Unlocking South Africa’s Potential: Leveraging Trade for Inclusive Growth and Resilience © 2024 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2024. Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522- 2625; e-mail: pubrights@worldbank.org. Photo Credits: Shutterstock and Unsplash. Acknowledgements The project was implemented by a World Bank team led by Jakob Engel and Bénédicte Baduel and comprising Mila Malavoloneque and Alexandra Soininen. The report builds on background contributions from Besart Avdiu, Andre Barbe, Paulo Bastos, Daniel Brink, Jing Chien, Masud Cader, Lawrence Edwards, Catherine Grant, Maryla Maliszewska, Regina Seri, Ivan Turok, and Justin Visagie. Overall guidance throughout the project was provided by Marie Francoise Marie-Nelly, Asad Alam, Mathew Verghis, Marco Hernandez, Antonio Nucifora, Sébastien Dessus, Paul Brenton and Jacques Morisset. Section 5 draws on work conducted by Ernani Checcucci and Charles Kunaka. The team is particularly grateful for the close cooperation of the Agriculture, FCI, Transport and IFC teams working in South Africa. Administrative and logistical assistance throughout the project was provided by Nani Makonnen, Victoria Fofanah, Tanya Cubbins, and Erika Odendaal. The report was edited by Peter Kjaer Milne and designed by Cybil Maradza. The report has benefited from comments, advice, guidance, and technical discussions from Thomas Farole, Ian Gillson, Lolette Kritzinger van Niekerk, Jean-Christophe Maur, Sara Nyman, Erik von Uexkull, and Gonzalo Varela, as well as numerous WBG colleagues and external experts who provided input at various stages. It has also benefited from frequent and productive engagement with officials from the South African Department for Trade, Industry and Competition, the National Treasury, as well as the participants of numerous WBG consultative events, external seminars, and presentations. Acknowledgements | iii Abbreviations and Acronyms AEO Authorized Economic Operator AfCFTA African Continental Free Trade Area B-BBEE Broad-Based Black Economic Empowerment BMA Border Management Authority BOP Balance of Payment BRIC Brazil, Russia, India, China CGE Computable General Equilibrium COVID-19 Coronavirus Disease 2019 DALRRD Department of Agriculture, Land Reform and Rural Development DIRCO Department of International Relations and Cooperation DTIC Department of Trade, Industry and Competition EG Environmental Good EM Emerging Market EMAA Environmental Monitoring, Analysis and Assessment EPA Economic Partnership Agreement EPP Environmentally Preferable Product ERRP Economic Recovery and Reconstruction Plan EU European Union EV Equivalent Variation FDI Foreign Direct Investment GATT General Agreement on Tariffs and Trade GDE Gross Domestic Expenditure GDP Gross Domestic Product GFC Global Financial Crisis GoSA Government of South Africa GVC Global Value Chain HS Harmonized System ICT Information and Communication Technology IDC Industrial Development Corporation IoF Industries of the Future IFC International Finance Corporation IFS International Financial Statistics IMF International Monetary Fund IT Information Technology IV Instrumental Variables iv | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience ITAC International Trade Administration Commission LCR Local Content Requirement LPI Logistics Performance Index MFN Most-Favored Nation NDC Nationally Determined Contribution NEDLAC National Economic Development and Labour Council NDP National Development Plan NRM Natural Risk Management NT National Treasury NTFC National Trade Facilitation Committee OECD Organization for Economic Co-operation and Development PPP Purchasing Power Parity PPPFA Preferential Procurement Policy Framework Act R&D Research and Development SACU Southern African Customs Union SADC Southern African Development Community SARB South African Reserve Bank SARS South African Revenue Service SEZ Special Economic Zone SME Small and Medium-sized Enterprise SOE State-Owned Enterprises TESA Team Export South Africa Teselico Technical Sectoral Liaison Committee TFA Trade Facilitation Agreement TF Trade Facilitation TFP Total Factor Productivity TISA Trade and Investment South Africa TIPS Trade and Industrial Policy and Strategy US United States US$ United States Dollar VAT Value Added Tax WBG World Bank Group WMM Wastewater Management and Potable Water Treatment WTO World Trade Organization Abbreviations and Acronyms | v Contents Acknowledgements iii Abbreviations and Acronyms iv Executive Summary x South Africa’s economic growth has been constrained by several structural challenges over the past decades x An export-oriented strategy can enhance economic growth and job creation in South Africa, while strengthening the economy’s resilience to shocks xi Seven key findings help explain South Africa’s weak export performance xiii What will it take for South Africa to see broad-based gains from trade? xviii I. Setting the Stage: More Trade Can Support South Africa’s Resilience and Drive Job Creation 1 Despite its enormous potential, the South African economy has stagnated over the past decade 1 The COVID-19 pandemic further worsened the economic situation 4 Trade can be a key driver of growth, job creation, and increased resilience 6 Objective of this report 8 vi | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa’s Trade Competitiveness since 2010 9 1. South Africa’s export market share declined, as diversification has stalled 9 2. South Africa’s exports to African markets have expanded faster than other regions, but remain constrained by tariffs and logistics barriers 12 3. Services exports have underperformed and are heavily concentrated, but there is significant growth among knowledge-intensive services 16 4. Export have been dominated by a few firms, with relatively few entrants that have seen their survival rate decline over time 22 5. Increasing transport and logistical costs have penalized the competitiveness of South African exports 28 6. Increased exports have led to significant improvements in wages, but have mixed distributional impacts 30 7. Broad-based localization requirements could negatively affect export performance 33 III. What Will It Take for South Africa to See Broad-based Gains from Trade? 41 1. New trade agreements and climate-related trade requirements present opportunities for diversification 41 Capturing the benefits from the AfCFTA and other free trade agreements 41 Seizing opportunities in the trade of environmental goods 43 Supporting those who may lose from trade agreements 44 2. Improving trade facilitation and addressing non-tariff barriers is essential to help firms benefit from trade 45 3. Policy reforms and investments are needed to help firms increase their capabilities and become successful exporters 48 South African firms, especially SMEs, struggle to become successful exporters 48 Maximizing the potential of services firms 49 Addressing domestic market distortions inhibiting the entry of firms 50 4. Looking Ahead: A Roadmap for Reform 50 The “what”: Overview of key policy reforms 50 The “how”: Implementing an ambitious reform agenda 53 References 55 Contents | vii Figures Figure E1: Key Findings xviii Figure 1: South Africa GDP per capita before and after the global financial crisis (real terms, index) 1 Figure 2: The dominance of commodities in South Africa’s export basket accelerated during the commodities boom and persisted even as prices declined 2 Figure 3: FDI as a share of GDP for South Africa and the middle-income country average 4 Figure 4: Value of South African goods and services exports and imports (US$ billion) 5 Figure 5: Exports of goods to GDP and imports of goods to gross domestic expenditure 10 Figure 6: Growth in the real value of exports and imports of goods 10 Figure 7: South African export value in comparative perspective 10 Figure 8: South Africa’s share of world export value 10 Figure 9: Share composition of South African exports 11 Figure 10: Africa’s share in South African goods exports, 2010 and 2019 13 Figure 11: Weighted average MFN and statutory applied tariffs on South African exports, 2018 15 Figure 12: Detailed industry job growth in South Africa’s metro areas, 2014–18 17 Figure 13: Greenfield FDI by sector for South Africa, 2009–19 17 Figure 14: South Africa lags comparators in trade in services as a share of GDP 18 Figure 15: Merchandise and services exports, 1994–2019 19 Figure 16: Relative size and growth of services exports by sector, 2005–19 19 Figure 17: South Africa’s share of African services imports (excluding travel and transport), 2019 20 Figure 18: Percentage of firms with an international presence, either as exporters directly or through a branch/subsidiary in another sub-Saharan African country* 21 Figure 19: Firms with an international presence, by region 21 Figure 20: Entry, exit and net entry rates for firms and transactions 22 Figure 21: Index of number of exporters and export transactions by GVC firm status (2010=1) 23 Figure 22: South Africa’s firm export concentration by HS chapter from a comparative perspective, 2012 23 Figure 23: Measures of export concentration 24 Figure 24: Share of top 5% of firms in exports by industry 24 Figure 25: Quintile transition matrix, 2013–19 (all firms) 25 Figure 26: The exporter size distribution of the 2013 cohort of entrants 25 Figure 27: Net margin’s contribution to mid-point growth of aggregate exports 27 Figure 28: Summary of ITAC investigations 35 Figure 29: Impact on real income by country in 2025 (% change relative to the baseline) 38 Figure B.2.1: South Africa remains highly diversified but its complexity in 2019 (blue) is eroding relative to 2014 (red) 40 viii | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Figure 30: South Africa’s increase in income, exports, and imports by 2035 as percentage deviations from baseline 42 Figure 31: EG export by category (US$ billion) 44 Figure 32: Average applied tariffs on EG in 2019 by country (%) 44 Tables Table E1: A roadmap for increasing South Africa’s export competitiveness xxi Table 1: Decomposition of South African manufacturing output growth (share of initial output) 12 Table 2: SACU (excl. South Africa) tariffs on imports from South Africa, the rest of SADC, the rest of Africa and the rest of the world, 2018 16 Table 3: South Africa’s ranking and scores on the LPI, 2010–23 28 Table 4: Impacts of reducing imports, by different policy methods, on macroeconomic variables (% change) 36 Table 5: Impacts of reducing imports, by different policy methods, on sectoral gross output 37 Table 6: A roadmap for increasing South Africa’s export competitiveness 52 Boxes Box 1: Overview of empirical approach 32 Box 2: South Africa’s capability formation is slowing but numerous opportunities with spillover and upgrading potential still exist 39 Box 3: New evidence on gender and trade facilitation in South Africa 47 Contents | ix Executive Summary International trade can be a powerful force opportunities for diversification; improving trade for economic growth and poverty reduction. facilitation and addressing non-tariff barriers; This report aims to support policy dialogue and increasing the capabilities of local firms to with the Government of South Africa on trade. become exporters and diversify products and It explores reforms to promote trade that can markets. Institutional changes to effectively support robust, inclusive, and green economic implement these reforms are also discussed. growth following years of unprecedented supply-chain disruptions during the COVID-19 South Africa’s economic growth has pandemic and ongoing uncertainties related been constrained by several structural to increasing geopolitical tensions and climate challenges over the past decades change. This was done by synthesizing a series of analyses carried out by a World Bank team in Over the past 15 years, South Africa has lost its collaboration with South African academics and economic growth momentum, systematically other stakeholders. It complements the existing underperforming other middle-income economies. and extensive literature on improving trade External shocks such as the COVID-19 pandemic and investment outcomes in South Africa and and the war in Ukraine have compounded a growth strengthening private sector competitiveness. and development trajectory driven by weakening productivity growth and capital accumulation. The report provides an overview of South Africa’s Hausmann et al. (2022) conclude that South export performance over the past decade for Africa’s current macroeconomic challenges both goods and services by using a wide variety of can be traced back to structural changes to data sources and analytical tools. It also proposes productivity and investment dynamics which a series of recommendations on how the country were triggered by microeconomic policy failures, can improve its trade competitiveness, with a political factors related to the role of state focus on using new trade agreements and other capture and governance, and declining quality x | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience at key state-owned enterprises (SOEs). The in South Africa requires bold microeconomic investment slowdown has been triggered by reforms to adapt to global changes and address structural constraints, productivity declines in domestic constraints. Among others, the South network industries and increasing economic Africa Economic Recovery and Reconstruction policy and regulatory uncertainty, and declining Plan (ERRP) released in 2020 considered governance. The subdued performance of greening the economy as one of the eight the domestic private sector and loss in trade priorities in the post-pandemic recovery (GoSA competitiveness also translated into weak 2020). It envisages that economic growth and export performance. employment come partly from new investments, new industries and new tradeable products and At the same time, global changes and services emerging from the country’s transition uncertainties (including megatrends such to low-carbon energy, while using trade and as climate change, technological disruption, investment opportunities compatible with demographic shifts, geopolitical realignment, external shifts in demand. The ERRP also called and social instability) have created a more for reducing South Africa's import dependence challenging environment for economic growth. on external partners over the next five years. One resultant shift that has gained particular policy momentum since the COVID-19 pandemic An export-oriented strategy can enhance and the war in Ukraine is a growing skepticism economic growth and job creation in around trade integration. International trade South Africa, while strengthening the trends have been marked by a renewed drive economy’s resilience to shocks toward industrial policies to promote “strategic” sectors, often resulting in complex and distortive However, international experience and subsidies, trade conflicts among major trading economic theory have demonstrated that trade partners and reshoring of some production to integration, as part of an integrated economic high-income countries (Brenton et al. 2022, strategy prioritizing productive development IMF et al. 2022). The COVID-19 pandemic and can play a key role in supporting economic the war in Ukraine accelerated this trend, growth and poverty reduction. International with significant negative impacts on countries trade has contributed significantly to prosperity with very concentrated exports. Worldwide, in many developing countries by supporting the pandemic-induced shortages of critical supplies, development of new, higher-paying jobs and from surgical masks to semiconductors, increasing the efficiency of firms, as well as by reinforced calls for the reshoring of production providing consumers with cheaper and better and economic self-sufficiency resulting in the products. Increased participation in regional reshaping of global value chains (GVCs). As a and global value chains has facilitated access result, government trade policy responses have to intermediate goods, helped attract strategic proliferated, particularly for medical goods and foreign direct investment (FDI), and built the food, including restrictive measures on exports. Many of these however, do not appear to have been removed as conditions improved. International trade has contributed significantly to prosperity in many In this challenging global and domestic context, developing countries promoting inclusive growth and development Executive Summary | xi capabilities of local suppliers and, hence, mitigate the impact of downside exogenous promoted industrialization and productivity shocks. For example, implementation of the growth. Evidence also shows that in the absence African Continental Free Trade Area (AfCFTA), of supportive conditions for competitiveness through increased regional trade and new or improvements, trade integration can lead to strengthened value chains, can help cushion the deindustrialization and lock economies into negative effects on economic growth of external low value production and exports. These shocks such as the COVID-19 pandemic and vulnerabilities were evident during the international conflicts. This report shows that COVID-19 pandemic when several developing full implementation of the AfCFTA could increase and emerging countries such as South Africa South Africa’s income by 3.8 percent relative to experienced disruptions in global supply chains of the baseline by 2035. In the long run, it would pharmaceuticals, medical goods and equipment, increase the resilience of the South African and specialized food and chemicals. economy, making it better prepared to face shocks. South Africa can also take advantage of Higher exports associated with greater global the rising demand for products from low-carbon and regional integration could bring substantial technologies in the context of global climate gains for South Africa, boosting growth and commitments and further develop its exports in employment. Traditional drivers of growth— these areas. household and government consumption—are hampered by a depressed labor market and These benefits are also recognized by the South tighter fiscal policy, constraining the Government African Government. It has emphasized the of South Africa’s (GoSA) ability to boost aggregate centrality of trade policy reforms in the economic domestic demand, while the potential of the recovery during the COVID-19 crisis. For example, current mining sector to create significantly more the ERRP includes as a key priority: “re-orienting jobs is limited. South Africa has underperformed trade policies and pursuing greater regional in terms of exports relative to its peers, such integration to boost exports, employment and as the BRIC countries (Brazil, Russia, India and innovation”. Many reform proposals in this report China), Turkey, Thailand and Malaysia over the are also policies that have been identified as past two decades. Greater outward orientation important and that have been pursued to various could help increase competition in domestic degrees by the South African Government over markets. It could also support the adoption of the years. productivity-enhancing technology through imported intermediate goods, which have not yet widely penetrated South African markets. This could also enable increased scale economies and Full implementation of the AfCFTA specialization, leading to job creation, inclusive could increase South Africa’s income growth, and poverty reduction. by 3.8 percent relative to the baseline by 2035 Export diversification in terms of both products and markets can also help South Africa to xii | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Seven key findings help explain South Africa’s weak export performance Finding 1: South Africa’s exports have expanded more slowly than the rest of the economy and remained highly concentrated in a few products and markets. Total merchandise exports have stagnated in the years preceding the pandemic with all major product groups except food products declining during the decade from 2010 to 2019. They have also continued to be dominated by minerals and agricultural products, while manufactured exports have become increasingly concentrated in resource-based products, with the exception of the automotive sector. Overall, after the 1990s, the growth of manufacturing exports has been insufficient to enable a manufacturing export-led growth path. The economic contraction during the global financial crisis, followed by a tepid economic growth, which coincided with the continuous decline in electricity supply, growing governance and policy uncertainties, and continued fierce import competition during the remainder of the decade and a half, contributed to the exit of firms and the hollowing-out of the productive base in manufacturing, including that of exporters. Finding 2: While South Africa’s exports to African markets have expanded faster than to other destinations, they have remained constrained by tariffs and logistics barriers. While China has been South Africa’s single largest export market since 2009, regional exports have expanded from 19 percent of all non-mineral exports in 2000 to 31 percent in 2019, with Southern African Customs Union (SACU) countries making up 44 percent of this share. Small firms are more likely to export to nearby markets, especially SACU. However, while the African market is an attractive destination due to its relative proximity and rapid population growth, trade barriers both in South Africa (such as port and transport infrastructure) and in destination countries (including tariffs and weak trade facilitation) present significant obstacles. Tariffs imposed on South African exports in the rest of Africa have a significant negative effect on South African exports of manufactures and food products. This arises from a combination of high tariffs on products exported, combined with relatively high negative tariff elasticities. This highlights considerable potential gains for South African exporters from the implementation of the AfCFTA due to both entry of South African exporters into African markets, an increase in the number of products by exporters, and rising values of exports per product. In negotiating the AfCFTA, South African policymakers may want to aim to locate the commitments to reduce tariffs across the continent in a wider developmental program to incentivize industrialization and investment, promoting a virtuous cycle.¹ ¹ South Africa is following a developmental regionalism approach in Africa, advocating for regional integration, led by the AfCFTA, to be built on a framework based on four parallel and interconnected pillars: a) cooperation on building mutually beneficial trade integration (fair trade integration); b) cooperation on industrial development and upgrading in regional value chains (transformative industrialization); c) cooperation on investment in cross-border infrastructure and trade facilitation; and d) cooperation on building democracy, good governance, and peace and security. Executive Summary | xiii Finding 3: Exports in services have underperformed merchandise exports contrary to the global trend, but there is significant growth among knowledge-intensive services. Tradable services play an increasingly significant role in the global economy, both in meeting consumer demand and in providing inputs for producers. They contribute to economies both through new activities and new jobs, and indirectly by raising the productivity and performance of existing industries and activities. As a result, services exports from middle-income countries increased three-fold between 2005 and 2019. However, South Africa’s services exports have not followed this global trend, with exports largely stagnating since 2005, and the share of services trade in GDP declining from 8.5 percent in 2011 to 5.2 percent in 2021. Travel and transport services have dominated, making up almost two thirds of all services exports. However, there have been positive developments in this sector, such as the emergence of exports in knowledge-intensive industries such as financial services and ICT, which have grown more rapidly than other services sub-sectors. Government and the private sector identified the global business services sector as a growth opportunity some time ago. A sector strategy was developed, supported by a customized and carefully calibrated financial incentives. As with many countries, a serious constraint to evidence-based policy making to support services exports has been the dearth of accurate, precise data at disaggregated sectoral levels. Finding 4: Export have been dominated by a few firms, in a context of declining entry rates and few new entrants surviving and growing over time. South African goods exports are dominated by a few firms. Export participation, which is measured by the number of exporters and export transactions, appears to be a key factor explaining South Africa’s post-2010 aggregate export performance. South Africa’s export structure is highly concentrated with firms’ export concentration levels rising within most industries in recent years. The very high concentration of exports in most industries also points to the absence of small and medium-sized exporting firms, and the presence of barriers inhibiting their growth. This indicates that South Africa faces challenges, as it becomes more difficult for exporting firms to succeed. Firms that enter and survive grow fast and diversify, but for the majority, entry is difficult and tends to require relatively high levels of productivity, as well as global value chain (GVC) linkages. xiv | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Finding 5: Increasing transport and logistical costs have penalized the competitiveness of South African exports. Despite longstanding efforts to address transport and logistics constraints, these remain significant impediments to South Africa’s competitive advantage. The country already faces a significant disadvantage in terms of distance to major trading markets, in turn negatively impacting the net returns to exporting. This has been exacerbated by other factors, including the inefficiency of South Africa’s ports, poor and deteriorating quality rail infrastructure services, a lack of intermodal facilities, and high road freight and pipeline transport costs. Trade facilitation bottlenecks are an additional challenge across all sectors in South Africa and the pandemic has aggravated the situation. South African ports and rail have also suffered from aging infrastructure, under-investment, theft, and weak management in recent years. The ports of Gqeberha, Durban, and Cape Town were ranked between 291st and 344th out of 348 for container port efficiency in the 2022 Container Port Performance Index. The result is serious delays in ships berthing at the ports and global shipping lines deliberately bypassing South African ports, consequently adding extra costs for exporters, importers, and other firms across the port logistics supply chain. As a result, many firms are not able to export, and those who do are often limited to regional markets. Finding 6: Although South Africa failed to significantly increase its total exports over the past decade, higher exports at the firm level have been associated with improvements in wages, especially for low earners. The analysis presented in this report on the effect of export shocks on firm performance shows that for exporting firms in the manufacturing, mining, and agriculture sectors over 2013-18, an increase in firms’ export growth leads to an increase in firms’ sales, real capital stock, and total payroll growth. The labor market impacts of export growth have a greater positive impact on those who are not at the top of the wage distribution. Moreover, the positive effects of export growth on firms’ performance, jobs, and wages are driven mainly by small and medium-sized enterprises (SMEs) and firms located in the Western Cape. This supports the conclusions of the 2022 World Bank report Inequality in Southern Africa: An Assessment of the Southern African Customs Union, which highlights the importance of strengthening access to, and the availability of, private sector jobs. Executive Summary | xv Finding 7: South Africa’s current policy focus on promoting local industries can come at the expense of competitiveness, penalizing export performance and consumers. In recent years, South Africa has moved increasingly toward localization as a key objective of its trade and industrial policies. One key dimension of this, as stated in the ERRP released in October 2020, has been the target of reducing non-oil imports by 20 percent over five years. Globally, a range of localization measures are applied across countries, including local content requirements (LCRs); tax incentives and tariffs; import licensing procedures; and local ownership and employment requirements. Evidence suggests that such policies can contribute to making targeted industries less innovative and competitive over time (e.g., OECD 2019). In South Africa, various studies on its localization policies raise concerns about the impacts of localization-driven trade policy on certain industries, including the impacts they may have on industries that could offer diversification opportunities for South African manufacturing and exports. A full review of the economics of South Africa’s localization approach and an impact analysis of various combinations of possible measures on economic growth, sectoral structure, exports, and employment are beyond the scope of this report. However, for illustrative purposes, the report shows some of the risks to growth, exports, and regional integration objectives of taking a very sweeping approach to localization based on the 20 percent target. Nevertheless, the government has shown pragmatism in its approach to implementing the localization objective, taking into account characteristics of the sectors, but a few initiatives pertaining to public sector procurement have still shown significant price distortions and resulted in bottlenecks (e.g., solar panels). The findings and illustrative charts are presented in the following Figure E1. xvi | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Figure E1. Key Findings a. South Africa’s share in world exports has b. Exports to Africa are a major source of been on a declining trend demand for South African manufactured goods but remain constrained by high barriers South Africa’s share of world export value Weighted average MFN and statutory applied tariffs on South African exports, 2018 Share other sectors (%) 1.0 4.0 12 minerals & metals (%) 0.8 10 Tariff (percentage) 3.0 Share Fuels, 0.6 8 2.0 0.4 6 0.2 1.0 4 0.0 0.0 2 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 0 SACU SADC excl. Africa excl. Rest of World Total Agricultural raw materials Manufacturing SACU SADC Food Fuels, minerals & metals Applied tariff MFN tariff c. Knowledge-intensive services exports have d. Exports are highly concentrated among grown rapidly over the last 15 years, outpacing a small share of firms, as medium-sized traditional services like transport, tourism, exporters struggle to grow and construction Measure of export concentration Growth of services exports by sector, 2005—19 100 80 150 60 Indexed service export Percent growth (base=100) 130 40 110 20 90 Top firm Top 5 firms Top product Top 5 products Top destination Top 5 destinations Top 1% firms Top 5% firms Top 1% transactions 0 70 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Transport Travel Telecomms & IT Construction Financial Other business 2013 2016 2019 2020 e. South Africa’s export performance could be f. Removing tariff and non-tariff barriers to trade negatively affected further by requirements in the context of the AFCFTA could increase to localize 20 percent of imports South Africa’s gains from external trade Impacts of reducing imports by 20% through different Increase in income, exports, and imports by 2035 as policy options on macroeconomic variables (% change) percentage deviations from baseline from AFCFTA implementation 24.7 0 25 -5 20 17.6 -10 14.9 15 12.5 -15 -20 10 -25 5 3.81 2 1.76 Income GDP Exports Imports Imports 0.38 1.4 (all) (non-fossil 0 fuel) Only tariffs Tariffs & NTBs Tariffs, NTBs & TF Tariffs Localization Real Income (EV) Exports Imports Source: World Bank, OECD-WTO BaTIS database. Executive Summary | xvii What will it take for South Africa to see resulting in a 0.7 percent gross domestic product broad-based gains from trade? (GDP) contraction in that quarter. South Africa’s exports of goods also remain concentrated in Adopting an export-oriented strategy and products that are considerably more carbon making the most of it for South Africa’s intensive than those of competitors. A recent economy will require policy changes in at least World Bank study estimated that nationally three key areas. These are (i) structural reforms determined contributions (NDCs), the European to promote further competition in product Green Deal and carbon tax adjustments would and factor markets; (ii) trade and industrial reduce South Africa’s income, output, exports policies that support export competitiveness; and trade by 1 percentage point of GDP by 2030, (iii) reforms in trade policy and facilitation. driven by a decline in coal and metals exports. As This report focuses on trade policies and trade a result, about one-third of South Africa’s exports facilitation. The success of this strategy will also are at risk, as importing countries and buyers in hinge on supportive global demand conditions GVCs implement policies that shift demand toward and continued access to global markets. “carbon-competitive” suppliers of a particular product and away from carbon-intensive products Firstly, a more dynamic export performance towards low-carbon goods. Hence, policies that requires addressing long-standing structural promote diversification, notably in green goods constraints related to input markets that and services, will be important. It will also be have continuously eroded private sector important to ensure that implementation of border competitiveness and profitability over the past taxes by trading partners are non-discriminatory, decade. Continuing macro-fiscal and structural transparent, and meet the requirements of World reforms (especially addressing infrastructure Trade Organization (WTO) rules. bottlenecks, the most urgent being electricity supply) to restore business confidence and The second area for reform is to align trade and stimulate private sector investment, including FDI, industrial policies towards the objective of improving is essential to restart growth, especially as public export competitiveness. This encompasses taking finances are expected to remain constrained. a multi-dimensional lens when analyzing specific Among social policy priorities, it will be important policy reforms and their implications at the level of to ensure that social safety nets and labor the firm, industry and macroeconomy. If localization market policies are supporting labor mobility policies can, under certain circumstances, support into dynamic sectors and that education systems growth and job creation, they also need to be equip the future labor force with the skills assessed in view of their potential costs throughout required by sectors with high export potential. value chains and on consumers. Ensuring a sound These policies need to be coordinated across analysis of these proposals, as well as stating clearly government agencies to achieve South Africa’s the objectives and concrete plans to achieve them, ambitions for faster, greener, and more inclusive developed in consultation with the private sector growth. Although structural reforms take time, and other social partners, will be essential to avoid the signaling effect of reforms to improve creating policy uncertainty, further deterring already competition, increase investment and boost trade weak investment, as well as to avoid weakening can help to improve confidence immediately. private sector competitiveness and hampering firms’ export capabilities. Strengthening South Africa’s resilience to climate change is critical. South Africa is vulnerable to The third area for reforms, which is the focus of climate shocks as the devastating floods in the this report, is to reform trade policy and trade KwaZulu-Natal province in April 2022 showed, facilitation to help further maximize South xviii | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Africa’s export potential. This report proposes is needed, which will require bringing the following three lines of actions (summarized in private sector investment. Gradually in Table E1): introducing more competition into the transport and logistics chains and improving • Making the most of new trade agreements the economic and financial situation of the and other opportunities for diversification: relevant state-owned enterprises will be Modernizing South Africa’s trade policy and necessary. Beyond continued efforts by market access framework, in particular new the South Africa Revenue Service (SARS) trade agreements and regulations, would to streamline processes and procedures to help the country to make the most of current assist exporters and importers, developing trade opportunities. The recently ratified a National Single Window for trade-related AfCFTA offers an opportunity to develop and processes would also facilitate a reduction in update regulatory assessments for trade red-tape costs for exporters and importers. negotiations. This report identifies digital In the short term, strengthening trade services as a sector where South Africa facilitation, notably by revisiting the mandate has a potential comparative advantage and and composition of the National Committee which could become a successful export on Trade Facilitation would help address sector, provided that there is a supportive persistent bottlenecks and non-tariff regulatory framework and strategy. South barriers. Addressing women traders’ specific Africa also has many of the essential inputs constraints would also ensure that the required for diversification into new green opportunities and benefits of external trade sectors and low-carbon exports. Diversifying are shared more equally across society. In the country’s focus on investment and export the long term, developing smart borders and promotion activities toward new markets, one-stop border posts, and enabling efficient especially in advanced countries and East corridor management between the main Asia, could also support competitive firms economic centers and key land crossings to expand beyond the region. In time, an and ports, and streamlining SACU processes overhaul of South Africa’s trade policy (for example, by adopting a single customs would help the country respond to changes declaration and implementing automated in international conditions and help it VAT refunds) would further reduce the cost position itself to take full advantage of trade of trade. opportunities where it is competitive. • Supporting firms’ capabilities to become • Improving trade facilitation and addressing exporters and survive: Consistent with non-tariff barriers: Lowering the cost of the mandate of South Africa’s export and trade through trade facilitation reforms investment promotion agencies at the and investments is critical to promote a national and provincial levels, strengthening competitive export sector and support the promotion of exports and increasing more broad-based and inclusive gains from firms’ capabilities to export would ensure that trade. The government of South Africa competitive firms are able to access trade has pursued efforts to strengthen trade opportunities. Quick wins can be achieved facilitation and address non-tariff measures by improving access to information on trade over the years. Additional reforms are regulations and opportunities. These include needed to lower the cost of trade at and centralizing information on import and export beyond the border. Notably investment regulations and procedures and improving in ports, road and freight infrastructure awareness of export opportunities to reduce Executive Summary | xix firms’ search costs and facilitate access to Complementary policies accompanying the three new markets, including by supporting the areas of action above would help mitigate potential development of export promotion agencies, negative impacts from trade and make sure that foreign offices, and others. Improving a more dynamic external sector contributes to access to trade finance of SMEs is critical higher and more inclusive growth. Although this for the external sector to contribute to report highlights that increasing South Africa’s trade employment. Promoting more FDI into key integration would offer significant gains in terms of input-supplying sectors would contribute growth and job creation, it also recognizes that some to a better integration into value chains, the sectors and individuals may face adverse impacts. adoption of technology and, hence, higher In this context, and to ensure that trade openness productivity and competitiveness of exporting contributes to the government’s overarching sectors. Measures to support exporting firms objective of higher and more inclusive growth, that have opportunities to be competitive economic policies can help mitigate these negative in a low-carbon environment are also impacts. Social, education and labor market policies likely to support overseas market access. can ensure that South Africans are equipped with Such measures would include improving the skills required by promising export sectors and access to environmental technologies, that individuals whose jobs may be impacted by such as renewable energy and knowledge increased openness have some income protection and equipment for carbon monitoring, by in the short term and are supported in moving reducing barriers to trade in environmental to more dynamic sectors through encouraged goods and services. mobility and reskilling. Table E1: A roadmap for increasing South Africa’s export competitiveness Time Trade policy and Improving trade facilitation Increasing firm Complementary horizon trade agreements and addressing NTBs capabilities to export policies Sprints Develop an updated Strengthen a coordination Continue to strengthen Preserve macroeconomic digital trade regulatory structure for trade a targeted export stability to promote assessment to contribute facilitation and improve promotion strategy to business confidence to a negotiating position and centralize access to reduce search costs for and increase for the AfCFTA and assess information on official firms, improve awareness investment. the role of the AfCFTA in border regulations. of export opportunities developing regional value and facilitate certification chains to promote of exporters to access sustainable and resilient new markets. development. Continue to pursue a Address specific Strengthen shared Deliver on the trade diplomacy strategy challenges of women approach between Government’s structural that prioritizes trade traders at border government and the reform agenda, in opportunities with crossings through private sector on particular the key advanced and emerging improved safety localization policies to measures prioritized by economies, including in procedures, ensuring ensure that these are Operation Vulindlela. East Asia. consistent application consistent with the goals of border processes of increasing and and increased use of diversifying exports. technology. xx | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Time Trade policy and Improving trade facilitation Increasing firm Complementary horizon trade agreements and addressing NTBs capabilities to export policies Medium Improve decision Develop a National Resolve hurdles that Improve the business distance times and the Single Window to SMEs face in environment and runs transparency of the tariff- integrate government accessing affordable competitiveness setting process (bearing agencies (SARS, DTIC, trade finance and through product and labor in mind confidentiality Home Affairs, DALRRD, continue to strengthen market reforms. requirements), continue among others). export promotion support. to assess implications of tariff adjustments on the value chain, and consider economy-wide impacts where required. Update South Africa’s Introduce more Continue to strengthen Ensure that social safety trade policy to address competition into key FDI promotion to attract nets and labor market emerging trade components of the investment into key policies are supporting issues and the impact transport logistics chain. input-supplying sectors. labor mobility into of changing global dynamic sectors. conditions. Marathons Implement the AfCFTA Develop smart Ensure that Special Ensure that the agreements, ensuring borders at the key Economic Zones education system access to regional or land crossings. (SEZs) have the equips the future labor national adjustment necessary force with the skills support for displaced infrastructure based on required by sectors with workers. an analysis of high export potential. comparative SEZ performance. Promote trade in Develop the SACU Assist exporters to enter Deliver on South environmental goods area Authorized Economic green industries and seek Africa’s climate and technologies to Operator (AEO) program to ensure carbon taxes commitments to support support South Africa’s and single customs and other planned taxes adaptation and ensure firms to take advantage declaration process. under, for example, the that exports are not of trade opportunities European carbon border hampered by trade associated with the global adjustment mechanism partners’ carbon border climate transition. are transparent, are non- taxes in the future. discriminatory, and meet WTO requirements. Source: World Bank. Note: *Sprints are stroke-of-the-pen reforms implementable within 1–3 months or less at minimal cost, given the political will. Medium distance runs are programs implementable within 18 months with tangible benefits for millions of South Africans. Marathons are longer-term structural initiatives and institutional reforms that can be initiated and put on a firm footing in the next three years but will take longer to complete. Executive Summary | xxi To implement this reform agenda and ensure participation at the provincial and municipal that proposed policy reforms lead to tangible levels, especially given their involvement in trade improvements, institutional bottlenecks need to and investment promotion activities. be addressed. While the appropriate institutions exist to advance policy development and Finally, the report highlights areas for future work implementation on trade, in the past, coordination to continue to strengthen the analytical foundation challenges, capacity constraints and policy to support trade policy in South Africa. This includes disagreements have contributed to slowing the analysis on (i) how to make tariff and industrial implementation of trade policy reforms. In order policy more effective and (ii) how obstacles to to advance implementation, progress along three exporting can be overcome. With respect to the dimensions is required, with each dimension former, key issues include the distributional costs informing the following ones: (i) modernizing of protection and openness, and the institutional the trade policy framework and strengthening processes on tariff-setting and remedies, how to the export focus in industry master plans; (ii) best engage in AfCFTA negotiations and maximize reviewing the coherence and effectiveness of the benefits from the agreement, how to best the current institutional structure in line with address new climate-related trade regulations and the new trade and industrial policy focus; and take advantage of the demand for green goods, (iii) identifying cross-government short- and and how special economic zones can be used to medium-term priorities and integrating them enhance intra-African and global trade. Regarding into Operation Vulindlela. This will require a the latter, more analysis is needed on the obstacles cross-government implementation process faced by non-exporters or SACU-only exporters to consisting of four key dimensions, with a clear enter export markets, targeted sectoral analysis mandate from the Presidency and led by the on the key constraints faced by services exporters, Department of Trade, Industry and Competition how export promotion polices can be enhanced, (DTIC). It will also require the National Treasury, and on the soft and hard infrastructure constraints the South African Revenue Service (SARS), the to effectively develop regional value chains in Department of Agriculture, Land Reform and priority sectors. Rural Development (DALRRD), the Department of International Relations and Cooperation (DIRCO) As shown in this report, the foundations for and the National Economic Development and trade to drive inclusive growth are in place. South Labor Council (NEDLAC) trade subcommittee Africa has enormous potential to drive forward (Technical Sectoral Liaison Committee, Teselico) Africa’s integration and industrialization. However, to bring in social partners. Technical and analytical the cost of inaction is high. Realizing this potential support and guidance can further be provided will require a shared and coordinated effort by the by the Presidential Economic Advisory Council. country’s leadership, government departments Furthermore, it will be important to encourage and agencies, the private sector, and workers. xxii | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience I. Setting the Stage: More Trade Can Support South Africa’s Resilience and Drive Job Creation Despite its enormous potential, the South between 1999 and 2008, annual growth declined African economy has stagnated over the to 1.7 percent over 2010–19. With the population past decade increasing by about 1.5 percent annually, per capita GDP contracted in real terms over 2015–19. The South African economy has been This contrasts with South Africa’s middle-income characterized by low growth and high peers. While these were also heavily impacted unemployment since the 2008/09 global by the global financial crisis, most recovered financial crisis. After the gross domestic product afterwards and continued to see growth in real (GDP) increased by an annual 4 percent on average GDP per capita over the past decade (Figure 1). Figure 1: South Africa GDP per capita before and after the global financial crisis (real terms, index) 220 200 180 160 140 120 100 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 South Africa Lower Middle Income Countries (simple average) Upper Middle Income Countries (simple average) High Income Emerging Markets (simple average) Source: World Bank World Development Indicators. I. Setting the Stage: More Trade Can Support South Africa’s Resilience and Drive Job Creation | 1 The end of the commodity boom of the early 2000s declining investment and productivity growth contributed to the growth slowdown. While South that resulted in a less dynamic private sector. Real Africa has a significant manufacturing base and gross fixed capital formation by the private sector some dynamic services sub-sectors, it is also one of failed to exceed its 2008 peak through 2021. The the world’s leading exporters of gold, platinum, and International Monetary Fund (IMF, 2020) finds diamonds. Iron ore, coal, chromium, and manganese that private investment contribution to growth are also important exports. In turn, fuels, metals was about half that of the median emerging and minerals have increased significantly over market (EM) over the period 1994–2018 and its time and now account for between 40 and 50 contribution to total factor productivity (TFP) percent of the country’s total gross exports (and gains was less than half that of the median EM. an even larger share of its value-added exports). Analysis from the 2020 World Bank Enterprise They are an important driver of economic activity Survey also finds that South Africa has lagged through linkages, and exports of these goods are peers in terms of labor productivity and TFP. an important source of foreign exchange. During the 2000–13 commodity super-cycle, minerals Numerous factors have constrained public and fuel exports helped drive the increase in total investment and resulted in an inefficient exports. As commodity prices attenuated, total allocation of production factors. This includes exports declined from their peak, but commodities policy uncertainty and state capture, as continued to account for close to half of South well as a business climate characterized by Africa’s export basket, as its capital and consumer weak product and labor market competition, goods exports remained stagnant. (Figure 2) high costs for non-tradable inputs such as electricity and transport, skills scarcity and But structural constraints predominantly drove labor market rigidities (World Bank, 2018).² the country’s economic stagnation, leading to Public corporations also recorded a sharp fall in Figure 2: The dominance of commodities in South Africa’s export basket accelerated during the commodities boom and persisted even as prices declined $120,000,000 50% $100,000,000 40% $80,000,000 30% $60,000,000 20% $40,000,000 $20,000,000 10% $0 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Capital goods Consumer goods Intermediate goods Raw materials Share of minerals, fuels and stones in total exports Source: UN Comtrade. Note: Raw materials, intermediate, consumer and capital goods based on UNCTAD SoP classification; share of minerals, fuel and stone exports in total exports based on HS classification (Chapters 25–27, 68–71). ² Specifically, the core structural constraints identified in World Bank (2018) include: (i) skills scarcity in the labor force, driven by the legacy of “bantu education” and the emigration of skilled workers leaving due to weak economic prospects. In turn, immigration regulations have hampered the inflow of skilled migrants; (ii) skewed distribution of land and productive assets, with high concentration of wealth and land ownership, weak property titling and concerns about property rights driven by calls for land expropriation without compensation; (iii) high costs of non-tradable inputs, due to the dominance of inefficient SOEs in the energy, ICT and transport sectors; (iv) limited competition in product markets, as ownership is skewed toward a few large firms with conglomerate style structures, resulting in high barriers to entry; and (v) policy uncertainty and deteriorating state capacity, with increased corruption contributing to uncertainty and declining business confidence. 2 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience investment after 2008. Investment spending by manufacturer; and (ii) the global financial crisis SOEs was also affected by weak management, that started in 2008 (Edwards and Jenkins, 2015). a deteriorating financial situation, and slow Exports currently play a relatively small role in completion of major infrastructure projects. the South African economy compared with higher performing middle income countries in Asia. Weaker investment in turn precipitated the decline Exports comprise 27 percent of GDP in South Africa in economic capacity—a key lever for future compared with 60 percent in Thailand, 65 percent growth. As a result, the economy saw a persistent in Malaysia and over 100 percent in Vietnam. In decline in productivity and competitiveness 2019, South Africa generated about US$1,800 of that affected private sector dynamism. The exports per capita, which is considerably below manufacturing sector’s growth decreased from the US$3,400 of exports per capita in Thailand and 3.8 percent annually over 1999–2008 to just 0.3 almost $7,800 of exports per capita in Malaysia. percent over 2009–18, while its contribution to GDP Inward FDI declined from 2.9 percent of GDP in growth over the past decade has been negligible. 2008 to 1.3 percent of GDP in 2019. Even modest Across relevant performance indicators in the steps toward improving the export performance of 2020 World Bank Enterprise Survey, South Africa countries that have been successful in leveraging is underperforming relative to comparators. For trade to drive growth would have profound positive example, the share of firms investing in fixed assets impacts on the South African economy. is very low and capacity utilization high, indicating large investment needs. Exports have also not responded significantly to the depreciation of the South African rand in the As a result of these structural constraints, South past decade.³ This has mostly been attributed to Africa has also been losing trade competitiveness. electricity bottlenecks, limited product market Although South Africa continues to have a competition, and labor market constraints that significant manufacturing base, exports and have reduced the responsiveness of firms’ inward FDI have lagged compared with other exports to the rand’s depreciation. Thus, despite middle- income economies (Figure 3). This loss the opportunity to expand exports that the in trade competitiveness over time was amplified depreciation of the rand offered, these rigidities by two exogenous shocks: (i) the emergence of have held back firms’ capacity to benefit from China in the early 2000s as the world’s leading the competitiveness boost. ³ Draper et al. (2018, p. 17) also review potential causes and focus on three additional factors: (i) the simultaneous decline in demand for South Africa’s leading commodity exports; (ii) the growing significance of GVCs and, in turn, a lower elasticity of exports to exchange rates as GVC firms tend to be more price-inelastic due to customization and longer-term contractual relationships; and (iii) balance sheet effects (i.e., if firms are indebted in foreign currency, currency depreciations increase their export competitiveness on the one hand, but on the other hand also increase the domestic-currency value of their liabilities). I. Setting the Stage: More Trade Can Support South Africa’s Resilience and Drive Job Creation | 3 Figure 3: FDI as a share of GDP for South Africa and the middle-income country average 5 4 FDI as a share of GDP (%) 3 2 1 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 South Africa Middle Income Source: IMF BoP Yearbook from World Bank World Development Indicators. The COVID-19 pandemic further to levels last seen more than a decade ago, worsened the economic situation undoing years of progress. Many of these challenges were intensified South Africa experienced dramatic changes in its by the COVID-19 pandemic. The pandemic aggregate exports and imports in the context of represented yet another exogenous shock the COVID-19 pandemic, and related global and to South Africa’s economy, and particularly local demand and supply shocks. The onset of to its export industries. Global demand for the COVID-19 pandemic in early 2020 led to the raw materials and commodities temporarily global imposition of control measures to contain declined, while access to industrial components the spread of the virus. In April 2020, South Africa’s and manufactured goods from the region was merchandise exports fell to half their April 2019 hampered. Exports to countries in the region, values, as the most stringent level 5 restrictions which had been flourishing, were constrained by were implemented (Figure 4).⁴ Aggregate exports border closures and challenges in the logistics fell by 37 percent in the second quarter of 2020 sector. As a result, GDP contracted by 6 percent relative to 2019 values. Such large declines in trade in 2020, hitting the poorest most severely. The values were last experienced during the first half pandemic also weakened an already anemic of 2009, when aggregate trade fell by 25 percent. labor market even more. A record 2.2 million The decline in South African exports and imports jobs had been lost by mid-2020, with less than of goods and services in 2020 exceeded that of 40 percent of these recovered by the end of comparator countries. However, in contrast to the the year. Net jobs have continued to contract global financial crisis, exports recovered rapidly as throughout 2021 and the unemployment rate lockdown restrictions were eased in May and then reached a peak of 35.3 percent in December June of 2020. By the third quarter of 2020, quarterly 2021. Consequently, poverty rates have climbed export values had recovered to pre-pandemic levels. ⁴ Under the level 5 restrictions, South Africans were only allowed to leave their homes to purchase or produce essential goods, no travel was allowed, and sale of alcohol, tobacco and non-essential goods was prohibited. 4 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Figure 4: Value of South African goods and services exports and imports (US$ billion) 40 35 30 25 US$ billion 20 15 10 5 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Goods & services exports Goods & services imports Source: South African Reserve Bank (SARB). Following the initial negative shock, the 11.8 percent. Terms of trade continued to improve external sector, which traditionally contributed through 2021 and the merchandise trade balance negatively to growth, supported GDP growth recorded a surplus of 7.2 percent of GDP in 2021. in 2020. This was driven by rising commodity However, for most industries, the recovery in prices and a contraction in imports relative to export volumes in 2021 was insufficient to offset exports. Weak domestic demand meant that the losses that had occurred in 2020.⁵ import volumes contracted by 16.6 percent. The fall in exports was less severe (10.3 percent), as South Africa has returned to a low growth– external demand started to recover in the second low employment trajectory and the medium- half of the year. term growth outlook is insufficient to improve economic and social outcomes without bold The primary source of growth in export value structural reforms. After a short-lived post- in 2020 was price increases, not rising export pandemic rebound in 2021 and early 2022, volumes. Rising commodity prices, including coal, economic activity in South Africa has slowed. The platinum, and gold, played an important role in growth in GDP fell from 4.7 percent in 2021 to 1.9 aiding the recovery in merchandise export values percent in 2022 and 0.9 percent in the first half in late 2020. Commodity price increases continued of 2023. The unemployment rate stood at 32.6 to boost export values into 2021, accounting for percent in June 2023, and at 42.1 percent when 85 percentage points of the 47 percent increase discouraged job seekers are included. Poverty in export values of fuels, and metals and minerals. remains very high, at 62.6 percent in 2022, Agriculture, which was more insulated from based on the upper-middle-income country COVID-19-related trade disruptions than other poverty line ($6.85 per day at 2017 international sectors, also contributed to the export recovery. prices). The World Bank projects real GDP growth As a result, net exports contributed 2.1 percentage of 1.6 percent over the medium term, driven by points to growth. Buoyed by favorable global persistent and broad-based structural constraints, demand and prices, the mining sector grew by in particular the electricity crisis and transport ⁵ Despite the recovery in export values, only animals & vegetables (24 percent), wood products (20 percent), chemicals (9 percent) and clothing, textiles & footwear (6 percent) experienced net positive increases in export volumes in 2021 compared with 2019. I. Setting the Stage: More Trade Can Support South Africa’s Resilience and Drive Job Creation | 5 bottlenecks. Such moderate growth will not be result, government trade policy responses have enough to reverse the impact of the pandemic proliferated, particularly for medical goods and on the labor market, and the unemployment food, including restrictive measures on exports. rate is projected to stay at around 32 percent Many of these however, do not appear to have in the medium term. Moreover, this will do little been removed as conditions improved. For to change South Africa’s status as the world’s example, the cumulative number of restrictions most unequal country according to the Gini on exports climbed rapidly in the early months coefficient. Additional global and domestic of the war in Ukraine. Some 89 restrictions shocks, including increased geopolitical remained in place at the end of September 2022 tensions, rising energy and food prices, and the – suggesting that, contrary to WTO principles, increased frequency and severity of climate- the export limits have not all been temporary. related disasters represent further downside risks to South Africa’s growth outlook. Trade integration offers more opportunities than costs. The pandemic has highlighted the Trade can be a key driver of growth, job need to keep critical goods flowing through creation, and increased resilience borders. Nevertheless, countries such as those in East Asia that are deeply integrated into GVCs Skepticism around trade integration has been have recovered more quickly, especially those growing over the last decade. The general whose trading partners were also recovering decline in tariffs globally, during the early 2000s, rapidly and where COVID-19 infection rates was accompanied by increased use of regulatory were lower. In contrast, countries and regions measures and non-tariff barriers such as export that were less integrated in the global economy subsidies, restrictions on licensing or FDI and have lagged (Brenton et al. 2022). This suggests domestic clauses in public procurements (Niu et that, although participation in GVCs increases al 2018). International trade trends were marked exporters’ vulnerability to foreign shocks, it by a renewed drive toward industrial policies to also reduces their exposure to domestic shocks promote “strategic” sectors, often resulting in and provides resilience. At the same time, complex and distortive subsidies, trade conflicts estimations show that a shift toward global among major trading partners and reshoring reshoring to high-income countries and China of some production to high-income countries could have devastating consequences, driving (Brenton et al. 2022, IMF et al. 2022). an additional 52 million people into extreme poverty, most of them in Sub-Saharan Africa The COVID-19 pandemic and the war in Ukraine (Brenton et al. 2022). Public support may accelerated this trend. The pandemic had be needed to respond to market failures or significant negative impacts on countries with external shocks (IMF et al. 2022). very concentrated exports. Garment factories in Bangladesh, Vietnam, and elsewhere shut Implementing reforms to improve business down as retailers based in the European confidence and increase private investment is Union and United States canceled orders. In paramount to creating an enabling environment wealthier nations, pandemic-induced shortages for a competitive export sector. Stimulating private of critical supplies, from surgical masks to investment will be essential to boost growth, semiconductors, reinforced calls for reshoring especially as public finances are constrained. of production and economic self-sufficiency. As a Addressing South Africa’s longstanding electricity 6 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience supply crisis is a priority. Making progress on for South Africa. Greater outward orientation could the structural reforms laid out in the ERRP and also help raise competition in domestic markets. supported by Operation Vulindlela in the areas It could support the adoption of productivity- of transport, logistics, and digital networks, enhancing technology through imported would all go a long way toward stimulating intermediate goods, which have not yet penetrated private investment and job creation by removing South African markets. This could enable increased constraints to private sector productivity, scale economies and specialization, leading to job competitiveness, and ultimately profitability. creation, inclusive growth, and poverty reduction. Higher investment associated with increased A larger role for trade in driving economic growth innovation and technology adoption would in turn would be especially important in the context of also support TFP gains and competitiveness. South Africa’s weak growth potential. Traditional drivers of growth (household and government Increased trade and investment can play a consumption) are hampered by a depressed vital role in supporting economic development labor market and tighter fiscal policy, limiting the and poverty reduction. Trade has contributed Government of South Africa’s (GoSA) ability to significantly to prosperity across countries by boost aggregate domestic demand. supporting the development of new, higher- paying jobs and increasing the efficiency of Addressing South Africa’s lagging trade firms, as well as by providing consumers with competitiveness is also a key objective of the cheaper and better products. A 1- percentage- Government. The National Treasury’s 2019 paper point increase in trade is found to increase per- “Economic Transformation, Inclusive Growth, capita incomes by 0.5 percent (Feyrer, 2019). and Competitiveness: Towards an Economic Industrialization and productivity growth are Strategy for South Africa” (National Treasury, supported by increased participation in regional 2019) identified six structural reform areas, the and global value chains, which enables access estimated impact of which would be to increase to intermediate goods, helps attract strategic GDP by 2–3 percentage points over a 10-year FDI, and builds capabilities within firms. This is period. These include the need to improve especially true in the context of the COVID-19 implementation of industrial and trade policy, pandemic and its after-effects: trade contributed export competitiveness and “harnessing regional to improved access to essential food and growth opportunities.”⁶ The GoSA continued to medical supplies and was integral to help the emphasize the centrality of trade policy reforms global economic recovery and limit the negative in the economic recovery during the COVID-19 impacts on jobs and poverty. crisis. This is captured in the ERRP, which includes “re-orienting trade policies and pursuing Tackling domestic constraints to improve trade greater regional integration to boost exports, competitiveness and fostering greater global and employment and innovation” as one of its key regional integration could bring substantial gains structural reforms. ⁶ Priority reforms in the area of industrial and trade policy reform included better assessing industrial policy interventions, leveraging public procurement to support industrialization, improving the capacity of the International Trade Administration Commission and addressing current biases in trade policy. To promote export competitiveness and harness regional growth opportunities, the focus is on removing infrastructure constraints, negotiating trade agreements with growing markets, export promotion, setting up an automated licensing system for key export documentation; and reviewing border control procedures for plant and animal health standards. I. Setting the Stage: More Trade Can Support South Africa’s Resilience and Drive Job Creation | 7 Objective of this report of data sources, to provide an overview of South Africa’s trade performance over the past decade Trade integration can help mitigate downside for both goods and services. exogenous risks for the South African economy. For example, the AfCFTA can help cushion the Seizing the potential of trade for growth will negative effects of the COVID-19 pandemic require changes in South Africa’s approach to and the war in Ukraine on economic growth by trade and industrial policy. As such, the report supporting regional trade and value chains. In the also provides an overview of broad policy areas long run, it will increase the resilience of African to be considered for improving the country’s economies, making them better prepared in the trade competitiveness. It builds upon past work face of future shocks. South Africa can also take by the World Bank⁷ and others⁸ on South Africa’s advantage of the rising demand for low-carbon trade competitiveness and seeks to provide the technologies in the context of global climate most comprehensive and timely analysis of commitments and further develop its exports in these issues to date. these areas. The report is structured in three parts. This report provides a comprehensive, data- Following the introduction (Section 1), Section driven analysis providing new evidence to help 2 provides a diagnostic analysis of South shape reforms within a dynamic international Africa’s trade competitiveness, structured trading context. It seeks to highlight potential around seven key empirical findings. Section opportunities for the GoSA and other 3 then provides a roadmap of key policy stakeholders to pursue harnessing the trade reforms that could be instrumental in helping potential of the South African economy. It is to unlock this potential, as well as how these intended to support discussion on potential could be implemented. It focuses in depth on pathways toward faster job creation and constraints impacting three policy areas to more inclusive growth in South Africa. The discuss how these could be drivers of export- report focuses particularly on improving the led growth. These are: (i) lowering trade costs understanding of the role of trade in a robust, both at the border and behind the border; (ii) inclusive and green economic recovery from making the most of new trade agreements and the COVID-19 pandemic in South Africa. It other opportunities for diversification; and (iii) synthesizes work carried out by a team of World increasing the capabilities of firms to become Bank Group and South African experts across a exporters and survive, with active export broad range of issues and utilizing a wide variety promotion strategies.⁹ ⁷ Key relevant publications in this regard include the report Factory Southern Africa: SACU in Global Value Chains (Farole, 2016), Between Gatekeeper and Gateway (Draper et al., 2018), and Creating Markets in South Africa: Country Private Sector Diagnostic (IFC, 2019). ⁸ There has also been a breadth of firm-level analysis, most notably through the data made available through the SATIED project carried out in collaboration between UNU-WIDER, IFPRI and particularly the National Treasury. In addition, South Africa research institutions, notably Trade and Industrial Policy and Strategy (TIPS), a wealth of sectoral analyses and value chain studies have been produced. ⁹ These areas of focus build on the findings from the diagnostic analysis, and an extensive consultation process with government, the private sector and academia. 8 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa’s Trade Competitiveness since 2010 1. South Africa’s export market share over the past decade. This was articulated in declined, as diversification has stalled¹⁰ the National Development Plan (NDP) 2030 and successive Industrial Policy Action Plans. The From 1994 and the end of apartheid-era NDP, for example, targeted an increase in exports sanctions, South Africa significantly opened up volumes by 6 percent annually by 2030, with to international trade. This included multilateral non-traditional exports growing by 10 percent tariff reductions under the Uruguay Round of the annually. GATT/WTO, and the implementation of several preferential trade agreements. Concurrently, its Despite some successes, South Africa’s exports participation in international trade increased, with have weakened over the last decade. There exports and imports of goods rising as a share have been some bright spots, underpinned by of GDP, especially between 2002 and 2008 in supportive government policies, especially in the response to the global commodity boom. As in the automotive and selected agro-food sub-sectors. rest of the world, the global financial crisis led to a However, overall, the NDP’s export growth and dramatic decrease in exports and imports, both in diversification targets are unlikely to be met. values and as a share of domestic production and This is in large part because South Africa’s consumption. The real value of goods exports fell export performance has progressively worsened by 18.5 percent between 2008 and 2009. since the Global Financial Crisis (GFC). While exports recovered briefly over 2010–14, during Raising and diversifying South Africa’s exports the waning years of the commodity boom, has been a central policy objective of the GoSA these growth rates were not sustained. By 2019, ¹⁰ This section draws on background work on the evolution of South African export competitiveness by Lawrence Edwards and Jing Chien, Benedicte Baduel and Jakob Engel. It uses exporter level customs transaction data for South Africa that cover the period 2010 to 2019 made available through the World Bank Exporter Dynamics Database. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 9 exports as a share of GDP have not recovered Thailand and Malaysia (Figure 7). This is reflected to their pre-GFC levels (Figure 5). Goods imports across broad industry categories, except food have followed a similar trend. In real terms, they products, which grew in value by 20 percent grew by 6.2 percent per year during 2010–15, during 2010–19. Performance was particularly but only averaged 0.4 percent per year during weak in manufacturing (with some exceptions 2015–19 (Figure 6). such as automotive and mineral-based products), which has consistently lagged that of the rest of South Africa’s exports also underperformed the world from 2010, leading to a drop in South relative to peers. Exports values grew less Africa’s share in world trade by about a quarter dynamically than in the BRIC countries, Turkey, (Figure 8). Figure 5: Exports of goods to GDP and imports Figure 6: Growth in the real value of exports of goods to gross domestic expenditure and imports of goods 35 25 20 30 15 Annual growth (%) 10 Percentage (%) 5 25 0 -5 20 -10 -15 15 -20 -25 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 10 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Growth in exports of goods, 2010 prices Exports of goods/GDP Imports of goods/GDE Growth in imports of goods, 2010 prices Source: Own calculations using data from the South African Source: Own calculations using data from the South Reserve Bank. GDP and GDE are measured in market prices. African Reserve Bank. Figure 7: South African export value in Figure 8: South Africa’s share of world comparative perspective export value Share Fuels, minerals 10.0 4.0 Share of other 2.0 & metals (%) sectors (%) 0.8 3.0 0.6 2.0 0.4 1.0 0.2 1.5 0.0 0.0 Index (2000 = 1) 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Total Agricultural raw materials Manufacturing 1.0 Food Minerals, metals & fuels Source: World Bank research. Calculations using world export values obtained from WTO. Note: South African 0.5 export data are obtained from UN Comtrade, but are 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 adjusted for missing or irregular data for several products (gold, platinum, diamonds) during the 1990s. The data World Brazil Chile China Colombia exclude South African exports to the other SACU members, as these data are only reported from 2010. Agriculture India Malaysia South Africa Thailand covers SITC sections 0, 1, 4, and 2 minus divisions 27 and Source: WTO data (https://data.wto.org/) and UN 28; fuels, minerals & metals covers SITC sections/divisions Comtrade. Data exclude exports to Botswana, Eswatini, 3, 27, 28, 68; and manufacturing covers SITC sections 5, 6, Lesotho and Namibia. 7, 8 minus division 68 and group 891. 10 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience One key outcome of the 2010–19 export growth these exports were primarily comprised of metal process has been that minerals and metals and mineral products. remained the most salient feature of South Africa’s export bundle. While historically South African Exports have been an important source of exports have been dominated by minerals and demand for South African manufactured metals, and gold in particular, South Africa’s export goods, but the net contribution to output after bundle diversified, with manufacturing goods rising considering import penetration has diminished as a share of total exports from 1992 to 2004. over the past decade. Overall increased domestic The reversal of this trend during the commodity demand has been the dominant driver of changes boom of the early 2000s was sustained even as in output growth, raising manufacturing output commodity prices declined and, in recent years, by 54.6 percent over the 1992–2019 period (Table manufacturing export growth has lagged other 1), The contribution of net exports to output sectors. The implication is that the post-2010 growth turned consistently negative from 2001, period appears to be characterized by diminishing driven by weaker growth in export orientation, diversification of manufactured exports, with and sharp increases in import penetration. This exports increasingly dominated by resource-based in turn was largely driven by imports from China, manufactured and automotive products (Figure 9). with the re-orientation of manufacturing toward an export-led growth path that was seen as A similar picture emerges on the import side. reversing in the 1990s. Moreover, manufacturing Imports of manufactured goods as a share of production has become more capital-intensive, consumption rose strongly from the 1990s with production in labor-intensive manufacturing as economic growth recovered following the declining, especially in recent years. recession in the late 1980s/early 1990s, and tariff barriers fell. Driven by China’s rapid Overall, apart from the 1990s, manufacturing export- led growth following the country’s export growth has been insufficient to lead South entry into the WTO in 2001, import penetration Africa onto a manufacturing export-led growth in manufacturing continued to rise strongly. path. The economic contraction during the global Imports by South Africa of manufactured goods financial crisis, followed by tepid economic growth, from China increased rapidly, and in 2009 China a decline in income per capita and thus local surpassed Germany to become the country’s demand and continued import competition during main source of imports. Exports to China also the remainder of the decade, contributed to the exit rose strongly, with China becoming South Africa’s of firms, and the hollowing out of the productive dominant export destination by 2009, though base in manufacturing, including that of exporters. Figure 9: Share composition of South African exports 70.0 60.0 50.0 40.0 Percent 30.0 20.0 10.0 0.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Agricultural raw materials Food Fuels, minerals & metals Manufacturing Source: World Bank. Calculations using adjusted UN Comtrade data. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 11 Table 1: Decomposition of South African manufacturing output growth (share of initial output) 1992–2001 2001–2010 2010–2019 1992–2019 Growth of domestic demand 19.8 17.1 9.4 54.6 Increased exports 17.0 3.4 6.8 30.8 (of which exports to China) 0.3 0.6 0.3 1.4 Increased import penetration -10.2 -9.4 -6.9 -31.9 (of which imports from China) -1.2 -5.5 -4.4 -14.3 Net trade 6.8 -6.0 -0.2 -1.1 % Change in output 26.5 11.1 9.2 53.5 Change in output (R billion) 142.1 74.9 69.6 286.6 Source: World Bank research extending Edwards (2021). Trade data are obtained from UN Comtrade via World Integrated Trade Systems, while employment and output data are obtained from Statistics South Africa. Note: Based on 44 manufacturing industries at the 3-digit level of the SIC. The calculations assume common deflators for output and trade values within each industry. 2. South Africa’s exports to African Unsurprisingly, key determinants shaping the markets have expanded faster than to geographical composition of South Africa’s other regions, but remain constrained by exports of food products and manufactured tariffs and logistics barriers¹¹ goods are destination GDP and distance. A 10-percent increase in destination GDP is South Africa’s exports vary enormously across associated with a 10.6-percent higher export destinations in terms of levels, exporter value to that destination. Higher aggregate numbers and product composition. However, export values to high GDP countries are driven it is important to understand the sources of by a combination of more exporters, that export this variation. Analysis using a gravity model more products with higher export values to these (following Bernard et al., 2007; 2009) and countries. The distance of trade partners also focusing only on non-commodity exports makes a significant difference, with a 10-percent shows that higher export values are driven by a increase in distance resulting in a 21.9-percent combination of more exporters, higher average decline in exports, driven almost entirely through export values per firm, higher average number reductions in the number of exporters and, to of products exported by firms, and higher values a lesser extent, by reductions in the average of exports per product. For example, the high number of products exported by firms. This export values to China, the United Kingdom, and illustrates the challenge that South African firms the United States largely originate from the high face in accessing international markets given number of firms exporting to these countries. South Africa’s geographic remoteness. Larger export destinations (in terms of export value) are also characterized by firms of higher Distance to destination markets does not affect average size. all firms equally, with trade costs constraining ¹¹ This section draws on background work on the evolution of South African export competitiveness by Lawrence Edwards and Jing Chien, Benedicte Baduel and Jakob Engel. It uses exporter level customs transaction data for South Africa that cover the period 2010 to 2019 made available through the World Bank Exporter Dynamics Database. 12 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience smaller and less efficient firms more. For These prior trends have continued including food example, small firms are more likely to export and beverages, rubber and plastics, non-metallic to closer markets, and particularly to SACU minerals and electrical machinery (Figure 10). members. This is because transport costs and fixed export costs are lower for these countries. However, while the African market is attractive as In turn, trade costs influence aggregate exports a destination in terms of its relative proximity and through multiple channels. First, high trade future growth potential, trade barriers present costs to destination markets reduce numbers a significant obstacle. When looking outside of of exporters to these markets. Second, for the Southern African Development Community exporters that continue to export, high trade (SADC), South African firms face substantial tariff costs to a destination reduce the value of the barriers on several of their key products. Improved firm’s exports to that destination, by lowering market access through lower tariffs should expand both the number of products exported, as well South African exports to these countries through as the value of exports per product. a combination of increased export participation and increases in the range of products by In this context, exports to regional markets have existing exporters. Equally, if not more important, grown in significance, with exports to Africa however, is to utilize the AfCFTA to coordinate serving as a major source of demand for South the implementation of the WTO Trade Facilitation African manufactured goods (Figure 10). During Agreement. Logistics costs are very high on the 2000–12, Africa’s share of South African exports African continent relative to the rest of the world.¹² of non-mineral goods (excluding those to the World Bank analysis shows that reducing barriers SACU) rose from 19 percent to almost 29 percent, in Africa could stimulate growth in exports mainly thus surpassing the European Union (EU) as the through rising numbers of exporters. country’s major destination for these products. South African exports to Africa are particularly Figure 10: Africa’s share in South African goods exports, 2010 and 2019 80 70 60 50 Percent 40 30 20 10 0 Animals, vegetables Foodstuff Fuels, minerals & metals Chemicals Rubber & plastics Wood products Clothing, textiles & footwear Non-metallic minerals Base metals Machinery Electrical machinery Transport equipment Other Total Share in 2010 Share in 2019 Source: World Bank research. Calculations using the SACU transaction data. ¹² Simulations of the impact of the AfCFTA predict increases in intra-African exports range of 14.6 percent if only bilateral tariffs are removed, to a high of 133 percent if other complementary policy changes, including the trade facilitation agreement, are implemented (African Development Bank, 2019). For South Africa, the World Bank (2020) simulations predict that exports will rise by 1.4 percent with AfCFTA tariff reductions but will increase by 17.6 percent if non-tariff barriers are reduced and customs procedures improved. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 13 constrained by high tariff barriers on the South Africa’s proximity to and membership in continent. While South Africa has negotiated a a customs union has resulted in high aggregate free trade agreement with SADC, tariffs on South trade values, firm numbers and product range African exports still remain for several of these destined for the SACU market. High entry rates countries. Some countries, such as Angola and the into SACU signal that many firms use the market Democratic Republic of Congo, for example, have in experimenting with exporting. This is aided by not yet implemented tariff reductions, while others lower export barriers associated with contiguity such as Zimbabwe and Malawi have fallen behind of borders and common external tariffs and in the implementation of the tariff phase-down institutions of the customs union. This provides schedules. Nevertheless, the weighted average access to entry into exporting by smaller firms. applied rate to SADC (excluding SACU) countries is Most of these firms export manufactured goods low, at 1.37 percent (2018 data). Weighted average and processed food products, which can assist in applied rates on South African exports of goods realizing the GoSA's industrialization objectives, to the rest of the world are also relatively low, and growth of small firms that are relatively at 1.9 percent in 2018, reflecting a combination labor-intensive. of generally low tariffs applied by advanced economies, together with preferential access Many new entrants only compete on the basis of into the European market in accordance with the preference margins and are unable to transition Trade, Development and Cooperation Agreement into international markets. Exit rates are also between South Africa and the EU. In contrast, Africa very high. However, there are exceptions. New (excluding SADC and SACU) imposes relatively high entrants into SACU that do survive, grow fast and tariff barriers on South African goods exports, diversify the product and destination composition averaging 8.6 percent in 2018. of their exports. The data suggest that there are considerable gains in learning from exporting. SACU is a major market, but dependency However, these exporters remain small relative of many South African exporters on the to successful entrants into other regions and SACU market has also contributed to a more other established exporters. Therefore, continued subdued aggregate export performance. The high dependence on the small SACU market may decline in the total number of exporters is constrain growth. disproportionately driven by low net entry into the SACU market. Gravity model analysis Tariffs in the rest of Africa disproportionately shows that this may in part be attributed to the affect South African exports of manufactured relatively low GDP growth in the rest of SACU goods and food products (Figure 11). This is countries over the period. For example, the expected given the manufacturing and food (lagged) trade weighted average log growth intensity of South African exports to the region. in the SACU market was 1.6 percent per year in 2015–19, compared with 3.1 percent in the rest of Africa, and 3.2 percent in the rest of the world. Our results suggest that this weaker growth will also result in diminished export While South Africa has negotiated a free growth through reducing the range of products trade agreement with SADC, tariffs on by firms that continued to export to SACU South African exports still remain for countries, as well as through lower values of several of these countries. exports per product. 14 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Nevertheless, a 10- percentage-point increase extent to which SACU member imports from in Most-Favored Nation (MFN) tariff rates in South Africa are biased toward products with the rest of Africa are associated with negative high external MFN rates and consequently high 1.8 percent impact on South Africa’s aggregate preference margins (Figure 11, Table 2). This has exports. The overall implications of these results several implications. First, preferences to South are that tariffs imposed on South African exports African exporters under the customs union help in the rest of Africa have a significant negative explain the relatively high number of exporters effect on South African exports of manufactured and the extensive range of products exported to goods and food products. This arises from a the SACU market. Second, the high preference combination of high tariffs on products exported, margins help explain the presence of small plus relatively strong negative tariff elasticities. exporters with wide product portfolios, but low The results therefore signify considerable values per product, exporting to the SACU market. potential gains for South African exporters from Preferences enable smaller, less efficient firms the implementation of the AfCFTA. According to overcome the costs of exporting and provide to the results, exports can be expected to protection against foreign competitors. Finally, increase through a combination of increased preference margins have also influenced the entry of South African exporters into African product composition of South Africa’s exports to markets, together with increases in the number the rest of SACU, with exports oriented toward of products by exporters and rising values of products with higher external tariffs. To the exports per product. The potential gains from the extent that South African firms exporting these AfCFTA, as well as policy priorities for realizing products only compete on the basis of protection, these, are discussed in more depth in Section III. their scope to expand and grow exports into other markets is limited. The consequence is that The product composition of South Africa’s the exporter base to SACU does not necessarily exports to SACU (and SADC) are shaped by provide a platform for expansion into the more preference margins. This is evidenced by the competitive global market. Figure 11: Weighted average MFN and statutory applied tariffs on South African exports, 2018 12 10 Tariff (percentage) 8 6 4 2 0 SACU SADC excl. SACU Africa excl. SAC Rest of World Applied tariff MFN tariff Source: World Bank research using tariff data obtained from TRAINS. Note: The values reflect the weighted average tariff across countries in each group using South African 2018 export values as weights. For countries not reporting tariff data, the nearest prior year tariff rate is used. Data for 127 countries are used (4 SACU, 8 Rest of SADC, 21 Rest of Africa and 94 Rest of World). II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 15 Table 2: SACU (excl. South Africa) tariffs on imports from South Africa, the rest of SADC, the rest of Africa and the rest of the world, 2018 MFN Applied Preference margin SACU 9.18 0.00 9.18 SADC excl. SACU 1.27 0.29 0.99 Africa excl. SADC 3.57 3.57 0.00 Rest of the world 4.57 3.92 0.65 Source: World Bank research using export transaction data obtained from SARS. Note: Based on HS6-digit tariff and import data for 2018 obtained from TRAINS. High barriers within Africa represent a services. With lower logistics costs smaller firms substantial problem for South African firms. A with fewer product ranges are able to enter into 50-percent reduction in African countries’ LPI gap these export markets, reducing the average size from the global mean results in a 26.5- percent composition of firms to these destinations. increase in the value of South African exports. These gains accord with general equilibrium 3. Services exports have underperformed model simulations of the potential impact on and are heavily concentrated, but there intra-African trade arising from improvements in is significant growth among knowledge- trade facilitation under the AfCFTA. intensive services¹³ Finally, South African exports have a positive The services sector is the leading source of relationship to trade facilitation, as measured employment in South Africa. The overwhelming by the cost and efficiency of destination share (76.6 percent) of jobs within South Africa’s logistical services. An improvement in logistics metropolitan municipalities in 2018 was in in a destination from the median to the 75th service-related industries, led by business and percentile is associated with about an 84 financial services (33.6 percent), retail and percent increase in South Africa’s export value wholesale trade (26.9 percent), transport and to this destination. Higher levels of logistics communications (8.2 percent) and construction performance, however, reduce destination-level (7.9 percent).¹⁴ Manufacturing accounted for measures of the mean number of exported only two out of 10 (19.3 percent) private sector products per firm, and within-firms, and the jobs in metropolitan areas. However, much of mean value of exports per product. This is this job creation came from services activities because the composition of exporting firms and with low value added and weak export potential products shifts in response to improved logistical (Figure 12). ¹³ This section draws on Visagie and Turok (2023) “Recognising the role of tradable service exports in the South African economy–An untapped resource?” It uses WTO/OECD balance of payments data and firm-level evidence from the 2020 South Africa Enterprise Survey. ¹⁴ This excludes largely non-tradable private households, government, utilities and community services. 16 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Figure 12: Detailed industry job growth in South Africa’s metro areas, 2014–18 10 BUS: labour brok 8 Average job growth per year (%) BUS: cleaning 6 BUS: legal BUS: IT BUS: manag TRADE: hotel & restaurant TRANS: air BUS: real est BUS: priv security 4 AGRIC BUS: built env BUS: adv & market MAN: transport TRADE: wholesale TRADE: retail MAN: elec MAN: food & bev CONST 2 & supp TRANS: ware MAN: other BUS: rentals MAN: chem TRADE: vehicle & fuel BUS: other BUS: R&D TRANS: land TRANS: telecoms 0 MAN: textiles -10,000 -5,000 BUS: bank & invest 0 wood & paper MAN: 5,000 10,000 15,000+ BUS: insur & pens TRANS: sea -2 MAN: metal & mach BUS: account -4 Average job gain/loss per year Source: Metro spatialized administrative tax panel, 2013/14–2017/18. Note: The data cover the tax-year period 2014/15– 2017/18 and apply a two-year rolling average. TRADE: retail contributed more than 85,000 jobs but was cut at 15,000+ for visibility. Figure 13: Greenfield FDI by sector for South Africa, 2009–19 10,000 9,000 Estimated CAPEX (USD millions) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 -1,000 2009 2011 2013 2015 2017 2019 Services Manufacturing Extractives Agricultural raw materials Source: Financial Times FDI Markets. Note: Data are based on announced greenfield projects over the time period. Capex numbers are estimates and should be treated with caution. FDI inflows over the past decade have also been consumer demand and in providing inputs for predominantly in the services sectors. Greenfield producers. They contribute to economies both investments into services sub-sectors were directly through new activities and new jobs, consistently two or three times larger than in and indirectly by raising the productivity and manufacturing between 2009 and 2019 (Figure performance of existing industries and activities. 13). While there was significant volatility in foreign South Africa has struggled to diversify and investment flows over time, the general trajectory upgrade its industrial base beyond the export of for both services and manufacturing was basic commodities, while business and financial downward, particularly over the past five years. services have been relatively successful. This begs the question as to whether tradable services could Tradable services play an increasingly significant make a greater contribution to international trade role in the global economy, both in meeting and, if so, what the opportunities and obstacles are. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 17 Services can also make an important indirect the COVID-19 pandemic, which had a substantial contribution to exports as they are embedded impact on some of South Africa’s leading services within the value chains of manufactured goods. sub-sectors such as tourism. In this regard, South For instance, according to the OECD’s Trade in Africa lags both the global average and many Value-Added Database, services comprised more of its comparators (Figure 14). For example, the than one-third (35.4 percent) of the value added of share of services trade in GDP of Southeast Asian manufactured goods exported from South Africa in countries such as Malaysia and Thailand in 2021 2018. A brief review of the structure and trajectory was three times that of South Africa’s. of South Africa’s economy helps to highlight the importance and potential of services within the The trend for service exports over the past two domestic economy, sometimes in contrast to decades was volatile and tended to correspond the trajectory of manufactured trade. It follows with movements in merchandise trade, and that the contribution of services to domestic hence to the commodity cycle. Both services and trade might be a precursor to opportunities for merchandise trade experienced a dramatic rise international expansion, either embedded in during the commodity boom of 2002 to 2008, manufactured goods or as a direct export. but severely contracted in response to the global financial crisis of 2008/09. Both were quick to Services exports have been far smaller in recover, rising to a period peak in 2011 but then comparison to total merchandise trade, fluctuating eroded over the rest of the period. By 2019, the between 10 and 20 percent of merchandise level of services and merchandise exports had trade. In 2019 services exports accounted for fallen to levels comparable to the mid-2000s. US$13.7 billion compared with US$83.9 billion for The volatility of South African services and merchandise exports. That said, the value of direct merchandise exports is clearly of concern, as is services exports was still substantial. the downward trend in recent years. South Africa’s overall services trade has remained This co-movement between services and stagnant relative to GDP since 2010 and in recent merchandise trade can be explained partly by the years has even declined. In 2010, services trade as significance of travel and transport services (65.8 a share of GDP was 8.5 percent and this declined percent of services exports in 2019) in South to 5.2 percent in 2021, especially in the context of Africa’s services export basket. Indeed, when Figure 14: South Africa lags comparators in trade in services as a share of GDP 30 Services trade as a share of GDP (%) 25 20 15 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 South Africa Chile Colombia Malaysia Thailand Brazil China India World Source: IMF Balance of Payments statistics. 18 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience excluding transport and travel from total services classifications are still highly aggregated but give exports it shows that total services exports some sense of what lies behind aggregated services were less volatile and dependent on the level of export trends. Construction was the only services merchandise trade (Figure 15). Non-transport sub-sector to see declining total exports over this and travel-related services rose significantly period, confirming the struggles faced by the South from 2000 onward—although from a low base— African construction sub-sector. Unfortunately, the increasing from US$1.9 billion in 2000 to US$5.3 category ‘other business services’, which showed billion by 2019, or by about 180 percent. the strongest growth overall, is too aggregated to discern specific types of services activities which Between 2005 and 2019, knowledge-intensive show significant promise. services such as financial services, IT and telecommunications performed best among South African services exports made up a services sub-sectors recorded in balance of small share of total African services imports, payment (BoP) data (Figure 16). The sector and countries nearest to South Africa were the Figure 15: Merchandise and services exports, 1994–2019 Merchandise Exports (US Dollars) Billions 20 120 Billions 18 16 100 Service Exports (US Dollars) 14 80 12 10 60 8 6 40 4 20 2 0 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Services Services (excl. travel and transport) Merchandise Source: IMF Balance of Payments Statistics Yearbook, OECD-WTO BaTIS database 2018 and 2021. Note: BaTIS was used to calculate the contribution of services excluding travel and transport. Prices are in constant 2015 US dollars. Figure 16: Relative size and growth of services exports by sector, 2005–19 Other business, $2,679 Cult. & recre., $274 160 Indexed service export growth 150 I.P, $130 Government, $266 140 130 (base=100) Maint. & 120 repair, $171 Transport, $3,381 110 100 Financial, $1,096 90 80 Construction, $61 2005 2007 2009 2011 2013 2015 2017 2019 Digital, $618 Travel, $6,803 Transport Travel Telecommunications & IT Construction Financial Other business Source: OECD-WTO BaTIS database, 2021. Note: Constant 2015 US dollar prices. Indexed in 2005, three-year rolling average. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 19 largest importers (Figure 17). Transport and firms (8 percent) reported exporting their travel have been excluded to focus on higher services to a foreign market, compared to one value-added services that promote diversification in five manufacturing firms (20 percent) that away from commodity-based trade. The results self-identified as exporters (Figure 18).¹⁵ This should be treated with caution, because of a high confirms the traditional contrast in tradability degree of modeling and imputation for partner- between services and manufacturing. However, related balance-of-payments data. Nevertheless, the picture changes dramatically when they do suggest that almost all countries in the considering whether firms had set up a branch region imported less than 10 percent of total or subsidiary. For manufacturing, 31 percent of services imports from South Africa. As such, firms had an African branch or subsidiary, and South African services firms have ample scope this was 27 percent for firms in services. In this to expand and deepen their reach and penetration context, South African services firms appear to on the continent, especially given their geographic have much greater foreign penetration than is advantage and the regulatory benefits of currently understood or acknowledged. While belonging to the same regional trade area. the survey did not go further to ask about the extent of sales through foreign subsidiaries, As for many other countries, the dearth of this at least gives some sense of the potential accurate, precise data at disaggregated sectoral tradability of services from South Africa. levels limits evidence-based policy making to support services exports. South African services Figure 17: South Africa’s share of African services data is also highly aggregated and largely imports (excluding travel and transport), 2019 drawn from SARB balance of payment statistics. More disaggregated data is needed, relevant to services trade for modes of supply (cross border, consumption abroad, commercial presence, and movement of natural persons), classified at detailed sectoral levels and specifying services export destinations. Another major limitation of balance-of-payments data is that it omits instances where firms establish a commercial presence abroad to service foreign markets. 10.0% This almost certainly means that balance-of- 5.0% payments data underestimate the true size and 0.1% potential of services exports. IBRD 47887 | MARCH 2024 Source: OECD-WTO BaTIS database, 2021. Based on the World Bank 2020 Enterprise Note: Export partner sectoral flows for services have a high Survey in South Africa, one in 12 services degree of imputation and should be treated with caution. ¹⁵ This survey covers 1097 firms in the non-agricultural, formal, private economy, and can be compared with more than 174,000 firms in 151 countries that have also completed the survey. Services sub-sectors in the survey include: construction, retail (incl. wholesale), hospitality (incl. hotels and restaurants), logistics (incl. transport, storage and telecoms) and ICT (incl. computer and software services). 20 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience A further interesting dimension to the tradability a branch or subsidiary on the rest of the of services is the high concentration of firms continent. This points to the potential role of reporting an international presence based in agglomeration for firms in services in helping to the Gauteng metropolitan areas (Figure 19). raise competitiveness and promote international Service firms in Gauteng were over three times trade. The international literature similarly more likely than those based elsewhere to suggests that sector clustering is relatively more report being an exporter, or otherwise having important for knowledge-intensive industries. Figure 18: Percentage of firms with an international presence, either as exporters directly or through a branch/subsidiary in another sub-Saharan African country* 35 30 31 25 27 Percent (%) 20 15 20 10 5 8 0 Manufacturing Services Exporter African branch/subsidiary Source: World Bank South Africa Enterprise Survey 2020; World Bank staff estimates. Note: *The Enterprise Survey asks “does this establishment have foreign affiliates, such as subsidiaries or branches in: SADC member countries or other sub-Saharan African countries”. Figure 19: Firms with an international presence, by region Smaller cities/towns 13 Services WC/KZN/EC metros 15 Gauteng city-region 53 0 10 20 30 40 50 60 Percent (%) Source: World Bank South Africa Enterprise Survey 2020; World Bank staff estimates. Note: Foreign presence includes firms that were either exporters or otherwise had a branch or subsidiary elsewhere on the continent. Only four provinces were included in the sample frame: Gauteng, KwaZulu-Natal (KZN), Western Cape (WC) and the Eastern Cape (EC). Firms were further sorted into urban agglomerations based upon geo-coordinates matched to the Global Human Settlements Layer. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 21 4. Exports have been dominated by a few compared with US$923,00 per firm exporting firms, with relatively few entrants that have manufactured goods. seen their survival rate decline over time¹⁶ Most exporters, and particularly smaller Export participation, as measured by exporter exporters, are highly dependent on the domestic numbers and transactions, appears to be a key market for the bulk of their sales. For many factor explaining South Africa’s disappointing post- exporters, sales to the domestic market provide the 2010 aggregate export performance. After initially platform from which they can access international rising quickly following the global financial crisis, markets. The empirical evidence also shows that a growth in the number of exporters and transactions firm’s size is a critical determinant of a firm’s entry tapered off, with levels falling from 2016. Exporter into exporting. However, South African industry characteristics vary enormously across industries. is highly concentrated, suggesting considerable On average, 38,526 firms exported each year in barriers to entry and success for small firms in the period 2010–19 and manufacturing by far the domestic market. The high concentration of dominates in terms of the number of exporters South Africa’s industries contributes toward the per year (close to 35,000), products (3,197), very high concentration of South Africa’s exports destinations (216) and transactions (914,000). (World Bank, 2018). Anti-competitive practices, and Each firm that exports manufactured goods policies that raise the costs of doing business for exports 18.4 products on average, compared with new and smaller firms, inhibit the diversification between 2 and 2.5 products for firms exporting of the manufacturing industrial base, and thus the raw agricultural materials and fuels, metals and export base. minerals. However, the average value of exports per firm is greatest for firms exporting fuels, This weak growth in exporter firm numbers metals and minerals at US$5.7 million per year, is associated with declining net-entry driven Figure 20: Entry, exit and net entry rates for firms and transactions a) Entry, exit and one-year survival rate for export transactions (b) Entry, exit and one-year survival rate for export firms 1-year survival rates of entrants (%) 1-year survival rates of entrants (%) 66 26 35 60 64 25 55 Entry and exit rates (%) Entry and exit rates (%) 30 62 24 50 60 25 23 45 58 20 56 22 40 21 15 35 54 52 20 10 30 2010 2012 2014 2016 2018 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Entry rate Exit rate 1-yr Survival rate Entry rate Exit rate 1-yr Survival rate Source: World Bank research using export transaction data obtained from SARS. Note: Entry rates for firms are calculated as Number of Entrantst/Number of Exporterst, Exit rates are calculated as Number of Exiterst/ Number of Exporterst-1, and Survival rates are calculated as Number of Survivorst/Number of Entrantst where Survivorst are entrants in t that export in t+1. ¹⁶ This section draws on background work on the evolution of South African export competitiveness by Lawrence Edwards and Jing Chien, Benedicte Baduel and Jakob Engel. It uses exporter level customs transaction data for South Africa that cover the period 2010 to 2019 made available through the World Bank Exporter Dynamics Database. 22 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience by declining entry rates and rising exit rates. industries suggests that common supply factors These trends were compounded by diminishing are driving outcomes. survival rates of new entrants and new export transactions: in 2011/12, the average one-year While in most countries, a small number of survival rate for new entrants was 57 percent. By ‘superstar’ firms drive export performance, this 2018, this had fallen to 46 percent (Figure 20). This is significantly more pronounced in South Africa. is also reflected in a contraction in the range of Figure 22 shows South Africa’s top 5 percent export products and destinations. The implication firm share of exports by HS Chapter heading is that South Africa was failing to replenish its (2-digit level) against the mean of a sample of 48 stock of exporters and transactions through countries in 2012. Most points in the figure are declining net entry and survival of exporters and above the 45-degree line indicating that South export transactions. This decline was broad-based Africa has a more concentrated firm export covering most industries and firm types. structure than the average in most of the HS chapters. Of the 94 HS chapters analyzed, South Firms operating in GVCs are more resilient, with Africa falls in the top five countries in terms of much of the downturn in exporter numbers concentration in one-third of the chapters. from 2016 being driven by exporter-only firms (Figure 21). The number of GVC firms rose from Lower export performance has been associated 2010, albeit initially more slowly than exporter- with growing concentration. Earlier research by only firms. But in contrast to exporter-only firms, the World Bank (2014) covering the period up their number continued to increase from 2015/16, to 2012 revealed that exports continued to be whereas exporter-only firms exited sharply. GVC dominated by minerals and metals, although firms are also found to have lower entry and exit substantial success had been achieved in rates, have much higher survival rates of new incentivizing exports of motor vehicles and other entrants (59 vs. 43 percent), and less churning. transport equipment. To assess whether export The pervasiveness of these changes across concentration has changed from this time, Figure 21: Index of number of exporters and Figure 22: South Africa’s firm export export transactions by GVC firm status (2010=1) concentration by HS chapter from a comparative perspective, 2012 1.5 1.4 1 1.3 Share top 5% in SA 1.2 .8 1.1 1.0 .6 0.9 0.8 .4 0.7 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 .5 .6 .7 .8 .9 Number of exporters Exporter only Number of exporters GVC Firm Mean share top 5% in other countries Number of transactions Exporter only Number of transactions GVC Firm Agriculture, fuels, minerals Other Source: World Bank research using export transaction Source: World Bank research using Exporter Dynamic data obtained from SARS. Database data for 2012 covering 49 countries. The Note: GVC firms are those that import capital and category Agriculture, fuels and minerals covers HS 01- intermediate inputs (as per the End-Use classification) 15 (Live animals, vegetable products (incl. fats & oils), in that year. A transaction is measured at the export- Animal fats and oils), HS 25-27 (Fuels and mineral product-destination level using annual data. products) & HS71 (Precious metals). II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 23 Figure 23 presents several measures of export (animals & vegetable products, fuels, minerals and concentration from 2013 to 2019. The data metals, base metals) where the export share of reveal two trends in export concentration. From the top 5 percent of firms exceeds 95 percent.¹⁷ 2013 to 2016, a period in which exports grew as Concentration levels are generally lower (below 90 a percentage of GDP, firm export concentration percent) in the manufacturing industries such as fell, whether measured in terms of the share of electrical machinery (80–82 percent), non-metallic the top firms or as a percentage of firms. For minerals (72–75 percent), rubber & plastics (82–86 example, the export share of the top 1 percent (5 percent), wood products, and clothing & textiles, percent) of firms fell from 77 percent (92 percent) but still exceed 90 percent in processed foods, to 73 percent (90 percent) over the period. The chemicals and transport equipment. geographic and product concentration of exports also fell, reflecting a diversification of South The very high concentration of exports in most Africa’s export bundle. However, from 2016 to industries also points to a “missing-middle” of 2019, as exports as a percentage of GDP fell, exporting firms, and the presence of barriers export concentration levels rose, with the export inhibiting growth of medium-sized firms. This share of the top 5 percent of firms rising back is indicative of a stagnant export structure close to 2013 levels of 92 percent. with very low transition of firms from small- to large-firm status, thus perpetuating high levels Similar trends in concentration are found across of concentration (Figure 25). There is also little most industries. Figure 24 plots the share of the transition by firms from low quintiles to the top 5 percent of firms in total exports by industry highest quintile over time, driven by a combination for 2013, 2016, 2019 and 2020. As shown in the of high exit rates, and insufficient export growth figure, firms’ export structure is most concentrated relative to larger firms. The low entry and exit in the primary and commodity-based industries rates and high survival rates are consistent with Figure 23: Measures of export concentration Figure 24: Share of top 5% of firms in exports by industry 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 Top firm Top 5 firms Top product Top 5 products Top destination Top 5 destinations Top 1% firms Top 5% firms Top 1% transactions Animal and vegetables Foodstuff Fuels, minerals & Chemicals Rubber & plastics Wood products Clothing, textile & Non-metallic minerals Base metals Machinery Electrical machinery Transport equipment Other 2013 2016 2019 2020 Source: World Bank research using South African export transaction data. The data exclude gold exports, the 2013 2016 2019 2020 inclusion of which raises the level of concentration, but has no effect on the trend. Export concentration across Source: World Bank research using South African export products is calculated based on data at the HS 6-digit level. transaction data. The data exclude gold exports. ¹⁷ Concentration levels rise the more disaggregated the product category. This explains the high levels of firm export concentration for the industry groups relative to that of total trade& plastics (82–86 percent), wood products, and clothing & textiles, but still exceed 90 percent in processed foods, chemicals and transport equipment. 24 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience an environment of high sunken costs of entry years are substantially larger than younger firms together with less uncertainty about export that have traded for fewer years. One reason is success at the firm level (Fernandes et al., 2016). that new entrants that survive are already larger But the high firm export concentration in South at entry than those firms that subsequently exit. Africa is also reflective of more pervasive barriers This is shown in Figure 26 where the cohort of 2013 to entry leading to high levels of firm concentration entrants that survive are much larger than the and markups across South African manufacturing size of the average entrant. Entrants that survive industries (Fedderke et al., 2018). Resolving South are also very different from non-survivors even at Africa’s manufacturing export predicament may the year of entry: they export more products, are therefore require policies to resolve South Africa’s larger, more likely to be GVC firms and less likely concentrated domestic market structure. to only export manufactures. However, growth from experience also contributes, as shown by Selection and relatively strong export growth the rightward shift of the size distribution of the are associated with the survival success of new 1,786 entrants that survived from 2013 and 2019. exporting firms. Firms that have traded for many Sustaining export participation by new entrants Figure 25: Quintile transition matrix, 2013–19 (all firms) 0.8 1.5 2.5 8.6 49.8 100% 3.8 7.3 8.3 6.6 80% 10.7 11.1 15.0 22.5 11.2 14.7 60% 17.3 9.2 9.1 40% 75.7 5.5 17.0 65.3 5.8 50.4 20% 37.0 2.5 21.5 0% 1 2 3 4 5 2013 quintiles 2019 Exit 2019 Quintile 1 2019 Quintile 2 2019 Quintile 3 2019 Quintile 4 2019 Quintile 5 Source: World Bank research using export transaction data obtained from SARS. Figure 26: The exporter size distribution of the 2013 cohort of entrants .2 .15 Density .1 .05 0 -5 0 5 10 15 20 n(export value) Entrants in 2013 Survivors in 2013 Survivors in 2019 Source: World Bank research using export transaction data obtained from SARS. Note: Based on a sample of 8,375 exporters that entered in 2013 and 1,786 of these entrants that survived to 2019. The legend ‘Entrants in 2013’ denotes all entrants in 2013 that had not exported in either 2010, 2011 or 2012. ‘Survivors in 2013’ presents the firm size distribution in 2013 of entrants in 2013 that survived to 2019. ‘Survivors in 2019’ presents the firm size distribution in 2019 of entrants 2013 that survived to 2019. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 25 can thus make a substantive contribution toward Of the extensive margin, net entry of firms and a recovery in export growth. net entry of existing firms into new countries are the major contributors, with net entry of products Exporting to other SACU countries does by continuing firms into existing markets playing not appear to provide a strong platform a very small role. A further feature is the for diversification and entry into global prominent role that price movements play in the markets. SACU-exporting firms share a contribution of the intensive margin, accounting few key characteristics. First, they are more for 76 percent of annual growth in the intensive numerous, and export a wider range of products, margin across the period 2011–19, excluding but are smaller as measured by export value, 2014, which was an outlier. The net contribution with substantially lower export values per of changes in export quantities to growth in the product. Second, exports to SACU are shaped value of continuing export transaction is very low by the preference margins, and target relatively and falls below that of the contribution of the protected products. These exports therefore do extensive margin in many years. The contribution not necessarily arise from a globally competitive to aggregate growth is moreover driven by the production base. Third, SACU represents a major top 1 percent, GVC firms, exporters to the rest source of demand for South African exports of of the world, and commodity-based exporters, manufactured goods and food products but not for given their dominant shares in total export value. much else, with the contribution of SACU to export growth diminishing over time. Finally, they have Post-Covid, it is notable that the recovery in lower survival rates. For some firms, SACU does aggregate exports of small firms was more rapid appear to provide a platform for some exporters to than for large firms. This reflects a persistent grow and diversify their product range and export negative intensive margin effect for large firms, destinations. But numbers are few, suggesting that and rapid extensive margin adjustments for small this is the exception rather than the rule. firms. While the extensive margin had a dramatic negative impact on export values in April 2020, All of this indicates that South Africa faces its negative impact on exports was temporary, challenges, as it becomes more difficult for as firms re-entered the market from May 2020 exporting firms to succeed. Firms that enter and and continuing firms re-established linkages survive grow fast and diversify, but for the majority with markets and re-introduced export products. entry is difficult and tends to require relatively However, whereas by July 2020 the extensive high levels of productivity, as well as GVC linkages. and intensive margins had proportionate effects The absence of more wide-spread “learning-by- on aggregate export growth of small firms, exporting” effects and the “missing middle”, in a relatively large negative intensive margin terms of firms’ size, may suggest that many firms continued to depress export growth of large are unable to enter the domestic market and grow, firms until October of 2020. From late 2020, and thus expand into the international market. growth in exports of both large and small firms raised aggregate export values, but the margin Finally, when examining the impact of these contributions continued to differ. Growth in firm dynamics on aggregate export growth, exports of large firms was mostly driven by the it becomes evident that South Africa’s annual intensive margin, while growth in exports of small export growth between 2011 and 2020 was firms was driven by the extensive margin, and dominated by the intensive margin (Figure 27).¹⁸ firms’ entry in particular. ¹⁸ Export growth along the intensive margin refers to increasing exports of existing exports and to existing partners. Export growth along the extensive margin related to increasing the number of exported products and export partners. 26 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Figure 27: Net margin’s contribution to mid-point growth of aggregate exports 20.0 15.0 10.0 5.0 Percent 0.0 -5.0 -10.0 -15.0 -20.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Net firm Net country Net product Net intensive Total Growth in unit value Source: World Bank research using export transaction data obtained from SARS. Note: Based on approach by Bricongne et al. (2012). Firms’ export response to the COVID-19 crisis likely to exit in response to the lockdown level 5, differed from that of the global financial crisis but were also quick to re-enter the export market. in some important respects. Matthee et al. (2016: Entry of new relatively small firms also occurred 183) find that the intensive margin contracted resulting in an increase in the total number of significantly during the global financial crisis of exporters of manufactured goods to levels above 2008/09, but then bounced back to pre-crisis pre-pandemic levels. Larger firms, and GVC firms levels quickly. However, they find that the negative in particular, continued exporting during lockdown impacts on the extensive margin persisted after level 5, but adjusted by exiting destinations and the crisis, with lower levels of entry of firms, new reducing the value of exports of products in those products and new destinations, particularly to markets that they continued to export to. The African markets. The decompositions using annual recovery in value of manufactured exports by data for 2020 and 2021 also show a recovery of these large firms was slower than small firms, the intensive margin in 2021, although to levels mainly because of a slow recovery in exports higher than the pre-crisis period. However, the along the intensive margin. One reason, as shown monthly decompositions reveal a much slower in the econometric estimates, is that COVID-19 recovery of the intensive margin compared with controls in destination markets impeded firms’ the extensive margin in 2020. Furthermore, the export growth. GVC firms were also affected by extensive margin recovered very quickly, such restrictive COVID-19 controls in markets where that it only had a small negative impact on export they sourced their imported intermediate and growth in 2020, despite the collapse in trade in capital goods. Exports by GVC firms were thus April 2020. Unlike the global financial crisis, the disproportionately negatively affected by the recovery in firms’ entry was particularly quick rapid imposition of relatively severe mobility and continued throughout 2021, boosting overall restrictions in many countries in the first part exporter numbers, with Africa a major export of 2020. GVC exports, however, then recovered destination for these firms. more quickly as COVID-19 controls were relaxed. The net effect was that GVC firms outperformed Overall, the analysis of the COVID-19 shock reveals other firms, after controlling for firms’ size and substantial differences in the adjustments by other characteristics, in terms of growth in export firms according to their size, industry and GVC value between the fourth quarter of 2019 and the status. Smaller firms, for example, were far more fourth quarter of 2020. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 27 5. Increasing transport and logistics Africa performance has stagnated over recent costs have penalized the competitiveness years (Table 3). of South African exports South Africa’s ports and rail systems have been Good access to international markets through deteriorating fast, because of mismanagement, exports and access to imported intermediate underinvestment, theft and lack of competition. inputs are critical for trade and GVC integration. Historical factors have also played a role. South High costs and delays associated with cumbersome Africa’s trade infrastructure was primarily border procedures impede the participation of designed for minerals trade rather than for firms in trade, as they raise the cost of accessing general goods trading (Pieterse et al., 2016; intermediate inputs and reduce the net price World Bank, 2018). Several powerful transport received for exports. Furthermore, they discourage SOEs have historically played an important the entry of smaller firms into exporting, and role in integrating the South African economy. contribute toward the rising capital and skill Transnet has origins dating back to the late- composition of the South African export bundle. 19th century with the creation of a government railway corporation. It subsequently developed Despite longstanding efforts to address and managed a variety of harbors to facilitate transport and logistics constraints, these the exporting of gold, minerals, and agricultural remain significant impediments to South produce. It built a strong international reputation Africa’s competitive advantage. Given its for technological leadership and engineering location, South Africa already faces a significant expertise (Visagie and Turok, 2023). disadvantage with respect to the distance to major trading markets, in turn negatively However, the capabilities of many transport impacting the price of goods (Draper et al., SOEs have been badly eroded over the past 2018). This is exacerbated by several additional decade, because of poor executive appointments, factors, including the inefficiency of South governance failures and mismanagement. There Africa’s ports, poor quality rail infrastructure, have been far-reaching effects on the efficiency, a lack of intermodal facilities, and high road cost, reliability, and responsiveness of state- freight and pipeline transport costs (Havenga owned transport systems. The railway network et al., 2017). This is borne out by numerous has suffered serious damage, disruption, theft indicators, in particular the World Bank Logistics and vandalism, resulting in business customers Performance Index (LPI) which shows that South diverting their cargo freight onto the roads. Table 3: South Africa’s ranking and scores on the LPI, 2010–23 Year LPI Customs Infrastructure International Logistics Tracking Timeliness Score shipments competence & tracing 2010 3.46 3.22 3.42 3.26 3.59 3.73 3.57 2012 3.67 3.35 3.79 3.50 3.56 3.83 4.03 2014 3.43 3.11 3.20 3.45 3.62 3.30 3.88 2016 3.78 3.60 3.78 3.62 3.75 3.92 4.02 2018 3.38 3.17 3.19 3.51 3.19 3.41 3.74 2023 3.70 3.30 3.60 3.60 3.80 3.80 3.80 Source: World Bank. 28 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience South African ports have also suffered from require improved cooperation and coordinated aging infrastructure, under-investment, and poor border management with neighboring countries decision-making in recent years. A recent study (in particular, Mozambique at Lebombo and found that the four main South African container Zimbabwe at Beitbridge), these efforts are ports are among the five worst performing of only proceeding slowly. This will, in particular, 351 container ports in the world (World Bank require improving customs procedures and and S&P, 2021). The result is serious delays fully implementing the WTO Trade Facilitation in ships berthing at the ports, global shipping Agreement, as well as targeted measures along lines deliberately bypassing South African ports key corridors.¹⁹ Recent progress in this area has increasing costs for exporters, importers and included the implementation of numerous key other firms across the port logistics supply chain. pieces of legislation²⁰ but among many other issues, the lack of a trade single window restricts The decision to reform Transnet could help the overall levels of facilitation provided. address some of these constraints. The Transnet Similarly, South Africa remains constrained Corporate plan, approved by the Board in March by inadequate and insufficiently coordinated 2021, envisions the separation of business units trade facilitation governance. These in turn to increase the private sector’s role in container limit effective engagement of key stakeholders, terminal operation and management, and in the coordination, and leadership for advancing freight rail sector (Transnet, 2021). Supported priority projects to improve customs and border by Operation Vulindlela, Transnet has appointed management procedures. an international terminal operator to develop a partnership for the operation of Durban In turn, addressing these non-tariff and trade Pier 2 container terminal in order to crowd-in facilitation barriers in South Africa and the private investment and improve its operational SADC region is essential. Trade facilitation performance. Steps have also been taken to bottlenecks are a challenge across all sectors in establish the National Ports Authority as an South Africa and the pandemic has aggravated independent entity. the situation (Zutari, 2022). Shipping lines avoided South Africa during the pandemic- While the freight sector does not face the same aggravated congestion by diverting to Walvis historical issues, border delays still constitute Bay and Mozambique, and in some cases did a significant competitive disadvantage. While not return to South African ports. The port of there is increasing recognition among customs Maputo offers comparable costs and efficiency and border agencies that the land borders to the port of Durban, for example. ¹⁹ For example, a recent report on the Maputo Corridor, which has seen significant investment and increased demand from South African firms in the context of high levels of congestion in Durban, is in need of support to function as a useful trade corridor (Mommen, 2022). Key problems include: (i) limited operating hours, which exacerbate congestion; (ii) cumbersome and fraught border crossing facilities; (iii) high levels of crime and lack of effective policing and traffic management; (iv) lack of transparency and high levels of corruption; (v) poor cooperation between South African and Mozambican authorities; and (vi) lack of a corridor management institutional framework on the corridor. ²⁰ This includes (i) the Customs Control Act, 2014 and The Customs Duty Act, 2014 which were promulgated into law in July 2014 to replace the Customs and Excise Act, 1964; and (ii) the Border Management Authority (BMA) Act, 2020 that designated the BMA as the lead agency to integrate border controls performed by other state agencies, with the exception of customs controls, which remain performed by the South African Revenue Service (SARS). II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 29 6. Increased exports have led to (2018) argues that the advent of new production significant improvements in wages, but technologies, such as industrial robots, will make have mixed distributional impacts²¹ it less likely that manufacturing exporters, even if successful, will eventually absorb a meaningful To better support job creation and increases share of the large pool of low skill labor in Africa. in wages and inclusive growth through trade, it is important to understand its distributional New World Bank research analyzes the causal impacts. Past work on South Africa has highlighted effect of export shocks on firms’ performance both broad-based gains from export growth and labor market outcomes in South Africa. It and diversification (e.g., Edwards and Lawrence, draws on rich panel data combining firm and 2006; Thurlow, 2007; Feddersen, Nel and Botha, worker-firm administrative records with customs 2017), as well as some of the negative impacts data on trade transactions from the South African from increased import competition, especially Revenue Service and National Treasury (SARS- from China.²² Despite this growing body of NT) over the period 2013–18.²³ These data are literature, there is a dearth of empirical evidence supplemented with macroeconomic variables on the effects of exports on firms’ performance on GDP growth and bilateral real exchange rates and wage inequality in Africa. Research has from the IMF’s International Financial Statistics been limited by the lack of administrative panel (IMF-IFS) dataset over the same period. The datasets at the firm and worker-firm levels. analysis utilizes an instrumental variables strategy exploiting initial heterogeneity in the composition At the same time, there have been growing of export destinations across firms, and differential concerns about the feasibility of export- movements in real exchange rates and GDP growth led industrialization in African economies, across those destinations. It relies on the variation of including South Africa, motivating an increased GDP growth and bilateral real exchange rates across focus on import substitution policies. Many the main export destinations of South Africa²⁴ to of these economies are characterized by a examine the causal effects of export shocks on disproportionate importance of commodity firm performance, employment, earnings, and exports and a limited number of successful demand for skills of firms. The heterogeneity in exporters in manufacturing. For instance, Rodrik the relative importance of different destinations ²¹ This section draws on background work on the impact of exports on labor market outcomes by Paulo Bastos, Daniel Brink and Regina S. Seri. It uses the SARS-NT panel database. ²² For example, Edwards and Jenkins (2015) find that increased import penetration from China caused South African manufacturing employment to be 8 percent lower than it would have been otherwise, with imports displacing output in labor-intensive sectors. Erten, Leight and Tregenna (2019) find that districts where tariff cuts where highest, saw the largest declines in tradable sector employment relative to other districts. Bastos and Santos (2021) find that a reduction in tariffs lead to those living in former homelands to experience slower growth in employment and income per capita than those living in the rest of the country. Between 1996 and 2011, a 10 percent reduction in employment- weighted tariffs led to a fall in income per capita of 1.4 percent outside the former homelands and a 3.7 percent reduction in income per capita in municipalities that included at least one former homeland. ²³ The SARS-NT database is an unbalanced firm-level panel data compiled from several sources of administrative tax data, including (i) the company income tax data from registered firms submitting tax forms, (ii) employee data from employee income tax certificates submitted by employers; (iii) value-added tax data from registered firms; and (iv) customs records from traders (Pieterse et al., 2018). The coverage period is 2008–18, but the focus is narrowed to the 2013–18 period due to lack of completeness in earlier years. ²⁴ The top destinations include both developed countries, such as the Netherlands, Germany, the United States, Spain, and Japan, and emerging markets, including India, China, Brazil, Turkey, the United Arab Emirates, Namibia, and the Republic of Korea. These figures unveil considerable variation in real exchange rates and GDP growth across the main export destinations of South Africa over the period of analysis. 30 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience at the firm level is important for identification There is significant heterogeneity of effects and makes it possible to construct firm-specific with regard to firms’ size, industrial sector and movements in foreign GDP and real exchange region. This includes the following: rates, in turn allowing for the estimation of how the resulting differential export shocks impact • The positive effects of export growth on firms’ performance and within-firm inequality firms’ performance, jobs, and wages are (see Box 1). driven mainly by SMEs. In contrast, the impacts of firms’ export growth on all The outcomes of regressions using the dependent variables are not significant for preferred instrumental variable specification large firms. This suggests that large firms show that an increase in firms’ export growth have already saturated export markets, causes an increase in firms’ sales, real capital limiting the scope for future growth via stock, and total payroll growth. The effects new products and markets. Thus, the most on employment and wage growth are positive significant potential for future export growth but non-significant. A 10-percent increase in would not come from the leading exporters firms’ export growth leads to a 1.01 percent but rather the “missing middle” discussed increase in sales growth, 0.17 percent in real under Finding 3. capital stocks growth, and 0.20 percent in total payroll growth. This evidence suggests that • Export growth is positively associated with sales policies aiming at creating suitable conditions growth for both manufacturing and mining to boost exports play a key role in maintaining firms. At the same time, increases in export firms’ growth, with ambiguous results on growth led to higher total payroll growth for wages and employment growth. This supports manufacturing firms, and higher growth in the conclusions of the recent World Bank the real capital stock for mining firms. (2022) report Inequality in South Africa, which highlights the importance of strengthening • Results are mostly driven by firms located in access to and availability of private sector jobs. the Western Cape. In this region, an increase in export growth causes improvements in However, the labor market impacts of export both firms’ performance and labor market growth have a greater positive impact on those outcomes through an increase in growth of who are not at the top of the wage distribution. sales, capital accumulation, employment, For the top 1 percent of firms, a 10-percent and total payroll. For other regions, these increase in export growth induces a 0.06-percent effects are less clear. We find a positive causal decrease in employment growth, but leads to a effect of export growth on firm performance 0.16-percent increase in growth of average wages. in Gauteng, KwaZulu-Natal and the Northern For the bottom 99 percent, the estimates show Cape. A positive impact of export growth that export growth leads to an improvement of on wage growth is observed in Free State all firm-level variables, including employment, and Limpopo. An increase in export growth payroll, and average wages growth, with a is associated with higher sales growth in more pronounced significant effect on payroll Gauteng, KwaZulu-Natal, with higher payroll growth. For example, a 10-percent increase in growth in Free State, with wage growth in export growth induces a 0.22-percent increase in Limpopo, and real capital stock growth in the payroll growth. Northern Cape. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 31 Box 1: Overview of empirical approach To examine the causal effects of export growth on firms’ performance and labor market outcomes for manufacturing, mining and agricultural firms, several firm-level outcome variables are considered. These include sales, real capital stock, wage bill, and average wages, as well as within-firm inequality. The empirical approach entails a two-step process where first a simple OLS specification regresses the yearly change in log of exports on the log of the firm-level outcome. Industry-period effects and firm-fixed effects absorb, respectively, common shocks to all firms in an industry in each period and common shocks across all firms. In contrast, the region-period effects capture the impacts of common shocks across firms operating in the same region in a given period. Second, an Instrumental Variables (IV) strategy is adopted in light of endogeneity concerns as changes in exports are unlikely to be exogenous to firm-level outcomes. Here export growth is instrumented using average firm-level, destination-weighted real exchange rates and actual GDP growth in destinations. This strategy exploits the fact that movements in the real exchange rate or GDP growth in a destination country will affect the South African exporter firms differently depending on their initial exposure to that destination. An IV model with the following first stage is estimated: ∆Exportsit = + ∆it + ∆it + + + (2) where ∆Exportsit is the predicted growth of exports in firm i in year t, ∆it is the yearly change in log of destination-weighted GDP growth, ∆ is the yearly change in log of destination- weighted real exchange rate; is a region-year effect, is an industry-year fixed-effect, is an error term. The ∆ operator denotes the linear change of a variable between each year t and year t- 1. The bilateral real exchange rate is defined as ℎ = ℎ /( ℎ / ) (3) where ℎ is the bilateral real exchange rate of rand (South African currency) per LCU; ℎ is the bilateral nominal exchange rate of rand per LCU; j, h, and t are, respectively, indexes of destinations, home (South Africa) and years. According to this definition, an increase of the bilateral real exchange rate reflects a depreciation of the rand relative to the other currencies. 32 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience 7. Broad-based localization 30-100 percent have been designated for local requirements could negatively affect sourcing. The Preferential Procurement Policy export performance²⁵ Framework Act (Act 5 of 2000) (PPPFA) draft Preferential Procurement Regulations of 2022, South Africa’s focus on localization policies to in combination with elements of the Broad- promote industrialization has accelerated in Based Black Economic Empowerment (B-BBEE) recent years. Most notable in this regard has Act prescribe the framework within which the been the GoSA’s target of reducing South Africa’s preferential procurement policies are being non-oil import bill by 20 percent over five years, implemented. Insofar as some state-owned which was announced by South African President entities, including Eskom and Transnet, have Cyril Ramaphosa in the October 2020 COVID-19 been exempted from the PPPFA, nonetheless, ERRP. This strategy focuses on strategic value they have to use their Supply Chain Management chains, including through the promotion of policies to drive localization and industrialization. localization and sector masterplans to ensure that more South Africans benefit directly In contrast to public procurement, government from the industrialization process through has limited policy levers to influence localization employment and broad-based ownership of in private sector procurement. Hence, the ERRP businesses as well as to increase trade within emphasized the need for social compacts in key Africa through the AfCFTA. The Reimagined sectors of the economy, finding expression in nine Industrial Strategy incorporates key aspects of sectoral masterplans. These social compacts national policy documents such as the National are the outcome of intensive negotiations Development Plan, New Growth Path framework, amongst social partners (business, labor and Industrial Policy Action Plans and the ERRP. government) and thus co-created and co-owned by social partners. The masterplans include The program to drive industrialization through ambitious goals and targets for local production localization is aimed at: reducing the proportion and employment, in addition to local content of imported intermediate and finished goods, requirements in private sector procurements, improve the efficiency of local producers and though they do not have explicit export targets. develop export competitive sectors that can The local content targets are based on what expand the sales of South Africa products on the social partners (particularly business and the continent and beyond. For this purpose, labor) in a sector regard as being reasonable and the policy levers include public procurement feasible. Targets are flexible and can be revised (leveraging both capital and operational based on market developments and changes in expenditure of all spheres of government and economic circumstances. state-owned enterprises), the national industrial participation program, the defense industrial participation program, the renewable energy independent power producer procurement The ERRP emphasized the need for social program, the local procurement accord and compacts in key sectors of the economy, designation of products for local sourcing. Since finding expression in nine sectoral masterplans. 2012, 28 intermediate or final products with local content threshold requirements ranging from ²⁵ This section draws on background work on the potential economic impact of South Africa localization plans by Andre Barbe. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 33 Localization measures have been complemented defines as “prompter and more comprehensive by trade policy measures. Overall, South interventions.” The two most significant industries Africa’s trade policy aims to support industrial experiencing direct interventions were the steel development, sustainable economic growth, industry (2015–17) and the consumer goods and decent work and economic inclusion and seeks poultry industry, which won duty increases in to improve the country’s trade performance 2013 and 2020, and several trade remedies. The by increasing exports of higher value-added implications of these measures on downstream manufactured goods. There has been an industries and consumers have not been increasing willingness by the International Trade robustly assessed although in both the steel and Administration Commission (ITAC) to support poultry sectors the tariff investigations revealed industry requests for more protection. ITAC is substantial job losses and reduction in production one of the key institutional structures supporting prior to the tariff increases. Nevertheless, the the DTIC, and supports policy implementation number of tariff increases year on year has for South Africa and, in some cases, for SACU in been comparatively small and there were also the areas of tariff investigations, trade remedies, instances of tariff reductions and rebates. The and import and export controls. While overall WTO has been tracking trade measures by G20 the number of investigations has remained members since 2009. Comparatively, South relatively consistent between 2014 and 2020, Africa is ranking low on the number of trade the Commission has been increasingly willing restrictive measures implemented in most years. to support greater protection for South African industries. Tariff investigations cover more than All trade barriers impose inefficiencies, but 50 percent of total investigations (Figure 28). LCRs can be particularly problematic. They often During 2019/20 and 2020/21, no applications impose barriers on imports of intermediate for an increase of duty were rejected by the inputs, but not final goods. LCRs also increase Commission, in line with recent amendments production costs for domestic producers, to ITAC’s legislation and administrative leading to lower exports and increased imports procedures to allow for what the institution in non-protected sectors.²⁶ As a result, LCRs ²⁶ Stone, S., J. Messent and D. Flaig (2015-05-01), “Emerging Policy Issues: Localization Barriers to Trade”, OECD Trade Policy Papers, No. 180, OECD Publishing, Paris. 34 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience can reduce local production, when downstream equilibrium modelling analysis exercise applied impacts are considered. Furthermore, LCRs to data shows South Africa some of the risks of impose requirements on final goods produced an approach to localization based on a full-scale domestically, though they generally do not implementation of the 20 percent target across constrain the import of final goods. As a sectors and beyond government procurement result, they can incentivize retailers to import programs – which would represent a more goods, instead of producing them domestically. extreme interpretation of the policy target Kaziboni and Stern (2021) discuss the example than the way localization initiatives have been of the South African firefighting vehicle industry: pursued by government so far. It is, however, if a firm wishes to sell fire trucks to the GoSA, illustrative of the potential negative impact of the firm is required to purchase at least 30 an undiscriminated approach across sectors percent of the auto parts from other South that would not consider industry capacity African firms. However, as no local assembler limitations as well as price effects. To assess can meet these LCRs, the public procurer could these potential economy-wide impacts of seek exemptions from designations. Finally, reducing imports through broad-based LCRs LCRs also are quantity-based and in turn do not or tariffs, the dynamic, global, computable impose a price cap on achievement, unlike an ad general equilibrium (CGE) model ENVISAGE valorem tariff. This is particularly problematic is used.²⁷ To describe the impact of each of in concentrated domestic industries, where these scenarios, they are compared with a access to alternative or substitute products is baseline where no policies are implemented. In limited. The cost to meet the requirements can all cases, the policies are in effect only during therefore be very high. 2022–25 (inclusive). In scenario 1, South Africa increases tariffs on imports of all non-fossil Estimating the potential impact of widespread fuel commodities. In scenario 2, South Africa use of LCRs and/or a combination of LCRs imposes LCRs on all sectors of its economy and tariffs is empirically challenging. For and mandates that they increase the share of illustrative purposes a computable general their non-fossil fuel material inputs that come Figure 28: Summary of ITAC investigations ITAC Reports 14 17 24 19 14 10 12 11 7 9 4 2 4 5 2014 2015 2016 2017 2018 2019 2020 Total Trade Remedies Total Tariff Investigations Source: World bank research. ²⁷ The full details of the ENVISAGE model are presented in van der Mensbrugghe (2019). The present analysis builds on an earlier study by Maliszewska et al. (2020), which adapted ENVISAGE to focus on Africa. Notably, we update the Social Account Matrix used for South Africa from 2002 to 2017. We also follow the methodology for modeling content requirements in CGE models developed by Barbe (2017). II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 35 from domestic sources. This imposes a quantity production, which lowers GDP and exports for constraint on the firm’s demand function, the same reason as in the tariff scenario (and increasing the shadow price of imports by each by similar magnitude). The one exception is that activity, as well as decreasing the shadow price since there is no direct increase in tax revenue, of the domestic inputs used by each activity there is no income transfer.²⁸ (Barbe, 2017). The scale of the negative impact on exports is Results from the CGE analysis show that worth noting: 17.6 percent for tariffs and 16.8 reaching the 20 percent localization target percent for LCRs relative to the baseline. Such an through tariffs or LCRs would have a significant approach to localization would not be compatible negative impact on South Africa’s economy, with strengthening export competitiveness. It lowering GDP by over 1 percentage point is worth noting that LCRs have worse impacts relative to the baseline (Table 5). In the case on national income than tariffs, as more of the of tariffs, the increased cost of imports makes distortion is on intermediate goods, rather than domestic production more expensive, which final goods. Despite their opaque nature, which reduces it directly, and GDP declines. The makes them appear to be a costless way of increased cost of domestic production reduces promoting the domestic economy, the costs are the competitiveness of exports, which reduces significant, and larger than those of tariffs. these as well. National income increases slightly. This is because the tax burden of the tariff is only partially borne domestically, with another part of it borne by the foreign supplier. The efficiency costs that the tariffs impose Results show that reaching the 20 percent on household income are smaller than the localization target through tariffs or LCRs foreign transfer to household income. In the would have a significant negative impact LCR scenario, the situation is similar as for on South Africa’s economy the tariffs: LCRs increase the cost of domestic Table 4: Impacts of reducing imports, by different policy methods, on macroeconomic variables (% change) Sector Tariffs Localization Income 0.0 -0.7 GDP -1.2 -1.3 Exports -17.6 -16.8 Imports (all) -16.4 -16.3 Imports (non-fossil fuel) -20.0 -20.0 Source: World Bank research. ²⁸ Finally, in a fast changing technology development environment, indirect costs also include costs related to the foregone use of new foreign technologies which South Africa may not be at the technology frontier, such as renewable energy technologies. These are in addition to costs captured in the modelling. 36 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience The decline in imports is concentrated in a South Africa’s trade and industrial policy also few sectors. At the sectoral level, both policies does not occur in a vacuum and would result in increase gross production of intermediate large income losses for countries where South goods (light manufacturing) at the expense of Africa is a significant trade partner. These include, industries that use them as inputs, such as fossil in particular, SACU member states, which would fuels or energy intensive manufacturing (Table see income losses ranging from 1.5 to 2 percent 6). This is because import declines are largest in of national income (Figure 29). Other neighbors, sectors that had large amounts of imports in the such as Zimbabwe and Mozambique, would also baseline, or which are used as inputs by other be impacted. This is because the higher price sectors. LCRs have a larger impact than tariffs of South Africa’s exports and its lower demand do, as these are similar to providing both a tariff for imports would reduce trade between South and a subsidy for the sector. Africa and its main trading partners. Table 5: Impacts of reducing imports, by different policy methods, on sectoral gross output Sector Baseline Absolute Percent Absolute Change / Value Change Change Baseline Grand Total Value of All Sectors (%) Tariffs Localization Tariffs Localization Tariffs Localization Agriculture 21,206 -355 -484 -2 -2 0.0 0.0 Fossil fuels 36,780 -3,351 -3,403 -9 -9 -0.3 -0.3 Minerals n.e.s. 18,718 -937 -796 -5 -4 -0.1 -0.1 Processed foods 60,683 43 -552 0 -1 0.0 0.0 Wood and paper products 24,925 430 455 2 2 0.0 0.0 Textiles and wearing apparel 27,903 1,444 1,374 5 5 0.1 0.1 Energy intensive manufacturing 74,851 -6,673 -7,047 -9 -9 -0.5 -0.6 Petroleum, coal products 33,922 721 936 2 3 0.1 0.1 Chemical, rubber, plastic products 66,675 2,621 4,989 4 7 0.2 0.4 Light Manufacturing 159,225 6,033 12,986 4 8 0.5 1.1 Construction 67,746 391 272 1 0 0.0 0.0 Trade services 122,019 1,887 3,045 2 2 0.2 0.2 Road and rail transport services 26,752 -373 -201 -1 -1 0.0 0.0 Water transport services 3,922 -86 -72 -2 -2 0.0 0.0 Air transports services 7,276 -101 163 -1 2 0.0 0.0 Communication services 51,203 305 54 1 0 0.0 0.0 Other financial services 15,591 109 -177 1 -1 0.0 0.0 Insurance, real estate services 49,979 402 -391 1 -1 0.0 0.0 Other business services 82,332 381 -41 0 0 0.0 0.0 Hospitality services 40,987 -530 -824 -1 -2 0.0 -0.1 Other services 228,632 -374 -1,545 0 -1 0.0 -0.1 Grand Total 1,221,327 1,986 8,740 0 1 0.2 0.7 Source: World Bank research. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 37 Figure 29: Impact on real income by country in 2025 (% change relative to the baseline) CAR, Chad, Rep of Congo Rest of South African & other Central Africa Customs Union Mozambique Congo, DR Zimbabwe Botswana Mauritius Namibia Zambia Malawi 0.0 Change in Real Income (%) -0.5 -1.0 -1.5 -2.0 -2.5 Tariffs Localization Source: World Bank research. The challenges of a localization policy based to support domestic demand for inputs, is a on very ambitious targets to be achieved over more promising path forward. South Africa a short period of time are highlighted by other has several industries where capabilities are analyses. Intellidex (2021), for example, assessed improving and primed for growth (see Box 2). the realism of a 20 percent target in South These opportunities would benefit from a more Africa through a quantitative study of import, integrated regional market where South Africa manufacturing and capacity data, as well as a already has a competitive advantage (especially survey of 125 firms across sectors. It finds that, within the context of the AfCFTA), and if core while there is considerable variation across binding constraints to private sector growth industries, in the short to medium term the could be addressed. target is most likely not realistic. However, with a longer timeframe and broader reforms in place to stimulate domestic demand and competitiveness, and by resolving market and government failures rather than distorting production and trade, such a target could be achievable. This points to the need for a nuanced and less prescriptive approach to localization and to find a balance between different trade and industrial policy objectives. Various studies by the OECD, IMF and Peterson Institute for International Economics suggest alternative Instead of distorting industry’s purchasing measures to LCRs to address barriers to decisions, focusing on the capabilities and industrial and technological development and competitiveness of domestic industries, employment growth. Instead of distorting both as exporters and to support domestic industry’s purchasing decisions, focusing demand for inputs, is a more promising on the capabilities and competitiveness of path forward. domestic industries, both as exporters and 38 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Box 2: South Africa’s capability formation is slowing but numerous opportunities with spillover and upgrading potential still exist South Africa has experienced an erosion of its overall competitiveness. According to the IFC’s “fitness” indicator—a measure of complexity-weighted diversification—competitiveness erosion is taking root in the more complex sectors of machinery, electrical equipment, and fabricated metals, while the largest increase in capability was in forestry, the simplest sector. While still the fittest African country, South Africa dropped 16 places since 2013, and the country is currently ranked 48th. Fitness losses in complex sectors such as chemicals, computer and electronics, fabricated metals, and food, drive an overall loss in country-level fitness (Figure B.2.1). However, in other areas the GoSA’s focus on building capabilities in the transportation equipment sector (automotive, boat building, rail niches), as well as in mining, has resulted in increased competitiveness to within the top 20 percent of countries globally. South Africa is better positioned for Industries of the Future (IoF) than most African countries, and even some other OECD countries. South Africa has a chance of becoming competitive in several IoFs, including Industrial Development Corporation (IDC) funding priorities of green industries (new energy), beneficiation (e.g., energy conservation technology), and the biomedical industry. In contrast, frequent comparator countries (Chile and Brazil) have lower chances of becoming world-class competitors in those industries. These sectors are scored by the likely progress that a country can make toward becoming a global leader in the industry based on current capabilities such as human capital and FDI. Among top imports, South Africa is poised to increase feasibility—to develop productive capabilities—in several complex industries, including electrical machinery. Electrical machinery imports of US$3.8 billion (2019) were in products with increasing feasibility, suggesting that global competitiveness could be achieved in the medium term. Feasibility increases indicate that much of the existing support has improved capabilities but those are yet to be deployed for increased competitiveness. II. A Decade of (Mostly) Stagnation: Seven Findings about South Africa's Trade Competitiveness since 2010 | 39 Figure B.2.1: South Africa remains highly diversified but its complexity in 2019 (blue) is eroding relative to 2014 (red) Forestry Fishing Chemical Computer & Electronics Beverage & Tobacco Apparel Machinery Wood Electrical Equipment Mining Fabricated Metal Leather Primary Metal Crops Miscellaneous Animal Production Minerals & Products Textile Products Transportation Food Textile Material Furniture Plastics Petroleum & Coal Raw Source: World Bank research. Note: Figure shows country sector fitness, with proximity to perimeter denoting the diversity, complexity and competitiveness frontier. 40 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience III. What Will It Take for South Africa to See Broad-based Gains from Trade? 1. New trade agreements and climate- The AfCFTA has been the main focus of related trade requirements present South Africa's trade policy. The AfCFTA is the opportunities for diversification trade agreement mentioned most frequently referenced in DTIC strategy documents. This is Seizing the benefits from the AfCFTA reflected not only in terms of the resources being and other free trade agreements devoted to the negotiations, but also the political commitment it has received from the highest As discussed in the previous section, the AfCFTA levels. South Africa is also playing a leadership provides an opportunity to take a comprehensive role in the AfCFTA, having assumed the chair approach toward developing regional value during the negotiations on trade in goods and chains and new export industries. Once finalized, services as well as the Phase 2 working groups the AfCFTA will be the largest free trade area on investment and intellectual property, and in the world— comprising 55 nations, 1.3 billion the dispute settlement body. A former South people and an economic area with a GDP valued African trade negotiator, Wamkele Mene, heads at US$3.4 trillion. The policy and regulatory the AfCFTA Secretariat in Accra. However, it scope of the AfCFTA is large: it covers tariffs, would also be important to consider signing and trade facilitation, trade in services, sanitary deepening trade agreements with other emerging and phytosanitary, standards and technical economies, especially those that currently impose barriers to trade, and many other issues. South significant barriers on South Africa. Africa is central to realizing the potential of the continental agreement. It can be an anchor for The African market is attractive as a destination increased regional trade, with many investors in terms of its relative proximity and relatively and foreign firms basing themselves in South strong growth rates and future growth Africa to access both the South African market potential. However, the immediate gains from and the wider region. reductions in tariffs from the AfCFTA may be III. What Will It Take for South Africa to See Broad-based Gains from Trade? | 41 low. South Africa already has duty free access World Bank work, the most significant gains into SADC and South African firms are already from the AfCFTA will come from reductions in disproportionately participating in exporting to non-tariff barriers (NTBs) and improvements in the region. Nevertheless, when looking outside trade facilitation. As such, addressing trade costs of SADC, South African firms face substantial will be central. According to World Bank (2020) tariff barriers on several of their key products. analysis, South Africa’s income could increase by Improved market access through lower tariffs 3.8 percent relative to the baseline³⁰ by 2035 could expand South African exports to these (Figure 30). This would mean that moderate countries through a combination of increased poverty (PPP US$5.50/day) would decline export participation and increases in the range by 3.7 percentage points relative to where it of products by existing exporters. Equally, if not would have otherwise been in 2035. These more important, however, is to utilize the AfCFTA outcomes assume the implementation of three to co-ordinate the implementation of the trade key dimensions of the AfCFTA: (i) progressive facilitation agreement included as Annex 4 of the reduction of tariffs on intra-continental trade; (ii) AfCFTA protocol on trade in goods, as logistics NTBs on both goods and services are reduced costs are very high on the African continent on an MFN basis;³¹ and (iii) implementation relative to the rest of the world.²⁹ of trade facilitation measures in line with the Trade Facilitation Agreement (TFA) leading to While South Africa has low tariffs, the condition of a halving of trade costs. As South Africa has the country’s trade infrastructure is a significant already reduced tariffs to SADC members (its obstacle to increased trade competitiveness. main trading partners besides Nigeria), the most The AfCFTA provides an opportunity for wide- significant gains would come from addressing reaching reforms in this area. As shown in recent NTBs and improving trade facilitation. Figure 30: South Africa’s increase in income, exports, and imports by 2035 as percentage deviations from baseline 24.7 25 20 17.6 14.9 15 12.5 10 5 3.81 1.4 2 1.76 0.38 0 Only tariffs Tariffs & NTBs Tariffs, NTBs & TF Real Income (EV) Exports Imports Source: World Bank (2020). ²⁹ Simulations of the impact of the AFCFTA predict increases in intra-African exports between 14.6 percent if only bilateral tariffs are removed, and 133 percent if other complementary policy changes, including the trade facilitation agreement, are implemented (African Development Bank, 2019). For South Africa, the World Bank (2020) simulations predict that exports would rise by 1.4 percent with AfCFTA tariff reductions, but would increase by 17.6 percent if NTBs were also reduced and customs procedures improved. ³⁰ Baseline scenario entails a continuation of past trends simulated over 2014–35, though not incorporating the COVID-19 shocks. ³¹ It is assumed that 50 percent of the NTBs are actionable within the context of AfCFTA—with a cap of 50 percentage points. These are implemented as ad valorem tariff equivalents. It is assumed that reduction of NTBs also benefits African exporters on non-AfCFTA markets with an additional reduction of NTBs by 20 percent. 42 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience South Africa also has scope to modernize or furnaces and ovens (HS 851420, MSHW) that develop trade agreements with OECD countries are used to destroy solid and hazardous wastes and other emerging economies. However, the (Figure 31). Catalytic incinerators are designed for GoSA has taken a cautious approach in terms of the destruction of pollutants by heating polluted its economic diplomacy, based on its perspectives air and oxidation of organic components. These of the suitability of such trade agreements for are followed by parts for auxiliary plants for addressing South Africa’s developmental policy boilers and condensers for steam and vapor needs. Its trade negotiations strategy remains power units (41.5 percent growth) and wind- largely confined to tariffs and to the African powered generator sets (40.8 percent growth). continent, limiting options for deeper integration Although the export volume of these products is with more advanced trading partners. However, small, the CAGR signals growing foreign demand there may be benefits in a shift toward prioritizing for South African products. In this context, trade and investment promotion efforts with measures to support exporting firms that have advanced economies to secure inputs of high opportunities to be carbon competitive are technology goods and services, while opening likely to support overseas market access. Such those markets to South African goods and services. measures would include improving access to environmental technologies, such as renewable Seizing opportunities in the trade of energy and knowledge and equipment for carbon environmental goods monitoring. Finally, climate change and related global South Africa applies lower tariff rates on agreements represent an enormous challenge environmental goods (EG) than on other for South Africa’s policy makers. South Africa’s products (Figure 31). MFN tariffs by product level exports of goods remain concentrated in products for clothing are the highest (41 percent), while that are carbon intensive and considerably more average applied MFN tariffs on EG are at the carbon intensive than those exported by many low end of the spectrum. This creates a better competitors. Hence, these key exports are at tariff environment to promote green trade. risk as importing countries and buyers in GVCs Compared with regional countries competing in implement policies that shift demand toward the EU market, South Africa’s average applied “carbon competitive” suppliers of a particular tariffs on EGs are among the lowest (Figure product and from carbon-intensive to low- 32). Morocco—a key competitor in the European carbon products. market—imposes 1.6 percent average applied tariffs. As such, South Africa’s EG production There are also trading opportunities by taking is less burdensome on importers. By product advantage of the export potential in some category, environmental monitoring, analysis environmental products. Although the compound and assessment (EMAA) equipment and natural annual export growth of these goods was only risk management (NRM) have zero average 0.3 percent between 2016 and 2020, 22 out of 54 applied tariffs, while wastewater management products experienced growth during this period. and potable water treatment (WMM) faces a The largest export growth (68 percent) was for 2.8-percent tariff in South Africa. III. What Will It Take for South Africa to See Broad-based Gains from Trade? | 43 Figure 31: EG export by category (US$ billion) Figure 32: Average applied tariffs on EG in 2019 by country (%) 4.0 5.6 3.5 5.1 5.3 5.0 3.0 2.5 2.0 1.5 1.0 1.6 1.4 0.5 0.8 0.7 0.0 0.2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 AGO ZAF TUN EGY MAR DZA CIV GHA NGA APC EMAA MSHW NRM REP WWM (2016) (2016) (2016) Source: WITS and WTO Statistics. Note: APC=Air Pollution Control; EMAA= Environmental Monitoring, Analysis and Assessment Equipment; EPP= Environmentally Preferable Products; MSHW= Management of Solid and Hazardous Waste and Recycling Systems; NRM= Natural Risk Management; REP= Renewable Energy Plant; WWM= Wastewater Management and Potable Water Treatment. Although South Africa’s trade agreements do for decarbonizing traditional exports. These not fully address environmental protection value chains are more likely to develop in an and climate change, a few of them have the integrated Southern African market where potential for improvement. The Southern African inputs, knowledge and final products (goods and Development Community (SADC)-EU Economic services) flow freely within the region and from Partnership Agreement (EPA), signed in June 2016, outside and opportunities to produce at scale is the only agreement that establishes provisions can be exploited. The SADC trade agreement for environmental protection in the trade and and the AfCFTA provide opportunities for South sustainable development section of Chapter II. Africa and its regional partners to identify and Both parties confirm that any new or modified implement mutual reforms that reduce barriers legislation on labor conditions or environmental segmenting the regional market. practices would adopt the internationally recognized standards and cannot weaken labor Supporting those who may lose from or environmental protection to encourage trade trade agreements or investment.³² The Agreement provisionally came into force in October 2016. In addition, the There is a pervasive skepticism about further AfCFTA does not currently feature a Protocol on trade integration in South Africa, especially Environment and Sustainable Development. As after the impact on some manufacturing the AfCFTA negotiations are ongoing, it would still industries of China’s entry into the WTO. Both be possible for the AfCFTA parties to consider the Erten et al. (2019) and Bastos and Santos (2021) costs and benefits of such a protocol. Southern find at least partial negative labor market Africa has many of the essential inputs required impacts from past liberalization reforms during for the development of new green sectors and the 1990s and early 2000s. Memories of the ³² European Commission, “Economic Partnership Agreement (EPA) between the European Union and the Southern African Development Community (SADC) EPA Group: Key Advantages,” June 2016. 44 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience decline of the textile and apparel industry has Engel et al. 2021) have focused in particular contributed to a strong bias toward import on speeding up labor market adjustment substitution and localization policies, rather by facilitating labor mobility and reducing than trade opening. At the time, many displaced constraints to international skills and domestic workers did not find jobs in expanding sectors migration as part of a comprehensive approach but instead exited the labor force. Erten et al. that also incorporates broader reforms to the (2019) attribute this to distinctive features of business environment and investments in core the South African labor market, including high infrastructure and labor-intensive value chains, base levels of unemployment, a small informal especially in lagging regions. sector, high barriers to entry, rigid wages and an underdeveloped manufacturing sector. 2. Improving trade facilitation and addressing non-tariff barriers is essential In the context of considering new trade to help firms benefit from trade negotiations, especially the AfCFTA, it will be important for the GoSA to enable broad- As discussed in the previous section, the most based gains from further integration. This may significant gains from the AfCFTA will come also include providing time-bound, targeted from reductions in NTBs and improvements adjustment mechanism to support workers likely in trade facilitation (see Section III.1). Trade to lose out from new import competition. This facilitation bottlenecks are a challenge across could be, for example, through the new Afrexim all sectors in South Africa and the situation has AfCFTA Adjustment Facility to support countries worsened since the pandemic. that may suffer revenue losses during the implementation process of the AfCFTA, bearing At the level of trade facilitation and border in mind the availability of funds, and terms and management, recent work by the World Bank³³ conditions for such support. South Africa already has identified several key priorities. These has a large and highly fragmented system of include, among other issues, establishing a more labor market and social assistance support so effective and inclusive governance structure the benefits of creating an additional program (also including the private sector) to develop are questionable. However, focusing existing and implement a robust trade facilitation programs toward potential trade-related risks of strategy. South Africa still lacks a comprehensive displacement may be advisable. governance framework to coordinate the regulatory agencies in trade facilitation reforms. Improving the overall structure of labor market The National Committee on Trade Facilitation programs and labor mobility would benefit has a narrow mandate and lacks private sector workers potentially losing out from further engagement. The weak collaborative structures integration. Recent analysis (World Bank, 2021) are further challenged by the embryonic form has highlighted the need to strengthen labor of the Border Management Authority (BMA). market linkages of temporary government While its designation as the lead agency programs, especially for young people and to integrate border controls performed by women, relaxing constraints on entrepreneurship other state agencies, except for Customs, is a and self-employment, and improving the relevant development and has the potential governance of labor market programs. Lessons to improve and transform the land border from global experiences (see, for example, posts environment, the slow pace of building ³³ This section draws in particular on work conducted under the World Bank’s “South Africa Trade Facilitation Support Project” led by Ernani Checcucci and Charles Kunaka. III. What Will It Take for South Africa to See Broad-based Gains from Trade? | 45 the BMA’s institutional capacity and its current Customs connectivity that will enable simplified exclusion from the National Committee on Trade clearance, and automated VAT refunds for intra- Facilitation remain problematic. As such, there SACU trade. The implementation of the One-Stop is an urgent need to increase the capacity and Border Post Policy and implementation strategy, scope of these institutions. These reforms should approved by the Cabinet on March 22, 2022, will be supplemented through additional analysis, in need to be advanced through negotiations with particular through time release studies and cross- neighboring countries. In many cases there will border coordination and connectivity studies.³⁴ also be a need to focus specifically on the needs of female traders (Box 3). Finally, there is also a need Other key trade facilitation reforms could to align current measures under the WTO Trade significantly reduce trade costs. The Facilitation Agreement with best practices.³⁵ development of a National Single Window would help integrate government agencies and To improve the efficiency of South Africa’s port provide a holistic digital process for traders. and rail systems, it will be important to continue SARS is streamlining processes and procedures advancing the GoSA’s recently initiated plans for to assist exporters and importers, through its introducing more competition into this sector.³⁶ Customs Modernization Program, working in The GoSA has acknowledged the poor state of partnership with entities such as the Freight harbors and railways. The National Infrastructure Association, the Technical Services Providers Plan explains that “high port tariffs and relatively Association, Transnet, the Cross-Border Road low efficiency … harm South Africa’s competitive Transport Agency and the South Africa Reserve positioning and hamper further diversification Bank. The expansion of the Authorized Economic in South Africa’s trade” (DPWI, 2022, p.27). The Operator (AEO) program across government GoSA is in the process of providing concessions agencies would support the alignment of risk to leading international companies to operate management processes to improve trade the container terminals at Durban and Ngqura facilitation initiatives—including strengthening Ports (Derby, 2022). This can bring both much- the development of SACU- and SADC-wide AEO needed investment into the sector and support programs encompassing mutual recognition efforts to improve efficiencies at container ports, and reciprocation of benefits across countries. At especially in relation to container dwell-time and the SACU level, there is a need for a single SACU ship turnaround time. Bringing global operators customs declaration process to align import and in could support far-reaching improvements export declarations, supported by Customs-to- in efficiency and quality standards, and much ³⁴ This includes, for example, monitoring time to trade across key borders and corridors and assessing key trade- related infrastructure in the region through cross-border coordination and connectivity studies. The latter would focus on an assessment of the legal, procedural, process, data sharing, information technology, connectivity, human capital, and physical infrastructure architectures required to optimally support border management cooperation between agencies and between the neighboring countries, including one-stop border post infrastructures. ³⁵ For instance, South Africa reported compliance with the provisions related to publication and availability of information; nevertheless, it has not consolidated all relevant trade information in a single website or a trade information portal. Similarly, the WTO TFA Article 8, about Border Agency Coordination, requests neighboring Members, to the extent possible and practicable, to cooperate with a view to coordinating procedures at border crossings to facilitate cross-border trade, which may include the establishment of one stop border post control. Nevertheless, the South African Cabinet has only recently approved the One-Stop Border Post Policy and implementation strategy, which will still demand significant investments and bilateral engagement with neighboring countries for full and effective implementation. ³⁶ The South African government has recently sought to encourage increased private investment, in part through the establishment of the Transnet National Ports Authority as an independent subsidiary. 46 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience needed investment in infrastructure and logistics and inefficient immigration procedures. The systems, though this is unlikely to be a panacea. AfCFTA is intended to address many of these issues and should facilitate the monitoring and The road freight sector on the whole is more resolution of such NTBs. The private sector has efficient and agile and does not suffer from many participated in the NTB monitoring project at the of the shortcomings of the rail and port networks. continental level and the newly established DTIC However, many freight providers still experience reporting process,³⁷ but these systems have only significant hurdles exporting to the rest of Africa, proven partially effective to date. including infrastructure challenges, institutional obstacles such as slow and bureaucratic customs, Box 3: New evidence on gender and trade facilitation in South Africa Trade facilitation is often assumed to be non-discriminatory and to apply to all traders in its design. However, trade facilitation measures may not necessarily impact or benefit all traders in similar ways. A World Bank study (2022) has sought to identify specific challenges that men and women face in cross-border trade and determine where further reforms can be made. The research team interviewed 204 trader firms and 78 customs agents from across South Africa to better understand whether women traders and customs agents experience different challenges to border processes and procedures than their male counterparts. The survey found that women traders and customs agents experience greater challenges compared with their male counterparts. This includes greater difficulty for traders in understanding official regulations and processes, more limited use of relevant websites by customs agents, and more limitations in access to finance for traders. Among customs agents that regularly visit the border, 100 percent of women respondents felt unsafe at some stage compared with 38 percent of men respondents. This informed several recommendations. These include: (i) improving access to and understanding of official border regulations and procedures; (ii) introducing/strengthening formal trade consultations between the GoSA and the private sector; (iii) promoting the National Trade Facilitation Committee (NTFC) and increasing its effectiveness, accountability and inclusiveness; (iv) streamlining the consistency of border processes and procedures; (v) identifying and addressing reasons for delayed release of goods; (vi) increasing the use of technology (including through the implementation of a National Single Window); (vii) publicizing official grievance procedures; and (viii) improving safety and security at borders. Source: World Bank (2022). ³⁷ See http://www.thedtic.gov.za/new-support-system-is-key-in-addressing-sas-export-barriers/. III. What Will It Take for South Africa to See Broad-based Gains from Trade? | 47 3. Policy reforms and investments are unable to expand and become exporters. needed to help firms increase their Moreover, many of those firms that can export capabilities and become successful exporters have low survival rates. This begs the question: what can be done to help firms become more South African firms, especially SMEs, efficient exporters? The previous two sections struggle to become successful exporters focused on the role of new trade agreements and lowering trade costs as key areas where Private sector dynamism is a prerequisite for a policy reforms can support export-led growth. buoyant export sector. The evidence presented However, there are also numerous measures at in Sections I and II shows that the performance of the firm- and industry-level that can be taken to South Africa’s private sector has been weakening support export-led growth. over the past decade, with stagnating activity and job creation, and declining productivity One of the key problems that South Africa and external competitiveness. Addressing has faced is a declining number of exporters, longstanding structural constraints to growth associated with declining entry rates and rising and private sector activity are key to improving exit rates. Regression decomposition results South Africa’s external competitiveness and presented earlier indicate that the lack of entry trade performance. This includes improving the into exporting contributed to South Africa’s weak business environment by supporting reforms export performance from 2010. This contrasts across competition, and business regulations to with other countries where the rising number of foster an enabling environment for the private firms has made a positive contribution toward sector. It also includes reducing the costs and aggregate export growth. Trends in destination reliability of input factors such as electricity, markets help explain some of these trends, but a digital services, transport and logistics, and labor. closer look at supply constraints is also merited. These are resonating with findings pertaining to common cross-cutting constraints that impact Many of the exporting firms primarily export to on the dynamism of an industry or hold back other SACU members, where they benefit from growth emerging from analyzing a number of preferential margins and proximity benefits. South Africa Industry Masterplans. These cross- High entry rates into SACU signal that many firms cutting constraints include: ‘aggregate demand; use the market to experiment with exporting. imports; electricity; input or raw material costs This is aided by lower export barriers associated and availability; rate of investment, technology with the contiguity of borders, and common upgrading, research and development (R&D) and external tariffs and institutions of the customs supply chains; labour-related factors and human union. Most of these firms export manufactured capital; collaboration; and industrial finance.’ goods and processed-food products, which can High priority areas encompass: (i) addressing assist in realizing the industrialization objectives South Africa’s longstanding electricity crisis; of the GoSA, and growth of small firms that are (ii) benchmarking labor legislation and its relatively labor-intensive. However, those new enforcement; and (iii) supporting SOE reform. entrants into SACU that do survive tend to grow Many of these are highlighted in government fast and diversify the product and destination programs such as Operation Vulindlela, but composition of their exports. The data suggest faster progress is needed. that there are considerable gains in learning from exporting, as growth in exports of the cohort of Firms’ entry into exporting is a key long-term new entrants is not just driven by selection, but driver of aggregate export growth. The analysis also by relatively strong growth of survivors. in Section II shows that SMEs are often especially 48 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience In turn, a key question will be how to assist these stringent requirements on local shareholding firms to expand beyond the SACU (and SADC) and/or local content. Furthermore, South Africa’s markets. The AfCFTA is one clear initiative that current immigration policies are a constraint to can support this effort, especially if accompanied sourcing critical expertise from abroad. Such by trade facilitation reforms and robust efforts to expertise includes tacit knowledge from foreign address NTBs. However, beyond this there may be nationals about their home markets. a need to also look more broadly at the capacity and effectiveness of the country’s national and Services exporters may also benefit from the provincial export promotion agencies. reshaping of consumer and labor markets following the COVID-19 pandemic. The shift Maximizing the potential of services firms toward online shopping provides firms with new avenues to access local and foreign consumers, Services exports have significant growth in particular benefiting smaller companies. This potential, but emerging sub-sectors will can reduce costs of accessing international require support to reduce search costs. New markets, thus facilitating the entry of smaller research informing this report examines digital firms into exporting. The ability of firms to services as a case study of a high-skill services participate, however, depends on the quality and sub-sector with untapped export potential. cost of digital connectivity, logistics and postal Advancing exports in this area will require more services, as well as the efficiency of border engagement between the business community procedures in dealing with parcel trade (OECD, and government, including practical cooperation 2020). South Africa performs relatively poorly on skills and early-stage financing, as well as a (ranked 45 out of 50 OECD and other countries more targeted focus on trade promotion and in 2021) in terms of the restrictiveness of policies commercial diplomacy. In the past, there has affecting courier services.³⁸ been a significant fragmentation in this area with a lack of clarity on the mandate and capacity of Beyond this, a key imperative for policy makers the South African Export Council, Team Export is the post-COVID-19 revitalization of the travel South Africa (TESA), Trade and Investment South and hospitality industry, which was instrumental Africa (TISA), and InvestSA, with firms often in the collapse of services exports during the feeling inadequately supported abroad (Draper pandemic. These industries are intensive in the et al., 2018). use of labor and have strong linkages with other sectors of the economy. The performance of firms is strongly affected by the local ecosystem, including the quality A more strategic approach to services trade also of the infrastructure, institutions and skillsets requires adequate data. Poor services trade data in the area, and the relationships with other constrains evidence-based policy making. More firms in the vicinity. As such, the potential for disaggregated data relevant to services trade developing regional high-tech value chains for modes of supply (cross border, consumption remains a long-term aspiration, as exporting abroad, commercial presence, and movement of these services regionally is perceived as high-risk natural persons), classified at detailed sectoral due to the volatility of exchange rates, frequent levels and specifying services export destinations late payments, political and policy instability, and would support policy-making in that area. ³⁸ Based on data from the OECD Services Trade Restrictiveness Index (https://www.oecd.org/trade/topics/services- trade/). III. What Will It Take for South Africa to See Broad-based Gains from Trade? | 49 Addressing domestic market distortions 4. Looking Ahead: A Roadmap for Reform inhibiting the entry of firms The “what”: Overview of key policy reforms Most exporters, and particularly smaller exporters, are highly dependent on the domestic market for As South Africa needs to raise its economic the bulk of their sales. For many exporters, sales potential, trade can play a key role in supporting to the domestic market provide the platform higher and more inclusive growth. This report from which they are able to access international seeks to stimulate dialogue with the GoSA and markets. The empirical evidence also shows that other stakeholders to harness the trade potential firms’ size is a critical determinant of their entry of South Africa’s private sector while promoting into exporting. However, South African industry faster job-creation and more inclusive growth in is highly concentrated, suggesting considerable the country. barriers to entry for small firms in the domestic market. The high concentration of South Africa’s Seven key findings have emerged from the industries is inextricably linked to the very high analysis of the wide range of issues covered, concentration of South Africa’s exports. including South Africa’s export performance and areas for increased export potential: Weak competition and policies that raise the costs of doing business for new and First, South African exports have declined in value smaller firms inhibit the diversification of the relative to comparators, becoming less diversified manufacturing industrial base and thus the and more focused on regional markets. The post- export base. Discussing these in detail goes 2010 period has been characterized by declining beyond the scope of this report, but needs to diversification of manufactured exports, with be addressed in order to enable non-incumbent exports increasingly being dominated by resource- firms to succeed (see World Bank, 2018; National based manufactures and automotive products. Treasury 2019; Andreoni et al., 2021, for an overview). This has been recognized by the GoSA Second, exports to the African markets have grown which has prioritized lowering barriers to entry in significance, but remain constrained by high and addressing distorted patterns of ownership barriers. While the African market is attractive as through increased competition and small a destination in terms of its relative proximity and business growth. In turn, key reforms in this area, future growth potential, trade barriers present a including reform of the digital spectrum and significant obstacle. Reducing barriers in Africa improving competition in the transport sector, through the AfCFTA therefore has significant have been brought under Operation Vulindlela. potential to increase South Africa’s exports. Third, while the services sector is the leading source of employment, services exports have been relatively stagnant and are still heavily concentrated in traditional transport and tourism sectors. South Africa’s services exports have been far smaller relative to total merchandise The high concentration of South Africa’s trade, fluctuating between 10 and 20 percent. industries is inextricably linked to Between 2005 and 2019, knowledge-intensive the very high concentration of services such as financial services, IT and South Africa’s exports. telecommunications, grew most rapidly among services sub-sectors, signaling their potential. 50 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Fourth, exporter entry and survival rates have Sequencing reforms is essential for successful deteriorated, while firms’ concentration levels implementation. All the proposed actions are critical have increased, pointing to a “missing middle”. to realizing South Africa’s potential. However, not all South African goods exports are dominated actions can be implemented immediately and yield by a few firms. Export participation, which is results in the short term. Against this background, measured by the number of exporters and “sprints” are stroke-of-the-pen reforms or targeted export transactions, appears to be a key factor analyses implementable within three months at explaining South Africa’s post-2010 aggregate very low cost, given the political will. “Medium- export performance. distance runs” are programs implementable within 18 months with substantial tangible benefits. Fifth, trade costs have increased, hurting the “Marathons” are long-term structural initiatives that competitiveness of South African firms. Despite can be initiated and put on a firm footing in the next longstanding efforts to address transport and three years. Table 7 charts a path for the authorities logistics constraints, these remain significant to start a process of trade and trade-related impediments to South Africa’s competitive reform that would put South Africa on a faster and advantage. more sustainable growth trajectory, if adequately implemented. It also focuses on complementary Sixth, export growth can lead to significant non-trade policies beyond the specific issues under improvements in jobs and wages but has mixed the three main reform areas. distributional impacts. An increase in firms’ export growth causes an increase in firms’ sales, In particular, it is important to emphasize that real capital stock, and total payroll growth. many of the critical reforms needed to restore private sector productivity and promote a Finally, the economy-wide impact analysis of competitive export sector are beyond the LCRs and import tariffs on South Africa’s GDP realm of trade policy. In this context, trade and trade, as well as on that of its close trading and industrial policies discussed in this report partners in the region cautions against using cannot be seen in isolation. They must be part these instruments as first best options. Instead of a broad-based systemic reform effort aimed of distorting industry purchasing decisions, at enabling private sector development more focusing on the capabilities and competitiveness generally and fostering structural change. These of domestic industries, both as exporters and to include a continued focus on macroeconomic support domestic demand for inputs, is likely to stability to support economic growth and be a more promising path forward. promote business confidence and investment, including in concentrated markets. It will also The report has focused on three specific trade be important to deliver on the GoSA’s priorities and industrial policy reform areas that can as laid out in Operation Vulindlela, to accelerate further help maximize South Africa’s trade the implementation of structural reforms in potential. These are: the areas of energy, water and transport and logistics. Among social policy priorities, it will be • Making the most of new trade agreements important to ensure that both social safety net and other opportunities for diversification; and labor market policies are supporting labor • Improving trade facilitation and addressing mobility into dynamic sectors and that education non-tariff barriers; and systems and migration policies are conducive to • Supporting the promotion of firms’ equipping South Africa’s labor force with the skills capabilities to become exporters and survive. required by sectors with high export potential. III. What Will It Take for South Africa to See Broad-based Gains from Trade? | 51 Table 6: A roadmap for increasing South Africa’s export competitiveness Time Trade policy and Improving trade facilitation Increasing firm Complementary horizon trade agreements and addressing NTBs capabilities to export policies Sprints Develop an updated Strengthen a coordination Continue to strengthen Preserve macroeconomic digital trade regulatory structure for trade a targeted export stability to promote assessment to contribute facilitation and improve promotion strategy to business confidence to a negotiating position and centralize access to reduce search costs for and increase for the AfCFTA and assess information on official firms, improve awareness investment. the role of the AfCFTA in border regulations. of export opportunities developing regional value and facilitate certification chains to promote of exporters to access sustainable and resilient new markets. development. Continue to pursue a Address specific challenges Strengthen shared Deliver on the trade diplomacy strategy of women traders approach between Government’s structural that prioritizes trade at border crossings government and the reform agenda, in opportunities with through improved safety private sector on particular the key advanced and emerging procedures, ensuring localization policies to measures prioritized by economies, including in consistent application ensure that these are Operation Vulindlela. East Asia. of border processes consistent with the goals and increased use of of increasing and technology. diversifying exports. Medium Improve decision Develop a National Resolve hurdles that Improve the business distance times and the Single Window to SMEs face in environment and runs transparency of the tariff- integrate government accessing affordable competitiveness setting process (bearing agencies (SARS, DTIC, trade finance and through product and labor in mind confidentiality Home Affairs, DALRRD, continue to strengthen market reforms. requirements), continue among others). export promotion support. to assess implications of tariff adjustments on the value chain, and consider economy-wide impacts where required. Update South Africa’s Introduce more Continue to strengthen Ensure that social safety trade policy to address competition into key FDI promotion to attract nets and labor market emerging trade components of the investment into key policies are supporting issues and the impact transport logistics chain. input-supplying sectors. labor mobility into of changing global dynamic sectors. conditions. Marathons Implement the AfCFTA Develop smart Ensure that Special Ensure that the agreements, ensuring borders at the key Economic Zones education system access to regional or land crossings. (SEZs) have the equips the future labor national adjustment necessary force with the skills support for displaced infrastructure based on required by sectors with workers. an analysis of high export potential. comparative SEZ performance. 52 | Unlocking South Africa's Potential: Leveraging Trade for Inclusive Growth and Resilience Time Trade policy and Improving trade facilitation Increasing firm Complementary horizon trade agreements and addressing NTBs capabilities to export policies Promote trade in Develop the SACU Assist exporters to enter Deliver on South environmental goods area Authorized Economic green industries and seek Africa’s climate and technologies to Operator (AEO) program to ensure carbon taxes commitments to support support South Africa’s and single customs and other planned taxes adaptation and ensure firms to take advantage declaration process. under, for example, the that exports are not of trade opportunities European carbon border hampered by trade associated with the global adjustment mechanism partners’ carbon border climate transition. are transparent, are non- taxes in the future. discriminatory, and meet WTO requirements. Source: World Bank. Note: *Sprints are stroke-of-the-pen reforms implementable within 1–3 months or less at minimal cost, given the political will. Medium distance runs are programs implementable within 18 months with tangible benefits for millions of South Africans. Marathons are longer-term structural initiatives and institutional reforms that can be initiated and put on a firm footing in the next three years but will take longer to complete. The “how”: Implementing an ambitious from 2010, incorporating the state of the art reform agenda in evidence, analysis, and international best practices. The global political, economic and Achieving better results than in the past decade trade landscape has changed significantly will require a willingness to do things differently in the past 4 years and needs an anchoring and support experimentation. In recent years, the document to inform policies. For example, DTIC (and, in turn, trade policy) has increasingly the current trade policy hardly touches focused on localization and increased domestic upon trade in services, let alone issues such value addition. As shown in this report and in as climate change. Moreover, most policy- other recent studies, the potential net gains making has taken place through sectoral from localization remain limited in a context of master plans. However, export constraints low growth and especially constrained domestic are often not sector-specific and require an demand over the medium term in South Africa institutional framework to address cross- and other SACU members, and of the costs on cutting issues that affect firms. consumers associated with restricting competitive imports. As such, it will be important to also look 2. Reviewing the appropriateness of the at how to increase regional and global exports, current institutional structure: The definition following the roadmap laid out above. of priorities through a new trade strategy in turn can inform an assessment of potential This has three key components, which link to and institutional changes and reforms that incorporate the specific roadmap recommendations could improve outcomes. For example, in Table 7: there may be merit in broadening the National Trade Facilitation Committee, and 1. Modernizing the trade policy framework: more actively integrating the private sector. Building on the growing body of high-quality Another example is to strengthen the DTIC research, there is an urgent need to review export promotion division and the industry the overall trade policy framework dating export councils to identify market access III. What Will It Take for South Africa to See Broad-based Gains from Trade? | 53 opportunities and to identify and mobilize to from the agreement, how to best address remove export constraints. new climate-related trade regulations and take advantage of the demand for green 3. Identifying cross-government priorities goods, and how special economic zones can for integration into Operation Vulindlela: be used to enhance intra-African and global Finally, major targeted interventions could trade; and be spearheaded within the context of Operation Vulindlela, which would provide additional ii. 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