2 days ago
Trump tariffs threaten thousands of Eastern Cape manufacturing jobs — but mitigating action can be taken
The announcement by US President Donald Trump that South African goods will be subject to 30% import tariffs from 1 August is the latest addition to the clamour of alarm bells about the viability of manufacturing in the Eastern Cape, potentially putting thousands of jobs on the line.
The reality is that a number of countries will now have significant cost advantages over South Africa, including countries on this continent, while other countries have the flexibility to absorb the tariffs.
In addition, this will strengthen countries with lower tariffs that we did not compete with in the past. And if imports from South Africa are replaced with products made by new US manufacturers, there will be an oversupply of these products in the global marketplace.
Analysis by the Nelson Mandela Bay (NMB) Business Chamber indicates that thousands of direct and indirect jobs in manufacturing in the Eastern Cape are at risk from the impacts of the new US tariffs. This is in terms of reduced competitiveness and economies of scale of SA manufacturing against more favourable locations worldwide, as well as the knock-on effects on other trading relationships and the responses of other countries in an escalating global tariff war.
Such job losses will have a vast socioeconomic impact, given that each employed breadwinner supports an estimated 10 other people in extended families and communities.
Alarm bells over the loss of manufacturing capacity and employment in NMB have been ringing for some time, as evidenced by the downsizing of operations and outright plant closures. This has been particularly evident in the tyre industry, where over the past few years we have seen Bridgestone and ContiTech closing factories, while Goodyear is restructuring its operations, which may result in the closure of its plant in Kariega.
Over recent years, we have also seen the restructuring and, in some instances, the closures of catalytic converter and seat manufacturing companies.
Automotive sector faces crisis
On the vehicle manufacturing side, General Motors left South Africa at the end of 2016, resulting in the Chevrolet brand leaving the market and job losses at the company, suppliers and dealers. Alongside this, vital community support initiatives in the education and housing areas disappeared.
Mercedes-Benz, which exports vehicles to the US, has suspended production at its operations for six weeks until the end of this month. This follows a restructuring last year that saw the plant shed 700 jobs.
The NMB Business Chamber's Enabling Environment Barometer indicates that more direct and indirect jobs are at risk, while several manufacturers have imposed hiring freezes.
Deindustrialisation is not in itself the issue. The shift from heavy industry and manufacturing to the services sector and high-tech, innovation-oriented businesses is a natural progression in advanced, maturing economies, especially where services are exported, which is not necessarily the case in South Africa.
The country is in line with global trends in developed economies of a declining contribution of manufacturing to GDP and employment. However, in our developing economy with rising unacceptably high levels of unemployment (the Eastern Cape has the second-highest unemployment rate in SA, which recently rose by 2.7 percentage points to 39.3%), this is not a sign of positive economic progress; it is a trend that urgently needs to be reversed.
Deindustrialisation in South Africa stems from a weakening economy characterised by increasing costs of production and doing business, inefficiencies in logistics and infrastructure, and a lack of basic service delivery.
The enabling policy environment is also lagging in incentives to support local manufacturing in general, and particularly the shift to new energy vehicle technologies and e-mobility solutions, all of which are exacerbated by the US tariffs and their knock-on effects.
Multinationals can move production between facilities around the globe, which gives them the most competitive base from which to operate. This becomes a barometer — the greater the number of multinationals closing or downsizing, the bigger the systemic problems in a region.
Why Nelson Mandela Bay and the Eastern Cape can't afford to fail
The economy of Nelson Mandela Bay and the Eastern Cape is in a vulnerable position, as the region remains centred on manufacturing, with the automotive sector the foundation of deep value chains and a surrounding ecosystem of component manufacturing, logistics providers and suppliers of indirect goods and services.
The strength of the automotive sector and its investment in innovation and technology, and the skills associated with it, bring immense value to the area. Alongside this, manufacturing in other sectors, such as beverages, pharmaceuticals and agro-processing, has emerged in NMB.
Given the economic knock-on impact of manufacturing, the sector's contribution to the Nelson Mandela Bay economy is probably far greater than its direct contribution of 25%. Similarly, the approximately 64,000 jobs in the metro directly linked to the automotive sector, representing more than 40% of auto manufacturing employment in South Africa, have an estimated multiplier effect of four additional jobs in direct supply chains and sectors such as retail, tourism and property.
The SA automotive industry is highly export-oriented, with almost two-thirds of local vehicle production destined for export markets and more than 50% of that emanating from Eastern Cape manufacturers.
South African manufacturers need to retain these levels of exports to maintain the economies of scale that enable competitiveness, which in turn supports local vehicle manufacturing and employment.
However, manufacturers that do completely knocked down (CKD) vehicle manufacturing, where the entire vehicle is assembled from imported or locally made parts, are losing ground to the rapid rise of cheap fully assembled vehicles and the semi-knocked-down (SKD) assembly of vehicles that are imported partly assembled.
Sales of locally built vehicles have declined from 46% of domestic vehicle sales in 2018 to 37% last year, and five of the 10 top-selling passenger cars in the local market are now from brands that do not do CKD assembly in South Africa.
Due to its deep value chains and interconnectedness with component manufacturers, and the surrounding network of local suppliers of goods and services, as well as the ripple effect into other sectors, CKD manufacturing supports far greater levels of investment, employment and localisation of manufacturing than does SKD assembly.
Policy reform
While addressing the issues of ineffective service delivery, crumbling infrastructure, logistics bottlenecks and safety and security are critical to ensuring an enabling environment for business, the other key to reversing deindustrialisation lies in reforming the policy landscape.
Attempting to protect local manufacturing through retaliatory tariffs is not the solution, as this is likely to result in further rounds of counter-tariffs and impacts on South Africa's trade relationships with the US and other countries — an unproductive approach with few likely positive outcomes.
Rather than using tariffs to eliminate external competition, South Africa needs to be looking at how to support and strengthen local manufacturing through incentives that encourage investment in CKD over SKD manufacturing, localisation of components, and give local operations a competitive advantage over other locations within a multinational brand.
Moreover, we need to reduce complexity and make it as easy as possible to retain and attract investment to our country. Incentives should be structured to attract and encourage new investment without imposing massive bureaucratic challenges.
Alongside efforts to improve SA's trade offer to the US, we need to explore and strengthen other trading partnerships, particularly with BRICS countries, the European Union and Southeast Asia, to diversify our markets. We should be driving towards finalising the rules of origin for vehicles to activate the potential under the African Continental Free Trade Area agreement.
Exports to BRICS markets currently generally comprise unbeneficiated raw materials and agricultural products. SA's exports to the European Union and the US represent greater diversity and integration, and more opportunities for job creation that are backed and supported by trade agreements.
SA needs to be a source of high-margin value-added products and beneficiated minerals, not a source of low-margin minerals. We must do everything possible to retain and strengthen our manufacturing capabilities so that we can create and unlock downstream employment opportunities.
Manufacturing is the bedrock of the Nelson Mandela Bay and Eastern Cape economy. The economic future of this region depends on strategic action to ensure that we offer a competitive value proposition for manufacturing, in terms of the basic enabling environment and forward-thinking policy. Our business community wants this to happen and is not simply whining about the issues; rather, we will continue to roll up our sleeves to take action and be part of the solution to retain investment and employment in NMB.
The chamber remains positive that we can realise the potential of the Bay of Opportunity as a diversified manufacturing and export hub for Africa, if we start now. This requires a multi-stakeholder response centred on speed and taking action. DM
