DONALD MACKAY: Tariff investigations performance worsens

The recently released 4th XA Import Duty Investigation Report brought many serious issues of concern to the fore, the most worrying being that the private sector is withdrawing from using tariff instruments, with engagements at their lowest level since International Trade Administration Commission of SA (Itac) came into existence in 2003.

In times of economic distress you would expect the use of these instruments increase, and yet the opposite has happened. Each bar in the accompanying graph represents a six-month period, and in the most recent six months only two tariff investigations were initiated. This seems to be connected to two important issues.

Investigations take too long

The first is the time tariff investigations take. In 2003, it took an average of eight months to complete an investigation, but in 2023 it takes 28 months. In 2003, the oldest open investigation was 33 months old, and in 2023 the oldest was 57 months old.

That investigation turns five years old this month. Imagine you are a company requiring tariff support or needing duty relief on a raw material that is not available locally. Now imagine that rather than the decision taking six months, as it says on Itac’s website, it instead takes five years. Would you trust this system?

The chart shows just how badly this situation has deteriorated. As you can see from the graphs, the wheels began coming off about five years ago and got consistently worse throughout the period. The blue bar chart shows the oldest open investigation in a given six-month period. Never before have we encountered anything like what we have to contend with now.

The reciprocal agreements are too intrusive

The second issue is the onerous reciprocal agreements (also known as irrevocable undertakings). These are contracts companies have to sign requiring them to make three year commitments for employment, investment, training and price controls. Now a local procurement requirement has been added, required even when no local producer yet exists. In such a case the applicant is expected to commit blindly to a future potential producer.

The state has now become the sales force of future manufacturers. This moves it from regulator to market participant, and if it is using its power to force companies to alter their procurement behaviour, the state is deliberately concentrating the market. If a private sector company did this it would be a prohibited vertical practice and it would face a stiff fine, but of course no such thing happens when the state is involved. The irony of deliberately creating a concentrated market in one part of the department of trade, industry & competition and then penalising this concentration in another part, should not be lost on us.

Import duties remain in place for too long

About 93% of all import duties now in place, and on which duties were paid in 2023, have not had their duty levels revised in more than 20 years. This is astonishing, a sign of an ossified economy. If an industry is not competitive after 20 years serious questions need to be asked. If duties remain in place in perpetuity we will have an economy comprising slow, large and inert monopolies or oligopolies. This is a low innovation, low employment environment. Sound familiar?

The tough decisions are not being taken. Our inflexible, job-destroying labour market must be deregulated, but this is a hard political decision to take, so instead we offer domestic producers import duties to shield them from their more nimble foreign competitors.

Or we give them direct subsidies. The automotive industry gets about R30bn a year in subsidies, and for as long as we make cars in SA we will have to pay those subsidies. The current subsidies were recently extended to 2030. I shudder to think how large the subsidies will need to be if we are to produce electric vehicles in SA.

The clothing sector benefits from a 45% import duty and producers receive about R2bn a year in subsidies, yet employment in that sector halved between 2010 and 2023.

We need an honest assessment of what is happening here. The broader textile and clothing sector, plus automotive imports, account for 75% of the import duties paid in SA, and most of these duties have been in place for more than two decades. Neither of these sectors is able to stand on its own, and is unlikely that they ever will.

The clothing industry, a sector that should be thriving in SA given our huge unemployment number, continues to bleed jobs. Not even the implementation of a master plan for that sector altered the trajectory. It was meant to shift jobs from the other Southern African Customs Union states to SA, yet has accomplished the very opposite. Imports from Lesotho and Eswatini actually rose after the plan was implemented, while our employment plunged further. It is difficult indeed to not believe that the master plan caused the jobs to shift to our neighbours.

These heavy-handed interventions in the market are causing clear and measurable harm, and yet rather than taking a lighter touch government has instead laid an even heavier hand on the economy. The harm will increase.

Aggregate unemployment cannot be reduced one reciprocal agreement at a time. The state cannot regulate business into growth or compelled to buy locally, from unknown suppliers, and expect those businesses to thrive. The policies in place are creating an uncompetitive manufacturing sector, unable to compete outside our borders.

The only growth left is in little bits scattered around the country, and these will keep shrinking as the economy is increasingly locked into a low growth pattern (negative growth at the per capita level). There is a 62% import duty on chicken, yet one of the pillars of the Poultry Masterplan is to grow exports.

Which local producer in his right mind would choose to export chicken into a world where prices need to be 62% lower than what can be obtained in the local market?

• MacKay is CEO of XA Global Trade Advisors.