Minister Patel published a policy directive on matters that ITAC should consider when evaluating applications for the amendment of Customs duties (presumably this means increases, reduction and the creation of rebates). The policy directive specifically excludes anti-dumping, countervailing and safeguard actions.

What does the policy say?

Like many government policies it raises more questions than providing answers, but here is a quick and dirty summary of the main issues ITAC is to now consider before making duty changes:

1. No duty changes should be made without binding and verifiable commitments to either raise incomes, promote investment or promote employment.
2. If the application is to protect local manufacturers (presumably with duty increases, but potentially also with rebates on raw materials I would guess), then the binding and verifiable commitment must also “protect, maintain or increase” the market share of local manufacturers.
3. ITAC is then also instructed to consider research and development, support for small manufacturing businesses, black owned or black managed enterprises and SACU supply chains.
4. Finally, the pricing of outputs also needs to be looked at when more protection is requested.

Why is this policy important?

The policy is a strong overt move towards more tightly integrating industrial policy and trade policy. It becomes a means for government to co-opt business into their broader industrial objectives by withholding protection when required or by leaving duties in place on products not produced locally, if the company concerned does not do as required. It will be interesting to see how this plays out and I suppose the first really big test will be to see what happens to the performance of Arcelor Mittal, given the commitments they needed to make to get their 10% duty increase. Their prices have already moved up quite significantly on some of their products, so certainly the downstream industry is funding this.

But what happens when companies don’t get the duty increases they requested?

Hulamin applied for a 15% duty increase on rolled aluminium and received no increase. Their commitments include the following, amongst others, over a 3 year period:

1. A 14% increase in research and development
2. A 13% increase in skills development
3. A 15% wage increase

Against these 3 measures they quite explicitly state that if they don’t get the increase then R&D will increase by only 5%, skills development by 8% and wages likewise by 8%.

Does government know best

My concern with the policy put forward by Minister Patel, is that government is trying to push the private sector to make its own promises come true. This may or may not work, but it will certainly add to the cost of making a change. The problem will become particularly serious if, for instance, a product is no longer produced in South Africa (perhaps an important raw material). If the duty remains in place then the manufacturers using that raw material will become less competitive relative to companies who import the finished product. There is now a greater price to having this duty removed and returning the applicant to normal levels of competitiveness, in the form of these commitments. There may be no logical reason to carry out the commitment, other than it being the price of having the unnecessary duty removed. It will take a while to see how this policy impacts the investigations that are carried out, but I fear that most of the impact of this policy will be impossible to measure from outside of ITAC because any application that fails the above criteria before initiation is completely invisible. We are thus only able to assess applications that already accept the criteria now being imposed. Want to find out more? Drop us a note at info@xa.co.za