Only competition will produce growth and industry needs a conducive environment

I am not going to step into the media battle about chicken that seems to never end, but I do wish to respond to Kevin Lovell’s missive on my light-hearted commentary on the amount of duty contained in the average braai. (How much does a braai really cost? April 22, 2016).

Let me first place my cards on the table. In my capacity as a director of an international trade consultancy, I have represented the Association of Meat Importers and Exporters in a number of trade disputes relating to chicken, so Lovell and I have indeed crossed swords over the years. Given the sensitivity of the existing ongoing safeguard investigation on chicken from the European Union, I am not going to discuss chicken in my response. But I have a lot of respect for Lovell and agree with many of his comments.

Countries, of course, can never import themselves to sustained economic growth, but at the same time you can never achieve sustained economic growth without being competitive. And here is the nub of the problem. Duties serve to make imports less competitive, rather than making the domestic producers more competitive. This distinction is important. Economic growth is ultimately driven by being ever more competitive. 

I am not suggesting that South Africa should not be manufacturing anything, but rather that for our manufacturers to be competitive, the environment has to be conducive to competitiveness. Let’s take a recent example that has been in the press a lot lately – the steel industry. 

Whilst by no means an expert in steel matters, it strikes me that at least three things need to be in place for the South African steel industry to be profitable and sustainable:

1. I assume those big furnaces consume a lot of energy, so affordable and reliable energy is important. This is pretty much not available in South Africa.

2. Affordable and productive labour. Should we turn South Africa into a sweatshop? Of course not. But can we afford to pay poorly skilled people above what our international competitors are paying their staff and expect our product to be sold internationally? If you want people to earn well, they need to be skilled and employed in profitable companies. Our education system is hardly supplying a fat stream of well-qualified people into the jobs market (welding has been identified as a scarce skill by the department of labour, presumably because we don’t seem to be generating enough welders into the market). Our labour regime has created an enormous incentive to not employ people, and our energy position has created a disincentive to automate. I am not sure what the third option is to get things done.

3. Protection against unfair foreign trade policies. South Africa has a specific instrument designed to offset “prohibited” foreign state subsidies of industry, which we refuse to use, known as countervailing. South Africa also signed a record of understanding with China that automatically treats China as a market economy as long as Chinse exporters respond in antidumping cases. The result? While the rest of the world brings more countervailing and antidumping actions against the Chinese metals sector, we see almost nothing. (More than 50% of all countervailing actions brought globally are against steel and most of those are against China.) Instead, our steel industry is forced into swapping out countervailing for safeguards, which affects the whole world, or antidumping that is hard to succeed with because of the record of understanding.

But philosophically, should we protect fundamentally uncompetitive industries, especially those far upstream? How many industries use steel in their production process? I challenge any reader who got this far into the Mail & Guardian to look at the room they are sitting in and be unable to identify at least one item containing steel. Steel is pervasive. Push up the duties on steel and you will drive the imports downstream, forcing the downstream industry to also push up their duties and so on until the whole supply chain has duties. 

This becomes a problem, not just because the consumer always funds duties but because the maximum rate that duties can be increased to on downstream products does not always equal or exceed the maximum duties on the raw materials. In other words, the duties on steel are 10%, but the duties on some downstream products made of steel may be zero. 

How many such products are there? We honestly have no idea because steel is so very far upstream.

The government is aware of this dilemma and so is setting up a steel pricing committee under Minister Ebrahim Patel, whose purpose will be to ensure that the only steel producer left doesn’t abuse its dominant position and push prices up excessively. They have a history here, so this is not an unreasonable concern. I am not optimistic about the prospect of pricing committees being set up for all sorts of industries requesting duty protection. We already have a Competition Commission whose job it is to tackle abuses of dominance and who mostly appears to do this job rather well. 

Donald MacKay is a director of XA International Trade Advisors and Stratalyze

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