GRACELIN BASKARAN: SA’s motor export industry at risk as the West goes green

Historically, the EU and UK have been a decade ahead of the US on climate change policy planning. But that gap began to narrow when Joe Biden took office and began adopting an ambitious reform agenda, including the recent Inflation Reduction Act, which is providing $385bn to address climate change.

Earlier in November the Democrats achieved big midterm election victories that will usher in more climate reforms at the state and national levels. But not everyone will be a winner because of it. Given the changes that are coming, SA needs to consider a faster transition to electric vehicle manufacturing, to avoid a hard blow to its export basket.

In Massachusetts the Democrats took gubernatorial control. Newly elected governor Maura Healey will lead the development and implementation of ambitious climate policies. She campaigned on the promise to be the country’s most aggressive governor on climate change.

Healy will drive the state’s efforts to reduce greenhouse gas emissions by at least 85% by 2050 by leading the implementation of a clean energy act, passed earlier in 2022. By 2035 all new cars sold in Massachusetts must run on electric or hydrogen power. California and Massachusetts — which are home to more than 46-million Americans — have adopted bans on petrol and diesel-powered vehicles.

Democrat wins in other jurisdictions are likely to cause similar climate legislation that could accelerate the transition to electric vehicles. Democrats took legislature majorities in Michigan and Minnesota, and gubernatorial control in Maryland. They thus now hold gubernatorial and legislature control in all three states. The combination of these five states exceeds that of SA, so consequences will be felt by carmakers.

Catalytic converters

SA’s car industry remains vulnerable to exogenous policy changes given that it’s a large exporter of vehicles and car components. Over the past five years catalytic converters have accounted for about of 52% of SA’s car component exports — an annual average of $1.6bn.

A catalytic converter turns toxins generated in the engine into water and substances that are less dangerous to breathe in. But catalytic converters are not used in electric vehicles given that they are battery operated and do not emit exhaust fumes.

SA exports 89% of its catalytic converters to the EU and the Americas, so now that the EU and an increasing number of US states are banning non-electric vehicles the car components industry faces a huge risk. 

SA also exports nearly two-thirds of its vehicles, all of which are conventional petrol or diesel models. A quick look at the country’s key trading partners and a red flag goes up. The UK is the biggest importer of vehicles manufactured in SA — but it has also banned all conventional petrol and diesel vehicles by 2030, and all hybrid vehicles by 2035. Seven of the other countries in the top 10 are from the EU, which has approved a ban commencing in 2035.

The US could be seen as a potential growth market in light of the African Growth and Opportunities Act. It was first signed by then president Bill Clinton in 2000. African countries were given a competitive edge by being given unilateral duty-free exports for 6,500 products to the US. At present 95.5% of vehicles exported from SA to the US go through the act.

Products eliminated

Though the act has been extended twice since 2000, most recently until 2025, amendments have been made along the way. For example, during the Trump era tariffs were imposed on key steel and aluminium products, and duty-free access was suspended for apparel imports from Rwanda.

The act is up for renewal in 2025, and if the Democrats stay in power we may see a “greening” of eligible tariff lines, such that products in high-emissions value chains may be eliminated. Electric vehicles may be required for leveraging the act in the car sector.

Given this, the SA car component and vehicle manufacturing sectors are likely to suffer a blow in the not-too-distant future as electric vehicle policies in the US, EU and UK are all set to go into effect at about the same time. If the momentum behind such measures continues to pick up pace globally, as it has over the past few years, the consequences will be amplified.

The question for the SA private sector and policymakers is when (if?) the country will decide to catch up. If it doesn’t, it could lead to the loss of 500,000 jobs and a key source of export revenue.

• Dr Baskaran (@gracebaskaran), a development economist, is a bye-fellow in economics at the University of Cambridge.