SA mulling over a protectionist response to global crisis

7th April 2009 By: Terence Creamer - Creamer Media Editor

As part of its response to the current economic crisis, the South African government would seriously consider reversing some of the tariff cuts that it had pursued diligently, and ahead of its international commitments, since the advent of democracy in 1994.

South Africa’s Deputy Trade and Industry Minister Dr Rob Davies gave notice on Tuesday that such a repositioning could be necessary to mitigate against some of the imbalances that were likely to arise as a result of the many bail-outs being deployed in other countries to salvage distressed firms and industries.

Speaking at a breakfast organised by the Metal and Engineering Industries Bargaining Council, Davies said that, while there had been a strong call from the World Trade Organisation (WTO) for countries to avoid protectionism, there were already signs that such measures were gaining traction elsewhere.

Indeed, WTO director-general Pascal Lamy has already warned that protectionism was on the rise, and had noted that such measures could be delay economic recovery and the resumption of trade growth.

Global trade was forecast to fall by 9% in volume terms this year, its biggest contraction since the Second World War.

But Davies indicated that government was applying its mind to tariff structures, particularly the “appropriate tariff stance” for downstream industry.

“People are saying that they don’t want the world to move into protectionism – and at some sort of level we can agree to that.

“But let’s not go into this situation starry-eyed and as idealists. Let’s not go into a multilateral disarmament process and come out unilaterally disarmed,” Davies quipped.

He argued that, while the developed world might not be using tariff policy, the “massive” bail-outs were certainly linked to messages about “buying local”.

He singled out the US’s $787-billion stimulus plan, some of which was being directed beyond the financial sector. “That’s three or four times the gross domestic product of South Africa – we can’t play this game,” he asserted.

South Africa would also direct some additional resources to support industrial sectors, probably through its development finance institutions, but Davies said that it could not compete with the quantum of money being dispersed elsewhere.

Therefore, he counselled against a situation where South Africa made commitments not to raise tariffs “even where we have WTO legal space” to do so.

He said that the country could not “sit by and let all these subsidies, which will have the same effect as a tariff, proceed” without considering responding by using all policy instruments at its disposal.

But he stressed that such “boldness” would need to be backed by strong evidence to justify how a tariff increase would be effective in enabling industries to develop over the long term.

South African Institute of International Affairs Development Through Trade project head Peter Draper told Engineering News that he thought the suggestion was an “overwhelmingly bad idea”.

Draper, who had already analysed the Southern African Customs Union (Sacu) tariff book to assess the scope for such increases, argued that the move would raise cost structures, reduce competitive pressures, go against some of South Africa’s recent international obligations, and possibly even precipitate the disintegration of Sacu itself, given that a number of members were keen on further, rather than reduced, liberalisation.

He said he was aware that the National Economic Development and Labour Council was considering a proposal to raise all South Africa’s tariffs back to “bound levels”.

This, he argued, would raise domestic cost structures and could be particularly deleterious to poor consumers. Exporting firms, which imported inputs, would also be rendered less competitive.

“It would also reduce the need for restructuring, as competitive pressures would be sharply reduced – pressures that have reduced anyway as a result of the stronger rand: dollar exchange rate,” Draper added.

Given that it also affected Sacu revenue, there was also the potential for a turf battle both at Sacu and between the Department of Trade and Industry and the National Treasury.

Draper also questioned whether the International Trade Administration Commission of South Africa, or Itac, had the capacity to administer such a far-reaching revision, as well as to adjudicate the merits for so many tariff-line increases.

It could also send an unhelpful signal about South Africa’s commitment to the Doha Development Round at the WTO, where the country had already been a major protagonist in holding out for a better industrial-tariff deal.

Meanwhile, Davies encouraged industries and firms, which felt that tariffs were too low, not to lobby the department, but to make their case to Itac.

“If there is a perceived need to raise or lower a tariff, make a case and go to Itac,” Davies said, adding that the department was encouraging Itac, which many found lacked responsiveness, to act more expeditiously.