Why trade policies matter

Why trade policies matter

Johan Fourie is associate professor in economics at Stellenbosch University.

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Let’s assume that Katlego earns R8 000 a month and spends R1 000 on clothes. 

Katlego loves fashion. It’s a way to express herself and a requirement at her job as receptionist. 

It also signals to a future partner that she is upwardly mobile. 

She wants a better life than her parents had.

What can government do to make Katlego’s aspirations a reality? 

There are many options. Reduce VAT and income tax – although this isn’t likely to matter much. 

Intervene directly by building better infrastructure: perhaps reduce the fees of Katlego’s train tickets to work, or simply improve the efficiency of the trains to ensure they run on time. 

Or more indirect measures: establish a farmer support programme that cuts the price of food; or implement measures to combat the anti-competitive behaviour of an agro-processing cartel in order to reduce artificially high food prices. 

There are many other examples but, truthfully, they would have limited impact on Katlego’s budget.

But what if there was one policy – one that can be implemented with a minister’s signature – that would increase Katlego’s budget by 5%? 

In fact, it would help all South Africans – but especially low- to middle-income earners that spend a large proportion of their meagre budgets on fashion retail in the formal sector.

There is such a policy. 

It is called an import tariff. 

And we need to scrap it.South Africans currently pay 40% to 45% more for clothes than we should. 

Of the R1 000 that Katlego spends every month, R400 goes to the government as a tax. (Note: This excludes an additional VAT of 15%.) So, Katlego could increase her monthly expenditure by R400, or 5% of her income, if there was no import tariff on clothes.

Protecting textile and clothing manufacturers dates back to the 1920s when the Pact government – a mixture of Afrikaner nationalists and English labour – wanted to protect jobs in industries that were suffering the consequences of a depression and mass unemployment (of whites). 

It’s been with us ever since. 

Each successive ANC regime has called for the liberalisation of trade but, despite being considered a sunset industry given SA’s high minimum wages, textile and clothing maintain high import duties.Make no mistake: it’s not only this industry that receives protection. 

We pay tax of roughly 20% on furniture, 22% on imported cars, and 30% on shoes. 

Several food categories are above 30%.

In 2008, the government brought some of the world’s leading economists to SA to identify economic policies that would move us forward. 

Recommendation 5 of this document read: “SACU trade policies should be reformed using a strategy that focuses on liberalising input tariffs so that tariffs on final products can also be reduced and exports stimulated through the creation of a competitive input base. 

The tariff structure should be radically simplified using just two or three rates although a limited number of temporary measures could also be implemented for infant industry and safeguard purposes.”

It remained a recommendation on a piece of paper. A year later, Jacob Zuma’s more populist economic policies put trade liberalisation on the back burner. 

It’s almost as if – a decade later – the rest of the world has begun to copy these populist ideas: build a wall against foreigners and block the trade routes that bring in their manufactured products.

Economists are partly responsible for this reversal in trade liberalisation globally. 

A long-held belief was that trade liberalisation policies were, at least partly, responsible for the post-WWII golden era of economic growth; a period, since the 1950s, also known as the second era of globalisation. 

Yes, major technological breakthroughs, like the container and the internet, meant that trade costs fell substantially. 

But economists also believed that multilateral trade negotiations, which later culminated in the creation of the World Trade Organization and reduced trade tariffs, also contributed to rising levels of global prosperity and poverty alleviation.

Yet over the last decade, trade economists have been downplaying the importance of trade policies. 

Many argued that technological innovations were far more important in explaining the rise in global prosperity. 

Some even argued that trade policies, given the Fourth Industrial Revolution, didn’t matter anymore.

A new paper in the American Economic Review, by four of the world’s leading economic historians, returns the focus to trade policy. 

They use a new dataset of disaggregated import statistics for the UK in the 1930s to show that the protectionist policies of the era – notably, the rapid rise in tariffs as countries tried to insulate themselves from the Great Depression – had a profound impact on imports to Britain, not only in reducing the size of imports, but also shifting imports to less-efficient producers within the Empire (rather than the more efficient producers elsewhere). 

Consumers in the UK lost out big time. 

The paper provides clear lessons for countries like the US and UK that today, almost a century later, are flirting with similar protectionist notions. 

But perhaps there is a lesson for us too. 

President Cyril Ramaphosa is adamant that SA wants to re-engage with an international economy that it has neglected for the last decade. 

That’s fantastic. 

But if he wants to improve the lives of Katlego and millions of other consumers who buy goods that face high barriers at the border, perhaps he should reconsider the advice of the 2008 expert panel and liberalise SA’s trade tariffs. 

Johan Fourie is associate professor in economics at Stellenbosch University.

This article originally appeared in the 21 February edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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