Free trade is good for consumers and economic growth

In his budget speech last week Finance Minister Trevor Manuel urged SA to take the initiative in reducing artificial barriers to trade, suggestions that should be welcomed and applauded. History shows us that the best way to move from poverty to prosperity is to reduce barriers to trade. Adam Smith wrote about this over 200 years ago, showing that trade is the engine of economic growth.

Since the early 1990’s SA has reduced the level of tariffs from an average of approximately 23 per cent to an average of 8.2 per cent, as well as the variation of tariffs from 13,609 to 6,420 commodity lines. But these figures hide some important intricacies. There are significant tariff peaks hidden in the average. For instance, most articles of apparel and clothing are afforded protection up to levels of 40 per cent.

The decrease in the number of commodity lines should also be seen in context because it also hides some important intricacies. Despite the rationalisation in the number of commodity lines there is a complex web of specific, ad valorem, compound and mixed tariffs – although it should be noted that the number of zero-rated tariff lines has increased to 54 per cent. Nevertheless, the various tariffs applying to the existing commodity lines warrant a further simplification of the tariff schedule.

Large multilateral organisations such as the World Bank and the International Monetary Fund (IMF) regularly publish advice based on the belief that openness generates predictable and positive consequences for economic growth. As a result, many countries have voluntarily undertaken reform programmes to reduce their trade restrictions. Integration into the world economy has proved to be a powerful tool for countries to promote economic growth and development and to substantially reduce poverty.

However, in recent years the process has floundered on the back of the failed Doha negotiations. Trevor Manuel, who was Minister of Trade and Industry over a decade ago, suggested last week that SA should blaze its own trail down the road of trade liberalisation. He was specific about what type of liberalisation he had in mind and suggested that SA move ahead with unilateral trade reforms. The most effective way for trade liberalisation to improve efficiency is for a country to remove all trade barriers against all countries instead of negotiating closed bilateral agreements or restrictive regional agreements.

Large economies, such as those of the United States and the European Union, should also encourage trade negotiations at a multilateral level. If they withdrew some of their more problematic demands upon developing nations, such as extreme environmental restrictions, and substantially reduced subsidies to their producers, there would be great welfare gains, not only in developing countries but also within their own economies. Free trade requires the co-operative endeavours of all nations and SA has the opportunity to take the lead in the move toward a world without trade restrictions.

Subsidies and artificial barriers such as tariffs and quotas harm the majority of SA citizens. Under protectionist regimes, government officials decide which industries are to receive protection and to what extent, a task that no one has the necessary information to perform without causing harm to the economy. When trade is open, domestic and foreign consumers decide through the goods they purchase or decline to purchase, which industries will prosper. Increased competition leads to greater efficiency overall. If government has the interests of all its citizens at heart, especially the poorest, it should seriously consider Mr Manuel’s suggestions.

For decades no country has achieved economic success without opening itself to trade with the rest of the world. For example, Hong Kong received little aid but achieved great per capita wealth through free trade, supported by limited government and secure property rights policies.

South African consumers would benefit from cheaper goods that unfettered free trade would provide. Similarly, consumers in the EU would benefit from fewer barriers to the importation of agricultural goods from South Africa and the rest of the African continent. Producers in countries that reduce barriers to trade would gain access to lower-cost resources. Access to low-cost imported components would reduce costs of production and facilitate exports.

The dismal economic performance of the Latin American countries as compared to the success of the South East Asia countries bears testimony to the wisdom of following more outward-orientated trade policies. Trade barriers impose costs on consumers and the majority of producers. The only winners are government and producers who rely on captive consumers forced to pay uncompetitive prices.

Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article/ 06 November 2007