South Africa on Regional Integration and Trade in the Era of COVID-19: Localisation vs regional value chains

Thabelo Muleya

The Covid-19 pandemic has been the most fundamental disruption to economic activity in a century, introducing huge challenges for the South African economy, regional value chains, and global trade. How is this affecting regional integration? To understand this, we first need to analyse the different types of trade and economic policy responses to Covid-19 and how they relate to regional integration. A good starting point is the 2021 State of the Nation Address (SONA) by President Ramaphosa, followed by the Budget speech delivered by Minister of Finance, Tito Mboweni.

Whereas commitments towards regional and continental trade can be found in the SONA, the general sentiment is that South Africa, just like most other economies affected by the pandemic, is looking to grow local production and encourage the localising of value chains. South Africa is not alone. In a growing protectionist climate, most SADC Member States appear to be acting in a manner that prioritises national interests over regional cooperation.  This has culminated in the debate about whether national economic policies should focus on creating local productive capacity or facilitate the building of regional value chains that remain linked to global trade. According to a study by the OECD, localising value chains in the post-Covid-19 world would add to the economic losses and make domestic economies more vulnerable.[1] This is not stopping countries from resorting to higher levels of protectionism and the emergence of economic nationalism.

President Ramaphosa reiterated that the African Continental Free Trade African (AfCFTA) provides a platform for the South African businesses to expand into markets across the continent, and for South Africa to position itself as a gateway to the continent. On the same note, Minister Mboweni, emphasised the government’s plans to improve access to African markets. This shall be done by upgrading and expanding South Africa’s six busiest border posts; starting with Beitbridge, which was last upgraded in 1995.  Ideally, these One-Stop-Border-Posts will harmonise the crossing of borders by people and goods, eliminating the dreadful scenes witnessed during the pandemic. There will be significant infrastructure interventions using a public-private partnership (PPP) model.

On the other hand, while acknowledging the opportunities for regional trade and growing regional value chains as presented by the AfCFTA, the SONA stressed the priority of localisation policies, as embodied in industry masterplans. The pandemic has left policymakers wondering whether more localised production of key goods would provide greater security against disruptions that can lead to shortages in supply and uncertainty for consumers and businesses[2]. However, even with the support and protection offered to domestic producers under a localised regime, not all stages of production can be undertaken in one country, and trade in intermediate inputs and raw materials continues to play an important role in domestic production. In this context, less international diversification of sourcing and sales means that domestic markets are required to shoulder more of the adjustments and to absorb shocks.

One of the priority intervention proposals of the Post Covid-19 Economic Reconstruction and Recovery Plan is to support a massive increase in local production and to make South African exports globally competitive. Key to this plan is a renewed commitment from the government, business, and organised labour to buy local. Increased local production will hopefully lead to the revival of the manufacturing industry and encourage greater investment by the private sector in productive activity. All social partners who participated in the development of the Recovery Plan as part of a social compact have agreed to work together to reduce the country’s reliance on imports by 20% over the next five years.

The above is a clear indication of the hard policy choices caused by the pandemic, which can be read from the SONA and the budget speech. While local value chains could look like the answer, the OECD study suggests that increased localisation could do more harm than good and that the international network of interconnected supply chains remains key to producing essential goods and services. Global and regional value chains organise the cross-border design, production, and distribution processes, creating much of what we purchase and consume every day.

What does that mean for SACU[3], SADC, and the continent? In his recent presentation to the Portfolio Committee on Trade and Industry, Minister Patel reported that over three-quarters of intra-African trade takes place within regional trading blocs. In 2019, around 26% of South Africa’s global exports were destined for the rest of Africa, with 80% of those exports going to SADC countries. The country should therefore use the opportunities created by the AfCFTA to expand trade beyond SADC to East, Central, West, and North Africa.[4] Strategically incorporated into national trade policies, the AfCFTA can unlock the region, grow regional value chains needed for resilient economies.

[1] https://voxeu.org/article/localising-value-chains-after-covid-would-add-economic-losses-and-make-domestic-economies-more-vulnerable

[2] Javorcik, B (2020), “Global supply chains will not be the same in the post-COVID-19 world”, in Balwin, R and S Evenett (eds) COVID-19 and Trade Policy: Why Turning Inward Won’t Work, VoxEU.org eBook, CEPR.

[3] Payments to SACU have been revised upwards by R1.9 billion in 2022/23 and R15.5 billion in 2023/24 to R137.3 billion over the medium term.

[4] DTIC, “Update on African Integration and the AfCFTA: Minister’s Presentation to the Portfolio Committee on Trade and Industry”, 16 March 2021.

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