The Debate about Tariffs for the South African Clothing Industry

The new Zuma government is under extreme pressure from the unions to protect jobs. Is the prospect of rising tariffs the correct way to both appease the unions and protect jobs? Will the implementation such economic policies create long-term sustainability; provide growth opportunities in the South African clothing industry?

The following articles debate these questions.

An article entitled “Zuma-ites eye higher tariff walls” appeared on the Mail & Guardian website on 19 May. This article highlights the apparent willingness of the South African Department of Trade and Industry (dti) to raise tariffs in support of certain strategic sectors which are deemed “job creators”.

After referring to a study which indicates that there is significant scope for the South African government to raise tariffs without violating the country’s World Trade Organisation (WTO) commitments, the article then implies that the differences that exist between South Africa’s applied and bound tariffs represent a “cost” to the country.

Some of the figures quoted in the M&G article appear to be inaccurate however, and thus the inferences drawn from them are misleading. Furthermore, the notion that differences between applied and bound tariff rates reflect a ‘cost’ to the economy is simply wrongheaded.Clothing and textile dutiesThe M&G article refers to a study undertaken by the South African Institute of International Affairs (SAIIA).

While the study itself is quite skeptical about the benefits of increasing tariffs, some of the data quoted in the study appears to lend support to the idea that SA has significant room to manoeuvre when it comes to raising tariffs. This, however, is not the case, at least in certain industries.

The study claims for instance that the average applied tariff for clothing and textiles is 22.4%, while the average bound duty is 35.9%. These figures are then taken to imply that the government has significant scope for increasing duties on clothing and textile imports. There are a number of problems with this conclusion.

According to South Africa’s schedule of commitments to the WTO, all clothing imports (HS lines 61 and 62) are subject to a bound duty of 45%. South Africa’s tariff book shows that the average MFN applied duty on these imports is currently 37.3% . Significantly, 88% of clothing tariff lines – including all 30 lines earmarked for an increase in duties by the dti in its Draft Rescue Package for the clothing and textiles industry - are subject to an MFN duty of 40%, only 5% lower than the maximum that could be applied.

To put this in perspective, import duties of 5% or less are generally considered ‘nuisance tariffs’, as the cost to governments of collecting them is often more than the revenue they generate. Clearly there is not that much scope for an increase in duties on clothing imports.In the case of textiles other than clothing items, South Africa’s schedule of commitments to the WTO shows that bound duties vary from 0% to 30%, with an average bound rate of approximately 21.8%.

Currently the average MFN applied rate for these goods is approximately 14.8%. Again, this difference is not that large. It appears then that the figures from the SAIIA study are inaccurate, and that they greatly overestimate the government’s scope for raising tariffs, at least in the case of clothing and textiles.

Raising duties on textiles other than clothing items makes little economic sense anyway, as a significant proportion of textile imports are used by local manufacturers as inputs in the production of clothing and other products. By increasing tariffs on these imports, the government would drive up costs for local producers, resulting in these producers becoming even less competitive, and having to charge more for their products.

This would result in higher prices for local consumers and smaller profits for local retailers. The dti has recognized the folly of increasing duties on imports which are used as inputs in local manufacturing, and has therefore proposed reducing tariffs on certain textile imports.

When examining existing tariffs, is also important to take into account the fact that average applied duties are influenced downwards by the existence of imports on which no duties are charged. Many of these imports enter SA ‘duty free’ as there is no significant production of these goods by domestic firms.

This means that the applied duties on those goods for which there is significant local production, and thus for which there is at least some sort of rationale for increasing tariffs, are likely to be much closer to bound rates than are average applied duties. The implication of this is that the goods for which there is the most rationale for increasing duties are those goods for which there is the least scope for doing so.

Another important consideration is that while the government would be able to unilaterally increase MFN applied duties to bound rates, this would have no effect on the duties imposed under South Africa’s various preferential trade agreements, including the Trade, Development and Cooperation Agreement (TDCA) with the European Union – South Africa’s largest trading partner.

In order for the government to increase duties on imports covered by these agreements, it would have to renegotiate the agreements with the other concerned parties. This is likely to be a difficult and time-consuming process, and in order to get these parties to agree to increased South African duties, the government would almost certainly have to offer them certain concessions.

This might involve the lowering of duties on other goods, which could result in certain local industries benefitting at the expense of others.Is the fact that applied tariffs are lower than bound levels costing the country?The M&G article speaks of the difference between applied and bound duties, often referred to as the ‘water’ in a tariff, as reflecting a “cost” to South Africa. This is simply not the case.

Increasing duties would indeed result in a modest increase in government revenue, provided these duties did not result in lower volumes of imports (something which is quite possible). Nevertheless, this would merely reflect the fact that South African consumers would have to pay more for their imported goods.

The increase in tariffs would represent a transfer from consumers to government, in other words, it would act as another form of consumption tax.Raising tariffs would also result in a number of indirect costs to the South African economy. These could include lower profit margins for retailers, a drop in demand for all goods following the loss of spending power that results from an increase in the prices of imports, higher input costs for firms who use imported goods as inputs in their production, upwards pressure on inflation caused by the higher prices of imported goods, costs to retailers in establishing new supply chains where higher tariffs make existing sources to costly, and a greater incentive for avoiding paying customs duties.

Given that all these costs could easily outweigh the benefits that might accrue from increased tariff revenue (as well as the protection higher tariffs might provide for some local industries), it makes little sense to describe the fact that tariffs have not been raised to bound rates as representing a cost to South Africa.

Some thoughts

Since the release of Nedlac’s Framework Document for South Africa’s Response to the International Economic Crisis there has been much talk of government raising tariffs to protect certain sectors which it believes to be strategically important.

In particular the dti has spoken of assisting industries which show significant potential for job creation. The dti regularly refers to industries such as clothing and textiles as ‘job creators’, but what exactly does it mean by this? Surely any industry could in theory be a ‘job creator’ if government throws enough money at it? Evidence shows that the clothing and textiles industry has been shedding jobs at an alarming rate for over a decade, despite (or perhaps in some cases because of?) government interventions aimed at assisting the industry.

The new minister of Economic Development, Ebrahim Patel, is quoted in the M&G article as stating that "any support that government may make available through the department of trade and industry will be evidence-based". Seeing as the clothing and textiles industry appears to be one sector that is earmarked for such support, it would be interesting to know what evidence the dti has that this industry could not only witness a halt in its decline, but could actually reverse this decline.

This is important, as government is likely to commit significant resources to assisting the industry, resources that could be used for various other initiatives. The dti also appears to be sending out mixed signals. On the one hand, the new minister of Trade and Industry, Rob Davies, is quoted in the M&G article as claiming that “we won't and can't become protectionist in our approach to the crisis”, yet he is also reported as wanting to increase tariff levels on certain imports to bound levels.

Surely this would represent a form of protectionism? Raising tariffs would also contravene the 2 April 2009 G-20 Agreement “to refrain from raising new barriers to investment or to trade in goods and services”. This would not send out the right kind of signal to other countries, and would portray SA as an unreliable trading partner.

This ambiguity in South Africa’s attitude towards tariffs displays the kind of muddled thinking that leads to an endorsement of export-led growth on the one hand, and an attempt to use protective trade policy measures to assist local industries on the other. The obvious flaw in such approaches is that if a significant amount of countries adopted similar measures, all would be made worse-off, as protectionist measures would restrict trade, thereby hampering each country’s attempts to grow exports.

The South African government sees tariffs and other trade policy measures as tools of industrial policy which can be used to achieve the country’s developmental aims. Given the lack of policy space for such measures in certain important areas, as well as the costs that would inevitably accrue from the use of these measures, is this approach sensible?
Sean Woolfrey, a tralac Researcher


Zuma-ites eye higher tariff walls
LYNLEY DONNELLY
May 19 2009

Jacob Zuma's new power brokers are signaling that a new trade regime is on the way.His new industry minister, Rob Davies, for one, said he wants to increase tariffs to the maximum allowed by World Trade Organisation (WTO) rules. In many cases actual tariff levels are significantly below those required by the WTO.Davies said that in some instances -- on a "case by case" examination -- there is no reason why tariff levels could not be taken to the bound levels allowed by the WTO.

Bound tariff rates are the maximum tariff levels a country agrees to under the WTO.South Africa is one of just a few countries that has not raised its tariff levels in response to the global financial crisis, research by the World Bank shows.South Africa, Japan and Saudi Arabia are the only G20 countries not to do so.South Africa has, in recent years, been taking an increasingly defensive stance in the WTO on liberalising trade.

But analysts believe with new ministers such as Davies at the Department of Trade and Industry and Ebrahim Patel at the new Department of Economic Development the position may quickly become an entrenched one. "We won't and can't become protectionist in our approach to the crisis," said Davies, "but we must also examine international reactions to [events].

It shouldn't only be up to individual countries with water in their tariffs to restrain themselves." "Water" is the difference between applied tariffs and their maximum bound rates and indicates how much room countries have to manoeuvre.According to research done by Peter Draper and Gilberto Biacuana of the South African Institute of International Affairs (SAIIA), goods that enjoyed the highest average applied tariffs in 2008 include textiles and clothing, 22.4%; footwear, 20.9%; and manufactured articles, 10.5%.

In all these cases SAIIA's research points to a good deal of room for the country to increase its levels to the average bound rates. For items such as manufactured goods this could rise from the 10.5% applied rate to the 30% average maximum bound rate, while items such as textiles and clothing could rise to 35.9%. Imports of machinery, mineral products and transport equipment amounted to $3-billion, $2.6-billion and $1.2-billion respectively, according to SAIIA's calculations. All these products enjoy low applied tariffs relative to their bound rate, with machinery, for instance, sitting at 4% against 30%.

If the maximum or bound tariffs are applied in this instance alone it could cost the country as much as an additional $780-million or R6.6-billion. Draper views the benefits tougher trade measures will bring South Africa with scepticism. Because the rest of the world has increased protection measures "does not mean it's right" for South Africa to follow suit, he said. He pointed to a host of problems that could arise, including the effect such as move might have on exporters and domestic consumers.Much of the concern about tougher tariff measures began with the release by government earlier this year of the Framework Document for South Africa's Response to the International Economic Crisis.

The document, put together under the auspices of Nedlac, was intended to explore ways for business, labour and government to mitigate the effects of the crisis on the local economy. It highlighted sectors in distress, including the automotive industry and clothing and textiles, which could warrant assistance from government in a bid to save jobs.Previous minister of finance Trevor Manuel was critical of any bailouts for industries already protected by trade and industrial policies.

But both Patel and Davies support sectors deemed to be job creators. Davies said there is a difference between bailouts and the financial support being proposed for troubled sectors, which will come on the back of a "serious appraisal of projects" that show potential. Similarly, Patel said the Industrial Development Corporation had been asked to prepare a report on ways it can help companies and industries in distress, based on clear criteria that must include the saving of jobs. "Any support that government may make available through the department of trade and industry will be evidence-based," Patel said.

Patel said more effective industrial policy measures to promote competitiveness and innovation would be emphasised, with a drive to strengthen industrial policy capacity.But the emphasis that local industrial policy has placed on the manufacturing sector is "a gamble" in the context of the crisis, said Brendan Vickers, senior researcher in multilateral trade at the Institute for Global Dialogue.

So far South Africa has been unable to compete with international power­houses in Asia because of high labour costs and a lack of skills and capacity. In addition, policies that emphasise economic growth on the back of exports are proving to be flawed as global demand for manufactured goods has fallen through the floor.

Ultimately, however, the way forward on microeconomic policy still remains unclear. With Manuel sitting in the presidency as head of the National Planning Commission, and Pravin Gordhan heading up the national treasury, any major interventions proposed will have to take into account what is practical, implementable and affordable.
Source: Mail & Guardian Online