President Cyril Ramaphosa is fully convinced of the economic merits of a ‘buy local’ programme. So was former US president Donald Trump, and an odium of politicians around the world. Here’s why they’re wrong.
Ever since his first State of the Nation Address (SONA) in 2018, Cyril Ramaphosa has extolled the virtues of buying local. He committed government to increasingly procure products from local vendors.
In SONA 2021, he made local procurement the second of four pillars of the government’s post-pandemic economic recovery plan, alongside a massive infrastructure roll-out, an employment stimulus, and expanding electricity generation capacity.
Speaking at the Proudly South African Summit and Expo 2021 on 9 March, he promised to combat the ‘illegal’ importation of goods (that is, imports that evade import tariffs), and introduce local procurement thresholds for the public sector in 27 designated industry sectors.
‘Whether public or private, we need to appreciate that choosing to procure locally through and across value chains is a solid investment in our economic recovery,’ he reportedly said, adding that local procurement grows the economy, creates jobs, broadens markets and creates numerous opportunities for business expansion.
Superficially, this all sounds very plausible. But is it really better for the economy to buy from domestic producers than to import goods?
The moral case
One must assume that the injunction to ‘buy local’ is intended to override the usual signals of price and quality. If the locally produced goods in question were of sufficient quality and competitively priced, they would be preferred without any additional encouragement or incentive.
Let’s say two identical widgets are for sale; one produced by a local manufacturer and sold for R100, and one imported and selling for R90. What, if anything, would be the benefit of spending the extra R10?
Proponents of the local procurement idea would say that the money stays in South Africa, that it benefits the South African producer instead of allowing foreign producers to ‘extract profits’ from the country, or that it impacts favourably on the country’s balance of trade.
The benefits of protectionism are concentrated and easy to see, but the costs are harder to discern. One can start with the buyer, however. None of these benefits accrues to the buyer, who actually pays for them.
In the case of public sector procurement, that means that the taxpayer foots the bill for the additional expense of favouring a less efficient local producer over a more efficient foreign producer. (Don’t forget that taxpayers aren’t limited to those rich enough to pay income taxes. Everyone pays VAT, and the fuel levy is reflected in the price of everything poor people buy.)
In the case of private buyers, they are exhorted to pay more (and if import tariffs have been imposed, forced to pay more) than they otherwise would have for the same or inferior goods.
Why, for example, should a poor mother pay 40% extra for all her childrens’ clothing just because the local textile industry is unable to compete with those of Vietnam or China? Why should she spend more on chicken, simply to keep cheaper imports from competing with the local chicken industry?
What she would have saved by buying cheaper imports could have been spent on food, education, clothing, healthcare – things poor children need rather more urgently than knowing that they have helped uncompetitive producers escape the pressures of market competition.
The money that is spent on artificially propping up inefficient industries could have been spent on vibrant, efficient industries with far greater potential to create jobs and build the economy.
So there’s a moral case against buy-local programmes and restricting imports by imposing quotas and tariffs.
The perils of autarky
Ramaphosa is far from the only politician who advocates ‘buy local’ programmes. Apartheid-era presidents like John Vorster and P W Botha were big promoters of ‘Koop Suid-Afrikaans’ campaigns.
US president Donald Trump was also a big fan of buying locally. On 14 May 2020 he told Fox News that ‘we shouldn’t have [global] supply chains, we should have them all in the United States. We have the companies to do it.’
Yet how is this view consistent with the notion, developed long ago by economists such as Adam Smith and David Ricardo, and borne out by experience since, that international trade benefits all countries by expanding the division of labour beyond country borders?
The Mercatus Center has a great primer on the benefits of free trade, as opposed to protectionism and domestic procurement mandates.
It explains that free trade increases access to higher-quality, lower-priced goods. It results in more growth, by reducing domestic manufacturers’ input costs. It improves efficiency and innovation, resulting in higher wages in more productive industries, more investment in infrastructure, and a more dynamic, job-creating economy. It drives competitiveness, instead of protecting inefficient industries that can produce only low-quality, high-priced products.
Most importantly, free trade is fair. Government intervention of any sort creates a non-level playing field, in which some suppliers become beneficiaries of government tariffs, subsidies or spending, while others miss out. No government is well-positioned to pick winners. Only the aggregate choices of individuals can do that.
Imagine if every country were to turn inwards and promote self-sufficiency at the expense of imports. What would happen to the South African economy then? Our reluctance to import from other countries would be matched by their reluctance to buy our exports. Even large economies would be hurt by such policies. A small economy like South Africa would be crippled.
Balance of trade
A widespread belief exists that trade deficits are bad for a country’s economy. An excess of imports over exports, they argue, must be paid by accruing debt or selling assets. This is a misconception.
In fact, there is a problem with the very notion of a trade deficit. No party would voluntarily engage in a transaction unless they believed it would make them better off, so both parties to a transaction benefit. Neither incur a ‘deficit’.
The idea of a trade balance at national level, which can be in ‘surplus’ or ‘deficit’, is merely an accounting fiction. They are expressed only in terms of the money that changes hands for imports and exports. They do not reflect the actual value of the goods or services traded, or the benefits that individual importers or exporters derive from the trades. In themselves, they can say nothing about whether a particular trade benefits the economy or not.
Not only the Mercatus Center, but economists across the political spectrum agree that trade deficits are not, in and of themselves, a great problem. The US, for example, ran stellar trade surpluses through the Great Depression. Conversely, for most of that country’s post-war growth, it ran large trade deficits.
Neither in theory nor in practice does running a trade deficit impact negatively on GDP growth. On the contrary, larger trade deficits – that is, imports exceeding exports – signal a country’s economic strength, and are usually correlated with higher GDP growth.
When polled on their opinion on the statement, ‘A typical country can increase its citizens’ welfare by enacting policies that would increase its trade surplus (or decrease its trade deficit)’, economists almost unanimously disagreed.
In fact, trade surpluses have an inflationary effect. If a country running a trade surplus wishes to avoid rising prices, it needs to reinvest the proceeds of its international trade in the countries with which it trades. So running a trade deficit actually stimulates inward investment.
This leads to the rather more complicated question of what a country does with its capital inflows. Not all investment is equal. Propping up asset-price bubbles, or bloated public spending, for example, are not good ways to spend capital inflows. Direct investment into productive industries, by contrast, is. But that question goes far beyond whether or not running trade deficits is inherently harmful. It is not.
These questions are not new. Adam Smith, in his magnum opus, Wealth of Nations, wrote: ‘It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. … What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.’
It is folly for a government to intervene to support the domestic production of goods that are more efficiently produced abroad. Other than the producers of such goods, nobody benefits from such support.
Investment in any country should be directed at goods for which domestic production is efficient and competitive, and the government has no role to play in orchestrating the market to do so.
A ‘buy local’ programme may, in the short term, support jobs in sectors that otherwise would not have been able to support them. This is why populist politicians with little economic sense, as well as special interest groups, love them.
In the long term, however, it imposes excess costs on the economy, much of it borne by poor consumers without a voice in economic policy-making. This has predictably negative results for both employment and general prosperity.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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