Opinionista Donald MacKay 27 September 2019

While global trading elephants the US and China butt heads, how should small countries like SA respond?

The US/China trade war creates a quandary not just for the two countries immediately involved but mimicking the US policy of closing its border is dangerous for a country like SA.

International trade, like every relationship, is complicated. We reduce it to a simple binary at our peril, but this happens with increasing frequency by the likes of Donald Trump, for example. On the face of it, a hard drive for local production seems like a goal worth pursuing, but as the soya farmers in the US will tell you, all is not as it seems when aggressive protectionism is the path chosen.

International trade is a two-way arrangement, which means if we decide to block imports, we also need to live with the consequence of increased difficultly in exporting our products to other countries. If you take this to its logical conclusion, we end up with companies never growing beyond the point of supplying our local market. In a country as large as the US or China, this is still possible (even if expensive and self-defeating), but in a country as small and poor as South Africa, it would be impossible to be self-sufficient.

However, it is abundantly clear that untrammeled free trade is also not working. The principles of free trade were founded on the assumption that goods would move freely, but people and capital were relatively bound to the country the capitalist resided in. This changed dramatically in the 1980s with Reagan/Thatcher neoliberal economics, which saw capital begin to flow around the world with little friction. Once the capital could move freely and shipping costs dropped enough, it was only a matter of time before production moved to countries where labour was cheaper, creating pressure on domestic labour markets.

The solution to this problem, and it is a problem, has been incorrectly stated as a choice only between free trade (often viewed as unfair trade) or protectionism, and currently protectionism is winning out. Of course, free trade advocates have to contend with the complicated problem of certain countries not playing by the rules. The American agricultural subsidies (of which another $16-billion has been provided by President Trump to offset the effect of his China trade war tariffs), as well as China’s subsidies, many of which are in contravention of WTO rules, are not helping. For free trade to work, it is important for all players to abide by the rules and when big countries do not, the effects can be ruinous.

Does this mean protectionism is the way to go? Absolutely not. By closing off our markets to the rest of the world, we run the very real risk that they will do the same to us. By concentrating power in the hands of a few local producers, we almost guarantee price increases, which consumers can ill afford. Think this will not happen?

Take a look at ArcelorMittal’s financial results for 2018, following the significant duty protection they received and continue to receive. Their own sales volumes increased by 1% yet their revenue increased by 16%. The total sales volume of steel (imports and locally produced) dropped by 4%. In other words, the price of steel increased significantly and the consumption of steel dropped. This is no anomaly. Look at the cement, construction and bread price-fixing cartels to get a sense of what happens when competition doesn’t function effectively.

The current solution to the problem is to also increase protection on products downstream from ArcelorMittal. Duties on things like steel fasteners now substantially exceed 100%. Is this working? We now can’t produce enough locally of many of these fasteners so the prices of these goods will rise.

Companies begin a process of relocating to other countries. Already, we have seen businesses in the downstream steel sector relocate their factories to places such as Mozambique, where because of the SADC free trade agreement, raw material can be imported duty-free from the East and the finished goods exported to South Africa duty-free.

This is not a circumvention of duties. It is an investment in another country desperately needing investment, even more than South Africa does. But once the plant has relocated, it is very difficult, if not impossible, to bring back to South Africa. African investment is the very purpose of the SADC Free Trade Agreement, yet it is doubtful that anyone anticipated South Africa ever actually losing investment to other African countries when the agreement was negotiated.

Yet here we are. The unintended consequences of our protectionist interventions will be measured over the next few years and it will either have worked or will have failed. Minister Ebrahim Patel with his industry Master Plans aims to try to strike a balance between protectionism and free trade, a balance which may prove very difficult to achieve with the chaos that has been introduced by what is rapidly becoming a global trade war. The only measure of success here is economic growth and a reduction in unemployment, and there is very little indication that the path we are on will yield either.

How do we deal with this trade dilemma? Global trade rules matter and we need to defend the use of these vehemently. This means addressing the problem we have created by not allowing the use of anti-subsidy actions (known as countervailing investigations). This is a political problem which we are trying to avoid through using anti-dumping or safeguard actions instead. At the same time, we need to manage our duty investigations in a way which is not partisan. If the rules don’t apply equally to everyone, then no one trusts the rules. This is a problem which Trump has truly taken to a different level and there is a real risk that we will soon be (or even are already) emulating him. This is not good.

I understand the panic both industry and government, but we are not going to fix our trade problems by alienating our most important trading partners. Although I remain sceptical of Ebrahim Patel’s Master Plans, I like the idea that these plans reduce the emphasis on more duties and instead focus on competitive local production and exports.

Now let’s see whether they work or get added to the very large and expensive pile of plans drafted but never implemented. DM

Donald MacKay runs XA International Trade Advisors.

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