After years of silence, discussions about the advantages and disadvantages of tariffs on international trade have become a common aspect. The renewed interest in the subject has been spurred by the actions taken by US Trump, the president of America. Donald Trump was the first president since the Great Depression to impose or threaten to impose more tariffs on imports.
In March of this year,e US introduced the tariffs of 25 percent on Chinese imports of 250 billion dollars a year. While the plan to extend the taxes to all Chinese products is currently put on hold indefinitely, it is not impossible to develop the measures. The US is threatening similar steps to those from the European Union.
The issue is vital for nations struggling to diversify their economy, as in South Africa’s case, to increase its capabilities in medium and high-tech-based industries.
The South African manufacturing industry has been severely affected by trade liberalization policies that date from the late nineties. In the past, these were frequently embraced to boost national economies in advanced countries, which were characterized as crippled by high input costs as well as stagnant markets in local areas. It was believed that market opening would create jobs, increase levels of competitiveness and productivity, and eventually boost economic output.
Our research found that in comparison to our peers and the industrial stage, South Africa’s industrial policy is too focused on supply-side tools. This includes tax-free allowances to support research and development as well as direct financial assistance to develop human resources or capital investment.
The study started with two basic propositions:
- The transition had been too long, and
- The more traditional manufacturing industries, like footwear and leather products, as well as clothing and metal products, were slow to adjust to the new framework of policy.
The study confirms that both.
The policy adjustments of the nineties were overly expansive, and South Africa’s current industrial policy system must be adjusted as a way to increase the number of jobs and Gross Domestic Product (GDP). A combination of targeted tariffs and a better approach to marketing potential customers could restore the significant manufacturing contribution to the economy.
The nineties
In the late nineties, South Africa was emerging from a long period of shielding and isolation. This was partly self-imposed and partially the result of international sanctions. The reduction of tariffs was viewed as a means of achieving two goals. One is to increase the global production efficiency of its base. Also, to ease the grip of the upstream industries, which include producers of chemical base products as well as steel, iron, and paper.
In general, the 90s could be described as a shift from an industrial policies framework dependent on market protection, the high level of tariffs, and government procurement (collectively called demand-side support) to a plethora of instruments, like the tax incentive for development and research as well as the focus on reducing company’s input costs (known as support for supply side).
Between 1991 and 2001, average tariff levels decreased from 27.5 percent in 1990 to around 8% in 2006 and 5% by the year 2016.
However, the promises of growth in the economy and job creation in the manufacturing industry in the wake of trade liberalization did not materialize. Reforms led, in the end, to a number of casualties, companies in vulnerable sectors shrinking and losing jobs.
While it increased by 50% between 1994 and 2006, the amount of manufacturing contributed to GDP has not drastically changed in the past year, despite a general 26% increase in the country’s economy (2007 through the year 2018). In the end, the percentage of manufacturing’s contribution to the economy decreased from 21 percent between 1994 and 13.2 percent in 2018.
Certain sectors of the manufacturing industry have been weakened significantly in the manufacturing sector. In a few cases, they’ve gone out of business completely. The production of textiles, clothing, as well as footwear sector has decreased by 40 percent. Textile manufacturing is the most deteriorating in terms of economic output, which is currently lower than 60 percent of its level in 1994.
The only exception is that of automobiles.
The auto industry has experienced the greatest growth since 1994. It is the only sub-sector that remained protected by high tariffs. They can be very effective. But the taxes that are imposed to support the auto industry have not been affordable. They have come at a substantial price in terms of economic impact and, in this instance, as well to the government. According to estimates, the cost of the Department of Trade and Industry of the Automotive Production and Development Programme is 5 billion dollars per year.
Concerning the policy-oriented area, the data backed the notion that supply-side measures are too predominant and the overall mix of policy needs to be adjusted to offer more support to the demand side. This support could come through protection against tariffs and a change to local specifications on public procurement’s content. This will help revive South Africa’s manufacturing industry by adopting a similar approach to the automotive industry.
Additionally, the findings of the study have revealed that traditional industries have not responded adequately to the post-1994 change in policy. They did not make recourse to the newly developed tools. Changes in policy trigger similar responses. Traditional businesses have been wary of new policies and hesitant to participate in these changes. However, the more liberal firms were excited about the new opportunities that these policies could open up.
The utilization of tax incentives, which is a crucial element of supply-side incentives, is highly fluctuating. The main winners have been the high-technology sub-sectors, with high absorbent capabilities, which are characterized by the ability to recognize and absorb relevant external information.
More efforts are required to aid traditional industries in gaining insight into and benefits from the changing policy environment instead of making them disappear completely. A more comprehensive rebalancing of policy on innovation in favor of stronger demand-side tools is also suggested.
