Two matters related to manufacturing, subsidies and tariffs caught my eye this week. One was the South African government signing a bill that gives 150% import subsidies for electric (EV) and hydrogen powered vehicles if they're manufactured in the country.
The other story, which is receiving a lot of attention in the mainstream media, is ArcelorMittal closing its Newcastle plant, bringing to an end steel long-steel production in the country because, AM complained, the Department of Trade, Industry and Competition had not imposed tariffs on imported steel, Chinese in particular.
First car manufacturing. Australia no longer has a car manufacturing industry because it cost too much. Their economy is over four times SA's and they found it unsustainable.
South Africa's R34 billion a year in subsidies to manufacturers is ridiculous given the size of the industry and its contribution to economy. And we don't benefit from cheaper vehicles - we pay import parity prices. Consequently, the taxpayer helps foreign carmakers twice: subsidies and above local and often international prices for the same product. Only manufacturers benefit.
Comparing other motor manufacturing countries to ours, say, Germany's, which is the home of three legacy manufacturers (VW, Porche & Audi are one group), in terms of level of subsidy, is faulty. SA has no homegrown manufacturer to protect here.
This is really unfair. If the ANC knew economics, which we know they don't, they'd stop the subsidies and let manufacturers make it in their own. Btw how many industry jobs does R34bn a year pay for?
SA's car manufacturing operation is not particularly efficient - largely labour intensive when the world has moved to automation to some extent - compared to international counterparts. It can cease without making much, if any, impact on international supply chains. It's useful while it's here but not essential to VW, Toyota etc. They're here because they're paid, via subsidies, to be here.
Governments give little or no thought to tariff and subsidy impacts on the end-user, ie consumers, who end up paying more. No consumer lobby groups aka political donors, you see.
Cost vs benefit, the local motor industry makes less and less sense (and so far from its North American, European and East Asian markets for our products). The Aussies, just across the strait from Asia, did the maths. SA can't, not under ANC. That's why Australia is successful and SA's not (mid-70s their GDP was twice ours, now it's over four times).
About ArcelorMittal. To complaints by media commentators and AM that government dithered over tariffs on imports which shut ArcelorMittal's plant, they don't get the context. (Incidentally, if the ANC government dithered it's because they can't make decisions.)
It's not economic sense to protect failing industries. And locally, ArcelorMittal is such (eg SAA, etc are others). Government previously conceded to Arcelor's request for import protection against cheaper Chinese steel which was granted. Now they wanted additional and\or continued protection.
What's wrong with this scenario? Unlike motors, SA can get cheaper steel elsewhere but Arcelor wants us to pay more for its steel. Like the motors, though, we pay for Arcelor's higher prices by subsidising them.
Everyone forgets Arcelor screwed SA and taxpayer twice. Government sold Iscor to Mittal on the tacit understanding this strategic industry would provide SA with competitively priced if not cheaper than imported steel for manufacturing, which is the driver for growth and job creation. But ArcelorMittal sold steel to SA at import pricing parity. Suddenly steel cost more than it did before. It had downstream impacts, car manufacturing for one. It's arguable this was one reason why manufacturing declined post-1994 to half later.
The irony is later, when internationally cheap steel became available, AM asked for tariff protection against cheaper Chinese imports, which incidentally, steel producers around the world including US were losing to. But by then the damage to SA industry of AM's rapacious pricing was done.
Several years ago Sunday Times, I think, put it to then DG trade & industry Lionel October, an LSE economics alumnus, about AM's past pricing conduct with it wanting protection. He said "we didn't know" they'd do that, ie betray the agreement and SA.
Of course the ANC didn't and doesn't know how economics work. Defending tariffs, like Trump wants for the US, shows ignorance of free market economics. Apologists for AM too.
Tariffs should only be applied in exceptional circumstances like they ought to have been done to protect Cape Town's once vibrant clothing industry that supported 100,000 workers and their families. The job and economic loss - far more than Arcelor's and many other industries - had significant consequences to the local economy and social group workers came from - Cape Flats.
To Arcelor closing I say good riddance! Don't cry for them, but spare a thought for the workers and their dependents. (The cost to protect Arcelor, a failing company anyway, from imports would far exceed any direct support to the workers and economic benefit to country.) That government imposed tariffs on scrap steel is likely because of opaque and illogical ANC thinking. And a powerful lobby group.
In the lamentation about ArcelorMittal there is an ahistorical apologia of sorts. Lakshmi Mittal is one of the richest persons in the world - check his Wikipedia page. (He once bought the most expensive residential property in London. Undoubtedly his dividend from AM's operations helped pay for it.)
Isn't it odd that when the going is good capitalists defend the free market and non-interference by government while reaping huge profits. But when faced with adversity and competition, want that government's protection (cf US' ban on Tik Tok).
Comments
Post a Comment