Whoever becomes minister of trade, industry and competition should start by slashing import tariffs across the board.
As I write this, the DA and the ANC are slugging it out behind closed doors over whether the former should occupy the ministerial seat of the Department of Trade, Industry and Competition (DTIC).
Of course, I want the DA to win this fight. After all, the ANC had already conceded this position in its offer to the DA on Tuesday, only for Ramaphosa to respond to a DA counter-offer by reneging on the deal and offering the DA the lesser portfolio of Tourism instead.
This move was no doubt encouraged by the SACP, the unions, and the central-planning leftists in the ANC, who must have been upset at the prospect of losing a position so central to “disciplining capital”, as the Marxists call it.
“Monopoly capital”, says the ANC, “made up of local and foreign corporations controlling large chunks of the economy, [is] the primary enemy of the NDR [National Democratic Revolution].”
And, as the Freedom Charter says, “The mineral wealth beneath the soil, the banks and monopoly industry shall be transferred to the ownership of the people as a whole; All other industry and trade shall be controlled to assist the well-being of the people”.
Levers
The ANC has always sought to control the economy, in pursuit of its varying social and political objectives, and the DTIC offers powerful levers of control.
Whenever one company seeks to acquire another, it must humbly ask the permission of the Competition Commission, which can, and routinely does, impose all sorts of arbitrary conditions upon a proposed merger or acquisition, such as a promise not to lay off any staff, or to cede a share to government cronies, or commit to certain fixed investments.
All this does, besides impeding the efficiency of a company’s operations, is to create numbers that might look good the next time the President has to make a State of the Nation Address.
This is how the ANC gets to brag about having created X number of jobs, even while unemployment statistics go stratospheric.
Another lever under the control of the DTIC is tariffs. Every time someone seeks tariff protection from the DTIC (or more accurately, the International Trade Administration Commission of South Africa, ITAC), the government can, and does, stipulate conditions.
Those conditions can involve surrendering ownership shares, forced capital investments, commitments to produce certain volumes, promises to maintain certain prices, or undertaking to increase employment numbers.
Failure
Yet the benefits of trade tariffs have yet to be documented.
Despite decades of tariff protection, the domestic automotive industry remains uncompetitive on a global basis, while substantially raising prices for motor vehicles for South African businesses and consumers.
The same is true for the textiles industry. Despite decades of protection, for which ordinary South Africans shelled out a 40% premium on imported clothing, the industry remains fragile, uncompetitive, and only a negligible contributor to employment.
Master plans for industries and extensive subsidies and tariff protection have not led to industrialisation, rising manufacturing output, or declining unemployment numbers.
Tariffs have failed. They always fail.
Harm
When the International Monetary Fund analysed the impact of trade tariffs in the US, it found “mostly adverse consequences of protectionism, in aggregate and across sectors and regions”, and noted that “[t]ariff shocks depress trade, investment, and output persistently”.
The Joint Economic Committee (JEC) of the US Congress found the same: “Research shows that tariffs eliminate more jobs than they create”.
Steel and aluminium import tariffs imposed in March 2018 were predicted to add about 26 000 jobs in the US steel and aluminium manufacturing sectors. Success, right?
No. They were also predicted to cause a loss of 500 000 jobs in the rest of the economy, thanks to higher prices.
“The harm of tariffs extends to every sector of the economy”, the JEC found.
In a study by Aaron Flaaen and Justin Pierce of the Federal Reserve Board, the authors write: “We find that the 2018 tariffs are associated with relative reductions in manufacturing employment and relative increases in producer prices. For manufacturing employment, a small boost from the import protection effect of tariffs is more than offset by larger drags from the effects of rising input costs and retaliatory tariffs. For producer prices, the effect of tariffs is mediated solely through rising input costs”.
And further: “While one may view the negative welfare effects of tariffs found by other researchers to be an acceptable cost for a more robust manufacturing sector, our results suggest that the tariffs have not boosted manufacturing employment or output, even as they increased producer prices.”
Unilateral
Trade liberalisation agreements benefit countries irrespective of whether they are developed or developing countries. In fact, bilateral trade rises more when agreements are made between only developing countries.
One can go further: by dismantling trade barriers unilaterally, most of the benefit of trade liberalisation can be obtained from the growing volume of trade between developing countries.
Trade tariffs always come at a cost to consumers. By imposing import tariffs on a particular product, local producers are free to either produce lower quality products at a price point lower than the import price plus the tariff, or produce products of equal quality at a price equal to the import price plus the tariff.
This increase in the price of domestic production has an effect throughout the supply chain. If automobile production is so protected, then every business that depends upon automobiles has higher input costs, which leaves it with lower profits, which limits its ability to invest, grow and employ more people.
If steel production is so protected, then every business that uses steel has higher input costs.
If a foreign country imposed taxes on exports, we would complain bitterly about the high prices we have to pay for those products. Why would we want to do this to ourselves?
Fresh look
Trade tariffs do not work. They destroy more value than they create. They destroy more jobs than they create. They stifle economic activity and lower economic growth.
An import tariff isn’t a tax on foreign producers. It is a tax on domestic consumers, and an entirely unnecessary one, at that. Even the revenue that tariffs generate can be replaced by greater tax revenues from lower prices and greater economic activity.
So, whoever ends up being the minister in the DTIC, let’s hope that they bring a fresh new look to the portfolio, starting with slashing import tariffs.
No doubt the beneficiaries of such protection will complain bitterly and threaten to disinvest, but let them. The broader benefits of free trade will accrue to everyone else. The rising tide of economic growth will lift all boats.
[Image: Market.webp – A late medieval market scene. Unknown artist. Public domain.]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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