In recent years, industrial policy has moved from the fringes to the forefront of economic policy in many developed countries. This shift is exemplified by the introduction of the Inflation Reduction Act and CHIPs and Science Act in the United States (US) and the Green Deal Industrial Plan in the European Union (EU). According to some estimates, the proportion of trade policies that can be classified as industrial policy has risen significantly from 18% in 2009 to 46% in 2019.[1] In 2023 alone, over 2,500 industrial policy measures were implemented, mainly by developed countries, with 71% of these measures described as trade distortive.[2]
The resurgence of industrial policy is driven by governments seeking effective strategies to deal with interrelated crises that have affected the global economy since the 2008/2009 financial crisis. These crises include inter alia the slowdown in growth after the financial crisis, COVID-19-related disruptions of supply chains, geopolitical risks, and climate change. In addition, industrial policies are being used to drive the race in advanced and low-carbon technologies.
While industrial policies are national strategies primarily aimed at inducing structural transformation, they have cross-border spillovers. These spillovers affect trade partners in many parts of the world, particularly when enacted on a large scale by major economies. As such, it becomes crucial to understand the potential immediate and long-term implications of the increased use of industrial policies by major economies on South Africa.
For analytical purposes, this brief uses two groupings – South Africa’s key trade partners (henceforth “key trade partners”) in developed countries (the United States, the United Kingdom and the European Union) and the BRICS countries (excluding South Africa).[3] This categorisation was chosen for two purposes. First, key trade partners accounted for 32% of total South African exports valued at R641 billion in 2023 and have actively pursued industrial policy in recent years, as discussed later in this brief.[4] Secondly, the BRICS is a global South grouping, which accounts for 41% of the global population. More importantly, it is also a significant trade partner with South Africa, accounting for 17% of South African exports valued at R337 billion in 2023. Therefore, any changes in these two market groups induced by industrial policy are likely to affect South Africa and its trade flows.
Motivations Behind New Industrial Policies
Industrial policy, which refers to selective government interventions that aim to alter the structure of production towards sectors with high growth potential, is not a new phenomenon.[5] It has been a cornerstone in the development of many of today’s industrialised economies. However, it became unpopular in mainstream economics from the 1980s, although many developing countries continued to rely on it to protect infant industries and achieve strategic competitiveness in key industries.
Industrial policy has not only made a comeback in recent years but developed countries explain a disproportionately large share of interventions. In 2023, developed countries accounted for 70.9% of trade distortive industrial policies, with developing countries making up the remainder.[6] Developed and high-income countries have been the most active users of industrial policy in recent years.[7]
Importantly, reasons for using industrial policies differ from those of the past. Figure 1 shows the official motivations provided for the use of industrial policy in 2023 by South Africa’s key trade partners in the developed world, BRICS, and the rest of the world. Evidently, at the aggregate level, the motivation for the use of industrial policy goes beyond the traditional goal of achieving competitiveness to fighting the existential climate crisis, ensuring supply chain resilience following the COVID-19 disruptions, and the mitigation of ongoing geopolitical risks.
Notably, the reasons for using industrial policy differ between South Africa’s key trade partners in developed countries and BRICS countries. Climate change mitigation, supply chain resilience, geopolitical concerns, and national security are major driving forces behind the industrial policies of key trade partners. Whereas in the case of BRICS, competitiveness remains the key motivation behind the use of industrial policy.
Figure 1: Reasons for implementing industrial policy between January and December 2023
Source: New Industrial Policy Observatory from Global Trade Alert. Author’s calculation. Note: Key trading partners refer to the US, UK, and EU. This graph only considers trade distortive industrial policies.
Another driving factor behind the renewed interest in industrial policy, is the retaliatory stance taken by developed countries. These countries are leveraging industrial policies to counter China’s extensive use of subsidies to gain a competitive edge in green technologies, including electric vehicles, lithium-ion batteries, and renewable energy technologies. While exact figures have been challenging to obtain, it is estimated that China’s industrial subsidies in 2019 amounted to 1.73% of the country’s GDP,[8] which is three to four times higher than those in large OECD countries.[9] These retaliatory dynamics are prevalent between China, the EU, and the US. According to Evenett et al (2023), on average, there is a 73.8% probability that a subsidy for a given product by one of these economies is met with a subsidy in second economy for the same product within a year. [10]
Policy Instruments and Targeted Sectors
Subsidies have become the most widely used instrument in the new industrial policy era. Figure 2 shows the industrial policy instruments used in 2023 by South Africa’s key trade partners, and the BRICS countries. Here, both key trade partners and the BRICS have leveraged subsidies. Among the key trading partners, subsidies made up about half of all industrial policy measures in 2023. Meanwhile, in the BRICS, they made up 44% of industrial policy measures. The US alone recorded the most subsidies implemented in 2023, with 168 subsidies, making up 60% of subsidies among the key trade partners. Through the Inflation Reduction Act, the country has committed to the provision of subsidies worth $400 billion, equivalent to South Africa’s GDP in 2022. These subsidies are aimed at increasing local production of clean technologies, including electric vehicles.
Figure 2: Industrial Policy Instruments used in 2023 by South Africa’s Key trading partners and BRICS.
Source: New Industrial Policy Observatory from Global Trade Alert. Author’s calculation. Note: Key trading partners refer to the US, UK, and EU.
Localisation has emerged as the second most widely used industrial policy lever in measures implemented in 2023. The US is the most active user of localisation for this period, accounting for over 90% of localisation measures among the key trade partners. Even at the aggregate level, looking at all industrial policy measures by all countries – localisation is in the top three policy levers, with advanced economies, led by the US, making up 70% of localisation measures implemented.
Overall, the type of industrial policy instruments pursued differs between the two groupings. Key trade partners rely on domestic subsidies, localisation, and export subsidies, while the BRICS countries still rely more heavily on general trade measures such as import and export barriers.
Figure 3 shows the distribution of industrial policies by sector across key trade partners and the BRICS. The graph shows the prioritisation of various sectors through industrial policy initiatives implemented in 2023. In this case, low-carbon technologies, advanced technologies, critical minerals, and semiconductors are emerging sectors that have received substantial support beyond traditional industries such as iron and steel.
Figure 3: Targeted Sectors in the New Industrial Policy, 2023
Source: New Industrial Policy Observatory from Global Trade Alert. Author’s calculation. Note: Key trading partners refer to the US, UK, and EU.
Dual-use products, which include goods, software, and technology that can be used for both civilian and military purposes, received the largest support across the board. Low-carbon technology and advanced technologies are prominently supported across both groups, reflecting the global transition towards a climate-resilient economy and innovation. The EU, India, and the US have placed substantial emphasis on critical minerals, reflecting their importance as an upstream sector in advanced and low-carbon technologies. Additionally, the semiconductors industry has received considerable support in 2023, particularly in the EU, China, and the US.
High-level Implications for South Africa
For South Africa, two key implications emerge from recent trends in industrial policy among key trade partners and BRICS countries.
First, as key partners, including some of the BRICS countries, prioritise low-carbon technologies, advanced technological products, and semiconductors, there will be a growing demand for critical minerals.[11] An assessment carried out by the EU in 2023 shows that aside from China, South Africa has the second-highest share of critical minerals, See Figure 4[12]. In this case, South Africa is well positioned to leverage increased demand for these minerals. Indeed, demand for critical minerals is on the rise as manufacturers across the world race to secure a steady supply of critical minerals to produce low-carbon and advanced technologies and to be at the forefront of this technological frontier. In 2023, demand for lithium rose by 30% while demand for nickel, cobalt, graphite, and rare earth elements saw an increase ranging from 8% to 15%.[13] Additionally, the demand for South Africa’s critical mineral is likely to be heightened in the coming years as countries look for alternative sources of supply to diversify supply chains and reduce reliance on China.
This surge in demand for critical minerals presents a crucial juncture for South Africa’s policy direction. The country will have to decide whether to enhance its role as a primary supplier of these minerals by creating a favourable environment for exploration and investment or to focus on beneficiating the minerals to boost value-added, thereby inducing the development of local and regional value chains.
Figure 4: Countries accounting for the largest share of critical minerals.
Source: EU (n.d). Security of supply critical raw materials resilience foresight strategic materials autonomy advanced materials material system analysis. Available from https://rmis.jrc.ec.europa.eu/eu-critical-raw-materials. Accessed in June 2024.
Second, given the tit-for-tat dynamics likely to ensue between the US, China, and the EU regarding trade-distortive subsidies and, more recently, tariffs, global trade growth will be negatively affected. Sustained efforts to curtail, reshore, and onshore global supply chains are likely to impede international trade growth, as these efforts limit international technological diffusion and reduce efficiency.[14] Given that international trade has been a key engine for the development and prosperity of many developing countries, its slowdown will likely affect the pace of growth of many countries, including South Africa. These global developments are likely to prompt South Africa to consider and review its own trade strategy. The South African government will need to decide whether to focus on the continent as a source of growth or actively pursue bilateral agreements with key trade partners and BRICS to mitigate the impact of declining growth rate and potential trade barriers.
In addition, the EU, and the UK’s Carbon Border Adjustment Mechanisms (CBAMs) illustrate how specific industrial policy measures can directly impact South Africa and its resulting policy choices. CBAM is a carbon border tax imposed on the embedded emissions of carbon-intensive products imported into the EU and the UK. Its primary objective is to prevent carbon leakage, which occurs when firms shift production to countries with less stringent carbon regulations.[15] By imposing costs on imports based on their carbon content, the EU and the UK aim to protect local producers from being undercut by cheaper, high-carbon imports; and to prevent carbon leakage.
The EU was the first to introduce the CBAM, which is set to be implemented in 2026. The EU’s CBAM covers sectors such as iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity.[16] Following in the EU’s footsteps, the UK is in the process of designing similar policy measure, albeit with differences in sectoral scope and timing.[17] Alongside the EU-covered sectors, the UK will include ceramics and glass but not electricity. Regarding timing, the UK’s CBAM will be implemented in 2027.
Given that the EU and the UK are among the largest trade partners for South Africa, the proposed CBAMs will affect South Africa’s trade flows. Under the EU CBAM, it is estimated that about 10% of South Africa’s exports to the EU are at risk. [18] The impact will be further amplified with the introduction of the UK CBAM, as well as the extension of CBAMs to cover a broader range of sectors. South African industries that will be most affected in the initial stages include iron and steel, and aluminium, given their large share of exports to both the EU and the UK.[19]
Additionally, the implications of CBAM extend beyond trade flows and affect South Africa’s industrial policy choices, including the pace of decarbonisation and sectors prioritised. Given the scale of impact (which will increase as the scope of coverage expands and more countries adopt CBAM), South Africa will need to actively pursue a green industrial policy route among other actions. This means focusing on supporting affected value chains, implementing our own carbon taxes, and prioritising low carbon energy systems. [20]
South Africa’s industrial policy and future choices
South Africa’s industrial policy, in comparison, predominantly targets traditional sectors, many of which have significant carbon footprints. This emphasis is evident in the priority sectors outlined in the 2019-2021 Industrial Policy Action Plan (IPAP) and related Master Plans, which highlight automotive, Clothing, Textiles, Footwear and Leather footwear (CTFL), agro-processing, steel and metal fabrication, forestry, and sugar. These sectors have received support through various instruments, including subsidies, procurement policies, localisation initiatives, and tariffs.
The manufacturing sector benefits significantly from various incentive programs under the dtic. These include the Black Industrialist Scheme (BIS), Automotive Investment Scheme (AIS), Agro-processing Support Scheme (APSS), Aquaculture Development and Enhancement Program (ADEP), Manufacturing Competitiveness Enhancement Programme (MCEP), Strategic Partnership Programme (SPP), Clothing and Textile Competitiveness Programme (CTCP), and the COVID-19 Black Business Fund.[21] A notable portion of government support is directed towards the automotive sector, which received R34 billion in 2021/22 through duty drawbacks.[22] However, the current incentive framework for the sector is technologically neutral[23] and does not explicitly promote electric vehicle production, unlike the targeted initiatives seen in advanced and some emerging economies.
Overall, South Africa’s industrial policy leans heavily towards traditional industries, with limited support for low-carbon and advanced technologies compared to key trade partners and BRICS nations. This indicates a need for realignment to promote a more sustainable and future-proof industrial base.
[1] Juhász, R., Lane, N., Oehlsen, E., & Pérez, V. C. (2022). The who, what, when, and how of industrial policy: A text-based approach. What, When, and How of Industrial Policy: A Text-Based Approach (August 15, 2022). Available from https://osf.io/preprints/socarxiv/uyxh9. Accessed in June 2024.
[2] Evenett, S., Jakubik, A., Martín, F., & Ruta, M. (2024). The return of industrial policy in data. IMF Working Paper (WP/24/1). Available from www.imf.org.za
[3] This refers to old BRICS being Brazil, India, Russia, and China (excluding South Africa) and does not include new members that joined effective from January 2024.
[4] Author’s calculation based on TradeMap data.
[5] Pack H, and Saggi K (2006). Is there a case for industrial policy? A critical survey. The World Bank Research Observer 21(2): 267–97.
[6]Evenett, S., Jakubik, A., Martín, F., & Ruta, M. (2024). The return of industrial policy in data. IMF Working Paper (WP/24/1). Available from www.imf.org.za
[7] Juhász, R., Lane, N., Oehlsen, E., & Pérez, V. C. (2022). The who, what, when, and how of industrial policy: A text-based approach. What, When, and How of Industrial Policy: A Text-Based Approach (August 15, 2022)
[8] DiPippo, G., Mazzocco, I., Kennedy, S., & Goodman, M. P. (2022). Red Ink: Estimating Chinese Industrial Policy Spending in Comparative Perspective. CSIS.
[9] Bickenbach, F., Dohse, D., Langhammer, R. J., & Liu, W. H. (2024). Foul play? On the scale and scope of industrial subsidies in China (No. 173). Kiel Policy Brief.
[10] Evenett, S., Jakubik, A., Martín, F., & Ruta, M. (2024). The return of industrial policy in data. IMF Working Paper (WP/24/1). Available from www.imf.org.za
[11] Critical minerals are essential inputs into low carbon or clean technologies including electric vehicles, wind turbines, and defense technologies, among others.
[12] Different countries use varying methodologies to identify critical minerals based on their economic needs and perceived supply risks. As such, the lists of critical minerals can differ slightly from country to country.
[13] IEA., 2024. Global Critical Minerals Outlook 2024. Available from https://www.iea.org/reports/global-critical-minerals-outlook-2024/executive-summary. Accessed in June 2024
[14] Kose, A. & Mulabdic, A. (2024). The impact of populism on stagnating global trade and economic growth. Available from www.worldbank.org. Accessed in June 2024
[15] Monaisa, L & Maimele, S. (2023). The European Union’s Carbon Border Adjustment Mechanism and implications for South African exports. Available from www.tips.org.za. Accessed in June 2024
[16] Roa, V H. (2024). Carbon Border Adjustment Mechanism [ Presentation]. Available from https://www.saiee.org.za/News/DisplayNewsItem.aspx?niid=51925#:~:text=CBAM%20currently%20covers%20cement%2C%20aluminium,as%20CBAM%20expands%20its%20coverage. Accessed in August 2024
[17] Wills, N & van der Westhuizen, V. (2024). A policy brief on Carbon border Adjustment Mechanisms (CBAMs) and the South African carbon market. DNA Economics (Forthcoming)
[18] Maimele, S. (2023). Briefing notes 2: CBMA and South African exports. Available from www.tips.org.za. Accessed in June 2024; Wills, N & van der Westhuizen, V. (2024).
[19] Wills, N & van der Westhuizen, V. (2024).
[20] Montmasson-Clair, G. (2024). The rise of Green Protectionism and South Africa. Available from www.tips.org.za. Accessed in June 2024
[21] Industrial Financing. (n.d). Manufacturing Investment Cluster. Available from www.industrialfinancing.co.za.
[22] National Treasury. (2024). Tax Expenditure Statement. Available from www.treasury.gov.za . Accessed in June 2024
[23] Moshikaro, L. (2024). Informal discussion on electric vehicle incentives in South Africa.