DONALD MACKAY: Fixing SA’s trade policy process is crucial for a vibrant economy

I opened the second XA Import Duty Investigations Report with the words “[i]f you love localisation more than you love ice cream, then getting trade policy working properly is for you”. Trade policy is the implementation arm of our industrial policy, hence its importance.

You love the idea of making more stuff locally, you want our factories protected from imports, and you want the government to buy local whenever possible. Now ask yourself how to make that happen, given that when someone buys a fridge they may be more concerned about the price than tracing the factory it came from. To incentivise them to buy local, the government imposes customs duties, which in the case of the fridge is 30%.

Our fictional fridge maker, Mr Fridge, says it’s struggling to compete with imports and may need to retrench people if the import duties on fridges are not increased. It promises to invest more in expanding its present factory and will become more efficient if the duty protection is granted.

Mr Fridge goes to the International Trade Administration Commission (Itac) and asks for the increase. Itac investigates and concludes that the customs duties should be increased. It sends its recommendation to the trade, industry & competition ministry.

The minister does not simply rubber-stamp these recommendations, so carefully considers the recommendation, eventually agrees with Itac and asks the finance minister to consider increasing the duties. Two court cases in 2016 made it absolutely clear that the finance minister must also apply his mind to the decision or risk it being overturned, so of course he does.

For the average company engaging in this process it will take 22 months from when the investigation begins to when it is finalised. In the case of Mr Fridge it took 54 months. Why so long? Is there a benefit to these investigations taking so long? Is it reasonable to expect an investigation to be completed in less than a year?

Back to my ice-cream metaphor. The cone is the process and the ice cream is the policy — in this case how much duty to impose on imported fridges. It is reasonable to say that if the process, from initiation of the investigation to implementation of the duties (or rejection of the application), takes four years or longer, it doesn’t matter what duty decision is taken, how many people Mr Fridge has committed to employ or how much it was going to invest.

The process (cone) gives structure to the policy (ice cream). Without the cone the ice cream is a colourful puddle on the ground. The speed of the process is more important than the content of a given decision if decisions routinely take almost two years.

For the process to work it must be transparent, dependable, fair and predictable. With this in place, companies trust the process and participate. Had Mr Fridge been told in 2018 that it would take almost five years to implement a decision, would it have brought the application?

Mr Fridge is not merely an artefact to hold my ice-cream metaphor. It represents a real company that applied for a duty increase on April 9 2018. The investigation was initiated on September 28 2018. Itac recommended a duty increase on November 13 2019, and duties were finally increased on December 23 2022, three years after Itac sent its recommendation and almost five years after initiation.

The really difficult part of the work sits with Itac. This is the part that is most tightly regulated, and to its credit it almost never allows applications to run much over six months from initiation to recommendation (the date on its report). However, once the matter leaves Itac everything becomes opaque (the shaded area of the diagram). This is usually where the delays happen.

It is hard to see how our localisation policy is best served by delaying a decision for four years. These inordinately long delays make it unattractive to use these instruments, so many companies don’t. There has been a 62% drop in tariff investigations initiated from 2021 to 2022. This is not because Itac is taking its time to determine if the cases have merit. The applications are just not there.

At times of economic distress we should be seeing more tariff investigations, not fewer. We have a deliberately interventionist industrial policy, and whether you love or hate the idea we can all agree there will be no intervention if everyone opts out of the process.

In 2009, in the midst of the financial crisis, 16 duty-change investigations were initiated, with the longest taking 12 months to be completed. The average time it took for a case initiated in 2009 to be finalised (terminated, or the change implemented by the SA Revenue Service) was seven months. The current average is 22 months and the longest case open now was initiated in February 2019 and has been open for 50 months.

Investigations have not become more complicated, yet it takes more than three times longer to complete them than 13 years ago. Perhaps there are other reasons why companies are opting out of these instruments, but it would seem as if the delays are at least one important contributing factor.

Why trade policy matters the most right now

Trade policy is especially important at times of economic distress. Don’t equate trade policy with protectionism — it’s also the instrument used to lower duties when goods cannot be made locally. The unicorn standard is perfectly agile policies based on perfect information.

The next best is to base decisions on the best information available, as quickly as possible, without compromising the quality of the decision. When manufacturers can’t secure raw materials locally and then have to wait years for duty relief, we stifle investment, the thing we need most in SA.

This is an easy problem to fix and I have no doubt the good people at Itac and the department of trade, industry & competition are fully committed to sorting out the delays. The report we published puts the facts in front of everyone.

We can pause arguing about whether localisation is a good or bad idea and instead give our attention to creating a policy environment that is inviting. This is good for everyone.

• MacKay is CEO of XA Global Trade Advisors.