US President Donald Trump meets with Chinese President Xi Jinping on the sidelines of the G-20 summit in Osaka, Japan, last month. AP
The much talked about trade war between the US and China is one component of a broader confrontation between the two largest economies in the world. Their relationship has been deteriorating rapidly over the past 10 years, and the extent of the deterioration has become more intense since Donald Trump took office as US president.

The relationship between the US and China is transforming from an essentially mutually beneficial one to an engagement that is increasingly confrontational. The US seems to view the rapid growth and progress in China as a threat, primarily because of its size, trading power and rapid, and often contentious, adoption of global intellectual property.

China has been actively extending its influence in emerging markets and developing economies through infrastructural development and co-operative aid.

The rising tensions have been over the US’s imposition on China of higher trade tariffs across a widening base of goods, and the response from China, although more muted.

Three different outcomes (probabilities) are proposed, based on a model developed by Dezan Shira and Associates, a multi-disciplinary consulting and business intelligence firm in Asia: a worst-case scenario where there is an all-out war (unlikely); a middle-ground scenario of a truce (likely); and a scenario where a trade deal is done (possible).

The relationship between China and South Africa has been in place for the past 21 years. In 2010, the Chinese government upgraded South Africa’s diplomatic status to that of strategic comprehensive partner, signalling its intention to take a more active role in its relationship with South Africa.

South Africa has been China's largest trading partner in Africa for eight consecutive years, accounting for a quarter to a third of overall China-Africa trade. South Africa aims to promote investment-led trade.

The BRICS relationship, of which China and South Africa are part, is about liberalising trade among this bloc and pushing for a more representative global order in diplomacy and trade.

At the BRICS Summit in mid-July 2018, President Xi Jinping pledged investments of $14.7billion (R208bn) in South Africa. Few details of these pledges are available, but Chinese banks have lent a combined $2.8bn to parastatals Eskom and Transnet, according to a Reuters report.

In 2018, South Africa's exports to the China trade group accounted for 11.4percent of its total exports and 19.8percent of its total imports.

South Africa's trade deficit with the China trade group is determined primarily by its net import deficit of R111.2bn in machinery, R17.1bn in textiles, R15.1bn in chemicals, R12.9bn in plastics and rubber, and R10.9bn in toys and sports apparel. These major deficit categories were partially offset by a net trade surplus of R79.5bn in mineral products, R15.4bn in precious metals and R5.9bn in vegetables.

In 2018, South Africa's trade deficit with the Asian region (which includes the Middle East) was R165.3bn, of which China, Hong Kong and Taiwan comprised 58.8percent, Saudi Arabia 39.9percent, Thailand 18.5percent, and the balance by the rest of Asia and the Middle East.

China has a long-term global development strategy, which is likely to continue regardless of the outcome of the current phase of the tangled US-China relationship.

China is expected to continue to invest directly and give aid to South Africa, given its rich resource base and its important role in the sub-Saharan African market.

If an all-out trade war were to develop, it is likely that China would reinforce its trade and investment ties with its BRICS partners and would more urgently expand its investment base in South Africa.

However, one of the key issues affecting direct investment in new production and existing businesses remains South Africa's racial empowerment quotas for investment, ownership, mining rights, management, staffing and procurement.

For now, the trade war has had a limited impact on South Africa's trade with China, given the mix of key product categories that dominate imports and exports. In the event of a trade truce or a trade deal, South Africa, along with the rest of the world, will benefit, due to the improved sentiment over global trade. In the event of an all-out trade war, base and carbon steel commodity prices are likely to come under downward pressure in the short and medium term, which would erode the value of South Africa’s exports.

An escalation of the trade war should be negative for international commodity prices in the short term. Commodity base metals and carbon-based steel raw material are likely to be negatively impacted.

However, the effect should mostly be offset by a rise in precious metal prices, particularly for gold. This means that investor positioning in the mining sectors would take on added importance.

An escalation in the China-US trade war would likely be negative for South African companies invested in Europe, given Europe's dependence on trade with China. It could slow eurozone gross domestic product (GDP) growth, which would affect apparel, food service and real estate companies in European markets. South African domestic companies are unlikely to be materially affected, other than the overall softening of market confidence due to an escalating trade war. Chinese investments in South African are in non-listed companies, so South African investors cannot obtain direct exposure to them.

If Chinese lenders and developers can reach an arrangement with South African partners on the latter's racial empowerment quotas, some important infrastructural and industrial developments could get under way. Again, South African equity market investors will have very limited, if any, ability to participate or benefit, as these businesses are likely to be non-listed.

The most likely outcome of the current US-China trade negotiations is a truce, which amounts to a trade deal that is long on form and short on substance. The global equity markets are likely to respond positively to this outcome in the short term. The deal is unlikely to be comprehensive, and the policing of intellectual property and cybersecurity issues are expected to remain unresolved, which suggests that further trade disagreements are likely in the medium term.

The reason for the confrontational relationship between the US and China goes far deeper than trade; it is due mainly to China's growing global power and influence, which the US sees as a threat to its position.

In the short term, a trade deal between the two largest economies in the world should be good for global trade, market sentiment and confidence in global growth. On this basis, we still see stronger real GDP growth in advanced economies and larger emerging markets and developing economies than in South Africa, in the medium term.

A trade deal would improve the global outlook, while the South African investment outlook remains structurally constrained by its empowerment policies, tight labour legislation framework, protectionist trade unions, necessary fiscal consolidation and badly under-performing state-owned companies, which are undermining economic stability and expansion.

The South African equity market has substantial exposure to metal commodity producers, companies with international subsidiaries growing in faster economies than in South Africa and multinational dual-listed companies.

Mike Haworth is an investment strategist at Sasfin Wealth.

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