SA Dare Not Spoil the Doha Party

Image: Flickr, Flowcomm
Image: Flickr, Flowcomm

At least one good thing emerged from last week’s Group of Eight summit: an agreement at the highest level that the Doha Round must be salvaged.

True, French President Jacques Chirac will do his utmost to scupper this apparent consensus and the gaps between the key players are still substantial but the round has received a welcome boost. The essence of the emerging deal is for the European Union (EU) to offer more generous tariffs on its agricultural imports; the US to offer tighter disciplines and bigger cuts on its trade-distorting agricultural subsidies; and big emerging markets (the G-20, including SA), to offer more generous access to their industrial goods markets under the non-agricultural market access (Nama) negotiations. The poorest will receive an “aid for trade” package and wholesale exemptions from the final deal.

The major players all face political constraints at home. But the consequences of failing to achieve a Doha round agreement would be severe.

First, its raison d’être, international economic negotiations, would have broken down. Second, while the World Trade Organisation (WTO) would not disintegrate over time, its dispute settlement mechanism would erode under a rising tide of high-stakes trade disputes. Third, the complexity and cost of international trade would continue to rise as bilateral deals, underpinned by asymmetrical power relations, continue to pile up.

Developing countries in particular would be worse off. Ultimately, the WTO could just as well slide into Lake Geneva and join the League of Nations in Davy Jones’ locker.

SA must do its bit to avert this scenario. Our political problem lies in potentially extensive tariff reductions on imports of industrial products. These negotiations are now centred on the coefficients in the tariff reduction formula, which determine the percentage tariff cut to be applied across the industrial tariff regime (approximately 5400 tariff lines).

WTO members agree that two separate coefficients should be applied to developed and developing countries respectively; and on the need for developing countries to enjoy “flexibilities” in the application of the formula (that is, exemptions and/or longer phase-in periods). Crucially, the final coefficient also represents the maximum level at which any one tariff line may be bound after the phase-in period is complete. The major players seem to be converging on a coefficient of 20 for developing countries. Clearly, we don’t want to be the skunk at a potential Doha celebration.

Yet the Congress of South African Trade Unions and some nongovernmental organisations are in open rebellion; and elements of organised business are quivering in trepidation. These views resonate in the corridors of the trade and industry department as it crafts its new industrial strategy, a set of interventions based on targeting selected economic sectors for policy support – possibly including tariff protection.

In our view, the decision is not difficult. A fuller understanding requires going back to basic economics.

Dani Rodrik, the eminent Harvard economist, argues that while factor accumulation (capital, labour and skills) and productivity growth (more output per worker) are the proximate determinants of economic growth and development, the fundamental driving forces are geography (physical features and natural resources), institutions (legal and education systems, regulatory frameworks, etc), and trade (internal and external market integration). And, once growth from the accumulation of factors runs into diminishing returns, an economy’s capacity to innovate is the ultimate determinant.

Geography is beyond policy control but the other determinants are not. Most markets cannot operate effectively without regulatory disciplines; and markets struggle to provide quality universal access to things such as health care and schooling – two key determinants of human capital. The real debate is over the nature of governments’ role, not whether it should play one. In our view, government should target “horizontal interventions” to support human resources, infrastructure and technology. These must be underpinned by appropriate institutions.

Governments are generally not good, however, at “picking winners”. That is what markets do best, wasting fewer scarce resources and minimising the risk of establishing industries that cannot survive without policy support. Yet the trade and industry department wants to focus on “vertical” or sector-specific interventions. Sector targeting is risky business, especially when it involves implicit or explicit trade protection, which biases production to the small internal market rather than to export markets.

This is hardly a smart way to develop industries. And lest anyone forget, SA experienced seven decades of infant industry promotion beginning with the 1924 Pact with government – so it is hardly new. The motor industry is a clear example of an infant that never grew up and still threatens to throw its toys out of the cot if it doesn’t get its way.

Furthermore, in a globalising world characterised by supply chain management and just in time delivery, competitiveness depends substantially on access to the best inputs at the lowest prices. Tariffs inhibit this, no matter how cleverly a tariff regime is designed.

But, above all, our economy, due precisely to protectionist apartheid policies, is still characterised by widespread inefficiencies: concentrated market structures (metals, fixed-line telecoms); some high tariffs (which in sectors such as clothing still don’t keep out more efficient competitors); a complex tariff regime open to arbitrage and abuse; relatively high unit labour costs; high communications costs; and a rickety, expensive national transport system.

Yes, tariff liberalisation would entail adjustment in certain sectors and government should be concentrating on how to minimise the pain associated with such change. The sensible response is to ensure the horizontal measures cited above are available to potential “losers” in advance of liberalisation. The department should work with such industries to ensure smooth adjustment.

But to believe that change is avoidable is to bury one’s head in the sand. Similarly, to believe that lower tariffs would lead to whole industries being wiped out is silly. Under carefully managed, well-sequenced opening, forward-looking producers can and do respond to increased competition. Even our beleaguered clothing industry is managing to do so, with some companies reportedly having doubled output since 2003. And with appropriate horizontal measures in place other export industries should thrive through the new global opportunities.

The Accelerated and Shared Growth Initiative (Asgi-SA) appropriately targets the country’s high cost structure. But this must be supplemented with carefully managed, well-timed internal and external liberalisation. Hence Asgi-SA’s silence on the role further trade liberalisation could play in driving costs down is puzzling.

But if domestic political constraints prevent us from getting it right at home, then for our own economic good and to support the multilateral trading system, SA should sign up to a substantial industrial tariff reduction package in the WTO’s Nama negotiations.

24 Jul 2006