By Tarien Zietsman, Trade analyst: Economics at XA Global Trade Advisors
‘Localisation’ is a government policy to drive the procurement of locally produced goods and services. In other words, to improve local production and procurement.
Localisation initiatives started to take form in South Africa in 1948 in the form of import substitution. In the new democratic dispensation, localisation has been seen as a lever for industrialisation since 2010 in the New Growth Path Framework and its Local Procurement Accord, which has a heady 75% local procurement target for the public and private sectors.
This culminated in the Preferential Procurement Regulations, in which designation features prominently as a tool for localisation of the production and supply of products and services. The lure of localisation has proven irresistible in the current era of protectionism and has become a focal point of South Africa’s Economic Reconstruction and Recovery Plan (ERRP). The current target is to reduce South Africa’s non-import bill by 20% over the next five years.
Localisation manifests in three sectors, namely, the industrial, trade and government sectors. Each of these sectors consists of various implementation mechanisms for localisation. The latest iteration of localisation is the industry master plans, such as for sugar, poultry and steel.
The legal issues that surround the conclusion of these localisation initiatives can be seen in the guidelines published by the Competition Commission, which attempt to shield the participants in these collaborations that may have broken the rules on collusion between competitors under the Competition Act. Apart from the obvious competition issues triggered by these localisation initiatives, they also will have a trade-restrictive impact that has a bearing on South Africa’s international trade obligations.
The impact of localisation on trade agreements
It is important to evaluate the impact of localisation on trade agreements since localisation has begun to play such an evident role in the South African economy. A policy initiative like this will most definitely have a ripple effect on South Africa’s trading partners.
Now it seems like trade agreements are the polar opposite of localisation. Trade agreements are, as the word says, trade agreements between countries with the purpose of liberalising trade restrictions in order to improve trade between countries. Whereas localisation is more focused on import substitution, which by its nature restricts trade.
The legal framework of the World Trade Organization (WTO) is specifically against localisation since it does not enhance trade between countries but rather restricts it. The WTO is built on the principles of non-discrimination, which, on the one hand, requires equal treatment of WTO trading partners, the so-called Most-Favoured Nation (MFN) principle, and equality of treatment of domestic and foreign firms, the National Treatment provision. Localisation falls foul of the National Treatment principle.
Localisation commitments are barriers to trade agreements, with different industries having local procurement and manufacturing commitments limiting trade with other countries. Localisation can result in other countries imposing similar measures against South Africa, the dreaded race to the bottom. If South Africa is substituting imports through the localisation initiative, we should expect our trading partners to do something similar to us.
A clear example of the impact of localisation on South Africa’s trading partners can be seen within the Southern African Customs Union (SACU). The following is a direct quote from the sugar masterplan:
“At least 80% of sugar procurement to be locally produced sugar, rising to 95% locally produced sugar in year 3, such that 150,000 tons rising to 300,000 tons of demand is restored to the local [South African] sugar industry.”
This directly translates to a trading partner like Eswatini needing to forfeit around 300 000 tons of their duty-free sugar exports in favour of South Africa. The localisation policy, therefore, can cause harm to South Africa’s trading partners, who could experience contractions in GDP, trade and revenue.
In contrast, localisation can also have a positive impact on South African trade. Localisation, if implemented correctly, can lead to increased employment, production capacity, local procurement and investment. Increased local production can lead to economies of scale. This allows for increased exports of value-added products into South Africa’s export markets, especially under different trade agreements.
The African Continental Free Trade Agreement (AfCFTA) should create more lucrative export opportunities into other African countries. Implemented correctly, South Africa’s localisation initiative will allow increased exports of manufactured goods into the African value chain. The opposite is also true in that localisation can spark the race to the bottom and it may stifle trade.
The effect of localisation on investments in South Africa
Large investments are needed to achieve localisation. Increased local procurement means there should be increased local production. Investments surrounding localisation thus entails investing in industrial capacity, infrastructure, transport and energy, amongst others.
The DTIC’s approach to increasing investment for the localisation policy is by creating investment incentives. These investment incentives commit recipients to achieve localisation objectives set by the Government.
Localisation thus creates multiple local investment opportunities but simultaneously disrupts foreign direct investment. Since localisation is a form of protectionism, it can and will result in an uncertain investing environment within South Africa. This can discourage foreign direct investment, something South Africa’s economy is in much need of.
South Africa should thus really think about the net effect of localisation on the South African economy, whether in the form of retaliation or disrupted trade agreements. South Africa should realise that the positive outcomes localisation can have, if correctly implemented, come at a cost.