AYABONGA CAWE: Changes in global production and trade make a case for localisation

At the start of World War 2 SA was a net importer, with the bulk of its import needs coming from the “mother country” in a matrix of global production, deeply interwoven with the colonial project.

Goods imported from the “empire” (later the Commonwealth) were exempted from the general tariffs that applied to manufactured and semi-manufactured goods, and this “imperial preference” ensured the value and composition of the UK’s export basket benefited from its access to raw materials in the colonies, and its manufacturing base in the UK.

By 1939, at the end of the Great Depression, according to the Official Yearbook of the Union of SA 1940, the value of imports from the UK and US constituted more than 60% of all SA imports. Yet less than 45% of its relatively lower valued exports (skewed towards primary agriculture and mining products and some semblance of manufacturing) ended up in the same two markets.

It would be the war that started in the same year and ended in 1945 that would lift consumer spending, industrial output and urban migration. The post-war boom period coincided with the independence of many colonies and led to a realignment of where manufactured final goods were produced, and by extension where they were imported from, before they landed on the tables of households or as intermediate goods in production. This is important, as recent reports on why localisation is likely to fail in SA do not account for the drivers of the evolutionary change in how production and exchange occurs on a global scale.

The bulk of our imports and exports now go to China, with the import bill for Germany coming a close second. Eighty years ago trade with those two nations was marginal as the imperial preference system locked colonies and dominions into a global web resembling a common market for goods, produced in many cases under hyper-exploitive conditions in the colonies.

While the UK remains a significant destination for our exports, only 6.4% of these went to the UK market in September 2021, compared with the lion’s share of trade it enjoyed in 1939. Why and under what influences did such a situation arise, and what does it have to do with localisation?

The first is that posing the issue of localisation as a contest between import substitution and export-led industrialisation is to misread how countries that have benefited from open global trade have done so. The experience of China is instructive here.

Economists Dic Lo and Mei Wu argue that three related state actions influenced positive production and export outcomes for the automotive and semiconductor industries. These involved state creation of demand, public actions to foster investments in technological upgrading (including importation of intermediate inputs and technology) and the formation of innovation-based market competition in key sectors.

Second, such actions do not make imports an anathema, as some commentators might have us believe, but rather create the import of intermediate goods that contribute to building the capabilities and know-how required in value added activities, as SA industrial policy allows.

Further, the relative benefit of long global value chains focused on cost efficiency and just-in-time production face a real constraint, much like the imperial preference system would have faced after World War 2. Container costs are higher, and lead times longer. “We sometimes have to stop the line”, one Eastern Cape carmaker suggested a few weeks ago.

At present reliance on imports can transfer inflationary pressures and increased consumer prices to the local market, as opposed to pushing up the cost of local production. Cheap logistics in long global supply chains may have been a cost advantage that translated to lower prices at retail level in the past, but that type of global value chain is now under increasing threat.

In such a context local production is an existential imperative rather than the “fool’s errand” some are suggesting it to be.

• Cawe (@aycawe), a development economist, is MD of Xesibe Holdings and hosts MetroFMTalk on Metro FM.