May 23, 2024

After years of relative quiet, discussions about the pros and cons of tariffs on international trade are now a regular occurrence. Donald Trump’s actions, as the first US president since the Great Depression, to impose or threaten to increase tariffs on imported products have sparked renewed interest.

In March of this year, the US implemented tariffs on Chinese imports valued at $250 billion per year. The US is currently halting the planned extension of these measures to include all Chinese products but has threatened similar actions against the European Union.

In South Africa, the debate is crucial for countries who are trying to diversify their economy.

South Africa’s manufacturing industry has been affected significantly by policies of trade liberalization dating back to 1990. These policies were adopted widely at the time to stimulate the national economies of developed countries that were hampered by high input costs, stagnant local markets, and other factors. Claimed that open markets would create jobs, increase levels of productivity and competition, and eventually increase economic output.

According to the study we conducted, South Africa’s Industrial Policy is too focused on supply-side instruments. This includes tax incentives for research and innovation, as well as direct financial support to human resource development and capital investment.

The study started with two initial propositions.

  • The transition was overdone.
  • The traditional manufacturing industries, including leather products, footwear, clothing, and metal products, have been slow to adapt to the new policy framework.

The study confirms both.

We conclude that policy changes in the 1990s were excessive, and South Africa’s Industrial Policy regime should be rebalanced to increase employment and Gross Domestic Product (GDP). A combination of selective tariffs and better marketing of the products to potential consumers could rebuild the important contribution that manufacturing makes to the economy.

The Nineties

In the 1990s, South Africa emerged from a period marked by isolation and heavy protection. It was self-imposed, somewhat the result of international sanctions. Lowering tariffs was a way to achieve two goals. To increase its global competitiveness. Second, it is important to break the stranglehold that upstream industries have on South Africa, such as manufacturers of basic chemicals and iron and steel.

The nineties were characterized by a shift in industrial policy from a regime that relied on high tariffs, market protection, and state procurements (collectively called demand-side assistance) to one that used a variety of instruments such as tax incentives for research and development and an emphasis on reducing input costs (also known as supply-side assistance).

Between 1991 and 2000, average levels of tariff dropped from 27.5% to 8% by 2006 and 5% by 2016.

Unfortunately, trade liberalization did not deliver on its promises of job creation and economic growth in the manufacturing industry. Reforms led to more casualties as firms in vulnerable industries contracted and lost jobs.

The contribution of manufacturing to the GDP has barely changed since 2007 despite a 26% increase in the overall economy from 2007 to 2018. The proportion of manufacturing in the economy has dropped from 21% to 13.2% since 1994.

The manufacturing industry has seen a significant decline in several segments. Some segments have almost disappeared. The output of the textiles and clothing sub-sector, as well as leather and footwear, has decreased by 40%. The textile manufacturing sector has had the lowest economic output, at less than 60% of its 1994 level.

Automobiles are an exception.

Since 1994, the automobile industry has seen the most rapid growth. The automobile sector is the only sub-sector that has retained high tariff protection. They can be very effective. Tariffs to support the automobile industry haven’t been cheap. The costs were high for the economy and, in this case, the government. The Department of Trade and Industry estimates that the Automotive Production and Development Programme costs R5 billion per year.

The data supports the idea that the focus of policy should shift to a more demand-driven approach. Support can take the form of tariff protection and revisions to local content specifications in public procurement. The aim is to revive South Africa’s manufacturing sector in a similar way to that of the automobile industry.

The results of the study also show that traditional industries failed to respond adequately to the policy changes after 1994. The new instruments were not used to their full potential. The responses to policy changes are similar. The traditional firms were skeptical of the new instruments and hesitant to use them. The more open-minded firms, on the other hand, were excited about the new opportunities that these policy changes could reveal.

The application of tax incentives for research and development, which is a major component of supply-side incentives, has been highly inconsistent. High-tech subsectors have benefited the most, as they have a strong ability to absorb external knowledge.

Instead of letting them disappear, we recommend making more efforts to help the traditional industries understand the new policy climate and benefit from it. It is also recommended that the innovation policy be rebalanced in favor of stronger demand-side tools.

 

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