South Africa Looks East for Economic Partnership

South Afrca - China
Jacob Zuma on a recent visit to China

Lethargy in US and European markets has pushed the South Africa’s ANC government to fast-track deeper ties with Asia, but not everyone is convinced that it will work.

European officials expressed anger in early June about the governing African National Congress’s new strategy to sideline South Africa’s traditional trading allies and forge closer ties with India and China. ANC Secretary General Gwede Mantashe announced in late May that South Africa would not focus on trade with Europe but on stronger economic and diplomatic ties with the BRICS group – Brazil, Russia, India and China. The move is running into strong headwinds because of differences over and opposition to the policy inside and outside the ANC’s Tripartite Alliance (ANC, Congress of South African Trade Unions – Cosatu – and South African Communist Party).

Policymakers in South Africa view the BRICS as key geopolitical allies in the struggle for the restructuring of global economic and political institutions to give Africa and developing countries a fairer say. More importantly, the government is using its own version of Zimbabwe’s ‘Look East’ strategy to overcome the contagion of the Eurozone, currently South Africa’s largest market for its products. Finance Minister Pravin Gordhan is a firm supporter of this approach. The main destination for the country’s manufactured goods continues to be Europe and the United States, so a continued slowdown in these regions in 2012 will have negative implications for South African exports.

President Jacob Zuma has already conceded that the continuing debt crisis in the Eurozone is likely to make it impossible for South Africa to achieve the kind of growth rates needed to reach its job-creation and poverty-reduction targets. Gordhan says South Africa’s ‘safeguard’ would be to adopt a dual trading strategy: firstly, to dramatically increase trade with Asia, and secondly to upscale its trade with the rest of Africa. Ernst and Young estimate that South Africa has up to three years to take advantage of the turmoil in Europe and attract alternative foreign direct investment to boost growth and create jobs.

Minister of Performance Monitoring and Evaluation Collins Chabane says that government expects China to be a major investor in a planned R800 billion (US$94 bn.) infrastructure deal. Trade and Industry Minister Rob Davies confirmed that China has undertaken to invest heavily in South Africa’s mineral beneficiation programme. The Industrial Development Corporation is also in talks with China for a loan to invest in sectors such as infrastructure and health, says IDC Chief Executive Geoffrey Qhena.

No painless transition

The ‘Look East’ strategy is not universally accepted. Some ANC leaders want quicker engagement. ANC Secretary General Mantashe said that ‘Western investors have to realise South Africa does not need their money since it can turn increasingly to fellow BRICS members India and China to fund its economic development.’ However, Finance Minister Gordhan cautions that the transition to new markets will not be without economic pain. Many in the White liberal establishment oppose the idea outright, arguing that South Africa’s strategic alliances should be with the USA and Europe. Lindiwe Mazibuko, the parliamentary leader of the official opposition Democratic Alliance, says the focus should be on the rest of Africa because the emerging markets are beating South Africa there.

Julius Malema, the former ANC Youth League President who opposes Zuma’s re-election as leader of the ANC and of South Africa, told a Union of Jewish Students dinner last year that Chinese companies were no better than Africa’s previous colonisers. In May, Public Enterprises Minister Malusi Gigaba warned that if unchecked, India and China would dominate Africa’s mineral resources and infrastructure.

ANC leaders such as Deputy President Kgalema Motlanthe agree on diversifying partners, but favour expanding trade with Africa and other emerging markets like Brazil, India, Russia, South Korea and Turkey. They argue that it would be better to let China compete with Japan, South Korea and traditional partners.

Asian-made imports are hitting the ailing manufacturing industry, leading to factory closures and job losses. Since the end of 2009, China has been South Africa’s largest trading partner. Exports to China amounted to more than R39 bn. and imports from China were over R43 bn., with a trade deficit of R3 bn. in favour of China from January to June 2011. Minerals make up about $5.5 bn. a year of the exports to China.

A special type of colonisation

Frans Baleni, the General Secretary of the National Union of Mineworkers (NUM), advises that China’s investment should be viewed with caution since the pattern so far shows that bilateral trade amounts to ‘colonisation of a special type’. South Africa exports cheap raw materials, which do not create jobs, to China; China exports manufactured goods, which create jobs at home, are more valued and made from the cheap South African raw materials, back to South Africa.

The textile industry has been hard hit by cheap imports from China, with factories closing down and heavy job losses since 2002. Cosatu protested at the local Olympic Committee’s decision to make national uniforms for the July competition in China. Manufacturers complain that while Chinese goods easily enter South African markets, China’s high tariff barriers make it difficult for South African products to get into Chinese markets. Trade Minister Davies says that the government has already given a list of demands to China on how trade patterns must alter to benefit the country.

South Africa sees itself as the ‘gateway’ to Africa but the new partners threaten its own markets in other African countries. Currently, about 27% of its manufactured exports go to Africa and 58% of mining exports go to Asia. Yet China, India and Brazil are increasingly establishing bilateral relations and pacts with individual African countries, circumventing South Africa. According to Business Unity South Africa President Futhi Mtoba, trade with India is also hindered by India’s opaque tariff schedule, and its stringent licensing and packaging regulations.

Many in the ANC worry about Chinese companies buying into strategic sectors of the economy such as platinum and rare metals. Ferrochrome producers are already seeking government support. China subsidises raw material imports, including chromium, as part of a beneficiation strategy. It imposes a 40% export duty on metallurgical coke, which is the sole ingredient that South African ferrochrome producers import – largely from China. The NUM wants restrictions on the export of chrome and ferrochrome to China and to step up efforts to develop local processing capacity. The union also wants government to investigate the role of Chinese companies in the economy.

Brazil is challenging South Africa’s anti-dumping fines on shipments of Brazilian poultry at the World Trade Organisation. This followed investigations in 2008-2010 by the International Trade Administration Commission, which imposed anti-dumping duties on frozen chicken from Brazil. In other cases, Tshwane’s emerging allies have failed to show support in key geopolitical decisions, for instance, the bid by Nigeria’s Finance Minister Ngozi Okonjo-Iweala for the presidency of the International Monetary Fund.

In Africa, China secures trade by lavishing largesse on presidents and ruling parties. Many of Zuma’s allies and opponents suspect the President and his family of receiving such favours, which he strongly denies. In the fierce battle for Zuma’s re-election as ANC leader, his family’s seeming closeness to Chinese interests are increasingly used against him. In a deal last year, where Black owned mining company Afripalm Resources saw its subsidiary, Afripalm Horizons, working with the Steel Authority of India to build a R21-bn. steel mill, there were accusations that Zuma’s partners had benefited directly. Afripalm’s Directors include Zuma’s ally Lazarus Zim, Tony Gupta, who is close to the Zuma family, and Duduzane Zuma, the President’s son.