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Trade wars and the channel

The USA is leading the world to economic nationalism and South Africa will get caught in the crossfire.

When South Africa held its first democratic elections 24 years ago, the country was invited to join the global trade movement from which it had been barred for decades.

South African companies rushed to diversify their businesses to the point where more than half of the revenue from the JSE Top 40 companies is now generated abroad. This makes business sense: diversification has protected South African-based companies from weakening economic conditions at home.

Globalisation became the unchallenged mantra of our age. That all changed with the arrival of Donald Trump in the White House in 2016. He tapped into a suppurating wound that had gutted once thriving industrial towns across the US hinterland as jobs were offshored to China in the preceding decades. The US trade deficit with China in 2017 was around $350 billion, with technology and electronics accounting for nearly half of that.

Trump wants to bring jobs back to the US and has chosen trade tariffs as his weapon of choice. He has slapped higher tariffs on $50 billion worth of goods coming from China, and is looking at expanding this to $200 billion. So far, 279 product categories have been affected. China has responded with titfor-tat tariff increases on US goods with a value of $50 billion.

Downside

This isn’t confined to the US. South African companies are witnessing the downside of globalisation. MTN was one of South Africa’s greatest business successes, with operations spanning Africa, the Middle East and Iran. Earlier this year the US imposed sanctions on Iran, forcing banks and other companies to scale back their involvement. Companies doing business with Iran will be barred from the US. MTN reported that the sanctions would make it harder for the group to repatriate money from Irancell, its Iranian subsidiary.

The US and Europe have also imposed sanctions on Russia over its reclamation of Crimea from the rump of Ukraine. The actions of the US economic shapers have real-world implications for businesses in South Africa.

Take cyber security firm Kaspersky Lab. Western governments have claimed it’s a tool of the Kremlin and therefore a potential risk to their computer systems. The US and UK governments stopped using its products and many US retailers stopped stocking its products. Kaspersky responded by making its software code available to responsible stakeholders and moving some of its operations from Russia to Switzerland as part of a charm offensive to win trust.

Another company to face the wrath of US sanctions was Chinese telecoms operator ZTE. Earlier this year the US imposed a trade ban on ZTE for violating sanctions on Iran and North Korea, but then started to relax the sanctions after an agreement with the US Commerce Department. More recently, Chinese vendor Huawei has become a target for the Trump administration.

Political climate

Speaking at the Canalys Channel Forum 2018, the analyst company's CEO Steve Brazier highlighted the challenges of the changing global political climate. "You’re going to have to take some political stands. Simple things like, will you promote Chinese clouds or not? Europe sits between the US and China in terms of a tech battle. Mostly you don't care, but your customers might care and you’re going to have to decide and it's going to be a political decision," said Brazier.

"Likewise, do you sell Russian security software? Which brands will you stop and avoid? Decisions will now be based on one’s personal ethos and how you want your company to look and behave.

" Bloomberg reported in October that Chinese spy chips infiltrated servers used by nearly 30 US companies, including government contractors, Apple and Amazon.

Chinese armed forces reportedly forced manufacturers to insert the chips, no bigger than a grain of rice, on motherboards to provide a backdoor into the hardware.

Then there’s the expected trade disruption arising from Brexit. According to a survey in 2017 by the Chartered Institute of Procurement and Supply (CIPS), 40% of UK businesses are looking to replace their EU suppliers. “One of the biggest challenges to supply chains and maintaining communicative relationships with suppliers will be Brexit,” says the Business Continuity Institute. “For
better or for worse, Brexit will cause a shakeup in the supply chains of many businesses, and the chaos at ports such as Dover that some are predicting along with the need for every lorry driver to have an international driving permit seems likely to dramatically slow down the flow of goods into the UK".

South African channels

The impact of escalating global trade wars could cut 0.1% off South Africa’s GDP forecast for 2019 and 0.2% in 2020, according to Fitch Ratings' June 2018 "Global Economic Outlook" report.

“South Africa, and other African countries, need to look at opportunities to leverage at this particular time, as this will allow South Africa to forge its own path,” says Lebohang Pheko, senior research fellow at Trade Collective.

Tlotliso Phakisi, investment analyst at Cannon Asset Managers, points out that US trade wars haven’t ended well, though we’re yet to see the full impact of Trump’s latest trade fusillade. “Unable to import the materials they need or export the goods they produce, companies will lose profits and lay off workers, while consumers will be hit with higher-priced goods. US economic growth will falter, low business confidence and uncertainty will slow global investment, governments will lose revenue and, ultimately, global growth will be pulled lower.

” Economist Joan Robinson was fond of pointing out that raising tariffs as a primary tool of trade wars is like throwing rocks in the harbour to stop the ships coming in.

“Put simply, trade wars don’t produce winners. Everyone loses,” says Phakisi.

One impact already visible in several emerging economies is the fall in their currencies. The dramatic fall of the Turkish lira, not to mention the rand, is a consequence of protectionism, trade war anxieties and emerging market risk aversion.

As South Africa finds itself in a period of negative growth for the second time in a decade, we would do well to remember the lesson that success comes to those who are prepared to share it.

All this could bring on a fundamental change in the way vendors approach their businesses. As trade opportunities become less certain, working the existing customer base looks like a sound bet. Brazier reckons vendors will be looking to mine their reseller base for data on how their customers behave as they look to cash in on 'as-a-service' offerings.

"They see as-a-service as an opportunity to make more margin over the lifetime of a contract. Of course, you’re seeing that in software, across the board in hardware and security as well," he says.

"When the vendors do that, it also means they get your customer data. You’re not quite sure you want to share so much customer data with the vendors; it's your job to know the customer. One of the questions that will really rank which vendors you can trust and be loyal to over the next two or three years will be how open they are about what data they have, and whether they're collaboratively sharing that with you so you can make better decisions on your business.”

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