Free trade versus tariffs

The debate over the future trajectory of South Africa’s economic policy is about much more than the powers of Trevor Manuel and the planning ministry.

Bubbling under for the past five years at least has been an argument within government about trade.

Put crudely, the question is whether South Africa is more likely to prosper if local companies are exposed to global competition and forced to lower their prices while improving their products, or if, on the contrary, we need to shelter them behind tariff and regulatory barriers that will enable them to grow stronger before they take on the world.

Right now this debate is taking place against the backdrop of reforms in the architecture of international finance and a tussle over the future of the World Trade Organisation’s (WTO) Doha development round.

These are discussions that can easily be lost in the technical minutiae of multilateral negotiations and the dry language of economics, but they are crucial to the future shape of our economic policy landscape.

The Mail & Guardian is collaborating with the South African Institute of International Affairs to try to draw more people into the conversation.

M&G editor Nic Dawes initiates the collaboration this week by interviewing Trade and Industry Minister Rob Davies, a robust proponent of the view that South Africa needs to protect emerging and strategic industries, and a leading activist among developing country ministers involved in negotiations at the WTO.

Nic Dawes: It is clear that high prices and cartel activity are a major constraint on economic growth, so there are many inside government and out who think we need more competition. Others, including you, are arguing for more trade protection while pursuing robust anti-cartel action. Broadly speaking, does South African industry need cosseting or shaking up?
Rob Davies: All our policies are informed by the commitment to create decent work and sustainable livelihoods. We need to defend jobs and create growth. Concentration in the mature part of our economy has been damaging to labour-intensive industries.

Sometimes people think we don’t want to allow cooperation between companies, but we are acting because we see detrimental effects from collusive activity. On the other hand, our flagship programme is industrial strategy.

There has been no country that has placed itself on a path of increasing returns without industrial policy. A degree of trade protection goes along with that. Mature industrial economies are in favour of free trade.

When the United States was industrialising, Britain [which had already gone through its industrial revolution] wanted free trade. We’re in an era of decreasing tariff protection, but it has been highly uneven.

As WTO members we have very little space between bound industrial tariffs [the maximum we can charge in terms of WTO agreements] and applied tariffs [the amount we actually do charge]. The bound tariff for clothing, for example, is 45%; our applied rate is 40%.

Once the Doha formulae kick in, we would have to take extraordinary cuts. So, we will continue to pursue tariff reduction in mature industries [such as steel] that produce high value goods for downstream industries. Where there is a case for tariff protection and we have legal space available to us, we will use it.

There is clearly huge frustration, particularly in the developed world, but also from more liberal emerging countries such as Chile, at what they see as your lobbying against aspects of the Doha deal that would see poorer countries reduce their protection on manufactured goods and services. Should we really, for example, continue to offer support in the form of subsidies and higher prices to a clothing and textile industry that has signally failed to remain competitive, even behind a 40% tariff? Wouldn’t it be better to have a bigger motor repair and sales sector than a local motor industry that still lives off tariffs and what look to many like subsidies?
The free trade model doesn’t describe existing reality and the free trade ideology [of those countries] is belied in practice. We have identified the possibility for our clothing industry if it restructures into things like fast fashion [very rapid response to emerging trends], industrial textiles and sporting goods.

There’s a need, though, for the industry to invest and the incentive programme for investment will help upgrade the industry. The motor industry has already seen a substantial reduction in tariffs and support since apartheid. People don’t see all the linkages into other areas of the economy involved.

The next stages we are looking to emphasise are components and heavy vehicles. If you look around the world, the motor industry generally has something like our programme. Ours, in fact, is extremely modest.

If you want to be a major player and you are far from major markets, this is how you need to engage. The point is, deindustrialisation would be a major step back. Once you lose industrial capacity, you don’t get it back.

Clearly, though, there are some serious difficulties about aligning this kind of approach with neighbouring countries. There are already clear fault lines over their relations with the European Union and you have seemed to suggest that the Southern African Customs Union [Sacu] may not survive.
There’s no doubt in my mind that deepening regional integration is very important. In SADC the pattern of trade hasn’t changed much with changing tariffs. Infrastructure—effectively, the inability of neighbouring countries to produce goods for the South African market—is the constraint.

The priority now should not be Sacu, but to make the SADC Free Trade Agreement work, and widen free trade agreements [FTAs] with Comesa [Common Market for Eastern and Southern Africa] and the East African community, while interrogating rigorously the timetable to move SADC to a customs union.

Sacu is an important building block for this, but we need at least the beginnings of common understanding about the development path for the region. The deal for 100 years with Sacu was that we got access; they got tariff revenue. It was a relationship of convenience.

We now need to ask whether tariffs are a revenue instrument [Sacu countries like Lesotho and Swaziland rely heavily on tariffs from cars imported to South Africa to fund their budgets] or a development instrument. If we are going to have free trade, who should it be with?

We have excellent political and economic relations with the countries of the south but not so much trade. If we have a common vision, we can deepen Sacu; if not, the centripetal forces will weaken it.

I would say the trade relationship with the south works less well for us than with the rich world, which buys some value added-products from us.
It’s not that the patterns of trade [with the south] are ideal. We export too many primary products and import too many manufactures. But they recognise this and want to complement FTAs with cooperative agreements to prioritise mutually beneficial trade. For all of them the model of driving their exports to the developed world is no longer that attractive.

There does seem to be agreement on sticking it to the US and EU on manufactures and services in the Doha talks.
The fact that we are increasingly put in the same boat helps. At an informal ministerial in India [last month] we agreed to re-energise the round, but the devil is in the detail.

We’ve had a modest deal on agriculture, but nothing more than that, and it is coupled with highly ambitious demands being placed on the bigger developing countries [in terms of giving rich countries market access for non-agricultural products].

South Africa is in a particularly invidious position. It’s a historic injustice. We had taken tremendous pain because during the Uruguay round of the WTO the apartheid government insisted we were a developed economy.

On the Doha formula we would be taking cuts at an applied rate of 30% on 27% of our industrial tariff lines [categories of goods]. Other countries say they are already at the line; we are over the line. We need to come back and they need to go no further.

What are the chances you can win any such concession when the political climate in the US and Europe is increasingly protectionist?
The analysis that informed the willingness of developing countries to reconsider Doha was the assertion that their needs would be placed ‘at the heart of the work programme”. Right now, those issues do not dominate the end game. The price [for the developed world] is too high.

In 2005 we won a paragraph that said the level of ambition for agricultural and non-agricultural goods must be comparably high. Whether the political will is there in the rich world is a question.

The new US administration talks about multilateralism, but it is not translating that talk into positions. We are hearing more and more about market access for US companies, just as we did from the previous administration.

Can you ever really prevail in the debate with treasury about these issues? They certainly lean towards competition and away from protection and, so far, they haven’t backed industrial policy plans.
Just because something is a manifesto commitment doesn’t exempt us from the need to produce sound plans. Capacity has been an issue—the developmental state is an aspiration, not a reality—but we are advertising new posts and developing skills. The new planning function in the presidency will help too, and I think we will be heard.

The Mail & Guardian and the South African Institute of International Affairs are collaborating to promote public dialogue on trade policy reform in South Africa. Supported by the British High Commission, the collaboration kicks off with a public debate on November 9 in Cape Town

Nic Dawes

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