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South Africa is in serious trouble
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South Africa has been hit by some of the highest tariffs of any country, with increased duties placed on its goods exported to the United States.
At 30%, the tariffs on South Africa are the third-highest of those tracked by S&P Global Ratings as part of its major emerging markets analysis.
If additional tariffs expected to hit India on 27 August are excluded, South Africa has the second-highest of any major emerging market country.
This means that South Africa's exports are effectively no longer competitive in the US market, with other countries experiencing far less severe tariffs.
Over the long run, this may result in companies shifting production to countries with lower barriers to entry into the American market.
In the immediate term, US companies are likely to source similar products elsewhere, with South Africa's citrus industry particularly at risk.
South African citrus farmers have built strong export links with the United States as the country is in a different growing season to America. This has resulted in the sector being heavily reliant on a single consumer.
South African orange farmers compete with other southern hemisphere growers, notably Chile and Peru. For the time being, they face a 10% tariff compared to 30% on South African exports, giving them an advantage.
This makes citrus from these countries immediately cheaper than South African alternatives, making it likely that American companies will prefer to source their products elsewhere.
The other sector heavily impacted is the automotive industry. Exports to the US have already fallen sharply, which might lead to parent companies scaling back local operations.
At the start of the year, economists were pencilling in South African GDP growth of around 1.8% for 2025. This has now been cut to around 1% due to the tariff headwinds.
Standard Bank's economics unit has calculated that for every 10 percentage point increase in the tariff rate, South Africa will lose 0.1% of GDP growth.
This may not appear significant, but considering the bank only expects South Africa to grow at 1.1% in 2025, a 30% tariff rate could shave off a significant amount of GDP growth.
The graph below shows the effective tariff rate placed on South Africa in contrast to that of other major emerging markets.
While tariffs on South African goods exported to the United States have the potential to have severe negative effects, they are likely to be largely offset by positive local economic data and a more resilient Chinese economy.
S&P noted that despite the headwinds presented by US tariffs, South Africa's economy remained robust, albeit not growing strongly.
Its Purchasing Managers Index (PMI) for the country has remained marginally in positive territory for the past four months.
This indicates that the economy is resilient in the face of tariffs and that local companies are more sensitive to domestic demand.
It also shows that tariffs on goods exported to the United States will impact a relatively small fraction of South Africa's production.
Old Mutual Wealth's chief investment strategist, Izak Odendaal, said the impact of tariffs on South Africa may be overblown as only 8% of exports by value go to the American market.
Of this, minerals and metals make up a substantial portion and are likely not impacted by new duties as they are classified as critical imports by the United States.
In other words, the tariffs are not a recession-inducing threat for a local economy that benefits from more stable electricity supply, lower inflation and lower interest rates.
Odendaal also said other factors may offset the economic impact of tariffs on South Africa, with local economic data looking increasingly positive.
The main offset should come from increased consumer spending, with the Reserve Bank having cut the repo rate by 125 basis points over the past year.
Coupled with lower inflation at 3%, real incomes in South Africa are growing. This will translate into increased consumer spending, boosting the local economy.
The jump in platinum and palladium prices since the start of the year, 45% and 25%, respectively, will have a positive effect, if sustained, by supporting a firmer rand and also feeding into higher corporate taxes.
Some of this windfall will presumably also end up in the pockets of workers as bonuses and shareholders as dividends. The same is true of gold, but South Africa is no longer the major gold producer it once was.
At 30%, the tariffs on South Africa are the third-highest of those tracked by S&P Global Ratings as part of its major emerging markets analysis.
If additional tariffs expected to hit India on 27 August are excluded, South Africa has the second-highest of any major emerging market country.
This means that South Africa's exports are effectively no longer competitive in the US market, with other countries experiencing far less severe tariffs.
Over the long run, this may result in companies shifting production to countries with lower barriers to entry into the American market.
In the immediate term, US companies are likely to source similar products elsewhere, with South Africa's citrus industry particularly at risk.
South African citrus farmers have built strong export links with the United States as the country is in a different growing season to America. This has resulted in the sector being heavily reliant on a single consumer.
South African orange farmers compete with other southern hemisphere growers, notably Chile and Peru. For the time being, they face a 10% tariff compared to 30% on South African exports, giving them an advantage.
This makes citrus from these countries immediately cheaper than South African alternatives, making it likely that American companies will prefer to source their products elsewhere.
The other sector heavily impacted is the automotive industry. Exports to the US have already fallen sharply, which might lead to parent companies scaling back local operations.
At the start of the year, economists were pencilling in South African GDP growth of around 1.8% for 2025. This has now been cut to around 1% due to the tariff headwinds.
Standard Bank's economics unit has calculated that for every 10 percentage point increase in the tariff rate, South Africa will lose 0.1% of GDP growth.
This may not appear significant, but considering the bank only expects South Africa to grow at 1.1% in 2025, a 30% tariff rate could shave off a significant amount of GDP growth.
The graph below shows the effective tariff rate placed on South Africa in contrast to that of other major emerging markets.
While tariffs on South African goods exported to the United States have the potential to have severe negative effects, they are likely to be largely offset by positive local economic data and a more resilient Chinese economy.
S&P noted that despite the headwinds presented by US tariffs, South Africa's economy remained robust, albeit not growing strongly.
Its Purchasing Managers Index (PMI) for the country has remained marginally in positive territory for the past four months.
This indicates that the economy is resilient in the face of tariffs and that local companies are more sensitive to domestic demand.
It also shows that tariffs on goods exported to the United States will impact a relatively small fraction of South Africa's production.
Old Mutual Wealth's chief investment strategist, Izak Odendaal, said the impact of tariffs on South Africa may be overblown as only 8% of exports by value go to the American market.
Of this, minerals and metals make up a substantial portion and are likely not impacted by new duties as they are classified as critical imports by the United States.
In other words, the tariffs are not a recession-inducing threat for a local economy that benefits from more stable electricity supply, lower inflation and lower interest rates.
Odendaal also said other factors may offset the economic impact of tariffs on South Africa, with local economic data looking increasingly positive.
The main offset should come from increased consumer spending, with the Reserve Bank having cut the repo rate by 125 basis points over the past year.
Coupled with lower inflation at 3%, real incomes in South Africa are growing. This will translate into increased consumer spending, boosting the local economy.
The jump in platinum and palladium prices since the start of the year, 45% and 25%, respectively, will have a positive effect, if sustained, by supporting a firmer rand and also feeding into higher corporate taxes.
Some of this windfall will presumably also end up in the pockets of workers as bonuses and shareholders as dividends. The same is true of gold, but South Africa is no longer the major gold producer it once was.
Source - dailyinvestor
