NICHOLAS WOODE-SMITH: SA must reject protectionism

The SA government must not be tempted into embracing even more protectionist and regulatory policies. While politically popular among the economically ignorant, throughout history protectionism has proven repeatedly to only stifle the economic growth of a country and drive it further down the path of stagnation and deindustrialisation. 

As global conflicts erupt between the West and wannabe hegemons in the form of China and Russia (and, perhaps even Iran), deglobalisation seems inevitable. The US seems to be on the verge of embracing relative economic isolation, with president-elect Donald Trump proposing exorbitant tariff barriers in an effort to encourage local industry. 

The consensus among economists and experts is that this populist policy will not work, and will either have little effect on US consumers or at worst a negative one. But while the US may suffer fallout from increased protectionism, trade tariffs and an aversion to free trade, it still has the sheer economic mass and sophisticated local industry to survive such bad policy.

SA, on the other hand, is a developing country that needs access to global markets to drive economic growth and prosperity. Developing economies have not benefited from protectionism. Argentina’s attempts to guard its local industries with high tariffs, export taxes and currency controls resulted in stagnation, mass inflation and a continued decline in global relevance. Only the election of free marketeer Javier Milei has stopped this slide as the new Argentinian president has slashed protectionist policies. 

Venezuela’s import controls and nationalisation of key industries to reduce dependence on foreign products resulted in undermined productivity, economic vulnerability and over-reliance on oil exports, and a severe shortage of essential goods. Even past forays by the US into protectionism have damaged its development, with the Smoot-Hawley Tariff Act of 1930 worsening the Great Depression.

Japan is often touted as a positive example of protectionism, but this comes from a selective reading of history. Japan’s protectionist policies were meant to establish a strong industrial base in chemicals and steel manufacturing. The fledgling industries of consumer electronics and automobiles was seen as a nuisance by economic planners and were not granted protection. We can see today that it was not the protected industries that thrived, but those that experienced increased difficulties.

Protectionism has damaged SA’s economy severely in the past. A 2011 paper, Cumulative Costs of Trade Protection in the SA Economy, by Dr Andreas Freytag, identified “old interventionist tools” — tariffs and protectionism — as causing enormous harm to the SA economy. 

As of the 2011 study the most protected product groups were textiles, clothing, footwear, food and beverages. Even by 2011, and far more pronounced now, it is clear that the average applied tariff of 22.4% on clothing and textiles has not protected SA’s clothing industry from imports. The local textile industry has faced continual decline since the 1990s despite these protections. Even with tariffs added on, imports are still cheaper. 

If these protections were to be removed, SA consumers, who are already purchasing imports, would save money they could then spend more widely, or save responsibly. Local industry would need to adapt to survive — a move that combined with general liberalisation might help the dying industry innovate effectively and resurrect itself.

Protectionism, what the government terms “localisation”, hurts consumers and coddles industry. Coddled industries are not exposed to the proper incentives to grow and prosper. If they survive it is only due to costly regulations and tariffs that hurt the people who matter — the citizens of a country. 

The goal should not be to play a resentful game against imports. It should be to produce enough of our own wealth that we can purchase the goods we need from abroad. No country can survive isolated economically; even the strongest economies that isolate themselves eventually wilt away and starve. 

Rather than embrace protectionist policies, the SA government should be working towards increased free trade, and augmenting trade. Non-tariff barriers to trade need to be eliminated. The most notable of these is port congestion. This can be solved through transparent and mass privatisation of port infrastructure, alongside the creation of free economic zones along SA’s coast to encourage local development of new ports.

Localisation requirements must be scrapped, and mass deregulation of the import-export sector must occur alongside a complete audit and close monitoring to combat corruption and theft. 

Tariffs must be cut as much as possible, if not completely. Government should enter into beneficial trade agreements with positive economic partners such as the US and EU to encourage mutual exchange of goods. 

Regulations that hinder the creation and growth of businesses, and those that exist to benefit one over the other, must be scrapped. A level legislative playing field ensures that only the most deserving enterprises prosper. 

The freer SA’s economy becomes the wealthier this country will become. And as wealth grows jobs will be created and poverty will diminish. Like trade, it’s a win-win. Government must just have the will to make the right changes.

• Woode-Smith, an author, economic historian and political analyst, is a senior associate of the Free Market Foundation. He writes in his personal capacity.