A greater variety of cars is good economics
AN ARTICLE last week was introduced with the headline, “State-aided car exports ‘almost 40% of trade gap’” (April 5). The article quoted Roger Pitot of the National Association of Automotive Components and Allied Manufacturers as saying that the motor industry’s trade deficit was R49bn “or more than 40% of the national trade deficit … by far the highest we’ve ever had”. Presumably this trade deficit is the difference between the imports of motor vehicles (fully built) and also of components of motor vehicles (to be assembled in SA) and the exports of motor vehicles and components.
Fair enough — but then the article goes on to quote Gavin Maile from KPMG: “Local production of vehicles for export also contributed to the trade deficit…”.
There is no logical reason to expect or plan for a balance of imports and exports in any one sector of the economy as perhaps the component producers are suggesting and would prefer. There will always be sectors of the economy that profitably export far more than they import: mining or farming, for example.
We and the firms we own and work for strive to profitably produce a surplus of the services or goods that we specialise in to supply consumers and users, domestic and foreign. We then turn these sales into money for salaries, wages, rents, taxes and profits for owners, who exchange the income for the goods and services that are cheaper to buy than produce ourselves.
An economy protected against foreign competition will import less and export less because it denies itself the advantages of specialisation in goods and services in which it has comparative advantages. The notion that trading partners will willingly buy from SA’s firms without an equal opportunity for their firms to also sell to SA’s customers is clearly false. Trade is a two-way street where the traffic is best kept flowing freely in both directions.
It is possibly a moot point whether SA would have much of a domestic motor assembly, let alone a domestic motor manufacturing industry, were it not for a long history of protection offered to the domestic manufacturer and component producer. The effective protection against imports may have declined to a degree — hence the greater volume of imported vehicles. The one great advantage of the present system of incentivising exports by giving licence to import is a local market with a great variety of vehicles.
This variety not only encourages demand for vehicles but also employment in distribution and maintenance. One wonders how the numbers employed in distributing and servicing the vehicle stock compare with those employed in manufacturing vehicles and components. Less variety on offer would mean reduced demand for new vehicles and a smaller, slower-growing vehicle park to service and trade.
There is another very valuable benefit from having a great variety of new motor vehicles for customers to choose from. The quality of motoring experiences for many highly paid and highly skilled people ranks for them (in lifestyle) not far behind, in importance, the quality of their homes, children’s education and medical services. Forcing them all to drive the equivalent of the East German Trabant or a limited selection of cars that might be produced cheaply in relatively large numbers in SA would mean a less attractive lifestyle for them and so, in effect, a still higher tax rate imposed on their incomes.
With all taxes or exactions on their standard of living, these key personnel with artificially diminished choices of goods and services they wish to spend their own incomes on, would have to be compensated with higher pretax incomes to help keep them in SA. Being able to exercise consumer sovereignty not only makes you free, it also makes your economy more competitive in the market for skills and so in all markets for goods and services that domestic suppliers enter.
Freedom to enjoy the full variety of goods and services on offer in the global village helps hold down the cost of attracting essential skills, without which no industry or economy can hope to be competitive. Adopting free trade helps supply a better quality of life, including a better quality of motoring. This is sensible economic policy that pays off for all sectors of the economy, especially for those that have a comparative advantage in exporting their surplus production. Protecting the market against imported goods or services inevitably will bring lower levels of exports and a lower standard of living for all — rich and poor.
Kantor is chief strategist and economist at Investec Wealth & Investment.