Trade policy, once viewed as a central pillar of the conversion of the post-apartheid South African economy from an uncompetitive closed system into one that was far more open, competitive and globally integrated, appears now to be on far less certain ground.

In fact, the exact position that trade policy will hold in the country's evolving economic policy remains to be seen, and could even form the basis of tussles and turf wars between the Department of Trade and Industry (DTI), led by Minister Rob Davies, the Department of Economic Development (DED), led by Minister Ebrahim Patel, the National Planning Commission (NPC), led by Minister Trevor Manuel, and the National Treasury, led by Minister Pravin Gordhan.

It is already apparent that trade policy will be subservient to industrial policy as South Africa seeks to rekindle its productive economic sectors. Less certain is whether South Africa is willing to take a step away from liberalisation towards more protectionism.

While the overarching aims of diversifying the economy and creating jobs remain intact, precisely which policy instruments will be used, how, and by whom, are questions that still need to be clarified.

South African Institute of International Affairs (SAIIA) trade expert Peter Draper argues that the "locus of economic decision-making is unclear" in the current political economy in South Africa.

NEW GROWTH PLAN

South Africa's "bold economic vision" as stated in the newly established DED's strategy plan, is to set the country on a "new growth path to inspire and mobilise society". Central to this new path is the focus on the creation of ‘decent work'.

The DED states that this employment-led growth path requires carefully considered policy initiatives as well as better implement- ation of economic programmes. It requires a strong, effective, responsive and democratic developmental State that works closely with both business and organised labour, drawing the resources and talents of South Africa's people into a national consensus.

Noting the increasing inequality in the country, Deputy Minister of Economic Development Gwen Mahlangu-Nkabinde recently stated: "It is clear that we need a new way of thinking going forward. It is indeed time to do things differently. South Africa needs to be a developmental State."

Under the developmental State model, it is likely that the benefits of unrestricted free trade will be questioned. Instead, the policy focus will shift to ensuring coordination between developmental finance institutions, regulatory bodies, government procurement, industrial policy, and macroeconomic policies in order to promote domestic manufacturing.

Trade policy will still be integral, but there is a good chance that there could be a case-by-case reversal of the liberalised tariff regime within the window provided by South Africa's World Trade Organisation (WTO) commitments.

In its medium-term strategy plan for 2010/11 to 2012/13, the DED notes that government policy is to promote a number of key sectors, chosen for their labour-absorbing capacity, technological contribution to the economy, or earning of foreign exchange. Sector policies are directed at dealing with both weak economic performance and large-scale job losses in distressed sectors, as well as regeneration of economic activity in particular regions and areas.

SA's RECENT TRADE POLICY HISTORY

After 1994, South Africa's trade policy changed from import substitution and heavily protected strategic industries, under the period of sanctions, to multilateral liberalisation following commitments made on conclusion of the Uruguay round of the General Agreement of Tariffs and Trade, precursor to the WTO.

Draper explains that South African trade policy, largely championed by then Trade and Industry Minister Trevor Manuel, reached further than commitments made under the Uruguay round and aimed for unilateral tariff liberalisation and deregulation.

In order to stimulate an export-orientated industrial strategy, domestic and inter- national competitiveness was promoted and achieved as quickly as possible, and opening markets to competitive imports was viewed as a way to achieve this.

University of Cape Town School of Economics professor and member of the Harvard Growth Panel Lawrence Edwards argues that trade liberalisation in the 1990s not only increased imports but, by reducing both input costs and the relative profitability of domestic sales, also boosted exports. The growth in noncommodity manufactured sectoral exports as a result of liberalisation was actually faster than sectoral imports.

Edwards adds that this evidence suggests that increased trade liberalisation could further enhance export diversification, and highlights the importance of policies that afford South African firms access to inputs at world prices as well as a competitive real exchange rate.

POLICY REVIEW

But such thinking has not prevailed in parts of the South African government, with the South African Trade Policy Review (TPR) draft document, released in 2009 by the DTI, calling for a strategic review of tariffs to support industrial development.

The TPR also argued that the process of trade liberalisation had not transformed South Africa's production and exports away from natural resources.

Unilateral trade liberalisation is, thus, viewed as having failed, evidenced mainly by the fact that the country continues to struggle with unemployment and a lack of industrial diversification. For this reason, "decisive State intervention" is said to be required to shift the country's growth away from commodity dependence towards manufacturing.

The TPR explicitly asserts that trade policy should be subservient to the National Industrial Policy Framework (NIPF) in order to promote such diversification, which would inform tariffs on a sectoral basis.

"It evinces a neutral stance to the direction trade policy instruments might move, but the tone is interventionist and defensive, possibly reflecting a stronger nationalism at work, together with an ideological reorientation," says Draper of the TPR.

According to the TPR draft document, tariffs will be raised or reduced where appro- priate, and this "strategic tariff policy" is currently being implemented on a case-by- case basis, with reviews of some selected lines, such as clothing and textiles, already completed.

The International Trade Administration Commission (Itac) of South Africa is the lead agency tasked with managing the proposed extensive review of South Africa's tariffs. Previously, Itac was situated within the DTI; however, it has since moved to the DED.

Because tariffs are seen as an instrument of industrial policy, a strategic approach to managing them is reportedly being pursued. Essentially they are taxes, and should be regarded as such.

REVIEW RISKS

Draper urges that the process of tariff review must be conducted transparently, as there is a risk that it could be captured by "strong lobbies" or "rent seekers".

He also raises concerns over the fact that the TPR document does not indicate when protection, if instituted, would be withdrawn, nor how the intended benefits would be monitored.

The TPR highlights that the key priorities of trade strategy must be regional economic integration, that is production led - rather than market led; a shift from free trade agreements to preferential trade agreements; retaining relations with the ‘North' but not at the expense of policy space; and standing firm at the WTO particularly with regard to negotiations on industrial goods in the Doha Development round.

The review identifies that South Africa is caught between low-cost producers in Asia and high-tech producers in the industrialised nations, but it does not explicitly indicate how industrial and trade policies could be used to deal with the situation.

The document also states that trade adjustment support policies should be formulated for workers displaced by trade liberalisation.

Draper argues that the TPR does not give much attention to competitiveness and does not mention trade facilitation measures and reducing costs of network services, such as telecommunications, transport and electricity, which are generally accepted to be barriers to trade.

He adds that it is also too dismissive of the potential for resource-based development, and does not look at the potential of the services sector to create sustainable employment.

Instead, it has an almost exclusive focus on manufacturing, where the jury is still out on whether it is indeed the best and only source of sustainable employment generation for South Africa.

Proponents of further trade liberalisation argue that the policy has been crucial in stimulating growth, competitiveness and diversification in those countries that have successfully implemented the policy, such as Chile, Malaysia and Australia.

They argue that continued unemployment could be a result of other factors, such as labour market regulation; the growing economic role of Asian, especially Chinese, competitiveness; concentrated domestic market structures; and large and growing problems in network services, particularly those run by the State.

BEYOND TRADE POLICY

http://preditor.creamermedia.co.za/article.view.php?ct_id=1&op=new
European Centre for International Political Economy senior fellow and trade expert Guy de Jonquières maintains that, while "good trade policy cannot guarantee outcomes, what it does is create opportunities by removing barriers and constraints on people and on markets".

Turning opportunities to advantages requires that a country is equipped with the right tools to create the right conditions. De Jonquières says that there is debate among development economists as to exactly what these conditions are. But he identifies six, which are rooted in the domain of domestic policy and have very little to do with trade policy.

First, stable macroeconomic policies can support low inflationary growth, employment creation and investment. In this regard, South Africa's policy framework is viewed as fairly stable, consistently applied, and unlikely to change.

Secondly, a good basic education system that equips people with literacy and numeracy and the ability to acquire new skills and continue learning is required.

South Africa's record on this point is debatable, and the apartheid legacy has ensured serious educational backlogs. While private education is viewed as being good, basic education problems are building up, and maths and science education is emerging as a serious long-term growth bottleneck.

The third condition is good physical infrastructure - roads, ports, railways and tele-communications systems that work.

Again, in the South African context, this receives a mixed and ever-changing scorecard. Underinvestment in certain areas, such as freight rail and most notably electricity generation, has caused problems.

The fourth desirable condition is clean and effective administration and institutions capable of effectively delivering public goods, from education and healthcare to justice and market regulation.

In South Africa, many questions have been raised over the capability and effectiveness of institutions to deliver on their mandates.

The fifth condition is having incentives that encourage and reward investment and enterprise - starting with a system that recognises and protects property rights and intellectual property rights enshrined within the law.

Here South Africa rates reasonably well, although debate has emerged regarding nationalisation.

And, finally, flexible labour markets enable workers to be redeployed easily to those jobs where they are most needed, and can contri-bute most to wealth creation. While minimum labour standards and progressive manage-ment approaches are important for labour retention, in overprotected markets, business interests will invest in capital equipment that can replace workers.

Considering unemployment levels in South Africa, it is felt that more could be done to ensure flexible labour markets.

COSTS VS BENEFITS

De Jonquières emphasises: "When trade barriers fall, those whom they protected will find it a struggle to adapt, and some may be unable to do so. Jobs will go and businesses will close. Some pain is unavoidable." And while the gains from trade are spread widely, the losses tend to be highly concentrated.

The introduction of competition on a global scale in theory means that uncompetitive industries will fail; however, if a company focuses on areas where it has efficiencies and competitive advantages, these sectors can present gains, such as employment and wealth creation, while lowering the cost of basic goods for con-sumers.

"Open trade needs a context in which to deliver its benefits," WTO director-general Pascal Lamy argued during a recent visit to Chile.

The benefits of trade work in an environment where other conditions are met. These include the necessary investments in infrastructure and in institutions. These include an economy where price signals are actually transmitted to the agents that benefit from such signals, and where the benefits of growing prosperity are widely shared, and are not just the preserve of a few, he added.

Ever opposing protectionism, Lamy further stated: "Nothing is static, and trade oppor- tunities come and go. Hence, the importance of domestic policies on competitiveness. Relative efficiency and competitiveness change over time, not the essence of how nations gain from trade."

FUTURE TRAJECTORY

Major policy reversals are unlikely, but fears exist that stagnation could occur, depending on the DTI's capacities. However, the current lack of capacity also leads to concerns about the potential for special interest groups to strong-arm the policy process.

However, should there be a major rupture in the current economic policy-making, or should ideology overtake pragmatism, then the prospects for policy reversals could increase substantially.

This is unlikely, though, if processes are kept transparent.

"The best trade policies are not the ones that are shaped in arduous wrangling with other governments in Geneva or foreign negotiating forums. They are the ones that begin, and are carried through, at home," concludes De Jonquières.