Enlarging Free Trade Areas Is Key

The global economy is going through significant shifts. The new era the world seems to be entering now is being shaped by a major backlash against globalization.

The most visible form to date has been a right-wing nationalistic populism in the developed world positing itself as anti-globalization, and anti-free trade. The social base of this is strata of what are called the middle class that have seen their economic security and living standards under threat. A number of studies have shown that these fears are indeed not unfounded, South Africa’s Minister of Trade and Industry Rob Davies wrote for IOL.

Other discontents have been visible for many years in both developed and developing countries.

A rearguard action from defenders of the status quo has sought to shift the blame for this economic insecurity on to the technological changes of the fourth industrial revolution: the emergence of digitized technologies like robotics, 3D printing, the “Internet of Things” that are predicted to lead to disruptive changes in the organization of production across entire value chains.

But the real issue is that both the technological changes and trade liberalization have occurred in context of a visible absence of inclusive growth and widening inequality.

“Rather than seeing a widespread sharing of the benefits of technological advances, we have witnessed a mushrooming of winner takes all markets with winners reaping huge rewards while others get little or nothing. Make no mistake globalization and the fourth industrial revolution are realities that could in other social contexts deliver significant opportunities for improvements in the human condition.”

But in the words of Nobel economics laureate Joseph Stiglitz up to now we have had “a globalization that works for a few, not everybody”.

 Need for Economic Transformation

In this context, South Africa needs to pursue radical economic transformation so as to promote inclusive growth and accelerate growth along a path that generates sustainable, decent jobs to address apartheid legacies. Industrial policy therefore becomes a core component of such a growth strategy to promote structural change to break out of commodity dependence and move to a more diversified base in which increasing value-addition and export intensity come to define South Africa’s growth trajectory. In short, the strategic necessity to restructure requires nothing less than a massive national industrial effort.

While some developing countries with robust and decidedly non-orthodox industrial policies, like China, were able to take advantage of greater market openings in the developed world, many others, including South Africa, were persuaded or cajoled to cut tariffs and open up markets to an extent that, with the benefit of hindsight, moved too rapidly “beyond our capacities” as developing countries.

South Africa was further disadvantaged by the fact that the apartheid regime declared in the General Agreement on Tariffs and Trade that it was a developed country. In the implementation of the Uruguay Round in the 1990s, “we were accordingly victims of a historical injustice that required us to cut industrial tariffs deeper and faster than many peer developing countries”.

 Policy Tools

South Africa employs a broad range of policy tools to nurture, support and protect emerging industries that are prioritized under the Industrial Policy Action Plan, including a developmental trade policy.

The Trade Policy Strategy Framework adopted in 2012 set the tone for tariff policy by stipulating that all reforms would be pursued strategically to support industrial development. Indeed, successful developing economies have all adopted a strategic approach to tariff policy and have ensured that tariff policy is informed by industrial policy and that where trade liberalization is undertaken, this is done gradually and selectively to support industrial development.

“We must therefore utilize and defend policy space that allows us to localize and pursue transformation. We must not hesitate to defend and use trade remedies and access dispute bodies when we are being unfairly treated. We must effectively utilize government procurement and state-owned enterprises to promote localization, drive and support industrial development and radical economic transformation.

“Everyone is using this policy tool, in one form or another, even those who preach against it. We must therefore remain steadfast in not signing the WTO’s ‘Optional Protocol on Transparency in Government Procurement’. For similar reasons, we must resist the entreaties of our friends to sign the Environmental Goods Agreement as this would hobble the local industrial development potential of the roll out of renewable energy.

“We must pursue development policies that aim to promote inclusive growth, broaden access, promote local manufacturing and put South Africa on a sustainable growth path. In this regard, to promote access to medicines and develop the local pharmaceutical industry as outlined in the IPAP, South Africa is currently busy developing the Intellectual Property policy.”

The IP Policy advances a coordinated and balanced approach to IP that provides effective protection of IP rights and responds to South Africa’s unique innovation and development dynamics. It engenders the ethos of the constitution and reflects the country’s industrial policy and broader socio-economic development objectives.

The country’s overriding priority must be to work to promote African regional integration by taking steps to enlarge the free trade areas existing in the SADC and other regional economic communities into larger units but also to complement this with active cooperation to address infrastructure deficiencies.

The aim of this is to promote more intra-African trade and support industrialization through the creation of large regional markets that can support the development of regional value chains.

Regional integration therefore aims to address the issue of small and fragmented markets in Africa, thus giving Africa the market size that improves its value proposition to attract investment.