SA urged to rethink its trade policy

• World Bank’s emphasis on exports contrasts sharply with status quo

The World Bank has called for a sweeping overhaul of SA’s trade policy, urging the country to consider forging new trade agreements with advanced and emerging economies, including those in East Asia.

“SA ... has scope to modernise or develop trade agreements with [Organisation for Economic Co-operation and Development] countries and other emerging economies,” the World Bank says in a report, “Unlocking SA’s potential: leveraging trade for inclusive growth and resilience”.

However, SA “has taken a cautious approach in terms of its economic diplomacy, based on its perspectives of the suitability of such trade agreements for addressing [its] developmental policy needs”.

The proposal that SA emphasise exports as the cornerstone of industry policy contrasts sharply with existing policy, which focuses primarily on a bigger role of local companies in shaping economic development, or so-called localisation.

The World Bank’s suggestion on trade openness has the potential to conjure up memories of the mid-1990s. At the time, SA embarked on an aggressive tariff liberalisation programme that opened the floodgates to cheaper Chinese textile imports, which in turn obliterated the once highly protected sector.

Still, the World Bank said that by seeking new partnerships beyond its borders, SA could unlock global markets, diversify its exports and enhance competitiveness.

SA’s exports have historically been concentrated in minerals, metals and gold but there was a shift between the early 1990s and mid-2000s, with manufacturing goods gaining a larger share of exports. But this trend reversed during the commodity boom. Even as commodity prices cooled, growth in manufactured exports lagged behind other sectors except for automotive products.

The report says SAs ’ export profile intersects with climate change concerns, necessitating strategic adjustments to remain competitive in a world that is putting together policies such as the pioneering EU carbon tax, the carbon border adjustment mechanism, which would punish products that have a high carbon footprint.

The study, conducted by a team of World Bank staff led by senior economists Jakob Engel and Bénédicte Baduel, finds that SA has opportunities to export environmentally friendly products, and strategic support can bolster their competitiveness in global markets.

The research shows that between 2016 and 2020 exports of furnaces and ovens, used to destroy solid and hazardous waste, increased almost 70%, wind-powered generator sets jumped more than 40% and catalytic incinerators, designed to destroy pollution by heating polluted air and oxidising organic components, rose 41%.

“Though the export volume of these products is small, the CAGR [compound annual growth rate] signals growing foreign demand for SA products. In this context, measures to support exporting firms that have

The government’s move to drive industrialisation through localisation could put the brakes on foreign investment and reduce the competitiveness of SA’s exports, according to a report by the World Bank.

Localisation, seen by critics as a form of protectionism, is a pillar of the government’s plan to revive distressed local sectors such as sugar, poultry and steel.

The policy was central to former trade, industry & competition minister Ebrahim Patel’s plans to increase trade with the continent. The department, now under minister Parks Tau, continues to promote localisation in state procurement and targeted sectors of the economy to create early stage demand. This is in line with the Public Procurement Act, signed into law by President Cyril Ramaphosa in July. The act requires all state departments and public entities to use a preferential framework in procuring goods. It provides for bids to apply a designated minimum threshold for locally produced goods or goods with local content in designated sectors of the economy. In its recommendations on overhauling SA’s trade and industrial policy, the World Bank report released in August advises SA’s policymakers to ease local content requirements, saying: “In the case of tariffs, the increased cost of imports makes domestic production more expensive, which reduces it directly, and GDP declines. The increased cost of domestic production reduces the competitiveness of exports, which reduces these as well.

“LCRs [local content requirements] increase the cost of domestic production, which lowers GDP and exports.”

The reports notes that imposing LCRs is costlier in the long run for local exporters as “the requirements have worse impacts on national income than tariffs, as more of the distortion is on intermediate goods, rather than final goods. Despite their opaque nature, which makes them appear to be a costless way of promoting the domestic economy, the costs are significant, and larger than those of tariffs”.

In defending its localisation drive, the department of trade, industry & competition said previously that it is consistent with SA’s international trade obligations to reduce overreliance by countries. The World Bank report notes that SA’s blanket approach to localisation, where input costs for local firms could be pushed up to 20%, would negatively affect the economies of SA’s neighbouring countries.

“SA’s trade and industrial policy also does not occur in a vacuum and would result in large income losses for countries where SA is a significant trade partner. These include, in particular, Sacu [Southern African Customs Union] member states, which would see income losses ranging from 1.5% to 2% of national income.

“Other neighbours, such as Zimbabwe and Mozambique, would also be impacted. This is because the higher price of SA’s exports and its lower demand for imports would reduce trade between SA and its main trading partners,” said the World Bank.