Is protecting local industry the solution?

Linda Tsarwe Business Correspondent
It is not uncommon for a Government to protect its local industries from imports. Keeping local industries viable is key to the growth of the economy. Unemployment is reduced and quality and standards of output is monitored in line with national requirements.Over the past years, many industries have called on the Government to introduce levies or impose higher tariffs on imported products which are cheaper and hence taking up market share from the local manufacturers.

Some measures have been taken to do so in some industries, while for the others, Government has been reluctant to do the same. It presents a true dilemma for the Government as not all factors justify for protectionism, despite local industries having a strong argument for it.

Recently, it was reported that some dairy industry players were calling for a levy on imported milk. They argue that the Government levies milk that is produced locally, while imported milk does not bear the same cost. Hence it was creating an unfair playing field against the local producers.

Also, just after dollarisation, an almost similar call was made by the poultry industry. This was following an influx of imported birds into the country from as far as Brazil.

The industry was almost crippled by the cheap substandard birds, which cost almost half the price of the local ones.

Furthermore, manufacturers of basic commodities have constantly been calling for some form of protectionism especially through a higher tariff.

Other sectors such as the textile industry have been crying out their case as the industry is now in near collapse, mainly due to cheaper textiles from countries such as India. The cases are many.

To some extent, it is understandable why the local players would call for government intervention. Levying local milk production, without doing the same on imports is clearly an unfair advantage to the foreigner. However, any further protectionism to the industry can be damaging.

At the moment the annual local milk production is projected to reach 70million litres for 2013 against a national demand of 120million.

The deficit is catered for by imports. With consumers already strained due to low disposable income, further tariffs will only put undesirable weight on their shoulders.

The poultry industry, back then also put on a strong argument. At the start of dollarisation, the poultry industry like any other industry was rebuilding.

Simultaneously, the industry got flooded with cheap birds from outside the country, which were sold at a much lower price. This was not in favour of local breeders who had higher costs mainly due to their organic breeding methods.

However, the problem of low incomes resulted in most consumers opting for the cheaper ones despite the fact that they were not up to standard. It therefore created a lot of problems for poultry breeders. Although the call on Government by local players is somewhat justified, on the other hand the argument can be porous. Is all competition unhealthy and hence should be eradicated? Arguably, by having a tendency of protecting local industries, there is chance of promoting inefficiencies.

The main question that ought to prompt investigation is that of why local products are costly in the first place. Most industries are operating with old machinery which is inefficient and expensive to run. Such costs are reflected through higher prices, which only burden the consumer.

Quality of some of the local products has also been brought to question, mainly due to their relic technology as compared to their foreign competition.

Furthermore, the issue of mismanagement cannot be left out. Some companies have been run down by their leaders, only to then use competition from imports as scapegoat.

Clearly protecting such industries will only promote such behaviour, to the detriment of the economy. It is noticeable that while certain industry players have been calling for higher tariffs, their fellow industry mates re-worked their strategy to retain their market share.

A good example is the poultry industry where Irvines and Suncrest were faced with the same challenges, but Irvines emerged victorious while Suncrest withered.

Should imports be blamed for Suncrest’s poor performance, when Irvines made it in the same industry? Irvines changed their game play to suit the new environment, and managed to remind the locals of how good local products can be. The quality of their products is able to withstand competition, even if they are priced marginally higher.

It could be argued that Irvines had the capital to be competitive. As has been seen over the past five years, capital is of the essence.

Most industries require a significant injection of funds. Manufacturing sector is even needier as most companies are on the brink of collapse or have fell down already.

Equipment acquired as way back as the 1960s at local manufacturing firm is no match to current technologically advanced equipment at Tiger Brands, for example.

Only when machinery is changed at our local manufacturing firms, will production costs slowly start to convergence to those of their regional peers. With an additional transport costs and import duty, regional products will become more expensive relative to the local product.

Naturally, foreign products have been made uncompetitive without imposing higher tariffs. In addition, capital injection will result in increase in capacity utilisation.

The deficit gap is closed up slowly until a point in time when local production can match demand.

Although the Government constantly faces the dilemma of whether or not to protect certain industries, it is important to investigate the cause of such a call. On the root, companies are simply calling for capital to heighten their game and be more competitive on a regional level.

Local products have never struggled to be accepted, but are only outshined by imports because they can meet only so much of the total demand. The bigger chunk is filled in by imports which become relatively more visible.

Injection of capital will result in an increase in capacity utilisation, which works in eradicating this deficit. Coupled with efficient machinery, imports are slowly pushed out of the system, and the calls for higher tariffs will not even be necessary.