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Fracturing global economy presents tough choices for SA

Natale Labia
By Natale Labia
24 Sep 2024
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Is this an opportunity, like it was in the Cold War, for smaller nimble actors to play off the great powers in pursuit of greater economic access and largesse? Or is it a case of, to use the Swahili adage, ‘when the elephants fight, the grass gets trampled’?

To borrow a phrase from historian Eric Hobsbawm, we live in “fractured times”. The world as we know it, at least economically and geopolitically, is crumbling. As European Central Bank president Christine Lagarde warned in a speech last week, “these changes resemble those that took place a century ago. Today, like in the 1920s, we are seeing setbacks in global trade integration and increased global fragmentation.”

But in what ways is this occurring? Why is it happening? And how will it affect mid-sized “emerging” economies, like South Africa, with strong ties to both the West and the Global South?

The first noticeable sign of global fracturing comes from the fragmentation of economic ties. Recent data from the International Monetary Fund (IMF), suggests that this fragmentation is accelerating, largely driven by geopolitical concerns. Protectionism is back.

Countries are trading more today than ever before


This fragmentation is not however synonymous with “deglobalisation”. According to World Bank data, trade today is a larger share of global GDP than ever before – a useful fact to keep in mind when hand-wringing about the end of globalisation. 

Furthermore, growth in global trade has disproportionately benefited almost all developing countries. While it is self-evident that China has been a net-beneficiary, perhaps what is less appreciated is the growth in trade that has accrued to developing countries excluding China, such as South Africa. 

According to UN trade and development data, from the mid-1990s to 2022, developing countries (excluding China) increased their share of global trade flows from 27% to almost 40%, largely at the expense of developed economies. However, the absolute growth in trade flows accruing to such “in-between” nations, such as South Africa, more than outweighs the shrinking of the rich countries’ share. 

This, then, is the correct story to tell about global trade in the past few decades: developing countries are trading more with the rich world than they ever have, but they have also added a huge amount of trade with China and each other. 

Fragmenting realities for emerging markets


Of course, if this is the story of the past 35 years since the fall of the Berlin Wall, it is clear that the dynamics shaping the next will be very different. 

According to the IMF, global trade is increasingly forming into large, integrated regional blocs. While trade between geopolitically aligned countries is growing, it is slowing between politically distant ones. Trade between countries within these blocs – such as those aligned with China, the European Union (EU), or the United States – continues to deepen. For example, since 2018, intra-EU trade has grown by 5%, and the same trend is seen in China and the US blocs.

But that implies a tricky choice. With trade a larger percentage of global GDP today than ever before, and geopolitical differences between the big trading centres making it harder and costlier to trade across the blocs, then it will be ever more difficult for the in-betweeners to choose between the blocs. This fragmentation presents serious challenges for countries like South Africa.

Is this an opportunity, like it was in the Cold War, for smaller nimble actors to play off the great powers in pursuit of greater economic access and largesse? Or is it a case of, to use the Swahili adage, “when the elephants fight, the grass gets trampled”?

The Politics of Choice


Until now South Africa has done an enviable job of playing to all camps. Somewhere within the seemingly dissonant chaos of Agoa, the Lady R, The Hague and posturing within the BRICS, there has been a cunning ability to remain non-aligned, retaining good trade and geopolitical linkages with all three blocs. However, it remains to be seen how much longer this will be possible.

The luxury of non-alignment, enjoyed by many countries since the end of the Cold War, is yet another casualty on the killing fields of Ukraine and Gaza. The world is entering a new era of bipolarity. 

If the future does compel choices to be made for non-aligned countries, geography, resource endowments and political alliances will all play crucial roles in determining which bloc emerging economies like South Africa choose.

Moreover, the future political landscape of the major trading blocs will influence economic decisions. Much is outside the control of smaller countries. The US, for example, has bipartisan support for greater protectionism. An example is the Inflation Reduction Act of 2022, which offers $369-billion in incentives for clean energy technologies, effectively encouraging domestic production at the expense of foreign imports. Trump, if elected, has promised to enact a 10% tariff on all imports. Similarly, the EU’s Carbon Border Adjustment Mechanism, which aims to tax carbon-intensive imports, threatens to make it harder for developing countries to access EU markets.

Domestic political factors will be even more critical. South Africa, under its new coalition government, appears to be leaning toward strengthening ties with the US and EU. However, maintaining this alignment could strain South Africa’s relationship with China, its largest trading partner. Any future populist coalition is likely to favour Russia and China.

The global economic landscape is becoming increasingly fragmented, with emerging economies like South Africa facing hard choices. The post-Cold War halcyon days of globalisation, when countries could have the best of all worlds, are over. DM

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