The latest research from policy research entity Trade and Industrial Policy Strategies (TIPS) reveals that, for the first time since the start of the Covid-19 pandemic, exports declined while imports continued to grow.

The latest Imports Localisation and Supply Chain Disruption Study for the fourth quarter of 2022, shows that exports fell 3% to R495-billion during the fourth quarter of 2022, from R510-billion in the fourth quarter of 2021.

Imports, meanwhile, continued to rise, increasing by 19% to R487-billion in the fourth quarter of 2022, from R409-billion in the fourth quarter of 2021.

Further, the study shows that exports have continued to grow at a slower pace compared with imports. Exports for the fourth quarter of 2022 were 6% higher when compared with the fourth quarter of 2020. In contrast, imports were 39% higher.

According to the TIPS Import Tracker, which provides an overview of import patterns and looks at the causes of surges in imports and their likely impact on industry, the trade surplus declined by a further 85% to R7.4-billion in the fourth quarter of 2022, from R100.6-billion in the fourth quarter of 2021, following a decline to R51-billion in the third quarter of 2022.

Speaking during a Development Dialogue on Localisation on Tuesday, TIPS senior economist Nokwanda Maseko, discussing the Import Tracker and the Imports Localisation and Supply Chain Disruption Study, released in August, said that South Africa remained a net importer of many products and changing this would likely need further discussions and studies on whether it would be worthwhile to pursue localisation in certain sectors, with the country having missed the opportunity to develop within some industries.

“The report itself contributes to the conversation by essentially trying to understand where there is potential for localising particular products.”

With the exception of parts of machinery for working mineral substances, South Africa is a net importer of the analysed capital equipment and accessories, with much of the imported equipment coming from China, India and Sweden.

About 59 products have been analysed since the first quarter of 2020, covering a range of sectors, including information and communication technology (ICT), clothing, textiles, footwear and leather, capital equipment and food and beverages, besides others, and combined, these amount to about R63-billion worth of imports per quarter, which shows that there can be higher value if there is potential for localisation.

“Some products we have missed the boat on, so we need to decide what is worth pursuing,” she commented, citing the example of set-top boxes (STBs) within the ICT sector.

Demand of STBs had been driven by the State and South Africa’s digital migration programme, which resulted in a surge of imports in 2015 and 2017.

“However, given the fact that migration has not been completed, if there is no local production of these products, then we are likely going to see rising imports in the coming years as well.”

“In terms of electronics and ICT products, I think South Africa has missed the entry point for production. So at this point, is it really worth the time to establish local production, or do we just cut our losses and move on?” she mused.

Another consideration is that, while capital equipment products, especially vehicles such as self-propelled mechanical shovels and dumpers, for example, are high-value products, they are also low-quantity products.

“Where we have seen higher quantities is with accessories. Parts and accessories for example, on a quarterly basis, you would see imports coming in in the millions of kilograms. However, there are already dominant players in the industry, especially with these kinds of capital equipment.

“In terms of local production, it raises questions of whether we can actually, as a country, reach scale for new entrants to be able to come in and join the local production force.”

“To be able to increase production, we will need to figure out where are we at: are we producing for export or are we producing for the local market? If we are going to industrialise and build industries, we need to think about where the demand is coming from,” Maseko commented.

Weighing in on the topic, TIPS senior economist Dr Neva Makgetla said that emerging local producers could only become competitive if they had local demand and they were able to compete on cost.

South Africa needs to diversify away from commodity dependencies, she says, noting that more than half of South Africa’s exports are still mining and metals products, with agriculture adding another 10% to 15%.

However, to diversify and expand exports, there has to be local demand, where there is a “bit of a safe space” in order to become competitive.

“The difference between the countries that have become major exporters and those that have just seen high costs from import substitution industrialisation is that the ones that became competitive also had incentives in place to make people look at ways to cut their costs.

“It is not only about tariffs, but also changing public and private procurement systems, and at the same time, addressing supply-side problems that make our local industries unable to compete without explicit support.

There is also often a price premium for local products as companies work to catch up to global producers.

New and existing local producers may need time, sometimes even years, to build new capacity and then to develop competitive technological and management systems.

While these “infant industries” may become competitive and, in some cases even global players, it could mean years of production at a higher cost, worse quality and/or unreliable supply for local users, Makgetla commented.

“So if it is going to take 20 years for a South African producer to become competitive, then obviously that is a bigger cost to society than something where they can catch up in a year.”

Local producers will often face blockages that prevent them from competing effectively with imports on price and quality, at least in the short term, and procurement systems may effectively favour imports even where they are not significantly better on price or quality.

However, local procurement would generate significant benefits, as meeting domestic demand boosted production, investment, technological capacity and employment, as well as reduced the transaction costs inherent in imports and encouraged production of goods and services to meet specific local and regional requirements, she noted.

“The economic logic of localisation means that every opportunity to replace imported products must be evaluated on a case-by-case basis. The critical questions around economic and social viability become what are the benefits of local production of a specific good or service in meeting local and regional needs; job creation; economic growth; technological advances; and other externalities? The benefits will naturally vary substantially by product, but taken together the supported activities should contribute to both more dynamic and more inclusive growth.”