The impact of trade wars and protectionism on M&A Activity in South Africa

Looming US-initiated trade wars and protectionism are not just geopolitical challenges; they also significantly influence business dynamics, particularly in mergers and acquisitions (M&A).

While trade wars and protectionism undoubtedly create volatility, they also serve as a catalyst for M&A activity in new and emerging markets. South Africa, with its established economic and trade ties to both developed and developing nations, is well-positioned to attract increased interest from companies seeking expansion and diversification in a fragmented global trade environment.

These trade-related tensions are likely to reshape corporate strategies, market access and the strategic direction of companies looking to expand. Some may even reconsider their expansion strategies.

Protectionism - the economic policy of restricting imports from other countries to safeguard domestic industries - has been on the rise in recent months, particularly with the emergence of trade wars between the US and various other countries – with South Africa unfortunately singled out. Trade wars typically involve tariffs and barriers on foreign goods, making imports more expensive and creating significant uncertainty in global markets. This impacts M&A activity as businesses’ valuations may worsen – based on fear of disruption to supply chains, reduced profitability or limited access to critical resources.

South Africa, as Africa’s most sophisticated economy, has not been immune to the global shift towards protectionism. The US-China trade dispute, which began in 2018, has had a significant impact on commodity markets, including South Africa’s mining industry. As China is South Africa’s largest trading partner, the volatility in commodity prices has affected mining company valuations. The uncertainty surrounding this could reduce foreign buyers’ interest in South African mining assets due to concerns over higher costs from tariffs. However, this scenario may open opportunities for countries like India and Japan to acquire mining assets at potentially discounted prices due to falling valuations amid trade tensions.

The African Continental Free Trade Area (AfCFTA), launched in 2021, represents an opportunity to counter the effects of rising protectionism from non-African countries. For South African businesses, AfCFTA offers a response to trade barriers, fostering regional growth. This has led to increased M&A activity between South African firms and businesses across Africa, particularly in sectors like consumer goods, banking and telecoms.

As the US and China focus on their protectionist agendas, African markets are becoming more attractive for businesses seeking new growth opportunities in a less restricted environment. This could spur regional M&A activity as businesses try to create new avenues for growth through intra-Africa partnerships, leveraging AfCFTA instead of relying on the US market.

For instance, during past periods of global trade uncertainty Kenya's business environment has looked more attractive to foreign investors seeking stable growth within Africa. As global protectionist policies escalated foreign investors began seeking markets with fewer external trade barriers. Kenya's membership in the East African Community (EAC) and AfCFTA made it an attractive M&A target, especially in the telecommunications and manufacturing sectors.

Similarly, investors seeking more favourable trade terms increasingly turned to Nigeria due to its large consumer market and its status within the Economic Community of West African States (Ecowas), a regional bloc with preferential trade agreements.

Egypt has become a key destination for foreign investors due to its favourable trade agreements within the Middle East and North Africa (Mena) region, along with increasing interest in its energy and infrastructure sectors. Amid rising global protectionism, Egypt’s market-friendly reforms and strategic trade relationships with Africa and the Arab world made it an attractive M&A target.

The potential end of Agoa (the Africa Growth and Opportunity Act) between African nations and the US, or South Africa’s ejection from the agreement, could have significant implications for M&A activity. Agoa has given South African businesses preferential access to the US market, particularly in sectors like automotive, agriculture and manufacturing. If this access is lost, it could increase costs for South African businesses seeking to export to the US, making the country less attractive for foreign investment, particularly in export-dependent industries.

The loss of this preferential trade access could reduce South Africa's attractiveness as a destination for foreign investment, especially for industries that rely heavily on exports to the US. This might slow down inbound M&A activity from international buyers looking to capitalise on tariff-free access to the American market.

South African firms might seek alternative markets or look to restructure operations to mitigate the effects of higher trade barriers. This could lead to more domestic-focused M&A activity, as businesses may seek to consolidate locally or partner with other firms to diversify their supply chains and distribution networks.

Andrew Bahlmann is the CE of Corporate and Advisory, Deal Leaders International.