Why SA must get its countervailing act with incentives together
Subsidies are becoming popular in the US and will have negative effects on many of its trading partners
Industrial policy is the fancy name governments use when they try to pick winners they believe the market has missed. They do this by erecting barriers to imports (duties, import permits and so on) and through subsidies, sometimes called incentives. Subsidies as industrial policy are becoming popular in the US and will have negative effects on many of its trading partners. The Creating Helpful Incentives to Produce Semiconductors (Chips) Act attempts to bring semiconductor manufacture from Taiwan to the US, because the Americans are worried that if China invades Taiwan it will steal its secrets.
This is not an entirely irrational fear, but in doing this the US is not only “localising ” US jobs, it is directly paying to take those jobs away from Taiwan. The effect on Taiwan will not be trivial; the US is ploughing about $53bn into subsidising semiconductor manufacture and another $24bn in tax credits for chip producers. And the Europeans are throwing € 6.2bn of public money at their own Chips initiative.
The US Inflation Reduction Act will provide an eye-watering $394bn in support for US industry over the next five to 10 years, as tax incentives, grants and loan guarantees. Lest there be any confusion, this is a truly staggering amount of money, only slightly smaller than SA’s GDP for 2021. And yes, it will distort global markets, including SA’s.
Not all of this is bad. If we can get our revised automotive policy off the ground with considerably more urgency than shown at present, this could present opportunities as demand for electric vehicles (EVs) is stimulated through the EV portion of these subsidies. At a $4,000 subsidy per vehicle this is a big saving and should drive up demand. If we are making EVs, we will benefit.
Of course, there is always a “but ”. Many of the US EV incentives have local content requirements, though local is expanded to include a percentage of minerals from countries that have a free-trade agreement with the US. The African Growth & Opportunity Act (Agoa) is not a free-trade agreement, so SA will have limited benefit from the battery subsidies.
Not to be outdone, Germany is considering subsidising electricity for industrial clients. The thinking is that cheap renewable energy should be passed along to factories and not simply banked as profit by the utilities. The details are sparse, but Germany is proposing a price cap on industrial electricity prices. This is a problem, especially in an electricity-constrained environment like Germany now has.
Price caps cause overconsumption, especially on perfectly interchangeable commodities such as petrol and electricity. If you sell electricity at artificially low prices you will have to generate a lot more electricity to meet the increased demand, something Germany cannot afford. But if done, it will spill over into its exports, creating problems for its trading partners.
China threw $600m at green energy generation subsidies in 2022. So there’s that too.
US sugar subsidies, about $3.5bn per annum, force other countries to subsidise their sugar to remain viable. Brazil gives about $2.5bn per annum to its sugar farmers. India, the world’s second-largest sugar producer, also subsidises its sugar production.
In a magnificent case of the pot calling the kettle black, Brazil challenged the Indian subsidies at the World Trade Organisation (WTO) and won. India has appealed. The EU, which also subsidises sugar production, also complained about India, but the European subsidies cause enormous overproduction, pushing a surplus 5-million tonnes of sugar into the global market.
Cotton too is subsidised ($2bn per annum) by the US. To settle a decade-long WTO dispute with Brazil over cotton subsidies, the US eventually paid a one-off amount of $300m to Brazil in 2014 to make the case go away. The case went away, but the subsidies linger. China owes almost all of its success to this idea, at the expense of everyone else who manufactures anything made in China.
In 2016 Japan said at the WTO that “it was concerned oversupply in steel was mainly due to expansion of production capacity among emerging economies that did not have an economic justification, and that this was triggering a rise in trade remedy measures globally”. China’s steel subsidies had become so large that other steel producers were forced to drop their prices to hang on to market share, and were being hit by antidumping duties as a result.
To offset the effect of subsidies, countries can impose countervailing duties. These are important because in a world where subsidies can flow unimpeded, the country that runs out of money last wins.
Because SA has no reserves to give, we cannot subsidise much, if at all. If we do, we run the same risk the others do, which is retaliation in the form of countervailing duties.
China has been on the wrong side of 37% of all countervailing investigations brought globally since 1995, when the WTO was established. SA brought 13 out of 669 countervailing applications but, not coincidentally, the last of these was in 2008, when Rob Davies was appointed trade & industry minister. Once Davies took over he publicly announced that SA would never challenge (countervail) China’s industrial policies, and at that moment SA stopped using countervailing duties against subsidised exports.
Our countervailing regulations remain in place and theoretically accessible, but in practice ways were found to never actually initiate countervailing investigations, no matter how strong the case. It is possible that this stance has changed, but if so it has been rather poorly communicated.
In a world where subsidies become the norm, any country without the ability to counter this problem will find itself the destination of choice for subsidised products. We are such a country, and need to urgently consider how we get our countervailing instrument working again before our economy is irreparably harmed.