Why trade policies matter

Let us assume that Katlego earns R8000 a month, of which she spends R1000 on clothes. Katlego loves fashion. It is not only a way to express herself and a requirement at her job as receptionist, but it also signals to a future partner that she is upwardly mobile. She wants a better life than her parents had.

What can the government do to make Katlego’s dreams of a better life a reality? There are many things, of course. They could reduce taxes, both on VAT and income, although these are unlikely to matter much to Katlego. They could have direct interventions, like build better infrastructure: maybe reduce the fees of the train tickets Katlego use to get to work each day, or simply improve the efficiency of the trains to make sure it runs on time. Or they could choose more indirect measures of support: maybe establish a farmer-support programme that cuts the price of food, or institute a case of anti-competitive behaviour against an agro-processing cartel, reducing the artificially high food prices. There are many other such examples, but in truth, they would have limited impact on Katlego’s budget.

But what if there was one policy – and one that can be implemented with a minister’s signature – that would increase Katlego’s budget by 5%? In fact, it would increase all South Africans’ budgets – but especially those low- to middle-income South Africans that spend a large proportion of their meagre budgets on fashion shopping in the formal sector.

There is such a policy. It is called an import tariff. And we need to scrap it.

South Africans currently pay 40-45% more for our clothes than we should. Of the R1000 that Katlego spends on clothes every month, R400 of that goes to the government as a tax on her clothes. (Note: this does not include an additional VAT of 15%.) So Katlego could increase her monthly expenditure by R400 – 5% of her income – if there was no import tariff on clothes.

Protecting textile and clothing manufacturers dates back to the 1920s when the Pact government – a mixture of Afrikaner nationalists and English labour – wanted to protect jobs in industries that were suffering the consequences of a depression and mass unemployment (of whites). It’s been with us ever since. Each successive ANC regime has called for the liberalisation of trade – but the textile and clothing industry, even though it is considered a sunset industry given South Africa’s high minimum wages, has maintained its high import duties.

Make no mistake: it is not only the textile and clothing that receives protection. We pay roughly 20% on furniture, 22% tax on imported cars, and 30% on shoes. There are several food categories which are above 30%.

In 2008, the government brought some of the world’s leading economists to South Africa to identify the economic policies that would move South Africa forward. Recommendation 5 of this document read: ‘SACU trade policies should be reformed using a strategy that focuses on liberalizing input tariffs so that tariffs on final products can also be reduced and exports stimulated through the creation of a competitive input base. The tariff structure should be radically simplified using just two or three rates although a limited number of temporary measures could also be implemented for infant industry and safeguard purposes.’

And that is what it remained, a nice recommendation on a piece of paper. One year later, Jacob Zuma’s more populist economic policies meant that trade liberalisation took a back seat. It’s almost as if – a decade later – the rest of the world has begun to copy these populist ideas: build a wall against foreigners and block the trade routes that bring in their manufactured products.

Economists are partly responsible for this reversal in trade liberalisation globally. For long the belief was that trade liberalisation policies were, at least partly, responsible for the post-World War II golden era of economic growth, a period, since the 1950s, that has also been known as the second era of globalisation. Yes, major technological breakthroughs, like the container and the internet, had meant that trade costs fell substantially, but economists had also believed that multi-lateral trade negotiations that later culminated in the creation of the World Trade Organisation and reduced trade tariffs also contributed to rising levels of global prosperity and poverty alleviation.

Yet over the last decade, trade economists had begun to downplay the importance of trade policies. Many argued that the technological innovations were far more important than trade policies to explain the rise in global prosperity. Some even argued that the trade policies, given the Fourth Industrial Revolution, did not matter anymore.

A new paper in the American Economic Review, by four of the world’s leading economic historians, returns the focus to trade policy. They use a new dataset of disaggregated import statistics for the United Kingdom in the 1930s to show that the protectionist policies of the era – notably, the rapid rise in tariffs as countries tried to insulate themselves from the Great Depression – had a profound impact on imports to Britain, not only in reducing its imports in size, but also shifting imports to less-efficient producers within the Empire (rather than the more efficient producers elsewhere). Consumers in the UK lost out big time.

The paper provides clear lessons for countries like the US and UK that today, almost a century later, are flirting with similar protectionist notions. But perhaps there is a lesson for South Africa too. Cyril Ramaphosa is adamant that South Africa wants to reengage with an international economy that it has neglected for the last decade. That is fantastic. But if he wants to improve the lives of Katlego and the millions of other buyers of clothes and other goods in South Africa, goods that face high barriers at the border, perhaps he should reconsider the advice of the 2008 expert panel and liberalise South Africa’s trade tariffs.

*An edited version of this was first published in Finweek on 21 February. Image source: N. Currier and J.M. Ives (1892), Library of Congress Prints and Photographs Division/Wikimedia Commons.