TRALAC Hotseat Comment

Sean Woolfrey, a tralac Researcher, comments on the debate over the Duty Credit Certificate Scheme for clothing and textiles in SACU.

Last week officials of the South African Customs Union (SACU) met to determine the fate of the region’s Textiles and Clothing Industrial Development Programme, commonly referred to as the Duty Credit Certificate Scheme (DCCS). It was widely believed that the outcome of this meeting would be the scrapping of the DCCS, which in turn would represent a further blow to clothing and textiles exporters in the region, many of whom are already struggling to cope with intense competition from Asian producers. To date, no clear indication has been given of the outcome of this meeting, although suggestions are that the purpose of the meeting was to determine the extent of the incentives offered by the scheme, and that no clear resolution has been achieved due to divisions between member countries on this issue.

The DCCS is a SACU-wide export incentive scheme first introduced in 1993. Under the scheme, clothing and textile manufacturers in SACU member countries can earn duty rebates on imported clothing and textiles based on the value of their exports to non-SACU destinations. The purpose of the scheme is to enhance the international competitiveness of local exporters by providing access to cheaper imported inputs and the opportunity to supplement their export production with imported clothing and textile products for their domestic ranges.

In addition, the duty credit certificates are tradable, although the extent of this tradability was curtailed in 2008 following concerns over the abuse of this system. The tradability of credit certificates allows qualifying exporters to sell their certificates to importers who then become the beneficiaries of the duty rebates. This aspect of the DCCS has become a source of much consternation, especially in South Africa.

South Africa’s Department of Trade and Industry (the dti) and labour representatives in the country are adamant that the DCCS in its current format is having a negative effect on the clothing and textile industry in the country. They point to the fact that the vast majority of certificates issued in SACU are not used by exporters, but are instead sold to South African importers who use them to avoid paying high tariffs on clothing and textiles imports into the country. These tariffs are supposedly in place to provide local manufacturers with protection from cheap imports, but the use of duty rebates by importers dilutes this protection, further adding to the local industry’s problems. The South African government and labour representatives are thus pushing for an overhaul of the DCCS which would see the number of product lines available for import under the scheme reduced drastically. Exporters maintain that this would render the scheme useless.

Local exporters have also suggested that limiting or scrapping the scheme could lead to many SACU exporters switching their focus to the local market, thereby increasing competition for manufacturers selling on the local market. This concern seems somewhat overstated however, as exports account for only about 6% of South Africa’s clothing production. In addition, the vast majority of clothing manufactured in Lesotho – the biggest clothing exporter in SACU – is produced for export to the United States under the African Growth and Opportunity Act (AGOA). The Lesotho clothing industry’s reliance on the duty-free market access granted under AGOA is illustrated by the fact that in 2007 over 90% of the country’s clothing exports were exported to the US under AGOA. If AGOA is indeed the lifeblood of the Lesotho clothing industry, then it seems unlikely that any loss of incentives provided by the DCCS will result in a reorientation of exports towards South Africa and other SACU members.

In emphasizing the fact that such a small percentage of South Africa’s clothing production is produced for export, the dti neglects to address why this is the case. In 2003 SA’s clothing exports were valued at over $300 million, but in 2008 the country exported only $107 million worth of clothing products. Undoubtedly, much of this decline can be attributed to increased international competition arising from the ending of the Multi-fibre Agreement and the increased capability of many Asian producers. Nevertheless these figures make quite clear the fact that the DCCS has failed in its aim of boosting exports.

While this might be due to a design fault, indications from firms who have attempted to make use of the scheme are that it has not been effectively administered. Indeed, the fact that the long-term future of the scheme has been unclear for a few years now means that manufacturers have not been provided with the clarity and predictability that they would surely require in order to grow and maintain successful export operations. Furthermore, it is surely the ineffectiveness of this administration that has resulted in the abuse of the scheme, which in turn is being used as a reason for its scrapping. Should exporters really be the ones punished for this failure?

The South African government’s position seems to be that the costs for supporting and developing a regionally integrated clothing and textile industry should not fall disproportionately on South Africa, and in particular on South African manufacturers serving the local market. But if the incentive scheme is important for exporters in the region, and a reduction in duties on inputs for clothing manufacture is infeasible, then perhaps South Africa should cover the costs of developing and maintaining a regional clothing and textile industry. Given the importance of the clothing industry to the economy of Lesotho in particular, any measures by South Africa that undermined this industry, could potentially lead to undesirable consequences for SA in the long run.

The Textiles and Clothing Industrial Development Programme is set to expire in March next year, and if no compromise can be reached before then over the extent of the tradability of the duty credit certificates, then the likelihood of the scheme being renewed seems bleak. What is not so clear however is whether this would represent a devastating blow to an already embattled segment of the region’s manufacturing capacity or if it would simply prevent a small group of importers dodging import duties?