The minister of trade, industry and competition, Ebrahim Patel, is quietly imposing binding commitments upon local producers in return for tariff protection.
A local smartphone manufacturing company, opened with great fanfare by president Cyril Ramaphosa in 2019, bit the dust just over two years later, its assets auctioned off to repay creditors.
A local electronics manufacturing company, opened with great fanfare by former Minister of Trade and Industry (and diehard communist) Rob Davies in 2018, bit the dust less than two years later, its assets auctioned off to repay creditors.
If the performance of state-owned enterprises weren’t enough, this is the business acumen of government on full display.
Redirecting capital by taxing productive private ventures and people, socialists in government pour it down financial black holes. They buy only extravagant luxury consumables for a connected crony or two, a few temporary and unproductive jobs, and a short-lived patriotic frisson.
This state intervention in the economy makes the country poorer, but making the country poorer is official government policy.
The successor to Rob Davies is an equally committed socialist and unionist, Ebrahim Patel. What qualified him for the job is the disastrous economic development South Africa enjoyed during his two terms as Minister of Economic Development from 2009 to 2019.
His union experience in the heavily protected and chronically inefficient South African clothing and textiles industry polished his turd of a CV.
Patel was no doubt the inspiration for Ramaphosa’s ‘local is lekker’ stunt at this year’s State of the Nation Address.
Recommitting the ANC government to protecting and increasing local production, he bragged about wearing locally manufactured clothes, ironically demonstrating that he would normally buy heavily taxed imported clothes, a luxury that most of South Africa’s long-suffering citizens cannot afford.
Patel, like Davies before him, keeps advancing the ever-growing protectionism of the country’s trade policy, as the political head of the Department of Trade, Industry and Competition (DTIC).
1490 turgid pages
The Customs & Excise Tariff Book now consists of 693 pages containing thousands of line items detailing tariffs levied on imports from various trade blocks.
In addition, there are 21 pages detailing 90 items on which a special ‘anti-dumping’ or ‘countervailing’ duty is levied, to ‘correct’ the prices of goods that the government believes are either priced below cost, or subsidised by the exporting country.
Such items include chicken pieces from the USA, garlic from China, cement from Pakistan, glass from all over the world, ropes and cables from various countries, stainless steel sinks, rakes with more than eight prongs, and forks of over 15cm in length. Many of these duties specifically exclude specific foreign companies, for mysterious reasons.
All in all, the Schedules to the Customs and Excise Act amount to 1490 turgid pages of government intervention in the market.
It now emerges that this is not where Patel & Co’s perfidious market-manipulation ends.
In an interview with Chris Hattingh, newly appointed senior policy analyst at the Centre for Risk Analysis, Donald Mackay, founder and director of XA International Trade Advisors, highlighted a contract that companies are expected to sign with the DTIC before the International Trade Administration Commission (ITAC) of South Africa will consider an application for an anti-dumping tariff to be implemented.
Such tariffs are considered ‘in order to ensure the competitiveness, building and development of [a local industry sector’s] capabilities’.
It seems likely that a similar commitment would be required for applications for countervailing duties, tariff rebates, and safeguard measures (‘a remedy or procedure for use in response to disruptive competition’, as if competition isn’t supposed to disrupt markets).
Nowhere in the International Trade Administration Act is a provision made for concluding such a contract, but the discretion which the ITAC exercises makes it a de facto, rather than de jure prerequisite.
The contract starts by committing a company to limiting price increases to reflect cost changes only, and to not increase profit margins by more than the consumer price index every year. In addition, it commits to passing any improvements in economies of scale resulting from the tariff protection on to customers.
This completely undermines a company’s fiduciary obligation to shareholders, which is to maximise profit.
This inability to increase profits undermines the market function of prices. Instead of rising prices signalling to competing producers that a market segment requires more efficient competition, artificially depressed prices will keep competition out of the sector, ensuring that the company or companies that needed protection in the first place will remain the only producers in the market.
Employment and investment promises
The applicant company also has to undertake to create a specific number of new jobs within three years, at given wages and salaries, and it has to implement a number of skills development initiatives.
It also undertakes not to retrench staff in response to external economic shocks such as Covid-19 lockdowns.
It further needs to promise to invest certain amounts in plant, machinery and buildings, as well as into research and development.
The contract does not specify which profit margin may not be increased, so presumably, operating profit is expected to increase, but must be reinvested in such a way, or compensated for by lower prices, so that net profits do not rise in real terms.
The applicant company must report its compliance with its commitments to the DTIC on a quarterly basis – more frequently than it is required to report to shareholders.
Dead hand of the state
In this manner, Patel extends state control over the private sector.
Instead of viewing job creation, capital investment, skills development and price levels as indicators emerging from a well-functioning economy, Patel believes that they are levers that can be pulled to engineer fake success indicators for the ANC’s state-led, socialist ideology.
Requiring companies to increase their costs does not improve their efficiency. Instead, they will likely need tariff protection forever, just like the textiles sector from which Patel hails has been selling over-priced, sub-standard products for decades, yet is unable to survive without tariffs on imported clothing.
Foisting future commitments upon companies also reduces the flexibility they have to face future economic shocks. This makes it more, rather than less, likely that protected companies will fail in future.
As a unionist, Patel has always fought hard to curb the profits and increase the costs of private sector companies, and that is exactly what these contracts do. This is the exact opposite of what is needed to stimulate robust economic growth and organic job creation.
Government intervention in the private sector is a curse rather than a blessing. Patel and his ilk have proven that they have no idea how businesses operate, how to make them profitable, how to create jobs, or how to produce real economic growth.
Patel’s extra-legal contracts extend the dead hand of the state into sectors that are already in distress.
If Patel were a doctor, he’d choke patients struggling to breathe, in the insane belief that this would cure them.