[Opinion] Avoiding the easiest of own goals

Within this cluster of challenges, the logistics space deserves special attention from the Government of National Unity that took office earlier this year. Focusing scarce resources and skills here could unlock easy wins for businesses large and small, under-pressure consumers, and unemployed South Africans. On the flip side, if the government allows logistics to flounder and follows the protectionist, cost-increasing path being trod by governments and economies that ought to know better, low growth and high unemployment will persist.

In an April 2024 research paper from the Centre for Risk Analysis, Perfecting the Own Goal, we investigated the drivers of the country’s trade infrastructure and policy shortcomings. While physical trade infrastructure such as ports and rail occupies much of the attention of policymakers and bureaucrats, we emphasised the importance of not neglecting Non-Tariff Barriers (NTBs). NTBs include obstacles such as onerous licensing requirements, long processing delays, inefficient customs procedures, subsidies, and technical barriers.

A new World Bank study published in August 2024, Unlocking SA’s potential: leveraging trade for inclusive growth and resilience, echoes many of our recommendations.

The seven key findings of the study relate to (1) the high concentration of South African exports in few products and markets; (2) the pernicious effects of domestic tariffs and logistics barriers on the country’s exports; (3) the underperformance of exports in services; (4) exports being dominated by a few firms; (5) increasing transport and logistical costs that have hurt South African competitiveness; (6) improvements in wages, especially for low earners, which have accompanied higher exports at the firm level; and (7) the country’s policy focus on promoting local industries, which “can come at the expense of competitiveness, penalising export performance and consumers”.

The final finding is worth unpacking. In South Africa the term is “localisation”, while the World Bank study refers to “local content requirements” (LCRs). These include measures such as “tax incentives and tariffs; import licensing procedures; and local ownership and employment requirements”. The study highlights that “evidence suggests that such policies can contribute to making targeted industries less innovative and competitive over time”.

While the study acknowledges the government’s hitherto relatively pragmatic approach to localisation, it notes that some negative effects have already been felt in public sector procurement, where “significant price distortions have resulted in bottlenecks (e.g. solar panels)”.

The negative effects of higher tariffs and subsidies – supposedly put in place to protect local industry – are not confined to exporters and consumers. The country’s overall economic development and competitiveness suffer, as state intervention leads to industry consolidation and raises barriers to new entrants. As a result, the number of companies receiving state benefits continues to dwindle. “South Africa’s export structure is highly concentrated with firms’ export concentration levels rising within most industries in recent years. The very high concentration of exports in most industries also points to the absence of small and medium-sized exporting firms, and the presence of barriers inhibiting their growth,” notes the study.

For all the talk of broader economic growth, the effect of state intervention is therefore to favour larger players that can deploy sufficient resources for government lobbying and compliance, while smaller firms are crowded out: “Firms that enter and survive grow fast and diversify, but for the majority, entry is difficult and tends to require relatively high levels of productivity, as well as global value chain linkages.”

By no means does the World Bank study advocate for a blanket removal of all tariffs and subsidies. Instead, it recommends a more pragmatic, balanced approach to such measures incentivising import substitution, coupled with trade openness: “It will be important to ensure that social safety nets and labour market policies are supporting labour mobility into dynamic sectors and that education systems equip the future labour force with the skills required by sectors with high export potential.”

This current policy path risks undermining the goals of the African Continental Free Trade Area (AfCFTA). If the AfCFTA were implemented enthusiastically by economic powers such as South Africa, local exports would stand to benefit considerably, due to “entry of South African exporters into African markets, an increase in the number of products by exporters, and rising values of exports per product”. The study urges South African policymakers to embed commitments to reduce tariffs “in a wider developmental program to incentivize industrialization and investment, promoting a virtuous cycle”.

However, should the country instead opt for higher trade barriers, “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”, the study emphasises, continuing: “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.”

The benefits of easier trade and investment flows are clear: “Trade has contributed significantly to prosperity across countries by supporting the development of new, higher paying jobs and increasing the efficiency of firms, as well as by providing consumers with cheaper and better products,” notes the study. “A one-percentage point increase in trade is found to increase per capita incomes by 0.5 percent (Feyrer, 2019). Industrialization and productivity growth are supported by increased participation in regional and global value chains, which enables access to intermediate goods, helps attract strategic FDI, and builds capabilities within firms.”

Globally, freer trade and the easier movement of goods, services, and people are under threat. Should the world follow the protectionist route, the potential of emerging and developing countries will be severely stunted. If, on the other hand, it chooses a different path, South Africa – with the new GNU prioritising trade (and higher growth) – will benefit greatly.

Article originally published here.