XA’s 4th import duty investigation shows an enormous deterioration in the performance of tariff investigations

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This week we released the 4th XA Import Duty Investigation Report and so many serious concerns are brought to the fore, the most worrying being that the private sector is withdrawing from using all of the tariff instruments, with private sector engagements at their lowest level since ITAC came into existence in 2003.

At times of economic distress, we should see the use of these instruments increase, and yet the opposite has happened. Each bar 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 amount of time it takes for a tariff investigation to now be completed. In 2003, it took an average of 8 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. In March 2024, that investigation will turn five years old. Imagine you are a company requiring tariff support or needing duty relief on a raw material which 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 below shows just how badly this situation has deteriorated.

As you can see, the wheels begin coming off around five years ago and consistently get worse throughout the period. The line chart shows the oldest open investigation in a given six-month period and we have simply never 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 them from regulator to market participant and if they are using their power to force companies to alter their procurement behaviour, then the State is deliberately concentrating the market. If a private sector company did this, it would be a prohibited vertical practice and they would face a potential fine, but of course, no such thing happens. The irony of deliberately creating a concentrated market in one part of the DTIC and then penalising this concentration in another part, should not be lost of you.

Import duties remain in place for too long

93% of all import duties currently in place, and on which duties were paid in 2023, have not had their duty levels considered in more than 20 years. This is astonishing. A sign of an ossified economy. If an industry is not competitive after 20 years, then serious questions need to be asked. If duties remain in place in perpetuity, we will have an economy made of 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. We give them subsidies. The auto industry gets approximately R30 billion per annum in subsidies and for as long as we make cars in South Africa we will have to pay those subsidies. The current subsidies have recently been extended to 2030. I shudder to think of how large the subsidies would need to be if we produce electric vehicles in South Africa.

The clothing sector benefits from.a 45% import duty and producers receive approximately R2 billion per annum in subsidies, yet employment in that sector has halved from 2010 to 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 South Africa and most of these duties have been in place for over two decades. Neither of these sectors is able to stand on their own and are unlikely ever to be able to. The clothing industry, a sector which naturally should be thriving in South Africa given our huge unemployment numbers, continues to bleed jobs. Not even the implementation of a masterplan for that sector altered the trajectory. It was meant to shift jobs from the other SACU states to South Africa, yet has accomplished the very opposite. Imports from Lesotho and Eswatini actually rose after the plan was implemented, while our employment plunged further. It’s very difficult indeed to not believe that the masterplan caused the jobs to shift to our neighbours.

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

Aggregate unemployment cannot be reduced one reciprocal agreement at a time. Business cannot be regulated 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 are the little bits in the rest of the country and these will keep shrinking as the economy remains 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 chicken masterplan is to grow exports. Which local producer in his right mind would choose to export chicken into a world where his prices need to be 62% lower than what they are in the local market?

You absolutely should download our full report and also get free access to our import duty dashboard, where you can track each investigation currently open, view all those due for review and see the cost of these delays.

Click here to sign up for free access to the dashboards and to download the full report.

Difficult is good.

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