The steel industry blames cheap imports for its woes, as government officials prepare a new wave of protectionism, at the cost of consumers.
Master Plans kill industries. Pick a Master Plan, concocted by the Department of Trade Barriers, Deindustrialisation and Anti-Competition (DTIC) in collusion with big business and labour unions, and I’ll show you an industry that would die if it wasn’t propped up by the dead hand of government.
The DTIC’s Master Plans are premised on the mistaken belief that government-led industrial planning works better than free-market competition and private-sector innovation. It doesn’t.
They assume, despite the evidence, that generous public investment, favourable tax treatment, protectionist import duties, localisation requirements, transformation mandates, and government micro-managing can invigorate industries, thus creating export revenues, employment and “inclusive growth”. They cannot.
Inefficient and uncompetitive
Even if they succeed in their stated aims, they would merely prop up inefficient and globally uncompetitive companies at the expense of the customers of those industries and the tax-paying citizens of South Africa. Even if they succeed, they’re bad policy, because of the negative downstream effects.
But they’re not even succeeding at their stated aims. There are Master Plans for the commercial forestry sector, for the poultry sector, for the retail, clothing, textiles, footwear and leather value chain, for the sugar value chain, for steel and metal fabrication, for the cultural and creative industries, for the furniture industry, and for the automotive industry.
And as I’ve documented before, none of these Master Plans have been particularly successful. In most of these centrally-planned industries, exports have fallen sharply, import protection remains necessary even after decades of support, growth has been stagnant, employment has declined, domestic prices have remained high, and major companies have been closing.
Even in the automotive industry, the jewel in the DTIC’s industrial policy crown, the Master Plan is brutally clear about the impact of 23 years of previous government interventions: “…the evidence suggests a lack of dynamism in the operating environment. Aggregated vehicle production has increased, but production for the local and regional market has declined. While the value of local content has increased on the back of more vehicles being assembled in South Africa, local content levels have declined to below 40%; and there have been declines in aggregate industry employment.”
Instead of picking winners, the government has picked losers, and the people of South Africa are paying premiums for their own vehicles to prop up uncompetitive, inefficient industries that make cars for rich foreigners.
Steel tariff review
With this in mind, what should we make of the comprehensive steel tariff review announced by the DTIC’s International Trade Administration Commission (ITAC) last week?
Despite a Steel and Metal Fabrication Master Plan in effect since 2021, which introduced comprehensive protectionist measures including import tariffs, the steel industry is collapsing.
Witness the closure of Saldanha Steel, and ArcelorMittal shutting down two long-steel mills despite promises of a R1 billion taxpayer bailout.
Now the socialist eggheads at ITAC want to double down on their taxpayer-funded central-planning interventions.
As Ronald Reagan once said, “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.”
ITAC wants to further raise import duties on hundreds of steel and steel-related products, to the maximum level allowable under World Trade Organisation rules. It wants to require importers to obtain import permits for steel products.
These measures will affect nearly 10 000 steel importers, claims Moneyweb, and could mean bankruptcy for scores of companies in the sector, according to its source.
The government also wants to force local producers of coking coal and iron ore to offer their product at a discount to the local steel industry, before being permitted to sell to the export market.
News24 put an excellent headline on their coverage of the story: “Trump-style tariffs and forced discounts: SA’s steel industry faces major shake-up.”
Who would have thought that the South African government would copy the example of its ideological enemy, Donald Trump?
Core misconception
The core misconception with this sort of industrial policy is the presumption that imports are bad for the economy, and exports are good.
This is mistaken. In fact, imports universally benefit an economy. The only benefit of exports is that they earn the foreign currency with which we can buy imports.
Think of exports as work. Why do you work for someone else? Few people work simply because they enjoy working. Why would someone do your books, or design your clothes, or cook your food, or diagnose your disease, or clean your toilets, or build your house?
They work to earn an income. But money is, in and of itself, useless. You can’t eat it. You can’t wear it. You can’t shelter under it. Life isn’t about work, and it isn’t about money.
People work to earn money solely because money buys them the necessities to enjoy life. They work in order to be able to acquire consumer goods. If they didn’t need more consumer goods and services in order to enjoy life, they would work less and enjoy more leisure time instead.
The economic benefits are consumption and leisure. The economic cost to obtain them is work.
Likewise, a domestic economy manufactures things for foreign consumers not for fun, or out of the goodness of their hearts, but to earn foreign currency that can be spent on imports. Trade benefits an economy not because you get to export stuff, but because you get to use export earnings to import stuff. (And if foreign sellers are willing to accept your domestic currency in payment, you get to import even more than you export; so much the better!)
The imports are the economic benefits. The exports are the work that needs to be done to be able to afford them.
Curbing imports hurts the economy
When local manufacturers import steel, the economy benefits from obtaining steel of the best quality and/or lowest price. Curbing imports by forcing them to pay a tariff, or forcing them to buy more expensive domestic steel, hurts those importers.
Higher input cost motivates them to raise their own prices, limits their ability to employ labour, and – because higher prices reduce sales volumes – reduces their profits. It therefore hurts not only their shareholders, but the market for employment, as well as the customers that depend on their products.
In turn, the customers of those importers now pay higher prices for their inputs, reducing their own profitability and forcing them to employ fewer people and raise prices for consumers.
And in their turn, consumers find that their pay-cheques no longer stretch as far, because they pay higher prices for items that contain steel (or are sold by companies that use steel), so they have less left over to spend on other things.
That forgone spending could have grown the economy and created employment elsewhere in the economy, but now, thanks to government’s industrial policy, it never will.
All these downstream effects of import tariffs and protectionist measures are not accounted for in the official data. The government only sees the impact on local steel producers and steel industry employment.
But they never consider any of the downstream effects caused by policies that impoverish importers and consumers. They cannot consider them, because they cannot see those effects.
Frédéric Bastiat described this problem in 1850, when he wrote That Which is Seen, and That Which is Not Seen.
That which is not seen
Bastiat argued that the jobs created by government spending are visible, but the jobs that would have been created by private spending and investment if taxes or tariffs were not so high are not seen, because they never happen.
He emphasises that government spending does not increase employment on balance, because the money taxed away from importers, manufacturers or consumers could have been spent or saved, leading to job creation in the private sector or investment in capital goods that create jobs.
All the evidence from other countries indicates that those downstream costs are too high a price for the protection of an inefficient upstream industry. Without fail, the more free an economy is, the lower trade barriers are, and the faster uncompetitive companies are allowed to fail, the more dynamic and vigorous the economy becomes, and the more prosperity it creates for the people.
All of this hullabaloo about the steel industry involves a few thousand jobs. The Saldanha Steel plant employed 500 people. At the time they said 2 000 jobs were in peril. ArcelorMittal’s mill closures involve 3 500 direct and indirect jobs.
Yet steel tariffs involve 10 000 importers, all of whom employ people, and all of whom will be forced to pay more for steel, whether they import or not. And downstream from them are hundreds of thousands of customers, many of whom employ people, and all of whom will have less disposable income to spend in the economy to support further employment.
And then they wonder why the economy remains sclerotic and stagnant, why unemployment remains stubbornly high, and why so many people remain poor.
Cheap steel
South Africa’s economy is unable to grow not despite the DTIC’s Master Plans and ITAC’s tariff interventions, but because of them. Instead of copying the tariffs and protectionism of that clown in the US, South Africa should drop tariffs. Unilaterally, if necessary, regardless of the economic policies pursued by foreign governments.
To quote the Mercatus Center’s Donald J. Boudreaux: “The long-standing and still-prevalent consensus among economists is that (a) protectionist policies in all but the rarest of theoretical cases impose net damage on the home economy and (b) the bulk of the economic damage of any government’s protectionism falls on its own citizens.”
South Africa’s industries need cheap steel. Government infrastructure products need cheap steel. South African consumers need cheaper products.
Taking measures to make steel more expensive, just to protect a handful of big business shareholders and a few thousand steel workers is short-sighted policy.
Ultimately, the rest of the industry and all consumers – including those steel workers who could be more productively employed elsewhere – end up paying the costs for this inefficiency.
Master Plans make a country poorer, not richer. Master Plans cause less employment, not more. Master Plans raise costs for everyone. Master Plans make an economy less productive, less efficient, less competitive, and less dynamic.
As Henry David Thoreau said: “Government never furthered any enterprise but by the alacrity with which it got out of its way.”
[IMAGE: Knysna Bridge.webp – Steel construction in a double-decker drawbridge that spans a canal connecting a private residential development to the commercial harbour in Knysna, South Africa. Photograph by Dietmar Rabich, 2024. Used under CC BY-SA 4.0 licence.]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
If you like what you have just read, support the Daily Friend.