Trade: Beware mercantilist sentiments

One of the most profound (and often most difficult to teach) insights in economics is the idea that trade is not a zero-sum game.

Just as my salary allows me to purchase all the things I cannot (or don’t want to) produce on my own, so our exports (of the things we are good at) allow us to buy imports (of the things we are not good at). We do not work simply to accumulate a salary; we work because it allows us to buy nice things.

In other words, we are not mercantilists. A mercantilist hopes to export as much as possible and restrict imports. A large, positive trade balance, they believe, will “make a nation rich”.

Not so. Mercantilism is not why England experienced an Industrial Revolution, and it is not why Africa will grow rich. Having more exports than imports over the long run simply means that a country’s citizens are not reaping the fruits of their labour. To return to the earlier metaphor: it’s like earning a salary but not being allowed to purchase anything with it.

It’s easy to sell mercantilist ideas, though. Here is Alexander Wilmot in the Legislative Council of the Cape Colony in August 1891: “Let us be wise in time, and really patriotic, grow our food, encourage our own industries…” Or John Xavier Merriman, the last prime minister of the Cape Colony, in the same debate: “The best form of protection was for everybody to set to and buy as much as they could in the colony. (Hear, hear.)”  

You don’t need to go too far to find similar sentiments in contemporary debates. The clothing and textile industry recently held an Imbizo to discuss ways to grow the industry. Some of the comments on news websites reporting this story summarise the sentiment I often find in my classes too: “Chinese imports killed the textile industry in South Africa”, “You forget the greedy retailers preferring the cheapest suppliers”, “All we need is a 90% buy local campaign”, “With a bit of goodwill and assistance in the form of import restrictions we would all benefit. Jobs, better quality and some pride in the achievement would do all of us some good!”

Again, not true. 

Aside from the small detail that the industry has received support since the 1930s, long before China was a competitive force, we should rather export what we are good at, and import the cheap goods which we aren’t relatively good at. (Also, Chinese clothes are becoming increasingly expensive as Chinese wages increase. We are increasingly importing clothes from other parts of Asia and Africa.)

But how do we do this? Two recent UNU-Wider working papers by South Africa’s foremost trade economists help to answer exactly this question. 

The first, by a team of economists from North-West University and Stellenbosch University, use a new firm-level dataset of South African manufacturers to understand exporting firms better. 

They report five key findings:

1) Export participation is rare – only 19% of South African firms export.

2) Exporters are systematically different to non-exporting firms – they are larger, more labour productive, pay higher wages, and are more capital and intermediate-input intensive than non-exports. I will lump all these things together and just say they are “better”.

3) Firms that export to multiple destinations and across multiple product lines are “better” across all the dimensions listed above.

4) Exporters to countries outside Africa are “better” across the same dimensions than exporters to countries within Africa.

5) Firms that already export are most likely to grow the total value of exports than new entrants.

The second paper, by researchers at the University of Cape Town and the University of Bari in Italy, use similar data to show that the most productive South African firms are the ones that both import and export. Importing from advanced economies especially makes local firms more productive, and more likely to export at greater scale, scope and value. The authors argue that access for domestic firms to a variety of intermediate inputs from abroad can be crucial to raising local employment and gaining access to new technologies.

The take-away: South Africa’s exporters need imports to be competitive. We can only grow our local exporting firms by giving them access to the cheapest inputs and the best technologies, and these are often found outside SA. Much like our 19th-century ancestors, our zest to expand exports will only inflict harm if we adhere to the mercantilist sentiment by restricting imports.

Johan Fourie is associate professor in Economics at Stellenbosch University.

This article originally appeared in the 14 July edition of finweek. Buy and download the magazine here. 

ZAR/USD
17.51
(-1.07)
ZAR/GBP
23.04
(-1.40)
ZAR/EUR
20.75
(-0.93)
ZAR/AUD
12.58
(-0.92)
ZAR/JPY
0.17
(-1.22)
Gold
2062.51
(+1.32)
Silver
28.30
(+5.46)
Platinum
987.00
(+2.45)
Brent Crude
45.33
(+1.67)
Palladium
2233.00
(+2.70)
All Share
57690.71
(+0.11)
Top 40
53392.96
(+0.21)
Financial 15
9771.62
(-1.58)
Industrial 25
76230.08
(+0.09)
Resource 10
60363.04
(+0.96)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 900 votes
It depends on how the funds are used.
74% - 6001 votes
No. We should have gotten the loan elsewhere.
15% - 1214 votes
Vote