Dr Mills Soko

Dr Mills Soko, a senior lecturer in business at UCT and CEO of research company Mthente Consulting, speaks to TradeInvestSA about the importance of South-South trade, the problem of trade negotiations with the West and the rise of emerging superpower China.

Given the current crisis is the pursuit of South-South trade the best path for developing countries?

Even without a crisis, South-South trade is a good thing to pursue. If you look at the larger developing countries - such as India, SA, Brazil, China - a great deal of their external trade is with the US or with the EU. In South Africa’s case about 40% of our external trade is with the EU.

What we’ve seen as a consequence of the credit crunch is a synchronized catastrophic collapse of export markets. In January alone, South Africa had a trade deficit of R17-billion because we just can’t export. The demand in Germany, Japan, the US and Britain has declined considerably, and this is the salutary message of the need to diversify.

What constraints are there to furthering South-South trade?
 
At a national level, South Africa has been faced with the problem of infrastructure bottlenecks and that is why government has set aside around R700bn to improve infrastructure, such as ports and roads. South Africa has the resources to do that, but not all African countries can.

Foreign investment can help these countries to build roads. China has been a massive boon for these countries; it has been building roads and ports in Angola. Of course there’s a self interest there, but I think it’s a very practical manifestation of South-South cooperation. It’s not only trade, but financial cooperation and infrastructure development.

Should intra-Africa trade be a priority above south-south trade?

Remember, intra-Africa trade is south-south trade. We’ve (South Africa) become a very important trade and investment partner with many African countries, but overall intra-Africa trade is very low. In 2007 it accounted for about 9% of total African trade.

It is not so much about trade barriers or tariff barriers. Overall tariffs have been high, but they’ve been falling. The problem is non-tariff barriers, such as poor trade facilitation problems, supply-side constraints, railway systems, poor roads.

To ship goods from one African country to another, say from Ethiopia to Abidjan, would cost you far more than to ship goods from Abidjan to Japan. These are the non-tariff barriers; they are not import duties but they are barriers related to infrastructure and supply-side bottlenecks.

Are there any other barriers to intra-Africa trade?

There is this notion of political sovereignty. When you look at the regional economic integration arrangements of trading blocks such as SADC and COMESA, they struggle because of an absence of political will. They talk about it, they make commitments, but when it comes to implementation, they balk.

Thankfully a lot of African governments have become democratic, but a lot of political elites are very insecure and they don’t like their prerogatives to be eroded by regional trade integration arrangements, which by necessity require that you give up certain powers and prerogatives.

What problems does South Africa face in the SADC trading block?

South Africa has specific national interests, which in most cases collide with those of its smaller regional partners. South Africa is a middle-income developing country; it has more in common with India, Brazil and China and less in common with countries like Lesotho, but it operates in that neighbourhood and it has to be seen to be a good regional citizen.

So in some cases it takes policy stances which conflict with those of its region, and this is very clear in the Economic Partnership Agreement (EPA) negotiations. Certain major powers have decided to use bilateral trade negotiations to smuggle through issues that have not been resolved at a multilateral level.

In the case of EPAs, South Africa refused to include these issues because it believes they have to be correctly resolved at a multilateral level. But in terms of its bargaining power, vis-à-vis the EU, South Africa is in a stronger position than the other countries.

Why did they not join together with SA?

The other SADC countries have other pressures, Botswana depends on two main exports, beef and diamonds. 80% or 90% of that beef has a captive market in terms of duty free access to the EU. If the EU decided to pull the plug on beef exports that would undermine the economy. It’s not a diversified economy such as we have in South Africa.

In terms of its bargaining power, the EU interacts with these countries regionally, but also interacts with them directly. In addition, some of these countries receive a lot of their aid from the EU, so it undermines their bargaining power.

At the same time these countries also have a gripe against South Africa which they accuse of undermining regional integration. What the EPA negotiations have demonstrated is the fragility of regional integration. They were billed as a stepping stone towards enhanced regional integration but in SADC they have sowed divisions.

What does the South Africa’s refusal to initial the EPA mean?

For South Africa, I think there are two issues. Firstly, it means South Africa’s leadership in the region gets undermined. You need legitimacy to exercise leadership, so if your smaller partners think that you’re undermining them that creates problems.

More importantly, economically South Africa has the trade and development cooperation agreement (TDCA), the bilateral free trade agreement with the EU, which was negotiated without the participation of the SADC countries.

The idea about EPA was to harmonise the TDCA to make sure that SADC countries become part of the new arrangement, which harmonises what South Africa agreed with the EU, but that has been undermined. 

What impact does the financial crisis have on trade in Africa?

In the African context, there is the problem of remittances. A lot of people who live in African countries depend for their livelihoods on remittances sent by their relatives in developed countries. There are also concerns about the impact this crisis will have on aid to Africa. Because developed countries are now turning inwards, as they are concerned about domestic issues.

The biggest casualty is the lack of access to trade finance and the lack of access to credit. Because international credit has dried up, trade finance is a big casualty.

One of the proposals that have been made for the G20 is that the World Bank should create a trade credit fund. Exporters don’t have capital to finance their exports. We’ve seen a collapse in the availability of trade finance.

A lot of African countries have become disillusioned with developed world policies, with unregulated markets, and are now looking to countries like China that have escaped relatively unscathed from the crisis and do things differently.

Should SA strengthen ties with China rather than the West?

South Africa shouldn’t de-emphasise the importance of Western markets. We need to strengthen the links with Britain, and with our reliable established trade partners, but we also need to diversify, we need to expand to the Middle East. We’re not doing much trade in Latin America, and we’re not doing much trade in Asia with the exception of China, Japan and India.

A lot of countries are looking to China to provide the initiative and the impact of China is a widespread suspicion. The rise of China is a real fear in the West. Everywhere you go they want to know about China.

When I’m with the Chinese they never speak about the West. They always talk about China and Africa, never the West. It’s patronizing for the West to say “you must be careful about China”. Africans know what is best for them. But it’s fear of competition, of the power shifting invariably to the East. They always ask do you think China is good for Africa?

So, do you think China is good for Africa?

We need to diversify, it makes geo-political sense and it makes economic sense. If you look at the economic relationship between China and South Africa, trade is booming. But we need to manage that relationship very carefully. We need to have a strategy.

The recent Dalai Lama episode has demonstrated that we shouldn’t do things on an ad hoc basis, we need a clear strategy. If you look at the relationship, China has a trade surplus with South Africa. That is because we export base metals and raw materials, which account for about 80% of our exports to China. We import finished goods, electronics, capital equipment, machinery, textiles. So it’s a skewed relationship.

President Mbeki once warned about the development of a new colonial relationship. We always talk about the colonial relationship between Africa and the West. If we’re not careful, that could develop with China, where all we do is supply raw materials and don’t beneficiate.

China provides a wonderful opportunity for African countries to extricate themselves from the economic mess. This demand from China will reach a saturation point, it won’t be there forever, but it provides a great window of opportunity for these countries.