Our government and Donald Trump are united on the philosophy of tariffs

It should be obvious that taking the logic of tariffs to its natural conclusion would make all prices unbearably expensive.

Photo by Natilyn Hicks Photography on Unsplash

United States (US) President Donald Trump has wreaked havoc on the global economy by imposing so-called reciprocal tariffs on almost all imports into the US. This has reversed decades of progress towards freer trade and rightly led to condemnation from sober-minded people everywhere. At the same time, President Trump has been treating South Africa as an adversary. But when it comes to his signature issue of tariffs, Trump has friends in Pretoria.

The logic of the Trump tariffs (which start at 10% for almost all countries, regardless of whether the country has a trade deficit with the US or is an ally of America) is that free trade has cost America in the form of offshoring of their manufacturing capability to foreign lands and a trade deficit. This is exactly the same logic South Africa’s Department of Trade, Industry and Competition (DTIC) has been operating under.

While South Africa has an average tariff of 7.6% (lower than the 10% Trump implemented across the board), for some categories of goods, some tariffs can be much higher. For instance, importers can expect to pay up to 45% on clothing imports depending on their classification. This is an attempt at protecting the local clothing and textile industry.

There used to be an exemption for imported clothing under R500 per parcel; this has now been changed to protect the local e-commerce sector against Chinese e-commerce retailers.

The philosophy behind South Africa’s trade barriers is the same as that of Trump. South Africa has three types of import tariffs: customs duties, anti-dumping and countervailing duties and VAT. We need to get rid of the first two altogether, and for the last one we need to change how it is calculated. But to see that, we first must understand why having no tariffs is good for South Africans.

Tariffs are a tax. For this reason they are administered by the South African Revenue Service (SARS). Like all taxes, tariffs add costs or friction, they make acquiring the product more expensive than it needs to be. South Africa is part of a global market, a market that is the same as the local market except that goods must cross national borders.

Imagine if we applied tariff logic locally, if the people of Newcastle in KwaZulu Natal, decided that buying goods from Johannesburg was an unfair subsidy on Johannesburg. Why stop there? What if the people of Madadeni decided buying goods from Newcastle town was an unfair subsidy, what if the Dhlamini family decided that buying goods made by anyone who is not from our family was harming us?

It should be obvious that taking the logic of tariffs to its natural conclusion would make all prices unbearably expensive. When we buy something from a business (regardless of where this business is located), we do so having made the determination that the thing we want is provided to us in the way that suits us most, by that business. Often this is because the business has the cheapest price, but it can also be a matter of quality, customer service etc.

Restricting trade means restricting this freedom for the buyer as much as it stops the seller being able to sell to them. It means the buyer must settle for less than what they could have gotten, ‘less’ in this case being relative to the buyer’s goals. Often politicians will say this is made up for by being able to buy from a local, but this is clearly a lie, with the maximum freedom, I would have chosen the local if they offered what I want, the fact that my freedom has to be restricted in order for me to choose the local means this is certainly not done for my benefit.

Of course, like all central planning economic schemes, the idea is that the ordinary person, you and me, are too foolish to make the right decisions when we are free to do so. ‘We need the wise people in the government to restrict our freedom to make these decisions for us,’ in this case by artificially raising the costs of products bought from foreign businesses.

Not surprisingly, when you make it harder for people to satisfy their wants/needs, they tend to become poorer. So, the International Monetary Fund (IMF) and other bodies, including the US Federal reserve, have warned that Trump’s tariffs will act as a drag on global economic growth. They have the potential to drag the world into recession if they trigger a so-called trade war, which is a cycle of retaliatory actions by other countries.

Which brings us back to South Africa’s tariff policy and the three types of tariffs in this country. Customs duties, according to SARS, are used to raise revenue and protect certain local industries. While the government does need some revenue, it is not clear why all the other taxes are not enough to fill this need. Protecting local industries via tariffs is a Trumpian level of economic ignorance, local companies benefit (in general and on average) from being able to source goods at the best price/quality etc that can be found in global markets, just like all of us.

Even National Treasury recognised this a few years ago when they pointed out that South Africa's industrial strategy of using tariffs to stimulate local industry had failed. You make local industry less competitive on average because the inputs to their manufacturing process become more expensive.

The second type of tariff levied by South Africa are the anti-dumping and countervailing duties. These are meant to “defend” us against excessively cheap products from foreigners. The idea is, subsidies from foreign governments can be used to make local manufacturers uncompetitive, and some countries can also decide to dump their products (sell them at significantly below market prices) to put our producers out of business and therefore capture our market.

Now imagine if this logic were applied to Boxer Supermarket or Shoprite. We would levy “tariffs” on their cheap products because they were dumping these on us as consumers and therefore putting our spaza shops out of business. Of course this is foolishness, lower prices benefit the consumer because they have more to save and more to spend.

Therefore, policies that subsidise exporters are really policies that subsidise foreign consumers. We do not need anti-dumping or countervailing tariffs against these. While the US government may think they are subsidising their farmers, they may in fact be helping Pep by subsidising our consumers through artificially lower prices. We do not need to fight against this, we need to welcome it.

This type of tariff should be the first to go.

Finally, there’s VAT. South African companies are also charged VAT so if it is removed for imports it must be removed everywhere. Since this is unlikely to happen and it might be better to keep VAT and instead do away with corporate and personal income taxes, this third type of tariff can stay but only if it is calculated in the same way as for South African companies.

The VAT (currently 15%) is applied to what is called the Added Tax Value (ATV); this is the original value of the product plus an arbitrary 10% plus any other applicable duties. So, VAT is then levied on this number. If the product cost R100 for the person importing it and other duties on the product amount to 20%, that means the VAT of 15% is calculated on R130 (the original value + the arbitrary 10% + the 20% duty) so the final cost would be: R120 + (15%xR130) = R139.5, an almost 40% increase on the original cost.

Get rid of the other duties and get rid of the arbitrary 10% in the VAT calculation. This would lead to a decrease in prices for South Africans, especially the poorest (one of the saddest things to see was South African chicken companies lobbying against ‘Brazilian chicken dumping’ when this would have benefitted the poorest people in our society) amongst us. It would also increase disposable incomes and therefore savings, which would in turn make more capital available and therefore we would produce more.

That is how you encourage manufacturing and exports. Taxes can only strangle productive activity; they can never encourage it.

Mpiyakhe Dhlamini is a libertarian, writer, programmer and an Associate of the Free Market Foundation.