The 30% headline tariff figure overstates risks to South Africa

South Africa now finds itself in a bind from a U.S. tariff rate of 30% on its products, which is significantly higher than the those that its regional neighbors were able to secure with Washington.

The tariffs’ impact will be contained, as the U.S. accounts for only 7.7% of South Africa’s total exports, with around a third of those — pharmaceuticals, manganese, and platinum — exempted.

Factoring in these exemptions and pre-existing duties on South African imports into the U.S., the added effective tariff rate on is actually 18.74%, over a third lower than headline figure.

Still, the country’s exporters are scrambling to find new markets, given the difficulty in replacing the depth and breadth of U.S. consumer demand in their export mix.

Moreover, South Africa is vulnerable due to its trade openness, with imports and exports each accounting for around a third of GDP, which fairly large for an economy of its size.

I’ve modeled the impact of tariffs as a simulated real exchange rate shock, with a synthetic appreciative effect for countries on the receiving end of tariffs. In South Africa’s case, using the added effective rate and U.S. export exposure, the synthetic real exchange rate increase amounts to only 1.44 percentage points.

I find that the impact on Pretoria’s current account — all else equal — would be a decline by around 0.1% of GDP, which equates to some $400 million.

It would be easy to dismiss such a sub-billion figure as trivial. However, most economies in the world now face similar difficulties in accessing U.S. consumers, suggesting increased global price competition among exporters. Through this channel, South Africa could well benefit from lower prices on its own imports, consistent with the modeled synthetic appreciation. Yet the negative volume effect on its exports outweighs any price gains on imports.

The takeaway for investors is that the actual (i.e. “non-synthetic”) impact on the rand — ceteris paribus — is likely to be depreciative. Indeed, this is consistent with the Reserve Bank of South Africa modeling the tariff impact, with a scenario featuring a 15% rand depreciation and resulting in a loss of 0.69% in GDP growth.

While the headline 30% figure remains concerning, it appears likely that any pain will be concentrated among just a handful South African firms. These could well be in the agricultural sector, even if only 4% of agricultural exports are destined for the U.S.

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