Protectionism in steel and metal industries makes sense, but it could do more harm than good
There are long-term, undesirable effects on other equally important sectors and consumers
The pre-Covid-19 challenges faced by local businesses in the diverse steel, metals and construction industries, two recent successive technical recessions and the unabated coronavirus-induced economic crisis, pose constraints to enhanced industrial activity. Companies are grappling with poor cash flow and lack of demand for their products, compelling senior executives and managers to recalibrate processes and review strategic plans, operations and budgets to weather the Covid-19 storm.
Disconcertingly, recent preliminary data (including high-frequency data) reflect the extent to which the economic crisis has wreaked havoc on industrial activity. Encouragingly, the available information also provides insights into idiosyncratic challenges faced by the various subsectors, enabling mitigating plans to be developed and implemented.
Steel overcapacity and a resultant surge in cheap imports have placed the SA steel, metals and construction industries in a precarious situation as companies fight for their continued existence. In addition, the advent of the Covid-19 pandemic has triggered the so-called new normal, with business operations becoming atypical amid galloping unemployment. These predicaments have put policymakers under immense pressure to protect domestic steel and metals producers via strict safeguard measures or enhanced protectionism aimed at boosting trade and rebooting the economy.
The strategic nature of these industries and their direct and indirect contributions to job creation broadly justify efforts by the SA government to implement protectionist import tariffs and custom duties to enhance the competitiveness of indigenous businesses, prevent dumping or trade deflection and support reindustrialisation. However, as the dogma of protectionism gains momentum one cannot discard its ambiguity, which may invariably cause more harm than good.
The arguments in favour of or against protectionism abound in the theoretical literature — and the good arguments by proponents of protectionism may include the need for strategic security for certain goods. SA places a degree of protection on its steel and metals industries and an argument in favour of protecting the strategic industries bodes well, as no country would want to be in a position where it is a net importer of steel or metals.
However, despite the good intentions, prolonged and repetitive protectionism could be interpreted by local companies that are not direct beneficiaries of the measures as an act of uncompetitive behaviour, with dire, unintended contemporaneous consequences. Import tariffs and custom duties should be time-bound and specific, to avoid long-term undesired effects on other equally important sectors and consumers of steel and metals products, such as the construction, mining and automotive industries.
Arguments in favour of trade barriers and taxes on imported steel and metals products, that these policies benefit the protected industries and prevent jobs from being exported, are invariably not good since they do not consider the costs. The trade barriers may protect the specific jobs in the industries that they are intended to protect, but be to the detriment of other industrial sectors that are users or consumers of the inputs, as jobs may be lost in the process. This is because companies in the unprotected industries would be compelled to buy locally produced and protected inputs at higher prices than they would imports, leading to higher operating costs and reduction in net domestic employment.
Raising tariffs on foreign coal or iron ore from foreign efficient producers, for instance, may protect the jobs of workers in the mining or steel industry in SA in the short to medium term, but prolonged repetition of such a policy may result in higher energy or input costs all over the country. The process would eventually compel local businesses outside the mining or steel industry to pay higher prices for coal or iron ore than they would from cheaper foreign producers, eventually forcing them to raise prices to remain competitive. Consequently, the demand for locally produced goods with higher costs could dip as selling prices rise, leading to diseconomies of scale and job losses.
Bizarrely, this exposition points to the uncomfortable fact that the continuous implementation of a set of protective import tariffs and customs duties within the steel or metals industry may inadvertently have contributed to the doggedly high domestic unemployment rate, also negatively affecting the derived demand for intermediate products as general income levels dip. Also, prolonged protectionism may eventually hinder the competitiveness of the local industry once indigenous companies are required to operate in a free market.
Prolonged or repetitive protectionist trade policy is not a panacea to the challenges facing the beleaguered steel and metals sectors, as any short-term benefit would be a Pyrrhic victory. Rather, time-bound protectionist measures should be applied, with a view to eventually opening up the industry for competition. Rivalry in business breeds success as companies learn from their failures and get to sharpen the saw. Therefore, systematic and targeted support for all companies, large or small, in the entire value chain, is needed to ensure their competitiveness.
Protecting an unproductive company or industry that faces foreign competition allows it to keep using resources that would be better used by more vibrant companies or industries. In addition, employees who would otherwise move to jobs in innovative, productive new industries in an open competitive and lively free market scenario instead get stuck in a company or industry so unproductive that it can survive by having the government consistently intervene to tilt the economy in its favour. Besides, continuous expectations of frequent support from policymakers and the International Trade Administration Commission (Itac), underpinned by written or tacit approval from industry stakeholders, to ring market forces in a certain direction to ensure sustainability or perpetuate monopolistic practices in the steel industry, is not unsustainable but is also unconscionable.
Instead of indefinitely protecting unproductive companies or industries to avoid the need for change and consequential unemployment, the government could directly assist employees by facilitating retraining programmes and enabling the acquisition of new skills. Once protective tariffs are implemented government and industry bodies that operate vibrant skills training centres should identify skills gaps that render the industry uncompetitive and support the requisite capacity development. This initiative would compel workers to embrace new technology towards reduced cost curves, increase their employability and ensure that the broader industry is more competitive when the tariffs elapse.
Undeniably, the move from a moribund company or industry to an innovative new company or industry can be rough for an individual worker, especially given the context of galloping unemployment in SA. However, if beneficiaries of protectionism stick to quid pro quo commitments to invest in technology and adopt smart manufacturing processes, the steel and metal industries will be the ultimate winners.
Initiatives aimed at boosting trade for businesses should be reciprocated by capital spending and not by lip service, since trade determines the demand for a commodity while investment is the supply side of the market. The dearth of greenfield investments and weak consequence management by national enforcing bodies partly explain the precarious state of the steel and metals industries.
Though protectionism has its benefits, it should be perceived as a means to an end, aimed at enabling local companies to be ready to compete globally, rather than as an end in itself, with negative implications for input prices and employment.
• Dr Ade is chief economist of the Steel and Engineering Industries Federation of Southern Africa.
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