MAT CUTHBERT: Localisation is nothing more than protectionism

An optimist would have hoped that Donald Trump’s protectionist trade policies would accompany him to the exit when he lost the US presidency. However, his ideas have permeated the hypothetical wall he erected around the US market and found popularity around the world — including the southern tip of Africa.

His policy centrepiece, economic nationalism, has compromised policy formulation in SA, and drawn both the political left and the right in respect of trade policy. The actions of certain developed countries have undermined the rules-based international trading system and set a poor example for developing countries.

The long-term harm trade protectionism causes is often overlooked in favour of its short-term appeal, such as its ability to protect local industries from foreign competition and the temporary gains in employment that can be realised. However, these benefits soon evaporate when the products that local companies produce start to decline in terms of quality and rise in price, and when jobs are outsourced due to diminished competition and a lack of market access. Ultimately, economic growth starts to slow as other countries put retaliatory measures in place and workers who rely on exports lose their jobs.

In March 2018 Trump announced a 25% tariff on all imported steel. As per Stell and Della Rocca in a column written for Foreign Affairs magazine in May 2021: “Trump assured Americans that the tariffs would curtail ‘unfair’ foreign competition, revive the foundering American steel industry, and bring back thousands of high-paying jobs. Five months later, he declared victory. “Tariffs,” he tweeted, “have had a tremendous positive impact on our steel industry.”

However, this was divorced from reality, as noted by Stell and Della Rocca: “That was abject nonsense. In reality, the steel tariffs were a costly failure. Steel prices ended that year 14% lower than they were when Trump imposed the tariffs.”

While Trump may have succeeded in delivering on his promise to his political base to “Put America First”, the unintended consequences were plentiful. Coupled with the decision to promote import substitution and increase tariffs on Chinese goods, on the grounds that China had long participated in unfair trade practices and intellectual property theft, these actions led to the start of a trade war between the two countries. This not only heightened geopolitical tensions but also crippled the World Trade Organization’s appellate body, thus undermining the rules-based international trading system.

The irony is that the trade and industrial policy tactics employed by the Trump administration bore significant resemblance to those employed by erstwhile Chinese leader Mao Zedong during his ill-fated “Great Leap Forward”. Furthermore, the Republican Party (which Trump represented) had historically been in favour of trade liberalisation and free markets, yet now adopted a policy platform historically occupied by parties and governments on the left of the political spectrum. This illustrates the convergence of the left and right sides of the political spectrum in terms of trade policy.

The South African case

How that applies to SA requires us to look at recent policy developments within the country and how they mirror several elements described in the case above.

In the early 2000s state-owned primary steel producer Iscor was privatised and sold to multinational ArcelorMittal. While Iscor was relatively profitable during the apartheid era due to the closed market within which it operated — due to the sanctions placed on the regime of the day — it became clear that it could no longer maintain its competitiveness with the opening of the SA market. 

Fast forward 10 years or so and it is clear that the transaction was a clear-cut example of privatisation in name, and not in practice. To this day the primary steel industry remains one of the most highly protected and regulated industries in the country. Government has tried to tariff the industry into profitability, with no fewer than 17 agreed to since 2015. At present the base level of protection on hot rolled coil (the feedstock from which most steel products are produced) sits at 10%, coupled with a safeguard duty that started at 12% in 2017 and tapered to 8% in 2021. It was only when local manufacturer Macsteel took the department of trade, industry & competition to court to put an end to the safeguard duty that a two-year moratorium on further safeguard duties was agreed to in an out-of-court settlement.

Despite the DA having cited serious concerns about the tariff regime due to its effects on price, quality and competitiveness in the industry, these were simply rebuffed. When we questioned the necessity of having a primary steel industry, a senior official in the department stated: “Even Donald Trump thought it important to retain a primary steel capability in his country, therefore we should too”. Aside from the fact that to base one’s policy choices on a flimsy rationale provided by the erstwhile US president was a bad idea, a left-wing government (which the governing ANC is) provided evidence of yet another instance in which the right and left have converged in terms of trade policy.

If the striking similarities between the approach to the steel industry by the US and SA governments seem uncanny, the section below reveals how the underlying sentiment of “America First” [economic nationalism] has spread across the Atlantic. While the SA government may have packaged its localisation policy in a more palatable way, its core intention remains the same — to pursue a neomercantilist trade policy. This entails import substitution, an increased role for the state in the economic affairs of the country, as well as an aggressive approach towards less developed markets.

The rhetoric that accompanies this kind of thinking draws on manufactured resentment among a given populace in which globalisation, international trade and migration are said to be the root causes of their lack of economic prosperity and wellbeing. It is popular with constituents and aids governments in deflecting from the fact that they have made historically bad policy choices.

In the SA context it is envisioned that 20% of nonpetroleum imports will be targeted for local replacement over the coming five years in struggling industries such as cement, poultry, steel and sugar. It is intended that a range of duties and tariffs will be applied across designated goods and services to achieve that. However, no socioeconomic impact study was conducted before the implementation of this policy. Evidence-based policymaking has been relegated to the periphery and nationalistic sentiment placed front and centre. For example, the government recently banned the use of imported cement in state-run projects, with scant regard for price increases and diminishing levels of quality.

Imminent threats

Localisation poses two more imminent threats to the SA economy: our participation in the African Continental Free Trade Area (AfCFTA) and a possible contravention of our trade law obligations under the World Trade Organization’s General Agreement on Tariffs & Trade (GATT) and the General Agreement on Trade in Services (GATS).

Despite having been warned by his lead negotiator for AfCFTA of the economic risks of this policy on our participation in what it set to be the largest free trade agreement in the world (which analysts have valued at $3.4-trillion) trade, industry & competition minister Ebrahim Patel has thrown caution to the wind and persisted down the path of neomercantilism. He has been warned that this approach undermines the intent of a free-trade agreement, which is to lower barriers trade and promote investment on a continent that up until now has been poorly integrated and lacks extensive value chains. It is naive to think other countries won’t implement retaliatory measures in response to Patel’s actions. 

In respect of possible contraventions of GATT and GATS, Peter Leon, Africa chair at Herbert Smith Freehills, argues that: “ ... measures that seek to impose domestic content requirements or alter market conditions in favour of domestic goods or services might contravene the general prohibition against quantitative restrictions in article XI of the GATT, or the national treatment principle in article III of the GATT and article XVII of the GATS”.

The consequences of contravening these provisions are that SA may end up being subject to a dispute settlement process initiated by another state, which would affect our benefits derived from our membership of the WTO. Furthermore, we would be undermining the rules-based trading system we subscribed to and have benefited from over the past 20 years or more.

The case set out in this article attempts to show how pervasive economic policies in a highly industrialised economy such as the US can gain traction in developing countries. Where a natural predisposition towards statism exists, such as in SA, it is even harder to recover from the disastrous effects these kinds of policies can have. Moreover, when historical champions of free markets and trade liberalisation undermine the global institutions meant to govern trade, it sets a poor example for the rest of the world.

In an interdependent and inextricably connected world decisions taken in one country can be felt in another, as we have seen time and again. The free market is the only system that has and is capable of delivering freedom and prosperity. It requires us to uphold its principles and respect its institutions. Failure to do so will only lead us down the path of populism and ultimately misery. Humanity cannot afford that.

• Cuthbert is a DA MP and shadow deputy trade, industry & competition minister.