Talking Turkey on Tariffs and Protectionism

The Big Tariff Questions

South African Minister of Trade, Industry and Competition, Parks Tau, has this week announced the possibility of South Africa raising import duties on fully imported automotive vehicles, mainly from China and India, with the view of protecting the country’s own automotive manufacturing sector. Sound Familiar at all?

The irony that the country that has criticised the US administration relentlessly for doing exactly the same thing, is currently imposing high tariffs on imports and is suggesting increasing these, has apparently been lost on the Minister.

However, it raises a lot of questions around tariffs and if they actually work to safeguard investments and jobs and most importantly, if it grows the economy and is an effective way of trading in a global market place. Have tariffs helped build Auto Manufacturing in South Africa and has this benefitted the country sufficiently or not?

It also raises the question about the effectiveness of the large rebates provided to Auto manufacturers in South Africa, that are essentially funded via tax breaks on revenues the government could have collected and utilised elsewhere to grow the economy.

We take a deep dive into the topic and provide what is hopefully a balanced perspective below:

Overview of Current Import Duties in South Africa, with Focus on the Auto Manufacturing Sector

South Africa’s import duties are administered by the South African Revenue Service (SARS) under the Customs and Excise Act, and they are influenced by trade agreements, regional blocs like the Southern African Customs Union (SACU), and programs aimed at protecting local industries. Duties on vehicles and automotive components are designed to encourage local manufacturing while complying with World Trade Organisation (WTO) rules. As of 2025, the structure remains largely consistent with prior years, but there have been discussions about potential increases in response to global trade pressures and domestic industry challenges.

Key points on import duties:

• Passenger vehicles (light vehicles): A standard import duty of 25% applies to fully built-up (FBU) passenger cars. This is up from a range of 18-25% in previous years, with the effective rate for 2025 confirmed at 25% for most categories.
• Commercial vehicles and trucks: Duties range from 20% to 25%, depending on the type (e.g., 20% for original equipment components used in assembly).
• Automotive components and parts: A lower duty of 20% applies to components intended for local assembly, to support the supply chain. However, fully imported parts not qualifying under incentive programs face the full rate.
• Additional levies and taxes: On top of the base duty, imports are subject to:
  • An ad valorem excise duty (luxury tax) for higher-value vehicles, which can add 10-20% based on the vehicle’s value exceeding certain thresholds (e.g., above R200,000).
  • Value-Added Tax (VAT) at 15% on the total landed cost (including duty).
  • Environmental levies, such as carbon taxes on high-emission vehicles, which can add 5-10% for non-compliant imports.
• Exemptions and reductions: Duties can be rebated or reduced under trade agreements like the African Continental Free Trade Area (AfCFTA), EU-SA Economic Partnership Agreement (EPA), or for imports from SACU members (Botswana, Eswatini, Lesotho, Namibia), where duties are often zero or minimal. Electric vehicles (EVs) and hybrids may qualify for lower effective rates through incentives.

International Shifts Affecting the Industry

These duties are part of a broader protectionist framework to shield the auto sector, which employs over 150,000 people directly and contributes about 6% to GDP through exports and manufacturing. However, recent comments by Trade, Industry, and Competition Minister Parks Tau highlight concerns: in August 2025, he noted that 64% of vehicles sold in South Africa are imported, prompting calls from local manufacturers for higher duties (potentially up to 30-35%) on cheap imports from countries like China and India to prevent market flooding and support localisation. This comes amid external pressures, such as U.S. tariffs on South African exports, which have already caused an 82-87% drop in auto exports to the U.S. in the first half of 2025

Breakdown of Current Discounts and Incentives for Auto Manufacturers

The South African government provides incentives primarily through the Automotive Production and Development Programme (APDP), which transitioned to Phase 2 in 2021 and runs until 2035. The APDP aims to boost local production, exports, and job creation by offering rebates and allowances. In 2025, amid U.S. tariff impacts, the government has expanded these to include EV-focused support, with a total budget allocation of around R7.8 billion unlocking R28.5 billion in private investments. Here’s a breakdown:

• Duty Rebates (Import Rebate Credit Certificates – IRCCs): Manufacturers can earn rebates on customs duties for imported components if they meet local content and production volume thresholds. For example, rebates cover up to 20-25% of duties on parts used in exported vehicles, effectively reducing net import costs.
• Production Incentives (Automotive Investment Scheme – AIS): Cash grants or tax allowances based on production volumes. Qualifying manufacturers receive 20-35% rebates on the value of local content in vehicles produced, paid as a duty-free allowance. This has supported major players like Toyota, Volkswagen, and Ford in expanding assembly lines.
• EV-Specific Incentives: Introduced in 2025, a 150% tax deduction on investments in EV production facilities and components (e.g., batteries, charging infrastructure). This applies until 2036 and aims to transition the sector toward green manufacturing, with rebates potentially covering 10-15% of EV import duties for hybrid models.
• Export Incentives: Under the APDP, exporters get volume-based incentives, such as a 10-15% rebate on the factory gate price for vehicles exported to markets like the EU or Africa. Additional support includes export credit insurance and financing from the Industrial Development Corporation (IDC).
• Other Programs: The Automotive Incentive Scheme (AIS) offers grants for capital investments (up to 20% of qualifying costs), while the Black Industrialists Scheme provides equity funding for black-owned suppliers in the auto chain. In response to U.S. tariffs, the government is considering further expansions, such as increased rebates to offset job losses estimated at 100,000 in agriculture and autos combined.

These incentives have historically supported growth, with the sector exporting over 400,000 vehicles annually pre-2025 tariff shocks. However, Minister Tau has emphasised that incentives alone aren’t enough without stronger localisation enforcement

Breakdown of Protectionism (e.g., Higher Import Duties) Benefits to South Africa’s Economy, Unemployment, or New Business Growth

Protectionism in South Africa’s auto sector—through high import duties (25%+), quotas, and incentives—has been a double-edged sword. While intended to foster local manufacturing, employment, and economic growth, evidence shows mixed results. Over the past two decades, the industry has indeed shrunk in some areas, with declining local content levels (hovering at 40-50%), factory closures, and job losses, supporting your understanding. However, protectionism has provided some buffers, preventing even steeper declines and enabling pockets of growth. Below is a balanced breakdown, drawing from economic studies, government reports, and recent data.

Benefits of Protectionism:

• Employment Preservation and Growth in Key Areas: High duties have helped sustain jobs in assembly hubs like the Eastern Cape (e.g., Volkswagen in Kariega) and Gauteng (e.g., BMW in Rosslyn). A 2019-2025 analysis indicates that without tariffs, import flooding could have led to 20-30% more job losses in tradable sectors. The APDP’s protectionist elements unlocked R28.5 billion in investments, creating or preserving 50,000+ jobs in supply chains (e.g., component manufacturing). Unemployment in auto-dependent regions like Nelson Mandela Bay would be higher without these measures, as tariffs encourage local assembly over full imports.
• Economic Contributions and Export Growth: Protectionism has boosted exports, with the sector contributing R200-300 billion annually to GDP (pre-2025 U.S. tariffs). Duties on imports have generated tax revenue (e.g., R10-15 billion yearly from vehicle duties), funding infrastructure and incentives. New business growth has occurred in EV supply chains, with 150% tax deductions attracting investments from firms like Stellantis for hybrid production.
• New Business and Supply Chain Development: Tariffs have spurred localization, leading to growth in downstream suppliers (e.g., tire, glass, and electronics manufacturers). From 2000-2020, protection helped double vehicle production to 600,000+ units annually, fostering SMEs in the auto ecosystem and reducing import dependency in components by 15-20%.

Challenges and Shrinkage Despite Protectionism:

The caveat in the protectionism position that the South African government has taken is that despite its intention it has not worked. The auto industry has contracted over the past two decades, with multiple manufacturers (e.g., General Motors in 2017, smaller suppliers in 2023-2025) closing operations, leading to over 4,000 job losses in the last two years alone and 12 company closures. Unemployment in the sector has risen, with towns like Prospecton (Toyota) and Kariega suffering as imports (now 64% of sales) undercut local production. Supply chains have weakened due to global competition, high energy costs, and logistics issues, not solely tariffs. Studies show protectionism’s cumulative costs (e.g., higher consumer prices, reduced competitiveness) have stifled innovation, contributing to a 10-15% production decline since 2010. External factors like U.S. tariffs (causing 82-87% export drops in 2025) have exacerbated this, threatening 100,000+ jobs overall.

Without increased protection, however, cheap imports could wipe out remaining local production, worsening unemployment (already at 33% nationally). Incentives like APDP have proven effective in attracting investments, and combining them with 30-35% duties could reverse shrinkage by making local manufacturing more viable, especially for EVs.

Critics of liberalisation point out that unprotected markets in other African countries have seen total industry collapse, suggesting South Africa’s protections have at least maintained a base for recovery. In essence, while not a panacea, ramping up duties could buy time for restructuring amid global trade wars.

Is Supporting Auto Manufacturing Providing Economic Growth?

There is also an hypothesis that says that the vast amount of incentives provided to Auto manufacturers is inefficient and that with the auto industry in South Africa relatively small, in global terms, could better be used to support and grow small Enterprises that are the lifeblood of economic growth.

This Hypothesis raises two interconnected points about South Africa’s auto industry: (1) that raising import duties in a relatively small domestic market could prompt manufacturers from China and India to exit or reduce engagement, thereby diminishing local investments, especially since most local production is export-oriented; and (2) that government incentives for the auto sector—funded by taxes—might be less efficient for economic growth and job creation compared to supporting a broader base of small and medium enterprises (SMEs). I’ll test this logically using available data from economic reports, industry statistics, and comparative examples. The analysis draws on 2024-2025 data where possible, acknowledging that South Africa’s vehicle market is indeed small globally (domestic sales around 500,000-550,000 units annually, versus a global market of ~85-90 million), with exports comprising 60-70% of production on average (e.g., 399,000 vehicles exported in 2023, supporting a R21 billion trade surplus).

The test is balanced: I’ll confirm elements of your view where supported, provide counter-evidence, and highlight uncertainties due to external factors like U.S. tariffs on South African exports (which have already caused 73-87% drops in 2025, threatening jobs).

Part 1: Risk of Manufacturer Exit or Reduced Investment Due to Higher Duties in a Small, Export-Heavy Market

Confirmation of Key Premises:

• Market Size and Export Reliance: Yes, South Africa is a minor player globally, with domestic new vehicle sales at ~278,911 units in the first half of 2025 (up 13.6% y-o-y but still modest), projecting ~530,000-550,000 for the full year. Production hovers at 500,000-600,000 units annually, but exports dominate: In July 2025, exports were 35,379 units (down 1.9% y-o-y), and historically, major OEMs like Toyota and Volkswagen export 70-80% of output to Europe, Africa, and the U.S. This makes the domestic market less critical for volume-driven manufacturers from China (e.g., Chery, BAIC) and India (e.g., Mahindra, Tata), who target it for affordable imports (64% of sales are imports, many from these origins).
• Potential for Exit or Diversion: Evidence supports your concern. Higher duties (e.g., proposed increases to 30-35% on light vehicles) could raise prices for imported models, reducing competitiveness in a price-sensitive market where consumers face high inflation and unemployment (33%). Studies on Chinese import penetration show that tariffs or local content requirements (LCRs) in markets like South Africa increase prices for imported vehicles (e.g., 5-10% hikes in heavy vehicles), deterring sales and prompting rerouting to larger, less protected markets like Brazil or Indonesia. In similar small economies:
  • China’s auto parts tariffs (2000s) led foreign firms to exit or reduce investments, as compliance costs outweighed market benefits.
  • U.S. tariffs on steel/aluminum caused small manufacturers to shift focus elsewhere, with examples like Harley-Davidson relocating production from tariff-hit markets.
  • In general, tariffs on imports from low-cost producers like China/India have led to market exits in small African economies (e.g., Kenya’s auto sector saw Indian firms pivot after duty hikes). For South Africa, rising Chinese imports have already pressured local firms, causing job losses; higher duties might amplify this by making the market unviable without local assembly, but if incentives don’t offset, firms could simply export to SA from hubs like Morocco.

Counter-Evidence and Nuances:

• Not all manufacturers would exit; some might invest in local assembly to bypass duties, especially with APDP rebates (20-35% on local content). For instance, Chinese firms like BAIC have established plants in SA to access incentives and exports, and higher duties could accelerate this if the export platform remains viable. India’s Mahindra has committed to SA despite pressures, viewing it as a gateway to Africa under AfCFTA.
• External tariffs (e.g., U.S. 25% on SA vehicles) are the bigger threat, already causing export drops and job losses (e.g., 4,000 in 2023-2025, 12 company closures). This could make SA less attractive overall, but domestic duty hikes might protect against import surges (e.g., from China, up 20% in parts).
• Overall: Your hypothesis holds moderately—exit risk is real for pure importers in a small market, potentially reducing investments by 10-20% based on similar cases—but it’s mitigated if duties pair with incentives to encourage localization. No mass exodus has occurred yet from current 25% duties.

Part 2: Efficiency of Auto Incentives vs. Reallocating to SMEs for Growth and Employment

Confirmation of Key Premises:

• Incentive Costs and Funding: Auto incentives under APDP (e.g., R7.8 billion budget in 2025, unlocking R28.5 billion private investment) are tax-funded rebates/grants, totaling ~R10-15 billion annually including duty revenue forgone. These support a few major OEMs (e.g., Toyota, VW, Ford, employing ~150,000 directly), but the sector has shrunk: Production down 10-15% since 2010, with recent closures and layoffs amid U.S. tariffs. SMEs, employing 60% of the workforce (>8 million jobs), are more labor-intensive and inclusive, yet face low incentive uptake due to bureaucracy.
• Comparative Efficiency: Studies confirm SMEs drive more net job creation: One SME job creates 1.5-2 indirect jobs vs. auto’s 4-7, but SMEs scale faster in numbers (e.g., MSME sector contributes 35-40% to GDP, with potential for 1-2 million new jobs via better support). Government incentive evaluations show auto programs (targeted at exports) have mixed results—boosting GDP by 6% but with high costs per job (~R200,000-300,000 per job preserved)—while SME-focused schemes (e.g., Black Industrialists) yield higher returns in inclusive growth. Reallocating could fund SME clusters, as in Thailand’s auto-SME integration, creating more jobs per rand. OECD notes minimal SME uptake of tax incentives, suggesting reallocation could enhance workforce integration.

Counter-Evidence and Nuances:

• Auto incentives have multipliers: Each direct job supports 4-7 in supply chains, contributing R200-300 billion to GDP annually (pre-tariff hits). Subsidies boost productivity in manufacturing, per recent analysis, and have attracted investments (e.g., EV shifts). SMEs face higher failure rates (70-80%), so incentives there might not yield as stable growth.
• Integrated approaches work best: Auto clusters can incorporate SMEs (e.g., suppliers), creating hybrid benefits.Full reallocation risks auto collapse, worsening unemployment in regions like Eastern Cape.
• Overall: SMEs likely offer better bang-for-buck in job creation (e.g., 2-3x more jobs per incentive rand based on IFC/DA estimates)—but auto support is crucial for export-led growth. A hybrid (e.g., linking incentives to SME integration) might optimise.

Conclusion

Our analysis confirms that the hypothesis is partially confirmed: Higher duties risk deterring Chinese/Indian players in SA’s small market, potentially cutting investments by prioritising exports elsewhere, aligning with examples like tariff-driven exits in other contexts.

Similarly, reallocating incentives to SMEs could foster broader growth and more jobs, given the sector’s shrinkage despite billions in support. However, counters suggest duties+incentives could encourage localization without full exit, and auto’s multipliers justify continued focus amid trade wars.

To fully test, long-term modelling (e.g., via CGE models) would be needed, but current evidence leans toward a cautionary perspective, recommending phased reforms in introducing new or higher tariffs over abrupt hikes.

Additionally, there is a great need to reassess where tax incentives are being allocated and if these are indeed the most efficient way to grow economies or should there be greater emphasis on broadening the effect of incentives to the powerhouse of any economy – small businesses.