For or against import restrictions?


Finance Minister Patrick Chinamasa

AS the trade deficit continues to widen, Zimbabwe has retreated to the age-old debate: to ban or not to restrict imports.
On the one hand, are those prodding government to protect domestic industries from foreign competition as way of giving them the breathing space needed to recover from nearly two decades of economic turmoil.
A section of traders who are making money from imported goods is obviously baying for a free market system in which the State should leave everything to market forces.
Consumers, attracted to the relatively lower prices of imported products, are throwing their weight behind the latter.
Naturally, economists are torn between the two arguments.
A large number of them believe that while it is noble to shield local industries from competition, the country must strike a balance between re-industrialisation and adhering to existing trade agreements.
Authorities in Harare are worried by high imports, which have resulted in the exportation of large amounts of cash in a liquidity strapped market.
At the same time, high imports, against declining exports have triggered sustained current account deficits, estimated at about US$3 billion per annum.
There seems to be consensus between the Ministry of Industry and Commerce and that of Finance that the only way to close the gap would be through tougher restrictions on imported goods.
Imports make up 70 percent of goods available on the local market.
Buy Zimbabwe Trust, an initiative encouraging locals to buy products made locally, says the high current account deficit was unsustainable.
“We cannot exist as a country with a high current account deficit,” said Munyaradzi Hwengwere, chief executive officer at Buy Zimbabwe Trust who warned that every form of restriction must be temporary.
“It means at one time we will crash. We have spent a cumulative US$15 billion in the past five years importing goods, which is higher than our national debt. We must protect local industries but we must always bear in mind that we must not protect mediocrity. We must not protect failure,” Hwengwere told the Financial Gazette.
He said careful consideration should be given to assisting companies and industries with the capacity to help the country recover, than protecting everything as this could also end up hurting the markets.
In a key note address to a Buy Zimbabwe conference in March, Finance Minister, Patrick Chinamasa, emphasised the need to protect infant domestic industries from competition from multinationals exporting into Harare.
He said due to hard hitting global sanctions placed on Zimbabwe for over a decade, domestic industries have been competing at a disadvantage and therefore cannot be left to compete without government leveling the playing field for them.

Buy Zimbabwe Chief Executive Officer Munyaradzi Hwengwere

Buy Zimbabwe Chief Executive Officer Munyaradzi Hwengwere

Chinamasa said he was happy with the quality of goods coming out of the domestic market, but was worried that higher production costs in Zimbabwe placed them at a disadvantage on the regional scale when it comes to pricing.
The minister said if the troubled firms were to recover, they must be able to exercise patience.
This means Zimbabweans must accept the higher prices, and even ignore poor quality, in order to give the firms a “gestation period”.
“We have to train our people so that these companies go through a gestation period. In terms of quality, our products compete globally. Where I have a problem is on pricing,” Chinamasa said.
“We have said we are under sanctions; we need to protect the local industry and assist those which show capacity to expand to other countries to avoid de-industrialisation. I will go on to protect local capacity to produce goods (but) convince me that you can produce a product that is worth protecting, then I give you protection,” he added.
Since a biting domestic economic crisis that cut Zimbabwe’s gross domestic product by 50 percent between 2000 and 2008, all of the country’s industries — food, car assembly, clothing and furniture manufacturers — have been forced to undergo painful restructuring.
But their mortality rate has continued to rise.
Government has been under pressure to find ways of restricting imports, which have forced companies to scale down production and cut close to 100 000 jobs in the past three years.
Over 4 000 companies have shut down.
The country now imports everything, including eggs, beans, meat, toothpaste, cooking oil, flour, fridges, beds, and several products that used to be manufactured in Zimbabwe.
The Zimbabwe National Statistics Agency says the country imported US$6 billion worth of goods last year.
Exports in 2015 amounted to US$2,7 billion resulting in a trade deficit of US$3,29 billion.
Imports are expected to rise further due to the effects of a drought, which will see the country importing more food.
Local producers have been agitating for controls on imports because they fear that cutthroat competition would cause more firm closures.
There are hurdles to be negotiated along the way.
The country has several trade agreements that it has to adhere to.
Zimbabwe has violated some of its trade agreements already, courting controversy.
In 2010, the Germany Embassy in Harare wrote to government protesting against the violation of investment protection agreements and warned that this could affect aid.
Industrial bodies are of the view that some of these agreements must be reviewed.
“Noting the trade imbalance between South Africa and Zimbabwe, the South Africa/Zimbabwe trade agreement should be reviewed,” says the Confederation of Zimbabwe Industries (CZI).
“This review will seek to improve Zimbabwe’s access to South Africa market and to stop fraudulent certificates of origin. The government should consider adoption of tariffs and other measures that level the playing field for local producers compared to external producers on a sector by sector basis,” says CZI.
South Africa has complained to government over import restrictions, following an upsurge in imports from that country since the rand lost traction against the United States dollar from last year.
The complaint came after Zimbabwe imposed a raft of taxes that have undermined South African products on the local market.
In September 2014, MAQ, the South African producer of a washing powder that was popular in Zimbabwe, ceased exports to Harare after government introduced a 40 percent surtax charge.
The effect of the increase was to raise the price of South African powder brands in Zimbabwe, which violated the Southern African Development Community Protocol on Trade.
Zimbabwe argued that “our industry has gone through a bad patch and we want them to grow”.
Industry and Commerce Minister, Mike Bimha, has warned that government would only protect domestic industries until a certain period.
After that, they would have to fight it out with foreign firms.
“We cannot continue to protect you,” he said.
“Competition is here to stay. We will only protect you for a certain period. You must develop competitive measures instead of always lobbying. We cannot compete if we have low quality goods and high prices,” he added.
Recent studies analysing international behaviour in imperfect competitive markets suggest that protection may not lead to increased domestic production. For example, foreign producers of products that compete with similar domestic products incurred substantial costs in setting up distribution and service systems abroad.
When temporary protection increases their costs of selling abroad, these foreign firms may decide that the best policy is not to raise prices, which will see them suffer declining market share.
They then accept lower profits and maintain market positions.
This is one of the issues that local producers have had to contend with in the face of competition from South African products.
But the Confederation of Zimbabwe Retailers (CZR) says the trend of imports is worrying because in the event of negative market fundamentals in countries from where goods are imported, Zimbabwe would run into deeper troubles.
The best way to save the economy, says CZR president Denford Mutashu, is for domestic retailers to devise ways of promoting local producers.
“In the long run, if we sorely rely on imports, what will we do if fundamentals change in those countries? We must try as much as possible to revive local production,” said Mutashu.
“But we need to look at their (companies’) problems on a case by case basis to see why some of them closed. Some of them were mismanaged and we must not waste national resources on them. For retailers, the advantage of using imported goods are higher profit margins. Stock turnover is higher in imported products than local goods. But we want to play our role in building domestic production by procuring local products. It is a deliberate strategy that we have taken,” he said.
Zimbabwe has been in deflation. Demand for products has been declining.
Many economists feel that industries, especially in developing economies, must be protected from competition from long-established foreign players during the early stages of their development.
Proponents of this argument say for infant industries, start up costs are high.
The country’s industries can easily fall into the category of infancy, as they have only been rising after a decade of turmoil that ended in 2008.
“They cannot compete with established foreign exporters,” said one economist.
“This is particularly true of a country that is attempting to initiate industrialisation,” he argued.
“By imposing a tariff on imports, the domestic price is therefore raised sufficiently to allow the high costs of domestic producers to maintain themselves,” he added., a website that analyses economies, says almost every industrialised country has had to protect its industries against foreign competition for a temporary period to consolidate its position.
“And now it is considered entirely legitimate for economically backward countries to protect their industries in the early stages to enable them to grow to their full stature without any mishap,” the website says.
“However, the exponents of the infant industry argument emphasise that protection should be temporary and should be removed immediately after it has performed its function of ‘nursing.’ In this regard, ‘nurse the baby, protect the child, and leave the adult’ is a well-known saying,” notes the website.

Follow us on Twitter on @FingazLive and on Facebook – The Financial Gazette