Extracting the maximum benefit

The recent mining indaba and the simultaneous leak of the ANC report on mine nationalisation signalled a turning point in the history of mining in South Africa.

The mainstream of the ANC, which has no particular desire to follow its youth wing down the path of nationalisation, has preferred to opt for nationalism: the new policy would seek to extract as much national benefit as possible by processing the country’s minerals internally.

A week before the indaba, the highest court of the World Trade Organisation (WTO)—the appellate body—struck down most of the policies China used to process its strategic minerals locally.
The ruling came after the United States had complained to the organisation about a range of illegal measures the Chinese used to assure the processing of their rare earth minerals.

Broadly speaking, there are three types of measures that governments can use to give investors an incentive to process and develop their raw materials in a country in which they would otherwise not choose to do so.

The first is the use of export taxes on unprocessed raw materials, which is compatible with the trade organisation unless you are unfortunate enough to have acceded to it, like China, and had the US and European Union impose bans.

For countries like South Africa, which is a founder member of the WTO, there are no real limits on the use of export taxes.

But unfortunately for South Africa, it signed the free-trade Trade and Development Co-operation Agreement with the EU in 1999. In that agreement—touted as a generous European gift to then-president Nelson Mandela and a new, free South Africa—export taxes on goods going to the EU were prohibited. For the Europeans, export taxes have become something of a hated instrument since the Russians began to use them heavily in the 1990s to tax gas exports to the EU.

If South Africa decided to impose export taxes on a strategic mineral like platinum—of which it is a major world producer—in order to help accelerate the production of catalytic converters or jewellery, then there will be EU trade retaliation before anyone can say “merlot”.

The Europeans have allowed the rest of sub-Saharan Africa to maintain export taxes only on a temporary basis in their economic partnership agreements with the EU—and then only after asking Brussels nicely.

It is one of the reasons why Namibia was so reluctant to sign the Southern African Development Community agreement with the EU.

There are many ways to skin a cat in trade policy and export taxes are just the most open and transparent option. The other way to give investors an incentive to process minerals locally is by simply telling them—“no processing, no minerals”.

This is the means used in the diamond trade to assure processing of diamonds in countries like Botswana and Namibia. If you want to be a De Beers site holder then one of the conditions is that you have to process the diamonds locally. The problem with this approach is that it is a trade-related investment measure and is banned by the WTO.

Another option, which is also of doubtful WTO compatibility, is to provide export subsidies to the industry in question. While governments are allowed to provide tax incentives under the WTO, they cannot be for the export sector only. Not only are export subsidies illegal, unlike the other two options, they cost serious money and are generally strongly opposed by the treasury.

There are no easy answers as to how South Africa charts a course that allows it to beneficiate its minerals and create the millions of jobs that its citizens demand. But there are some important lessons.

The period of high globalisation which ended in the 1990s brought with it a series of trade agreements. The opponents of these agreements warned that what was being demanded by the EU and the WTO would come back to bite developing countries when they tried to establish their own industries.

It has been a truism of trade policy north of the Limpopo that countries could sign whatever trade agreement was put in front of them and go home and do as they please.

It was understood that no one would ever enforce a trade agreement against a small African country because the legal cost is simply too great given the size of the trade.

This is not true of large diamond exporters and is certainly not true for South Africa’s strategic minerals. If South Africa attempts to develop mineral beneficiation policies as its stated national objective, then it will have to be more clever than the Chinese about the measures it uses.

These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed

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