What did the content creator, architect and citrus farmer say to the South African policymaker?

Maintain our preferential access to the US market

International trade involves people and firms buying and selling goods and services between countries. One of the main reasons it’s good for economic growth is that it allows nations to specialise in what they’re best at. One country might, for example, have a lot of fertile lands for growing citrus, another might have a rich oil supply, and another might have highly skilled workers able to produce smartphones. By trading internationally, these countries can each focus on producing what they’re best at and then trade for what they need.

But what if one country – like the United States – is better at everything? Would it make sense for them to still trade internationally? Yes, said the nineteenth-century British political economist David Ricardo. Trade benefits all parties if countries specialise in what they are relatively better at. Even if it takes fewer people to produce citrus and smartphones in the US compared to South Africa, it would still make sense for both countries to trade those goods in which they are comparatively better, presumably citrus in South Africa and smartphones in the United States. This, the idea of comparative advantage, is one of the most profound ideas in economics. And it is often also the least understood.

Take debates around AGOA, the African Growth and Opportunity Act established by the United States in 2000. South Africa’s alignment with Russia (or non-alignment, depending on who you listen to) has frustrated US leadership to the extent that South Africa’s participation in AGOA is under threat. Removing South Africa from AGOA would be devastating for the South African economy, as many economists have reiterated, as it would deny South African exporters duty-free access to the large and wealthy US market. The graph below demonstrates just how important the US economy is to South African exporters, especially compared to the Russian economy.

Yet the general sentiment, if you read between the political lines, is one of indifference. But the truth is that almost no export sector will escape the harsh punishment of relinquishing AGOA. The mining, motor vehicle and farming industries, to name just some of the important ones, will all be affected. And many of these employ thousands of workers.

Take citrus, for example. After Spain, South Africa is the biggest international exporter of citrus. According to Justin Chadwick, CEO of South Africa’s Citrus Growers’ Association, citrus is South Africa’s number one farm export and largest employer, creating around 140 000 jobs, many of which are in rural areas where the industry is often the only significant employer. ‘The current US tariff on citrus for countries without any trade arrangement is within the range between $1.5/kg to $2.5/kg. That would be approximately between R30 and R50 per kg but, of course, currently South African citrus does not face those tariffs in the United States’, says Dr Mmatlou Kalaba, the director of the Bureau for Food and Agricultural Policy. Were those tariffs enforced, the shock would reverberate across many of South Africa’s small, rural towns.

Competitive pressure is another reason why trade benefits a country. Businesses face more competition when goods and services are traded freely between countries. This encourages them to improve their products, reduce their prices, and innovate to stay competitive. It might seem tough for businesses, but for the overall economy, this process tends to boost efficiency and productivity, which are key drivers of economic growth.

South Africa’s experience joining the global economy in the 1990s is a case in point. For much of the apartheid period, South African businesses faced little global competition because of sanctions. Because of South Africa’s relatively small market, many industries consisted only of a few firms – known as oligopolies – that further reduced price competition, innovation and efficiency. When South Africa democratised in 1994 and, in the following year, joined the World Trade Organisation, things started to change. Suddenly international firms could enter the South African economy and often outcompeted local firms that had become complacent. The result? South African consumers benefited from access to new, higher-quality goods at lower prices. To become more efficient, businesses had to adopt new business plans, which often meant reducing their bloated workforce. That is why the early 2000s was characterised by what economists called ‘jobless growth’: even though the economy was growing, creating new jobs, jobs in other sectors were being shed by oligopolistic firms trying to remain competitive.

Fast forward two decades. The South African economy, now with three decades of ‘openness’, has remained surprisingly resilient despite the collapse of many of its institutions and infrastructure. The Competition authorities, one of the few effective government agencies, have ensured a competitive business landscape. (If anything, the Competition Commission has sometimes been too zealous in its application of competition law, introducing new criteria that have little to do with competitiveness and more with what may be called fairness or historical justice. See my earlier post on this topic.) But one thing that has changed is the exchange rate: two decades ago, one dollar was worth seven rand. Now it is eighteen and counting. This creates opportunities for exporting firms, another reason why access to large consumer markets like the US is critical for South Africa.

The good news is that it is not just large firms that can benefit from this weaker exchange rate. Consider, too, that 3.1 million South Africans had access to the Internet in 2003. Today, it is 45.3 million. This allows many more of us to sell our services abroad, earning in dollars, and living in rand. And there is evidence that this is happening. A report by the United Nations Conference on Trade and Development (UNCTAD) earlier this year showed that of the major global economies, South Africa witnessed by far the largest increase in services exports in quarter 3 last year – an increase of 43% year-on-year. Exports of goods, by contrast, declined by 6%.

What services South Africans export is difficult to tell, but they range from large firms selling business process outsourcing services (like those offered by iContact) to South African architects designing houses for rich Americans, to local artist The Kiffness creating massively popular YouTube clips. Master KG’s Covid-hit Jerusalema has now been viewed more than 565 million times. A rough calculation suggests that the song has earned the South African DJ more than $10 million, or almost R200 million, at the current exchange rate.

The lesson is clear: economies flourish when they harness the advantage of what they do best and use trade as the conduit for growth. To profit from a weak and depreciating currency, South African entrepreneurs, from large citrus farmers to digital content creators, will have to rely on our policymakers to do the right thing and ensure that the global economy remains open and accessible for South African-produced goods and services.

An edited version of this article was first published on News24. Image created with Midjourney v5.2. Data by Codera Analytics.