DONALD MACKAY: Regular tariff code reviews make it easier to invest

Ninety-three percent of all tariff codes that attract an import duty and saw trade through them in 2023 last had their duty levels reviewed more than 20 years ago.

That is an astonishing and important statistic. Taxes serve one of two purposes: to raise revenue (VAT) or to deter certain behaviour (such as excise duties on booze). Customs duties fall into the latter category. They exist to make certain imported products more expensive, creating an advantage for local products, which should cause their volumes or profit or both to rise.

When someone earns an income beyond the cost of bringing a product or service to market, economists call it a rent. When there is a lot of competition the size of that rent is capped, and when the amount of competition diminishes the size of the rent increases.

The point of an import duty is to reduce the amount of foreign competition, creating a larger rent for local manufacturers. This increased price (rent) is funded by the consumer of that product — not the foreign producer as Donald Trump keeps saying.

The theory behind this trade-off is that a portion of that rent will be spent on employing more people and helping to fund innovation so that local producers over the long term become more competitive. For this to work the cost-benefit analysis should be properly done, and the protection should not be evergreen.

When government support is permanent, problems arise. The beneficiary companies begin to budget for the support (prices are kept elevated because the duty is certain), and the consumer becomes habituated to the elevated prices.

Because import duties don’t appear on the label of a product like VAT, few consumers understand how much duty is contained in the price they pay. Innovation levels in the sector drop because of less competition.

Not around

Companies behind high levels of protection are less able to adjust when anyone works out how to be competitive, despite the duties. We see this with the global clothing manufacturing sector and the arrival of companies such as Shein.

The longer the protection remains in place the more likely it becomes that the companies being protected may no longer be around. This is well understood, which is why the International Trade Administration Commission (Itac) publishes a date by when the duties on a given tariff code should be reviewed (usually three years after the duty was increased).

These reviews seldom happen. XA Global Trade Advisors publishes an import duty investigation report twice a year and this is an important aspect we look at in our fifth edition. And it’s what brings us to the 93% of tariff codes that have not been reviewed for more than 20 years.

About R81bn was paid in import duties for the past 12 months on these tariff codes, out of a total of R87bn in total import duties paid for the period. Of the 94 tariff codes whose duties were increased from 2003 to 2024, 52 codes were identified for future review in the subsequent three year to five years, depending on the product.

Only 18 of these reviews were actually done. Perhaps some of these duties should remain, but it’s not clear how this can be known without a formal review, in which comments are requested and proper cost-benefit analysis is done.

Taken away

That these are overdue doesn’t mean they need to stay that way. If only 10% of these duties are found to no longer be appropriate, this would put R8bn per annum back into the productive part of the economy.

When duties are found to be unnecessary, their removal should not be contingent on commitments from the importers of these goods. They should simply be taken away.

Everything in this space takes too long, and these delays are not benign. Predictable government policy is the bedrock of positive investment sentiment. If a promise is made to review the duties on a product within three years, do the review.

The Itac website says a tariff investigation will finish in six months, so don’t take five years. Replace the years of haggling with companies to extract commitments with economic studies to determine if the decisions are good or bad.

Without growth, SA is in deep trouble According to the 2024 Budget Review: Fiscal Policy, “The National Treasury’s internal estimates confirm that the fiscal multiplier is below one, meaning higher government spending has not been contributing to higher economic growth”.

There can be no growth without investment, so let’s make it easier to invest. Predictable government policies are one important way to get there.

• MacKay is CEO of XA Global Trade Advisors.