Industrial policy is the fancy name governments use when they try to pick winners that the market misses. 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 very popular in the USA and will have negative effects on many of America’s trading partners. The CHIPS Act attempts to bring semiconductor manufacture from Taiwan to the USA, because the Americans are worried the Chinese will invade Taiwan and steal all the secrets. Not an irrational fear, but in the process of doing this, the Americans are not only ‘localising’ American jobs, they are directly paying to take those jobs away from Taiwan. The impact on Taiwan will not be trivial. America is ploughing around $53 billion into subsidising semiconductor manufacture and another $24 billion in tax credits for chip producers.
The Europeans are throwing €6.2 billion of public money at their own Chips initiative.
The American Inflation Reduction Act will provide an eye watering $394 billion in support for US industry over the next 5 to 10 years, as tax incentives, grants and loan guarantees. Here is how the money will be spent:
Lest there is confusion, this is a truly staggering amount of money, only slightly smaller than South Africa’s GDP for 2021 and yes, it will distort global markets, including South Africa. Not all of this is bad. If we can get our revised automotive policy off the ground with considerably more urgency this could present opportunities as demand for electric vehicles (EV) is stimulated through the EV portion of these subsidies. At $4 000 subsidy per vehicle this is a significant saving and should drive up demand. If we are making EVs, we will benefit.
But of course there is always a but. Many of the American EV incentives have local content requirements, although local is expanded to include a percentage of minerals from countries which have a free trade agreement with America. AGOA is not a free trade agreement, so South Africa 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 like 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 can’t afford. But if done, it will spill over into their exports creating problems for their trading partners.
China threw $600 million at green energy generation subsidies last year. So there’s that too.
The USA’s sugar subsidies, around $3.5 billion per annum, force other countries to subsidise their sugar to remain viable. Brazil gives around $2.5 billion per annum to its sugar farmers. India, the worlds 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 WTO and won. India has appealed. The EU, who also subsidises sugar production also complained about India, but the European subsidies cause massive over production, pushing a surplus 5 million tonnes of sugar into the global market.
Cotton too is subsidised ($2 billion per annum) by the Yanks. To settle a decade long WTO dispute with Brazil over cotton subsidies, the USA eventually paid a once-off amount of $300 million to Brazil in 2014 to make the case go away. The case went away but the subsidies linger.
China, owe almost all 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 onto market share and were being hit by anti-dumping duties as a result.
Offsetting the effects of subsidies
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 who runs out of money last wins. Because South Africa has no reserves to give, we can’t 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. South Africa brought 13 out of 669 countervailing applications but, not coincidentally, the last of these was in 2008, when Rob Davies was appointed Minister of Trade and Industry. Once Davies took over, he publicly announced that South Africa would never challenge (countervail) China’s industrial polices and at that moment, South Africa 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’s possible 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.
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