphosa’s approach to mend relations with Trump and challenge misinformation is right. Trump is impulsive and, if cool heads don’t prevail, he might up the ante by imposing economic sanctions on US-headquartered companies that do business with and in South Africa.  This is another worst-case scenario that might mean goodbye to Starbucks, Amazon, Burger King, Krispy Kreme, Ford Motor Company and many other American giants in South Africa. DM