tralac - trade law centre for southern africa

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Also in this Newsletter
Sean Woolfrey, a tralac Researcher, comments on the policy space for increasing tariffs.

An article entitled “Zuma-ites eye higher tariff walls” appeared on the Mail & Guardian website on 19 May. This article highlights the apparent willingness of the South African Department of Trade and Industry (dti) to raise tariffs in support of certain strategic sectors which are deemed “job creators”. After referring to a study which indicates that there is significant scope for the South African government to raise tariffs without violating the country’s World Trade Organisation (WTO) commitments, the article then implies that the differences that exist between South Africa’s applied and bound tariffs represent a “cost” to the country. Some of the figures quoted in the M&G article appear to be inaccurate however, and thus the inferences drawn from them are misleading. Furthermore, the notion that differences between applied and bound tariff rates reflect a ‘cost’ to the economy is simply wrongheaded.

Clothing and textile duties
The M&G article refers to a study undertaken by the South African Institute of International Affairs (SAIIA). While the study itself is quite skeptical about the benefits of increasing tariffs, some of the data quoted in the study appears to lend support to the idea that SA has significant room to manoeuvre when it comes to raising tariffs. This, however, is not the case, at least in certain industries. The study claims for instance that the average applied tariff for clothing and textiles is 22.4%, while the average bound duty is 35.9%. These figures are then taken to imply that the government has significant scope for increasing duties on clothing and textile imports. There are a number of problems with this conclusion.

According to South Africa’s schedule of commitments to the WTO, all clothing imports (HS lines 61 and 62) are subject to a bound duty of 45%. South Africa’s tariff book shows that the average MFN applied duty on these imports is currently 37.3% . Significantly, 88% of clothing tariff lines – including all 30 lines earmarked for an increase in duties by the dti in its Draft Rescue Package for the clothing and textiles industry - are subject to an MFN duty of 40%, only 5% lower than the maximum that could be applied. To put this in perspective, import duties of 5% or less are generally considered ‘nuisance tariffs’, as the cost to governments of collecting them is often more than the revenue they generate. Clearly there is not that much scope for an increase in duties on clothing imports.

In the case of textiles other than clothing items, South Africa’s schedule of commitments to the WTO shows that bound duties vary from 0% to 30%, with an average bound rate of approximately 21.8%. Currently the average MFN applied rate for these goods is approximately 14.8%. Again, this difference is not that large. It appears then that the figures from the SAIIA study are inaccurate, and that they greatly overestimate the government’s scope for raising tariffs, at least in the case of clothing and textiles.

Raising duties on textiles other than clothing items makes little economic sense anyway, as a significant proportion of textile imports are used by local manufacturers as inputs in the production of clothing and other products. By increasing tariffs on these imports, the government would drive up costs for local producers, resulting in these producers becoming even less competitive, and having to charge more for their products. This would result in higher prices for local consumers and smaller profits for local retailers. The dti has recognized the folly of increasing duties on imports which are used as inputs in local manufacturing, and has therefore proposed reducing tariffs on certain textile imports.

When examining existing tariffs, is also important to take into account the fact that average applied duties are influenced downwards by the existence of imports on which no duties are charged. Many of these imports enter SA ‘duty free’ as there is no significant production of these goods by domestic firms. This means that the applied duties on those goods for which there is significant local production, and thus for which there is at least some sort of rationale for increasing tariffs, are likely to be much closer to bound rates than are average applied duties. The implication of this is that the goods for which there is the most rationale for increasing duties are those goods for which there is the least scope for doing so.

Another important consideration is that while the government would be able to unilaterally increase MFN applied duties to bound rates, this would have no effect on the duties imposed under South Africa’s various preferential trade agreements, including the Trade, Development and Cooperation Agreement (TDCA) with the European Union – South Africa’s largest trading partner. In order for the government to increase duties on imports covered by these agreements, it would have to renegotiate the agreements with the other concerned parties. This is likely to be a difficult and time-consuming process, and in order to get these parties to agree to increased South African duties, the government would almost certainly have to offer them certain concessions. This might involve the lowering of duties on other goods, which could result in certain local industries benefitting at the expense of others.

Is the fact that applied tariffs are lower than bound levels costing the country?
The M&G article speaks of the difference between applied and bound duties, often referred to as the ‘water’ in a tariff, as reflecting a “cost” to South Africa. This is simply not the case. Increasing duties would indeed result in a modest increase in government revenue, provided these duties did not result in lower volumes of imports (something which is quite possible). Nevertheless, this would merely reflect the fact that South African consumers would have to pay more for their imported goods. The increase in tariffs would represent a transfer from consumers to government, in other words, it would act as another form of consumption tax.

Raising tariffs would also result in a number of indirect costs to the South African economy. These could include lower profit margins for retailers, a drop in demand for all goods following the loss of spending power that results from an increase in the prices of imports, higher input costs for firms who use imported goods as inputs in their production, upwards pressure on inflation caused by the higher prices of imported goods, costs to retailers in establishing new supply chains where higher tariffs make existing sources to costly, and a greater incentive for avoiding paying customs duties. Given that all these costs could easily outweigh the benefits that might accrue from increased tariff revenue (as well as the protection higher tariffs might provide for some local industries), it makes little sense to describe the fact that tariffs have not been raised to bound rates as representing a cost to South Africa.

Some thoughts
Since the release of Nedlac’s Framework Document for South Africa’s Response to the International Economic Crisis there has been much talk of government raising tariffs to protect certain sectors which it believes to be strategically important. In particular the dti has spoken of assisting industries which show significant potential for job creation. The dti regularly refers to industries such as clothing and textiles as ‘job creators’, but what exactly does it mean by this? Surely any industry could in theory be a ‘job creator’ if government throws enough money at it? Evidence shows that the clothing and textiles industry has been shedding jobs at an alarming rate for over a decade, despite (or perhaps in some cases because of?) government interventions aimed at assisting the industry.

The new minister of Economic Development, Ebrahim Patel, is quoted in the M&G article as stating that "any support that government may make available through the department of trade and industry will be evidence-based". Seeing as the clothing and textiles industry appears to be one sector that is earmarked for such support, it would be interesting to know what evidence the dti has that this industry could not only witness a halt in its decline, but could actually reverse this decline. This is important, as government is likely to commit significant resources to assisting the industry, resources that could be used for various other initiatives.

The dti also appears to be sending out mixed signals. On the one hand, the new minister of Trade and Industry, Rob Davies, is quoted in the M&G article as claiming that “we won't and can't become protectionist in our approach to the crisis”, yet he is also reported as wanting to increase tariff levels on certain imports to bound levels. Surely this would represent a form of protectionism? Raising tariffs would also contravene the 2 April 2009 G-20 Agreement “to refrain from raising new barriers to investment or to trade in goods and services”. This would not send out the right kind of signal to other countries, and would portray SA as an unreliable trading partner.

This ambiguity in South Africa’s attitude towards tariffs displays the kind of muddled thinking that leads to an endorsement of export-led growth on the one hand, and an attempt to use protective trade policy measures to assist local industries on the other. The obvious flaw in such approaches is that if a significant amount of countries adopted similar measures, all would be made worse-off, as protectionist measures would restrict trade, thereby hampering each country’s attempts to grow exports.

The South African government sees tariffs and other trade policy measures as tools of industrial policy which can be used to achieve the country’s developmental aims. Given the lack of policy space for such measures in certain important areas, as well as the costs that would inevitably accrue from the use of these measures, is this approach sensible?
Tell us what you think...

A tralac Working Paper on the Clothing and Textile Industry will appear in next week's newsletter.
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Special Features


Capacity Building at tralac:

tralac wishes to congratulate all graduands who is about to graduate with Post-Graduate Diploma in Management Practice (Trade Law and Policy Management) from the University of Cape Town. The programme is presented by tralac in collaboration with the Graduate School of Business, University of Cape Town. This postgraduate qualification is awarded and accredited by the University of Cape Town.

We would like to congratulate the following graduates on their success: Sibusiso Gumede, Ekhsaan Jawoodeen, Siegfried Kuwite, Daniel Machemba, Shirley Moncho, Niven Muneesamy, William Mwanza, Kevin Naidoo, Zuko Ntsangani, Tina Reddy, Jodi Scholtz, Reginald Selelo, Hargrreaves Sikwibele, Sephewe Chetane, Sam Geiseb, Johnathan Maftale, Herbital Maluleke, Joyce Mutua, John Mwangakala, Lerato Ntlopo, Kleopas Sirongo and Marie Umulisa.

Herbital Maluleke reflected on his experience on the programme: "South Africa has shortage graduate and professional skills. This has prompted me apply for a Trade Law Centre for Southern Africa (Tralac) scholarship for the Postgraduate Diploma in Management Practice (Trade Law and Policy) program. This program has helped me keep my mind focused on the positive contribution of developing the South African economy through trade facilitation. The program is more about intellectual challenge; the results were more of my personal growth. My success story begins when I was working for Limpopo Department of Agriculture as a junior agricultural economist to become a principal agricultural economist at Grain South Africa. The biggest thing this program has done for me is a chance to move my career again from being a principal agricultural economist to manage the international trade intelligence desk at the South African Agricultural Business Chamber (ABC) in Pretoria. This is my personal goal I have set for myself, and I have worked extra hard and tirelessly to get it. I have learned more about the importance of trade for our continent, Africa. I have also realized that development and wealth can be easily realized through trade in Africa due to its abundance of natural resources, agricultural produce and minerals African countries can trade among each other as well as to the world. In conclusion, this program has boosted my confidence to give the kind of advice agribusiness/business requires. The greatest gift the program has given me is the ability to market my brand name Herbital Maluleke and build relationships with both public and private sector." Read commentary from other graduands here.

The graduation ceremony will be held on 11 June 2009 at the Jameson Hall of the University of Cape Town. Pictures of the graduation ceremony will follow soon. For more information about this progamme please contact us here.


tralac MEDIA LIBRARY. View an interview with Professor Debra Steger from the University of Ottawa. She comments on international institutional reforms.


Download the latest Weekly Customs, Excise, Tariff and Trade Remedy Summary Notification.
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News

Region Divided On Trade Pacts
Hopes of regional consensus on economic partnership agreements (EPAs) with the European Union were shattered when a watershed meeting between trade ministers in Botswana ended in a deadlock, with Namibia, represented by Minister Hage Geingob, one of the countries still refusing to sign the controversial deal.

France, SA to Sign R360 Million Trade Finance Deal
The French government has announced it is to sign a new financial agreement with South Africa's Industrial Development Corporation worth 30 million Euro this week.

China defends economic data as quality questioned
China is defending the quality of its economic data, arguing that figures showing declines in energy use mean the economy is changing, not contracting.

Dairy subsidies big blow to NZ
New Zealand Prime Minister John Key has added his voice to condemnation over the United States' decision to reintroduce export subsidies on dairy products.

China, Brazil sign trade deals worth billions
CHINA and Brazil signed a raft of agreements yesterday, including a $10bn loan for the South American country’s state energy company and a deal to send oil to China, amid stronger ties between the two developing world giants.

Clothing industry to benefit from dti plans
A review of the import duties paid on textiles not made locally or in short supply which are needed for clothing manufacture, has been completed according to the Department of Trade and Industry (dti), and the results of the review are currently being readied for implementation by the South African Revenue Service.

Trade with China Must Benefit Continent
As the geopolitical ambitions of SA and Africa shift from trade links with established economies in favour of ties with the robust economies in the southern hemisphere, trade experts are encouraging Africa to engage actively with countries such as China and India to formalise ties.

ECOWAS gives fresh terms for free trade with EU
Forty days to the June 30, 2009 signing of the free trade agreement between the Economic Community of West African States (ECOWAS) and the European Union (EU), the sub-Saharan bloc has raised fresh issues that need to be resolved before the pact is sealed.

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Events



Workshop: Regional Integration in Southern Africa: On 19 June 2009 tralac will host a workshop on regional integration in southern Africa. Our focus will be on key developments related to the current regional agenda; including:


An agenda for competitiveness and development in Southern Africa – what should this agenda be?
What is South Africa’s regional policy under the new administration?
What is holding back SACU and SADC from being robust vehicles for regional integration?
Where will the tripartite FTA (COMESA, SADC and the EAC) lead us to?
Extra-regional relations: what are the agendas with regard to the European Union (Economic Partnership Agreements), China, India and USA, and who drives these agendas?
For more information, contact events @tralac.org by email.


WTO Regional Intensive Course on Trade Negotiations Skills, 11-15 May 2009


Seminar report by Mr J.A.H. Hoffmann, Namibia: Use and Application of Geographical Indications by ACP member states as a trade tool, Montpellier, France, 24–27 March 2009.


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Publications



New Working Paper (South Africa, Brazil and Argentina: the agricultural trading relationships) by Taku Fundira, Bonani Nyhodo and Ron Sandrey. This paper examines the background to agricultural policies and trading regimes and patterns in Brazil, South Africa and Argentina to set the scene for an analysis of further promoting the trading relationship beyond the current partial trade agreement by moving to a full free trade agreement (FTA). Read more...


New Working Paper (You’ve got mail: The postal and courier sector in South Africa) by Paul Kruger, Researcher at tralac, examining the distinction between the postal and courier industries and explains the classification of the two types of services. The paper further explores the applicable domestic legislation in South Africa to determine the exact boundaries of the postal monopoly. International, regional and domestic commitments made in these two sectors are also discussed to provide a general outline of the current liberalisation process in South Africa. Read more...


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AGOA.info


2009 AGOA Forum dates
The 2009 AGOA Forum will take place in Nairobi, Kenya, from 4-6 August. Follow the link to the Forum's dedicated website on AGOA.info. Programme details have been published and may be downloaded from AGOA.info at the following links:

AGOA 8 Ministerial Session
AGOA 8 Private Sector Session
Registration Form Private Sector
AGOA 8 Civil Society Session
Full update with March 2009 trade data on AGOA.info
All 50 data sections on AGOA.info have been updated with the latest trade data to March 2009, which was recently released by US authorities. Aggregate exports from AGOA beneficiaries reveal a year-on-year decline of 58%, mainly due to lower oil export revenues from Angola and Nigeria. Exports under AGOA have fallen by a similar percentage. Perhaps of greater interest is the performance of the non-oil exporters: South Africa's AGOA exports are down by 31% compared to the same period last year, Lesotho is down 11%, Swaziland has recorded a 28% increase, Mauritius has remained stable and Malawi has doubled its exports under the Act.

Key features:

South Africa: large decrease in platinum, ferroalloy, diamond exports, lower automotive exports, large increases in aluminium and auto engines
Lesotho: slight decrease in clothing articles
Swaziland: large increase in cane sugar, some clothing articles
Botswana: large decrease in diamond exports, substantial increase in clothing exports
Malawi: large increase in tobacco, some clothing lines and sugar cane
Namibia: large increase in uranium products

View country profiles at the link below:
Bilateral US-Africa country trade profiles

Profiles of disaggregated bilateral US-Africa trade, by country, has been updated to reflect March 2009 data. This includes regional profiles - SACU, BLNS, COMESA, ECOWAS, and CEMAC. Follow this link

Other updated AGOA data sections include disaggregated bilateral trade profiles for each AGOA country individually (as well as within various regional configurations) , aggregate bilateral trade, preferential trade under AGOA / GSP and sectoral data from AGOA-eligible countries by value and as a proportion of US imports, as well as sectoral “new AGOA” and “GSP AGOA” data. Textile data, which is categorised by rules-of-origin category (for example, it distinguishes garments made from local or third country fabric), is available both by value and by volume. Data to March 2009 shows that exports appear to be relatively resilient to difficult global trading conditions: Aggregate garment exports under AGOA are down 4% for the year, with the sub-category permitting the use of third country fabrics shwoing a 2% drop. Aggregate garment exports under AGOA are down 11% for the year, with the sub-category. Export data to March 2009 is available at this link.

The current quota period commenced in October 2008 with the latest available quota utilisation rates for the period October-April showing an overall uptake of 9.76%, and 18.93% under the 3rd country sub-quota. The total allowable quota for the October 2008-September 2009 period has been set at 1,711,900,006 square meter equivalents (SME), which for the first time is lower than the quota allocated to a previous year (2007/8: 1,746,798,542).

Follow these links to diagrams showing clothing exports under AGOA, and quota utilisation during the current quota period.

Trade acronyms and terminology
Visit AGOA.info's alphabetically-ordered database of trade-related acronyms and terminology


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Read these and other AGOA-related news articles in AGOA.info’s news area, which is continuously updated with articles sourced from a wide range of African and foreign publications.