AYABONGA CAWE: Localisation and imports work hand in hand

Not much good news comes out of SA ports these days. So when a new port rail terminal is opened it unsurprisingly comes with a lot of fanfare.

The relaunch of the Tetra Pak packaging facility in Pinetown was welcomed with such fanfare. At that launch, President Cyril Ramaphosa reflected on the criticism the sixth administration’s investment and localisation drive has received, particularly from the business commentariat. 

“When we spoke of localisation we were laughed out of court,” said Ramaphosa. “We were not daydreaming, and we knew what were talking about.”  

A lot has changed since the sixth administration, drawing on the work of social partners at the National Economic Development & Labour Council, began to speak of localisation as a strategic feature of the Economic Reconstruction & Recovery Plan (ERRP).

What we have observed since in an incisive way is that the investment drive alongside the localisation push highlights the important link between foreign direct investment in industrial pursuits and an enabling trade and industrial policy. This is important for a few related reasons.  

Localisation is an evolutionary process rather than being a static autarkic experiment, as some have suggested since 2019. Localisation needs imports, as the economic history of not just China but also SA shows us. The biopolymers used in the making the packaging materials for juices and milk at Tetra Pak are imported, for instance.  

A more sophisticated perspective allows for an understanding of the crucial role of lead firms and particular imports (of machinery, intermediate inputs and even raw materials) that are not available or cannot be produced to the necessary scale here at home.

This is why rebate provisions, and even drawbacks on inputs used in exports, are in place. It is out of a recognition that a country such as SA (a small, open economy) can only industrialise through managing its vertical specialisation, or the imported content of our exports.  

Lessons 

There are lessons to learn here. Building capabilities and self-sufficiency requires, ironically, a degree of imported material. In China the imported content of its exports after its ascension to the World Trade Organisation in 2001 went from a peak of 25.3% of gross exports in 2005 to 19.4% in 2020.

SA has seen a trend in the opposite direction in the same period, from 19.7% to 22.5%. This compares to Vietnam’s labour-intensive manufacturing sector, which accounts for a fifth of national output and has been heavily reliant on imported content in the same period, the proportion rising from 36% in 2005 to almost half (48.3%) now. On the other hand, the imported content of Nigeria’s exports has fallen below 10%.

A 2023 study by McKinsey made an the important point about the Vietnamese productive base, that “despite the manufacturing sector’s growing contribution to the overall economy, the value added by this sector remains flat”. 

It is becoming increasingly clear that a feature of the sustainable business cases of industrial firms includes the use of waste inputs such as ferrous, paperboard and other forms of scrap as inputs into further rounds of production.

This requires a regulatory response that ensures access to such supplies of scrap for domestic industrialists whose technological processes make use of such waste. This is the case for Tetra Pak, and I am also made to understand it is the same for electric steel mills and the float glass sector.  

This suggests that it is not enough to be engaged in manufactured exports, but that localisation implies not the wholesale displacement of imports but rather their management.

This to ensure imported content of our consumption, and even production and exports, declines over time in step with market entry and advance by SA firms in strategic intermediate industrial inputs and consumer goods.  

• Cawe is chief commissioner at the International Trade Administration Commission. He writes in his personal capacity.