Challenges of The Developmental Trade Policy in South Africa

1.

South Africa has recently experienced controversy over agriculture trade deals with its partners, namely the USA and Poland. After using antidumping measures against the chicken import from the United States, the latter threatened to end SA duty-free access to the American market, which it has granted to Sub-Saharan African countries since 2000. The controversy is compounded by Africa’s southernmost country’s reversal of the measures and the latest agreement for Poland to export its poultry into South Africa, with the spectre of the latter’s poultry business losing millions of rand and shedding jobs. More importantly, it is a sign of the malaise that is battering SA government in trade policy, incapacitating it to strike a balance in economic cooperation with the Global North.

The aim of this essay is to tackle the key challenge faced by the post-apartheid South Africa in agricultural trade deals with developed countries under the WTO regime. This challenge can be summed up in the following question: How can South Africa achieve agricultural development under the current international free trade regime that constrains it to open its market to highly competitive products from developed countries? My answer is that, given its emerging economy status, South Africa can achieve this by jettisoning the free trade and, like the old industrialisers before it, by embracing market-controlling practices within the developmental state perspective.

The essay is articulated into three sections. First, I shall provide an overview of the present-day international trade regime, pointing out its limitations in inducing industrialisation and development of developing nations, particularly its narrowing the opportunity for any sustained agricultural boom in the Global South. Second, I shall outline the position of the democratic South Africa in the international trade system, exposing its shakiness as the source of its obvious malaise in trade-related policy making. And third, I shall succinctly discuss the mercantilist exiting the free trade regime as the imperative trade policy framework of a sustained developed agriculture in South Africa. The essay shall end with concluding remarks.

2. INTERNATIONAL TRADE REGIME: AN OVERVIEW

Since the end of the Second World War it can be estimated that the international trade regime has evolved in three phases: the hegemonic stability regime, the predatory regime, and the ambivalent regime.

The hegemonic stability regime, at first, is embodied by the Bretton Woods system, which is constituted by the IMF, the World Bank and the GATT. Its key feature is the stabilisation of the exchange rate through “fixing all currencies to the value of the US dollar, which acted as a ‘currency anchor’, with the US dollar being convertible to gold at a rate of $35 per ounce” (Jackson and Sorensen 2010). This regime is universally beneficial, with the mix of mercantilism and liberalism as its ideological foundation. On the one hand, the institution of the US dollar as the currency anchor makes the US the core of the world’s financial web by prodding big businesses and investors to convert their wealth into the US dollar and to deposit them into the Federal Reserve Bank. The inflow of foreign wealth allows the US Treasury to sustainably finance the budget deficit, while spending much in infrastructure building, policing the world, and social security to ensure the highest living standards to the US citizens—the regime’s mercantilist component.

On the other hand, the system is good to the rest of the world. Based upon the Keynesian embedded liberalism (Peet 2003:7), to avoid another Great Depression, it takes into account the particular background of a nation (post-war reconstruction or post-independence nation-building, for instance), causing the USA to allow the Western European countries and Japan to protect their markets (for the benefit of their infant industries) and to access the American market. Besides, the system managed the international economy through “Keynesian-style regulative framework” (Jackson and Sorensen 2010: 462), including regulation of capital movement to fight speculation, monitoring of investments for real growth, and favouring fiscal policy “to deliver growth and keep unemployment low” (Ibid), a big government spending for the citizenry’s goods (See Peet 2003:7), and import-substitution industrialisation (ISI). This assisted by stable exchange rates led to a fast recovery of Western Europe and Japan (and the East Asian Tigers thereafter, from the 1950s to 1970s) and their catching up with the United States.

Second, the predatory regime is born as the USA starts behaving as a “predatory hegemon” (Peet 2003: 198). In 1971, following the stiffening competition from West Europe, Japan and the East Asian NICs; the addictive devaluation of the dollar, and Keynesianism’s inability to overcome stagflation, the Nixon administration sealed the end of stable exchange rates through decreeing the floating of the US dollar instead of its convertibility to gold (Ibid, p.78). President Nixon’s decision gave rise to the free trade[i]. From America the wave of the phobia of competition through regulated, stabilised trade (which is the driver of the new predatory regime) reached the entire Global North to the point that developed countries began to prevent developing countries from utilising the same illiberal, mercantilist policies that made them rich. Chang (2007: 45-46) perfectly put it as he says: “rich countries have ‘kicked away the ladder’ by forcing free-market, free-trade policies on poor countries”.

Third, the ambivalent regime is characterised by two contradictory attitudes to trade on the part of developed countries, the Western nations in particular. The latter set trade preferences for exports from developing countries while, simultaneously, they uphold rules that are prohibitive to the development of the Global South: full opening by poor countries of their domestic markets to foreign competition, wholesale privatisation of the SOEs, autonomy of the banking sector, liberalisation of the exchange rates, enacting of the TRIPs and the TRIMs[ii], etc. The bad part of this ambivalence is compounded by the developed countries’ being selective over which imports from poor nations are customs-exempt and which Global South country is eligible for the preferences. For instance, through the Lomé Conventions (1975-2000) and their successor, the Cotonou Convention (2000 to date), the European Union selected sugar, bananas, meat and rum as the customs-exempt exports from the ACP countries, making them enjoy quotas priced at an export price determined on the EU internal market (Laaksonen et al. 2016). Still, the interested motive behind the Union’s opening its market is that it has little if no price to pay: there is no competition with local farmers since, living in temperate zone, they do not produce these products that are grown only in tropical zone. Furthermore, to compete with the EU, in 2005, the USA enacted the AGOA, a unilateral law granting trade preferences to Sub-Saharan countries, i.e. a duties-exempt access of their exports to the American market. Yet as in Europe, the USA has nothing to worry about these preferences so long as the selected countries of Sub-Saharan Africa do not trade competitive products: their economies are still agonisingly dominated by agriculture and mining. Conversely, alongside Europe, the free trade dispensation allows the USA to reap more benefits by dumping the competitive products in Africa and the broad Global South.

3. POSITION OF SOUTH AFRICA IN THE INTERNATIONAL TRADE SYSTEM

The above indicated malaise that unsettles the South African government as regards the trade policy is due to the complexity of the country’s relationship with the developed world within a highly unfair international trading system. An outlining of the historical backdrop of South Africa’s international trade can help understand this complexity.

The apartheid regime is credited to be a developmental state in the footsteps of the first industrialisers (Britain and France) and the second industrialisers (the rest of Western Europe and North America)—an actor in the third industrialisation wave alongside Japan and the East Asian NICs. Within a period stretching to five decades (1925-1973), Pretoria opted for ISI as the development policy framework and utilised the same patterns of initial industrialist push: the state’s dominant role in the economy as the core around which gravitate huge SOEs, mining corporations, banks, and manufacturing and agricultural businesses; protection of domestic industries; guarantee of monopoly over the domestic market by infant industries; and state repression of labour—all this materialised by political and economic elites driven by the ideology of the Afrikaner national identity springing from resistance to British imperialism (Schneider 2000).

In summary, South Africa emulated the trading wisdom of previous and contemporary industrialisers: opening up to the world market for the areas Pretoria deemed profitable, such as by importing the much needed capital goods, raw materials and technologies to pollinize labour-intensive manufacturing industries in exchange for its diversified exports into the international market; whereas simultaneously it delinked the economy from the developed world in areas judged dangerous to growth and expansion, such as big foreign banks and predatory TNCs.

Furthermore, the emergence of an excellent macroeconomic environment (rand stability due to the Bretton Woods fixed exchange rates and the subsequent sustained availability of hard currency) and of sound economic fundamentals (rule of law, at least for the white minority; state delivery of modern infrastructure, including large railway and road networks; low tariffs on capital goods and duty-free import of raw materials and input essential to agriculture and mining; cheap electricity; state-run steel industry (ISCOR); collective bargaining that pacified industrial relations so that white workers were paid “civilised” wages; and offer of cheap plentiful black labour) attracted a lot of FDIs that brought in more sophisticated technologies (Ibid)[iii].

Consequence: although it occurred at the expense of the de-humanised black majority, the spectacular expansion of manufacturing led to South Africa becoming Africa’s most industrialised economy and its beacon of hope of steadfastly booming agro-industry; and the apartheid regime paved the way for the country to gain the status it enjoys now in the international affairs: that of an emerging economy and the continent’s preeminent representative in the world arena, namely the G20.

The situation of South Africa’s trade policy (and the trade policy on agriculture, for our purposes) in the aftermath of the 1994 national democratic liberation is totally different from that of the apartheid era. It is ambivalent, a bitter-sweet potion. The sweet part is the end of the isolation from the rest of the world, due to sanctions, and the signing by the Mandela administration of the WTO protocol on trade liberalisation, as well as other subsequent agreements with the European Union and the SADC member states, and the bilateral agreement with the United States within the latter’s AGOA. It thus allowed the businesses that had grown during the apartheid era in agriculture, mining and manufacturing to expand their operations continent-wide and worldwide.

In agriculture, for instance, trade liberalisation opened windows of opportunities to the mature white commercial farms that flourished through the export of citrus, wool, avocados, nuts, horticultural products, wine and tea; the diversification of crops, the consolidation of agro-processing and other value addition practices, the utilisation of advanced technology for a more productive intensive agriculture, and the planting of genetically modified organisms (Kabala 2015a).

On the other hand, nowhere could the EOI push be perceived much more than in the rapid expansion of white farmers’ agribusinesses in Africa. Within quarter a century (1990-2014), the push has consolidated the status of South Africa as a leading exporter of agricultural products in Africa and the main trade partner with the continent in the sector, overtaking even North Atlantic advanced economies (Kalaba 2015b).

The bitter part of the trade liberalisation potion is the stagnation of the South African economy, including the throttling of the majority black-dominated small-scale agriculture. Against the backdrop of the abovementioned ambivalent Washington Consensus-led regime, South Africa is forced to concoct the GEAR policy, thus jettisoning both the apartheid-dating, state-centred developmental drive and the left-leaning pro-poor RDP policy. Narsiah (2002) cites some of the neoliberal policy positions adopted within the GEAR programme: fiscal austerity, export oriented development (through free trade) and privatisation—to which I add the promotion of the floating of the exchange rates, the autonomy of the banking sector, the emphasis of inflation targeting as the essential policy of the Reserve Bank, the deregulation of the capital flows, and the market rule. The underlying rationale of the GEAR strategy is, let’s grow the cake before we redistribute it thereafter; this is the best way the standards of living of each South African will be lifted up. However, neither sustained growth nor considerable redistribution has materialised (Jacobs 2007). What went awry?

The GEAR policy positions have exposed South Africa as a prey to offensive external influences, selling it out to the TNCs, abandoning it at the mercy of an unequal damaging trade and the volatility of the open capital market, and rendering it vulnerable to foreign financial shocks, the latest being the Great Recession and the downturn of the Chinese economy. Economic policy should have focused on enlarging the public sector by midwifing a lot of SOEs in the vital sectors of the economy: steel, energy, infrastructure, petrochemicals, etc., towards technologically and industrially catching up with the First World, as well as by subsidising and protecting infant industries. Unfortunately, it is driven by the obsession with attracting and keeping FDIs, grooming a marginal BEE business community, and paying the apartheid-dating foreign date (Jacobs 2007). Yet foreign investors have not added value to the economy by creating more labour-intensive manufacturing industries and bringing latest cutting-edge technologies; they rather have been ‘brownfield investments’ (Chang 2007:75), buying existing SOEs, merging with struggling local private companies, clinching government tenders and/or being outsourced for service delivery, and transferring their profits to their mother countries (Narsiah 2002; Jacobs 2007)[iv]. Result: South Africa’s economy is still depending essentially upon primary exports from mining and agriculture; which is why it currently is agonising under the spectre of a new recession and downgrading to junk status following the sharp slump in China’s demand of raw materials.

The negative impact of neoliberal positions on agriculture is even more eloquent, serving as the backdrop for the government’s discomfort in trade policymaking on the matter, and resulting in latest controversies with its trading partners. Unlike its counterpart white commercial agriculture, which grew up out of protection and subsidies from the apartheid regime, the black-dominated small-scale agriculture is poorly assisted by the democratic government. Stagnation and short-sightedness as regards industrialisation have led to the ANC-led government’s decision “to remove most of the support [of both commercial and small-scale farmers] [rather] than to expand it”, lest the implementation of such a support may over-strain the national fiscus (Kalaba 2015a). Governmental support is limited to granting land tenure and farming equipment; and at the same time there is the prevalence of the shortage of funding for capacity building, skills training, protection against unfair competition, update on market trends and weather forecasts for a responsible, enlightened decision making, and other empowering measures. The situation is worsened by the longest drought since 1915, which has hit even commercial farmers, turning South Africa for the first time into a net importer of the mainstay crop of maize.

Consequently, concerning the recent trading standoff over the US chicken export, the bottom line is that South Africa is suffocating in the trading race with mighty competitors. America dumps its chicken leftovers into South Africa at very low price, making competition quite impossible for the domestic poultry industry[v]. This eventually will lead to a loss of US$ 72 million (900 million rand) in turnover and 6,500 jobs (Reuters Africa 2015). This damning eventuality is compounded by a more recent agreement signed by the government allowing Poland, a major poultry producer in Europe, to pour its chicken into Africa’s southernmost nation by August 2016, with a serious prospect that other EU members will follow suit (Mchunu & Reuters 2016). According to Tinashe Kabuya, a senior agricultural economist at Agricultural Business Chamber (Agbiz) quizzed by Mchunu (Ibid), the reason of Africa’s most industrialised country’s vulnerability to competition by First World major producers is that it remains a net importer of key feed input ingredients, namely soya bean cake and yellow maize; and this steeply heightens the cost of producing a live bird, by the standards of developed and emergent economies.

4. WHAT IS TO BE DONE

South Africa has only one firm option to emancipate itself from the pitfalls of the free trade and to lift its economy out of stagnation. It has to embrace the market-controlling mechanism traditionally adopted by any genuine industrialiser as a developmental state. In other words, it is about rehabilitating and modernising the industrialist drive that made breakthroughs during the early years of the apartheid regime. This includes, inter alia, the regulation of the FDI “by imposing performance requirements” regarding “technology transfer, local contents [and/] or exports” (Chang 2007:77)[vi]. The significant presence of such regulated greenfield investments (Chang, ibid, p.75) could lead to the diversification of the economy and the swelling of the national fiscus. And the latter, in turn, would have the capacity to finance a large, ambitious agricultural industrialisation programme at both small-scale and commercial levels. It can be contended that such a move would scare away investors and occasion the reversal of preferential treatments within AGOA and Cotonou Convention, thus reinforcing the likelihood of a long recession. However, this contention appears to be a dramatization often brandished by neoliberal media, pundits and experts.

Let’s first address the prospect of scaring away investors. A mountain of empirical evidences shows that FDI carries on flowing into a country with tough regulatory measures: the USA throughout the 19^th Century, Japan on the wake of World War II, China from the 1980s till now, etc. (Ibid, pp. 78-82). Despite regulation, following factors attract FDI into an economy: plentiful immobile inputs (e.g. mineral resources), cheap abundant skilled labour, large domestic market, an already well built supplier network, a good infrastructure (railway, road, ports, telecommunication, etc.), and a mild general economic and political climate (Ibid, pp. 84-85). Subsequently, investors will not leave a regulating South Africa because the latter harbours almost all these attractive factors. It may be argued that the country’s market is not large enough, and the economic climate not mild because of recurrent labour strikes. Nonetheless, the SADC region has been so well integrated (politically, legally, and in terms of good infrastructure) that FDI operating in South Africa can consider the larger SADC market as its own. Besides, the country enjoys an entrenched collective bargaining culture that stave off worn-out strikes, and workers’ demands are relatively reasonable.

On the other hand, it is not guaranteed that, in case South Africa rescinds the WTO neoliberal treaties, sanctions will automatically follow, especially from the USA and the EU with the reversal of the preferences within the AGOA and the Cotonou Convention, respectively. It is likely that the imposition of such sanctions will be problematic because (1) a round of negotiations might delay or preclude them; (2) Pretoria could rely on bilateral cooperation with a lot of dovish developed nations, as well as the fledgling BRICS bloc and its New Development Bank; and (3) more importantly, the world liberal order is melting down following the Brexit and the serious prospect of Donald Trump’s election as the US President; this reinforces the possibility of a bilateral cooperation becoming more robust than the multilateral one.

5. CONCLUDING REMARKS

The market-controlling mercantilism is the most serious alternative South Africa needs to adopt in order to steer economic development and effect a genuine agricultural boom. Withdrawing from the WTO free trade regime, Pretoria should implement following policies: midwifing a significant number of SOEs in vital industries; protecting infant industries; providing mature industries with a package of incentives for their expansion in Africa and the world; regulating greenfield investments and banning predatory and brownfield ones; nationalising financial institutions and subjecting the Reserve Bank to the national development agenda; ambitious investment in education, with a bias towards vocational training; and pacifying industrial relations by improving collective bargaining. The fear of retaliations from the major industrialised countries seems to be unfounded. The current international context of the end of the neoliberal world favours bilateral cooperation at the expense of the multilateral one, giving South Africa enough manoeuvring space outside the BRICS and AU blocs. Finally, Pretoria’s pulling out of WTO may have a domino effect on other nations fed up with the present unfair trade system.

Noah Benadam is a political analyst, philosopher and sustainable development activist.

The views expressed in this article are not necessary upheld by AMAGEP.