‘Proposal to go it alone on trade misreads the evidence’
The growing interest in the role that trade policy can play in promoting growth and development in SA is welcome. The issues that arise are complex and require careful consideration to ensure that trade policy contributes positively to SA’s broad development objectives. We need also to note, first and foremost, that SA is a part of the Southern African Customs Union (Sacu), and consequently cannot, as happened before 1994, decide on tariffs unilaterally. There is no doubt that trade and tariff reform can make a positive contribution to growth and development if they contribute to industrial development, and improve resource allocation, efficiency and competitiveness to meet employment, growth and export objectives. We should, however, be careful not to overestimate the role played by trade policy in meeting these objectives.
Other factors, such as commodity prices, exchange rates, investment, and global and national demand can be equally, or more, decisive. Meeting the objectives set out above requires an intimate understanding of the industrial economy, and a nuanced policy approach. The pace and sequencing of trade reform to support industrial diversification and upgrading are key to promoting sustainable growth and development, otherwise trade liberalisation will foster specialisation in terms of static comparative advantage.
International experience demonstrates the variable effects of trade reform. In successful developing countries, economic reform, particularly trade liberalisation, has taken place gradually and selectively as part of a long-term industrial policy to expand supply capacity aimed at domestic markets or exports. By contrast, those economies that embarked on rapid structural reform, including uniform and across-the-board liberalisation, have reoriented their industrial sector in accordance with static comparative advantage, except for industries that were near maturity.
Without the appropriate pacing and sequencing, trade reform programmes could lead to the destruction of existing industries, particularly infant industries, without necessarily leading to the emergence of new ones. It should also be remembered that there is a lag between the implementation of trade liberalisation and the emergence of new and efficient industries. How long such a lag could be is not clearly established. What is clear is that in the absence of a robust industrial policy, any new industry that may emerge would be in line with static, rather than dynamic, comparative advantage. This would imply that the economy remains locked in the production and export of primary commodities, simple processing and assembly operations or labour-intensive ones with little prospect for upgrade.
SA’s recent experience with tariff policy resonates with the global experience. Proposals for unilateral trade liberalisation, outside of a coherent industrial and trade policy, represent a fundamental misreading of the South African and international empirical evidence. SA has undertaken significant tariff cuts, and while exports in all sectors grew, manufactured exports continue to be heavily dominated by resource-based sectors. In other words, despite significant tariff reduction since 1995, efforts to restructure the industrial economy have been generally insufficient to induce the necessary structural change in the economy to alter the export basket significantly.
In short, tariff reductions are not the only key to improving competitiveness per se. SA’s most dynamic exports have been in medium-technology products that comprise resource-processing products such as steel, aluminium, chemicals and automotives.
Strong export performance in these industries is a function of prior and current industrial policy.
The resource-processing sectors emerged from a long period of state support under apartheid with substantial restructuring tax allowances in the early 1990s. Automotive exports have been driven by the Motor Industry Development Programme.
The current discourse on trade policy also betrays an inadequate recognition of the limited scope for further tariff reductions. In the early 1990s, our average tariff was in the region of 23%. It now stands at 8,2%. We need to ensure that further tariff liberalisation in SA does not mean remaining locked into commodity-based production and export.
Last year, the proportion of zero-rated tariff lines climbed to 54%. There has also been considerable simplification of the tariff regime. In 1990, the tariff schedule consisted of 13609 tariff lines and 28% were subject to import control. By last year, the number of tariff lines had been reduced to 6420.
The SA-European Union Trade and Development Co-operation Agreement and the Southern African Development Community (SADC) Trade Protocol have set additional parameters on our tariff regime. SA’s trade with the EU accounts for 36% of our total external trade and by 2012, 94,9% of SA’s exports to the EU, and 86,3% of the EU’s exports to SA, will be duty-free. By 2005, under the SADC Trade Protocol, 99% of tariff lines, consisting of 97% of imports from SADC, qualified for duty-free access to SA.
We should also not exaggerate the correlation between tariffs and export competitiveness. There might be a theoretical case for improving the profitability of exports relative to domestic production but the empirical evidence that this easily takes place is weak, both in SA and internationally. Across-the-board unilateral trade liberalisation will worsen the short- to medium-term current account deficit with little guarantee of long-term competitiveness unless undertaken in a highly strategic and sequenced fashion.
Last but not least is the effect that unilateral action would have on SA in the global arena. Unilateral tariff reduction would weaken SA’s bargaining leverage in bilateral and multilateral trade negotiations, since these negotiations involve an exchange of tariff concessions. Also, tariff reductions cannot be undertaken without concurrence from our partners in Sacu, whose economies are highly dependent on tariff revenue.
Upgrading SA’s industrial base to encourage production and export of more sophisticated value-added products requires purposeful intervention in the industrial economy aimed at achieving more dynamic competitive advantages. As tariffs are instruments of industrial policy and have implications for capital accumulation, technology change, productivity growth, and employment, the tariff reform programme needs to be carefully calibrated and nuanced, taking into account the specifics of each sector and its production possibilities.
The government’s National Industrial Policy Framework foresees a review of SA’s tariff regime in these terms. The customised sector programmes will also consider tariff levels of the production lines that make up each sector. Already progress has been registered in the area of capital goods, and work on other sectors will follow. Tariff determinations will be conducted on a case-by-case basis, taking into account the specific circumstances of the sector involved.
As a general guideline, tariffs on upstream input industries could be reduced or removed, in the interests of lowering input costs downstream. We will also need to take into account domestic production capabilities and potential as well as the degree of global distortions on these products. Tariffs on downstream industries, particularly those that are strategic from an employment or value-addition perspective, may be retained or gradually changed so as to ensure sustainability and competitiveness.
To conclude, there is no ideal tariff regime. Tariff rates are a function of, among others, industrial policy, negotiating outcomes, global trade flows, relative competitiveness, employment and other social considerations as well as global and national market structures.
