Dark clouds gather over one of South Africa’s most important industries

The Centre for Development and Enterprise (CDE) called for an overhaul of South Africa’s industrial policy to move it away from protectionism and towards a focus on maximising exports.

The CDE said a new approach to master plans, tariff-setting, and competition policy is urgently required. The organisation’s latest report, ACTION SEVEN: Rethink growth, jobs and the DTIC, outlined this.

This report shows how the Department of Trade, Industry and Competition (DTIC) has failed to achieve its goals of re-industrialising the economy and makes several recommendations to remedy this.

“The President and NEDLAC partners acknowledge that existing policies have failed to deliver and that fresh thinking is needed,” CDE executive director Ann Bernstein said.

“South Africa needs a new approach, and the Government of National Unity (GNU) creates an opportunity to change the country’s course for the better.”

The report highlighted the following alarming statistics:

• From 1960 to 2023, the manufacturing sector’s contribution to GDP fell from 20% to under 13%.
• Employment in manufacturing declined from 1.8 million in 2001 to less than 1.6 million in 2023.
• Only 20% of South Africa’s manufacturing firms export at all, with the number of firms exporting manufactured goods falling from 42,000 to 36,000 between 2015 and 2022. Of these, more than half export less than 5% of their output.

The CDE acknowledged that some reasons for this poor performance are outside the DTIC’s control.

• The mining sector’s decline has had a knock-on effect on manufacturing.
• The quality and availability of infrastructure have declined.
• Competition from imports has increased.
• Ill-conceived empowerment policies have dented manufacturing and export capabilities.

However, the CDE explained that, in this challenging environment, the DTIC’s efforts to promote manufacturing have largely been harmful rather than helpful.

“Policy choices are not premised on maximising export growth, but on trying to replace imports with local production – an approach that has led South Africa down an increasingly protectionist path,” Bernstein said.

According to the CDE, the DTIC’s focus on protectionism, master plans, and a selective, interventionist approach to regulating firms, especially in the realm of competition policy, has been counterproductive.

Such policies have overwhelmingly taken the form of import-replacement, known colloquially as ‘localisation’.

“The problem with localisation policies is that they undermine the likelihood of South African firms becoming sufficiently competitive to expand their share of the world’s demand for goods,” Bernstein explained.

There are three reasons for this:

• Lack of Competition: Protectionist policies shield local companies from foreign competition. Without this pressure, they have less motivation to improve productivity at the pace seen in other countries, causing them to lag behind.
• Reduced Export Incentives: High tariffs discourage exports. For instance, why export frozen poultry at global market prices (minus transport costs) when it can be sold domestically at a price inflated by a 62% tariff? This creates an “anti-export bias.”
• Hindered Access to New Technologies: Protectionist measures not only lessen competitive pressure but also make it harder for local businesses to import advanced technologies, further limiting their ability to innovate and grow.

“South Africa should not be following a Trumpian, beggar-thy-neighbour path of protectionism, which will be the death knell for our economy in an ever-globalising world.”

“Far from protecting South African manufacturing employment, localisation policies are accelerating firms’ loss of competitiveness, with a negative impact on employment,” said Bernstein.

The Department of Trade, Industry, and Competition’s (DTIC) master plan approach assumes the South African economy comprises distinct sectors and sub-sectors.

While this framework can sometimes guide effective policy, it risks oversimplifying complexities within sectors.

Companies within the same sector often differ significantly in size, age, profitability, and location. However, what unites them is a shared interest in limiting foreign competition, which often leads to protectionist policies under the master plan.

A better strategy would prioritise supporting businesses aiming to expand exports.

“Exports should be regarded as the most important metric to assess the competitiveness of firms and of the impact of policy interventions,” Bernstein said.

By making exports the goal of industrial policy, policymakers are forced to focus on the key elements that drive competitiveness, particularly input costs and productivity.”

This export-driven approach would have benefits beyond international trade. The resulting gains in efficiency and competitiveness would extend to firms serving the local market, helping domestic businesses compete more effectively against imports.

---

Recommendations

CDE’s report contains several recommendations for the DTIC to create an environment in which firms can become more productive and more competitive:

1. Reform the tariff system

• Implement an independent evaluation process for tariff applications, ensuring that these assessments account for the economic costs to industries dependent on protected goods, not just the benefits to the protected firms.
• Regularly assess the effectiveness of tariffs, enforcing sunset clauses that mandate their phase-out after a specified period unless compelling evidence supports their extension.
• Remove tariffs on goods that are not produced by any South African manufacturers.

2. Review the DTIC’s major industrial subsidy programme

• Conduct an independent evaluation of subsidies provided to the vehicle manufacturing sector, South Africa’s largest subsidy programme. This initiative, which costs the economy billions annually, should be publicly debated once findings are released.

3. Move from masterplans to productivity councils

• Transition to productivity councils formed and guided by groups of firms. These councils should focus on improving value chain competitiveness and facilitating entry into export markets.

4. Change the focus of competition policy

• Revert to the foundational goal of competition policy: preventing anti-competitive practices by large firms. Reduce excessive public interest interventions and full-scale market inquiries.

5. Adopt a new role for the DTIC: Promote business and markets in government and society

• The DTIC should promote business expansion within the broader government, the economic cluster of ministers, and in public discourse. This involves ensuring other departments align with strategies that foster a business-friendly environment.

“The DTIC needs to reform its trade policies, shift its industrial policies towards promoting exports, and harness the competitive pressures that well-functioning markets can provide,” Bernstein said.

“It should also become an effective advocate for business and markets, within government and across society.”

“Such an approach would help remove obstacles to firm entry, survival and expansion. The DTIC’s aim should be to create the environment in which firms can become more productive and to harness the competitive pressures of markets.”