Trade, trade policy and growth in South Africa

1. Trade, trade policy and growth in South Africa Lawrence Edwards School of Economics UCT

2. Growth Policy initiatives in SA • Accelerated and Shared Growth Initiative in SA • Identifies key constraints to economic growth in South Africa • (a) currency volatility; (b) infrastructure; (c) skilled labor and settlement patterns; (d) barriers to entry, (c) the regulatory environment and SMMEs; and (e) deficiencies in state organization. • Employ Harvard Economists (led by Ricardo Hausman and Dani Rodrik) to advise on growth strategy with local academics • Results presented to President and cabinet • This lecture I will present some of the main insights from the trade team

3. Structure • Extent of liberalisation in SA • External constraint to growth • Impact of liberalisation on trade flows • Impact of liberalisation on growth • Conclusion

4. Question: Has SA liberalised?

5. Trade liberalisation in SA: Collection rates 1980s: Replacement of quotas with tariffs. Offset by imposition of import surcharges 12% Period of import substitution industrialisation 10% 8% 6% 4% Reynders commission: export promotion plus replacement of quotas 2% 0% 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 2000 2002 2004 1994 1960 1962 1964 1966 1968 1970 1972 1996 1998 plus surcharges Collection rates Trade reform since 1960

6. Trade liberalisation in SA: Collection rates 12% Period of import substitution industrialisation 10% Bilateral trade agreements post 2000 8% 6% 4% Reynders commission: export promotion plus replacement of quotas 2% Multilateral liberalisation under WTO 0% 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 2000 2002 2004 1994 1960 1962 1964 1966 1968 1970 1972 1996 1998 plus surcharges Collection rates Trade reform from 1994

7. Question: Should SA further liberalise trade? Policy and empirics

8. What Role does Trade Play in SA Policy Debate? • Accelerated and Shared Growth Initiative in SA? • Trade performance not emphasized as major constraint to growth • Trade policy not given key role as policy instrument • DTI National Industrial Policy Framework • “No major changes to tariff structure are anticipated” • Industrial policy must lead Trade Policy • Retain tariffs on final goods and reduce on inputs • In all cases “… tariff determinations will be conducted on a case-by-case basis, taking into account the specific circumstances of the sector involved” (DTI, 2007).

9. Liberalisation is a contentious issue • BARRING an obsession with trade negotiations, there is no discussion of trade policy in SA. Yet well-calibrated trade policy can have significant positive effects on economic growth. It should be carved out as a separate policy space in its own right. As government moves to accelerate our economic growth, it is time to consider this issue.(Draper and Sally, 2006. See reader “SA needs to get the basics right”) • Mandisi Mpahlwa (Trade and Industry Minister) • “ Proposals for unilateral trade liberalisation, …, represent a fundamental misreading of the South African and international empirical evidence. • “Trade liberalisation on its own will entrench specialisation in commodity based production…”

10. Main Message: Trade matters! • An external constraint may inhibit growth without sustained/improved export growth • Trade Policy is a major factor in South African Trade Performance. • Trade and trade policy are a major factors influencing South African productivity growth

11. External constraint • We live in a global environment • Globalized consumers: Look at what you are wearing • Globalized producers: Approximately 70% of imports are made up of intermediate inputs and capital goods • Growth and investment requires foreign currency to purchase essential imported inputs in production • Where is this foreign currency going to come from? • Financial inflows • EXPORTS !!! • Lack of foreign currency can choke economic growth • “External constraint”

12. External Constraint? Not a laughing matter for SA? 1960s: Rapid growth, but economy runs into balance of payments constraint 1970s-early 1980s: Commodity boom, but then collapse 1980s: Capital outflow, investment collapse and Slow growth Post 94: Rising growth, but worsening trade balance

13. ASGISA? Investment-Led growth is very import intensive.

14. Key message 1 • An external constraint may inhibit growth without sustained/improved export growth • ASGISA growth strategy requires an export strategy

15. Import volume Trade Policy Matters: A Tale of Two Periods 140 120 100 80 (2000 = 100) 60 40 20 0 1985 1988 1991 1982 1994 1979 1970 1973 1976 1997 2000 2003 Non-gold commodity exports Non-commodity exports Source: Edwards and Lawrence (2006)

16. What is the link between trade policy and exports growth?

17. But market access is not even half the story • To boost exports, we need to make export production more profitable • HOW? • Real depreciation of Rand • Tariff liberalisation Lerner symmetry theorem: “A tax on imports is a tax on exports” • Tariffs protect production for the domestic market, but raise production costs for all firms including exporters. • Tariff liberalisation shifts firms from import substitution production to export production

18. Exports and costs, profits, tariffs and REER Manufacturing export volumes, REER and Tariffs 160 140 120 100 2000=100 80 60 40 20 0 1979 1985 1988 1982 1991 1994 1997 1976 1970 1973 2000 2003 1/(Tariff+surcharges) 1/REER Commodities Non-commodities Profitability (PX/ULC)

19. Key Message 2 • Trade Policy is a major factor in South African Trade Performance. • Trade Policy Restricted Exports and Imports in 70s and 80s and Boosted Non-commodity exports and imports in the 90s. • Trade policy is also partly responsible for South Africa’s dependence on capital-intensive, commodity-based exports.

20. So, is there scope for further liberalisation and what form should it take?

21. Tariff protection still high on some products

22. SA tariff structure complex compared to similar economies

23. Costs per job lost very high

24. Key message 3 • There is considerable scope to simplify tariff structure • And to reduce some tariff peaks • But effect on average protection probably small

25. How should reform take place ? • DTI National Industrial Policy Framework • In all cases “… tariff determinations will be conducted on a case-by-case basis, taking into account the specific circumstances of the sector involved” (DTI, 2007). • Dangers • Industrial policy is about the exceptions: You cannot have exceptions without a rule • By default DTI rule is status quo, which is complex, expensive and lacks economic rationale • DTI process in danger of capture by industry lobby groups • Our proposal • Rule: Dramatically simplify tariff structure • Zero tariff or one or two tariff bands • Have clear exceptions for industrial policy purposes, but only temporary deviations from rule allowed

26. Policy Implications • Increased openness is an important strategy for economic growth • Export-Profit Enhancing Strategies are important! • Further trade liberalization can enhance export growth and diversification? • Simplify tariff structure, apply rule based approach to tariff settings, allow exceptions for industrial policy, but temporarily