America President Donald Trump has stirred trade waters with his punitive tariffs and redefining global trade flows. Very few countries known to him have been left unscathed. Even the little known, small land locked country of Lesotho was slapped with a much more punitive tariff of 50%.
By Robert Matsila, agricultural economist
The traditional Western allies were not sparred until a trade deal was concluded. Other countries are falling over themselves to conclude ‘trade deals’ with President Trump. The World Trade Organisation has been reduced to an irrelevant bystander, unable to offer any counter counsel to these so-called ‘reciprocal tariffs’, which aren’t reciprocal.
However, the point that is escaping most people is that Trump didn’t ban products from the so-called offending countries from entering the US, he just made it harder for the US consumers to imports. Impacted countries do not necessarily have to divert their products to other markets, which they can, and many are considering this option, but can opt to make it easier for the US consumers to obtain their exports.
South Africa, for her own sins, has been slapped with a 30% import tariffs. At the time of writing, discussions between SA-US trade officials were ongoing in an effort to conclude a deal that would either attract less tariffs or better yet, no tariffs at all, implying to some extent continuation of AGOA.
While the outcome of SA-US trade negotiations remains unknown, what is known is that South Africa is a major player in global agriculture, agricultural trade, mining and tourism. The country is ranked 20th in the world in terms of all fruits production but third in the Southern Hemisphere, only behind Brazil and Milei’s Argentina. But it is South Africa’s global ranking in agricultural exports that is significant. The country is the world largest exporter of citrus, ostrich meat and macadamia, among ot5hers. It is also the top fruit exporter in the Southern Hemisphere. Therefore, South Africa appears on the global radar screens when it comes to agricultural trade flows.
The United States, on the other hand, is a significant and premium market that accounts for a quarter of the global economy and therefore a market that cannot be ignored. The market offers attractive prices to those with market access. From the macroeconomic perspectives, the United States is a vibrant market because it has been in expansionary fiscal mode the longest (since the early 2000s).
Also read: Citrus growers appeal to Ramaphosa for urgent US trade intervention
Export markets in general offer premiums relative to domestic markets. In the case of agricultural products, export premiums are so high that South African farmers can take a hit on export margins and keep on ticking. As an example, I am going to use citrus to explain how farmers can continue exporting profitably to the US market. However, it goes without saying that managing down concentration risk is always a good business strategy. Being overly expose to any one market, domestic or foreign, is never a good strategic positioning.
South Africa ranks first in the world in terms of citrus exports with Europe, at 36% of the total citrus exports, being SA’s major agricultural trading partner. For historical reasons, South Africa was heavily exposed to European market but has been successful at reducing concentration risk to that market. With good reasons, citrus exports to the USA are a paltry 4% as not all of SA’s citrus growing regions are accredited to export to the USA. The top citrus growing province of Limpopo, which accounts for 40% of the total hectares planted to citrus, cannot export to the USA due to the prevalence of citrus black spot (CBS). Two provinces that are accredited to export to the US are the Western and Northern Cape, which together account for 21% of hectares planted to citrus.
Most exporters with economies of scale tend to be vertically integrated with marketing subsidiaries/affiliates incorporated in foreign jurisdictions while others have strategic marketing alliances. These locally owned marketing subsidiaries/affiliates in exports destination countries are to secure marketing programmes, which are inclusive of pricing agreements.
As is clear from the table below, export net realisations (net prices) are, on average, more than 100% above those generated from the domestic fresh produce markets (FPMs). To be able to continue exporting to the USA under the 30% tariffs regime, farmers can reduce free-on-board (FOB) prices by 30% and still be better off than diverting their produce to the local FPMs.
During the peak of cost-push inflation in 2022/2023, some local retailers decided to sacrifice some margins not only to protect hard-pressed consumers but also to preserve customer loyalty. Farmers can do the same in order to continue accessing the premium market of the United States.
The long-term trend on the rand-US dollar exchange rate has been one way – depreciation. This means some of the losses on the FOB prices are likely to be recouped through currency depreciation.
The above should not be misconstrued to be advocating for profit shifting, which involves local entities selling to foreign subsidiaries at a loss (also called base erosion). Profit shifting is a tax avoidance strategy that cannot be condoned under any circumstances. What is being proposed here is a voluntary squeeze on the margins in order to preserve access to the US market.
As I conclude, diversification is always an option but one that is also available to all other countries that are similarly affected by Trump’s tariffs. The upside for South Africa is that when compared with competing producers in the Southern Hemisphere, SA has comparative logistical cost advantages, bar Australia and New Zealand, to service the Middle East and Asia.
If all Southern Hemisphere countries follow similar diversification strategies, the outcomes could however be worse than voluntary sacrifice on the margins. With 30% tariffs, it is easy to determine size of the haircuts on the margins while there are no certainties on the negative impacts from simultaneous diversification strategies by all affected countries.
Prices of agricultural commodities are very sensitive to volumes. For South Africa, Europe is not really an option given the continuing trade disputes on citrus. That said, Africa, under the < https://au.int/en/african-continental-free-trade-area > African Continental Free Trade Area (AfCFTA), is a market with potentials.
Disclaimer: The views expressed in this article is solely that of agricultural economist Robert Matsila and does not necessarily reflect the views of African Farming, his employers or other associated parties.
