A New Trade Plan for South Africa
by Robert Z. Lawrence, Peterson Institute for International Economics
and Lawrence Edwards, Cape Town University
Op-ed in Mail & Guardian Online
May 22, 2008
© Mail & Guardian Online
South Africans are too pessimistic about South Africa's ability to compete. In the apartheid period, trade protection seriously impeded both exports and imports, and the economy depended on favorable global commodity price trends to avoid running into an external constraint. By contrast trade liberalization in the 1990s not only increased imports but, by reducing both input costs and the relative profitability of domestic sales, boosted exports and stimulated productivity. Commodities remained important, but the growth in other manufactured goods exports in response to trade liberalization was impressive. This experience suggests that given the right incentives South African firms will increase their noncommodity exports. It points to the importance of policies that afford local firms access to inputs at world prices, as well as a competitive real exchange rate.
While considerable progress was made in the 1990s in liberalizing and simplifying the South African Customs Union (SACU) tariff structure, such movement has slowed in the past few years. This is unfortunate because trade performance is a key constraint for attaining the country's growth objectives.
South Africa needs a more focused approach to trade policy. The tariff structure remains excessively complex and opaque, even when compared with other middle-income countries. There are about 100 different bands and individual products in the same sector that are given disparate amounts of protection. The differentiation appears to be mainly the result of historical accident and is not justifiable as efficient job preservation, equitable income distribution, or on infant industry grounds.
On average manufacturing workers earn R95,000 a year. Yet consumers, many of whom are poor, spend almost R1.5 million for each job that the tariffs on manufactured goods save. If the effect of protection on agriculture, mining, and services are included, South African consumers forgo welfare benefits that are almost three times the average wage of each job saved.
Some still continue to defend the complex tariff structure and argue for a piecemeal and conservative approach towards tariff reform on a product-by-product basis. Their arguments are unconvincing. There might be a case for exceptional temporary safeguards for vulnerable industries and selective infant industry protection, but that is not what the system does now.
The approach is not to change any particular rate unless a good reason can be given, but this is unlikely to alter the structure, which allocates resources inefficiently. A major problem is that it still protects many inputs. This is particularly damaging and distorting of the choices of those seeking to beneficiate and export. Expensive fabric, for example, makes it impossible to become competitive in clothing. Expensive grapes hurt those producing wines. Giving exporters rebates on import duties, as the system does with drawbacks, is cumbersome, expensive to use, and discriminates against domestic input suppliers.
A much simpler tariff structure using a few, or even just a single tariff rate, should be adopted. In particular, tariff reductions on inputs should be emphasized and, with few exceptions, only one rate used when granting protection. Such an approach could do far better than the current one by a number of measures. It could simultaneously provide more benefits to consumers and promote exports, while still limiting employment dislocation by conferring a reasonable degree of effective protection on finished goods.
It would also be simple to administer. You cannot have exceptions if you do not have a rule. The current system is so complex that its priorities are not clear. A simpler tariff structure would provide a clear norm against which industrial policy priorities could be set. This, in turn, would provide some insulation from industry lobby groups and send a clear signal to investors and industries as to the priority of the protected sectors for industrial development. Implementing such an approach would also lead to a more competitive rand.
South Africa's regional trade policies also require attention. The African continent plays a key strategic role in the country's export diversification strategy. Regional development is a vital priority. But the SACU tariff-sharing formula is expensive and defective. A major reform of SACU tariffs along the lines just outlined would make particular sense for the BLNS (Botswana, Lesotho, Namibia, and Swaziland) countries, allowing these nations access to cheaper inputs and final products. It would provide the opportunity to renegotiate the SACU revenue-sharing formula, more clearly and rationally separating its aid and tariff revenue-sharing components. Instead, SACU should share its tariff revenues on a per capita basis, and South Africa should establish a separate regional development fund.
SACU's vision about the proposed Southern African Development Community Customs Union also requires some scrutiny. Customs unions eliminate barriers to trade between members, allowing deeper integration of goods markets, but require a common external tariff. Agreeing on an external tariff is not easy. SADC economies differ widely in terms of their development needs. They are also members of multiple different arrangements, including the Economic Partnership Agreements with the European Union, which seek to establish customs unions. These different obligations are incompatible unless they adopt the same external tariff. The goals of increased integration might be better met by deepening and extending the existing SADC Free Trade Agreement through developing cooperative policies on trade facilitation, rules of origin, competition policy, industrial policy, standards and technical barriers, and dispute settlements.
Trade reforms were one of the more impressive features of the new South Africa, but in the past few years a reform fatigue seems to have set in. It is time to renew the effort. Such reforms would not undermine the ability to conduct an industrial policy. On the contrary, they would make an industrial policy more effective.