Eustace Mashimbye is CEO of Proudly South African. Photo: Supplied
By Eustace Mashimbye
Debates about localisation tend to take the form of overworn ideological talking points and are usually held at a high level of abstraction.
But in the real world, there are not always one-size-fits-all policy solutions. And with the increased global turbulence of the last few years, old axioms about trade and industrial policy don’t always hold up.
We need to be more pragmatic and adaptable, and follow evidence-based policies, in the face of uncertainty and change.
The changing face of global trade
Global trade is now marked by an unusual degree of uncertainty. We have seen supply chains stretched to breaking point in recent years. The pandemic revealed how fragile these global networks are. Conflict accelerated and exacerbated the problem, as the war in Ukraine affected the price and supply of vital inputs, from seed oils to grains to fertilisers.
Meanwhile, “friendshoring” – the process of moving supply chains to allied countries – is gaining more attention in the business press, as geopolitical rivalry threatens to reform the terms of international trade. As more businesses transition from Just in Time production to “just in case” inventory management, what are the lesson at a policy level?
It would be premature to say globalisation is over, but it is clear that countries need smart policy tools to enhance resilience and adaptability.
Selecting the appropriate policy mix requires a careful consideration of South Africa’s social and economic needs. As a priority, we can all agree that we need to grow the economy, while securing a reliable supply of critical goods. At the same time, South Africa’s ambitious social policy framework envisions developing underserved communities, increasing opportunities for previously disadvantaged entrepreneurs and driving a just transition to a sustainable energy future.
The selective and judicious application of tariffs can be a valuable tool in our policy toolkit to help us meet these goals. Practical implementation of these policies would also be necessary. A pragmatic partnership between the public and private sectors would be needed to not only develop an environment favourable for local manufacturing, but one that would also see punitive repercussions for policy transgression.
No magic trade bullet
Many of the arguments against localisation are well known. Tariffs can increase the cost of goods and make local industries less competitive. These are reasonable points and should make us cautious about tariffs as a blanket policy.
Consider the success of South Africa’s automotive industry, which is one of the most important sources of employment and a significant contributor to gross domestic product. The sector’s success is, in part, attributable to careful state investment, coordination and targeted subsidies, tailored to the needs of private industry and other stakeholders across the automotive value chain.
As the global economy shifts, the country’s largely export-driven automotive sector needs a new shot in the arm. As our major export markets phase out internal combustion vehicles, we need to adapt to keep up with the times. However, without directed widescale state-led action, South Africa’s vehicle industry will no longer be fit to compete in the global market
The complex value chains required to produce electric vehicles at scale won’t emerge spontaneously. They will require massive investment and coordination. This raises an interesting point: in some cases, localisation is not a process of moving away from the global economy, it is an essential precondition of remaining competitive on the global scale. That is particularly the case when foreign governments are imposing exacting new trade conditions, such as carbon border taxes.
Security of supply
One of the most salient lessons of the last few years is that global supply chains are less resilient than we recognised. Post-lockdown demand saw massive port congestion. And the war in Ukraine had a dramatic effect on the price and supply of food, fertiliser and energy.
In this context, we cannot afford to be complacent about the security of our supply of essential inputs. For instance, the cement sector has been vocal about the need to ensure the domestic sector remains capable of providing a consistent supply of quality cement amidst dumped imports, which arrive on our shores in erratic intervals.
Critically, cement production is highly dependent on continuous production and economies of scale. Producers cannot rapidly and efficiently scale production to fill demand without market certainty. Even if it were desirable from an economic perspective, we cannot rely on ramped up production when imports are irregular and scale down production when there is a glut of cheap imported cement. That’s simply not how the production process functions in the real world.
A cement plant is a massive, complex industrial site, employing hundreds of people, and integrating into a complex local and national value chain. Once a producer makes the difficult choice to turn off production, starting up again is not simply a question of pushing a button and firing up the kiln.
Dumped imported cement undermines the local cement industry’s capacity to maintain current infrastructure and provide a reliable, high-quality source of local cement.
At a time when we urgently need to grow the economy by stimulating private investment and meeting government’s ambitious infrastructure goals, we should be working towards securing the local cement industry which can expand to meet economic growth. Instead, local industry is hampered by foreign producers dumping excess supply in local markets, reducing local investment and, ultimately, putting security of supply at risk.
Here again, targeted tariffs can play a vital role in encouraging investment while ensuring sustainability in a critical sector. The same can be said about similarly labour-intensive sectors such as the clothing, textiles, footwear and leather (CTFL) and the poultry sectors.
Advancing social goals on a level playing field
Any use of tariffs should have a purpose and should be evidence-based. At the same time, we shouldn’t assess the outcomes of any programme of localisation too narrowly.
Ideally, tariffs should enhance resilience, support the country’s broader strategic goals, and bring broader benefits to communities and developing small business.
This is not just a South African phenomenon. In the US, the Biden administration has applied tariffs to Chinese solar panel imports to help sustain and grow the American renewable energy industry. If the world’s most advanced economies can benefit from trade protection, why shouldn’t developing economies benefit from the same targeted policies?
Evidence shows that localisation works in the right cases. We should take a targeted approach to tariffs that gives our domestic industries a fair opportunity to compete, especially in cases where the rest of the world is practising protectionism and developing complex, restrictive import requirement. To drive resilience in the rapidly evolving world system, we need integrated defensive measures and proactive pro-growth strategies.
To reach these goals, all stakeholders need to put aside our ideological blinkers and work together to find pragmatic solutions suited to the times. At the foundation is our country’s very own buy local movement, which seeks to change mindsets of how local goods and services are viewed and purchased.
The Proudly South African stance on localisation should be considered for adoption across all spheres as this multifaceted solution to economic growth is developed and implemented. A demand for local goods begets a demand for local jobs, and this can only be achieved with stringent pro-South African policies.
Eustace Mashimbye is CEO of Proudly South African.
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