These are trying times for international trade but they also present an opportunity for South African exporters to get the fundamentals right.  

Escalating food and oil prices are causing upheaval in the global economic system; but this is not news to anyone who has recently picked up a newspaper or turned on a television. Just about everyone has something to say about the global financial market turmoil and issuant slowdown. And indeed these are trying times, especially for exporters. Here follow some coping mechanisms for exporters.

Fuelling the fire
How do high fuel prices impact on exporters? Firstly, they push up the prices of inputs into the production process, making goods more expensive – a cost borne by the final consumer. Exports become less competitive as profits erode, culminating in a contraction in economic growth.

Secondly, the cost of transporting goods becomes more expensive. This is particularly relevant for heavy cargo (such as steel) where international transport costs have become prohibitively expensive and have eroded the benefits of sourcing abroad. Indeed this phenomenon is what some economists, namely Jeff Rubin and Benjamin Tal of CIBC World Markets, have termed reverse globalisation. They argue that if oil prices continue to spiral out of control, it will have the same effect of a tariff barrier and will lead to a substantial contraction in international trade.  According to Rubin, at the (then) current oil price of US$133/barrel (26 May 2008) this is equivalent to imposing a 9% tariff rate on goods going into the USA. At US$150/barrel transport costs would equate to an 11% tariff and at a level of US$200/barrel all the trade liberalisation efforts of the past 30 years would be reversed. This phenomenon makes the case for regional trade even more compelling.
 
The sky is not falling
While a persuasive argument indeed, the validity of their predictions remains to be seen. However, I would not subscribe to the Chicken Little school of thought just yet – the end (of international trade) is most certainly not nigh. As long as the global economic system still creates countries that are better able to produce products more efficiently (and cheaper) than others, the world trade system will continue unabated. 

This is not to discount the role of international transport costs - indeed a vital component of competitiveness, but not the only ingredient for success (or failure). While rising fuel prices most certainly impact on the competitiveness of exports in international markets, the way in which exporters respond to adverse trading conditions is what really sets the winners apart from the losers. Here flexibility and adaptability to volatile trading conditions are by far the key ingredients to becoming one of the former. And of course a government committed to export-led growth really doesn’t hurt. This is what Global Insight’s chief economist, Nariman Behravesh explains is the case in China where the Chinese government’s system of price controls on energy and their system of fuel subsidies have kept China’s domestic energy prices below international prices for many years. These price controls have ultimately cushioned the blow of rising oil prices on the Chinese exporter and is particularly significant considering that China (along with the US) are the foremost consumers of oil worldwide, leaving few at whom to point the finger for the global oil price.

What is driving up the price of oil?

So how does the South African exporter ensure that they are members of this elite winning club? The short answer is by focussing on competitive (as opposed to comparative) advantage.  

Adjusting to the new rules of the game
South African exporters face challenging times indeed at both the global and domestic level. The slowdown in arguably the world’s most significant economy, the United States, is a notable concern to exporters the world over. This is especially true in South Africa given that the US is South Africa’s primary destination for exports at a country level. According to figures released by the Customs and Excise division of the South African Revenue Services in 2007, South Africa’s exports to the US totalled roughly R52-billion and imports R43-billion. Closer to home, domestic challenges such as the Eskom power shortages and corresponding tariff hikes will place added strain on production increasing lead times and undermining flexibility.

In this make or break climate, competitiveness requires an adjustment to volatile conditions by enabling exporters to expand (or at least maintain) their position in international markets. This is done by supplying quality products, timeously and at competitive prices. The fundamental rule that any exporter should live by is to supply products that people want to buy. Product diversification is key to expanding our export market and moving up the value chain. Technological innovations, responding to market needs and exploring niche products that fetch a premium in international markets are all elements of a successful export strategy. And if your export business can survive in times such as these, then a US$200/barrel oil price won’t make a difference.

FNB, in conjunction with the Exporters Club, will be hosting a seminar addressing this concept of reverse globalisation and coping strategies for the SA exporter. For details on how to attend contact Sandy Nicel at sandy@exportersclub.co.za

To contact Lizanne Case at FNB email lizanne.case@fnb.co.za
www.fnb.co.za