The International Trade Administration Commission of South Africa (ITAC) notes the XA Global Trade Advisors (XA) Import Duty Investigation 5th report, issued on the 27 August 2024. The report highlights certain alleged shortcomings in the use of tariff instruments, principally by the administrator of these instruments, the International Trade Administration Commission of South Africa (ITAC), but also by the line department, the Department of Trade, Industry and Competition (the dtic) and its executive authority. Surprisingly, despite progress in clearing the backlog of recommendations noted in XA reports, the focus shifts to new points of criticism.
Despite some of the more entertaining headlines, suggesting that the use of these instruments is akin to a lottery (“The Great Trade Policy Lotto”), the matter is one that should concern all South African, individuals or businesses. Why? Because the targeted use of the tariff instruments (alongside trade defense and import and export licensing in selected product categories) can be instrumental in advancing production capabilities, investment and employment in South Africa, as well as the Southern African Customs Union (SACU).
The report’s “more than 90% of import duties” claim creates the impression that all these duties are pointless, something which the business media, especially the Business Day’s editorial of 4 September 2024, “The hidden cost of stagnation”, immediately latches on to. The import duties that the XA report complains about are, in many cases, in place to support local investment and employment by allowing domestic companies to compete with foreign manufacturers of imported products. In other cases, a tariff may be in place to prevent importers from circumventing existing tariffs.
XA’s report also fails to acknowledge that market forces may well be effective enough in establishing whether there should be duties or not. If a retailer or manufacturer investigates procuring a finished product or an input and discovers there are duties in place despite there not being local production, they can approach ITAC. We receive countless such applications, including, contrary to what the report states, from smaller businesses. Recently, the duties on Canned Minced Anchovies and Onion Powder have been removed or rebated after smaller businesses approached us.
THE STAMPEDE TO REMOVE TARIFFS
While asserting that 93% of import duties have not been reviewed in two decades makes for a headline-grabbing statement, it obscures several fundamental realities. The tariff schedule in South Africa and our customs union is an ever-evolving outcome of the balance of market power and production capabilities in our industrial base. How tariffs emerge, how they are maintained and ultimately reviewed will remain a matter of open discussion. Yet this ought to be a productive discussion grounded in reality rather than ‘imagined’ notions of hyper-efficiency with no link to the policy context and the realities faced by SACU manufacturers. Firstly, no trade authority in the world, even those that have more resources than ITAC, could conduct the number of investigations needed to make a meaningful dent in the 3 537 tariff codes that attract duties in South Africa.
Secondly, and more importantly, tariff investigations are intensive fact-finding and investigative exercises. By their nature these take time. While half a year might be the ‘target’, there are often reasonable occurrences within and beyond the control of the Commission and applicants, that mean these may take longer. This is not as a result of rank inefficiency, but rather because of the demanding nature, in terms of time and resources, of ITAC’s tariff investigations. Specifically, ITAC’s investigations involve a multitude of steps, including engagement with key industry stakeholders (manufacturers, importers, and others), collection of extensive data, thorough evaluation of data, providing an opportunity for the public to comment, and ultimately formulating a recommendation to the Minister of the Department of Trade, Industry and Competition. This recommendation must withstand scrutiny not only from the Minister, who makes the final decision on actions such as removing a duty, but also from the Minister of Finance on the proposed amendment and the courts, in the event of a judicial challenge.
Additionally, it should be pointed out that the impetus for changes to tariffs typically comes from South African businesses through the submission of applications. This makes sense because firms are not only in the proverbial marketplace but, critically, are also in possession of the ‘evidence’ that ITAC needs to collect, analyze and use to make its final recommendation.
That said, and despite the implication in XA’s Report of an inactive administrator, ITAC does not sit idly by and only wait for such applications. Instead, ITAC at times self-initiates sector-specific investigations involving various industries. Typically, these involve industrial and strategic interests or where there is great employment sensitivity. Recent examples include the steel and poultry sectors, which included dozens of tariff codes, and which were reviewed for their alignment to industrial and national priorities.
Finally, ITAC cannot amend tariffs outside of the regulations that set out how this might be done, alongside giving some consideration to how we would proverbially cut our coat according to the cloth provided. Moreover, to do so in the ‘blanket’ fashion that the Report’s main headline-grabbing assertion suggests, would be to forego the strategic sector prioritization, that would inform which value chain reviews are undertaken. And for what reasons. Moreover, such an approach also considers which tariffs, for certainty and predictability of the investment and operating environment firms navigate, may be well suited to be kept at current levels.
In the end, it is a ‘balance’ rather than the gamble of ‘heuristics’ or rules of thumb. While it is indeed correct that many of the Commission’s recommendations highlight the need for any trade measures to be periodically reviewed, that such a review occurs for instance when rebate measures are introduced in instances of inadequate or no supply domestically, or where capabilities are lost, is also part of the story. As a result, between 2010 (following the Global Financial Crisis) and last year, ITAC recommended and the executive authorities approved, around 70 rebate measures, covering three categories of products – those characterized by insufficient domestic supplies (18.6%) , products where there is a tariff (‘to attract industrial investment’) but there has never been domestic production or capabilities (67.1%) and a third category, of products that had been produced in South Africa before where capabilities have been lost (14.3%).
As can be seen from the foregoing, two thirds of the rebate measures issued since 2010 are in areas ‘(where) there are no companies to protect’, which is the case precisely because ‘rebates’, as an alternative to the tariff removal proposed by the Report, are a ‘responsive’ measure. Responsive insofar as we recognize that reducing the cost of imported input materials, can be pursued without disavowal of the ‘policy signal’ that a tariff presents for prospective or latent industrial investment. It is here that the ‘policy guide’ of trade policy statements as set out in section 7(2)(ii) of the International Trade Administration Act 71 of 2002 (‘the Act’), rather than some textbook belief that tariffs ought to function like patents, with a set expiry date determined by the temporality of some imagined adjustments at a firm level, is applicable.
NEW ENERGY VEHICLES AND SOLAR PANELS
The Import duties on alternative vehicles had been put in place to safeguard the domestic automotive industry, especially local manufacturers of Internal Combustion Engine (ICE) vehicles. At the time, the former were considered to be a substitute for the ICE engine in terms of their use. Additionally, duties are typically only reduced in instances where there are no production capabilities, and there is no probability of future production in the country. Noting South Africa’s aspirations to be a manufacturing location and the country’s desire to have a structured approach to attracting the required investment in the manufacture of new energy vehicles (‘NEVs’) and their substitutability with locally manufactured vehicles, the duties could not be lowered.
It is also worth considering some of the ‘particular’ examples used in the Report. One such example relates to the evolution of the policy on electric vehicles (EVs). The Green and White Papers on NEVs, framed the transition to new automotive technologies as one that would in South Africa, be ‘production-led’ rather than reliant on the immediate levels of consumption domestically, given the fact that 60% of local production is destined for the export market.
The sequencing implied by this, was that tariffs would be exempted on batteries or battery components going into EVs initially, to encourage domestic assembly for export and some relatively competitive access (thus the retention of the tariff on fully built EVs) to early domestic demand for EVs. While one might disagree with this approach, to frame duty free entry of fully built EVs as the only way to get to a 5% domestic consumption target, is to overlook the frame of incentives required to ‘crowd-in’ multiple technology platform investments in the automotive sector.
To encourage the early adoption of NEVs’ local production and the transition to sustainable mobility, the DTIC and ITAC are amending the legislation framework (the Automotive Production and Development Programme Phase 2 – ‘APDP 2’). The industry and stakeholders are fully participating in these processes, including the EV white paper, which was published in December 2023. It is worth noting that locally produced hybrid vehicles, components and tooling used in the manufacture of hybrids, are already benefiting under the APDP 2 regime.
Regarding solar panels, ITAC initially received a request to increase the customs duty rate, which was followed by an investigation, impact assessment, and subsequent recommendations to the Minister of the DTIC. Considering the economic implications of increasing customs duties, especially during a period of unprecedented load shedding, and with limited domestic production capacity, the Minister referred the matter back to ITAC, with a directive for ITAC to explore a temporary rebate provision to protect local importers in cases of insufficient supply.
Following ITAC's review and recommendation, the Minister endorsed both the increase in customs duties and the introduction of a temporary rebate facility. This dual approach assisted in addressing South Africa's power supply challenges, meeting domestic demand, all while supporting local assembly of solar panels.
RECIPROCAL COMMITMENTS
The XA Report’s views on irrevocable firm undertakings (‘reciprocal commitments’) is that, inter alia, they add costs, slow down investigations and are unevenly applied. Reducing these to ‘compulsion’, ‘impositions’ and undertakings shrouded in secrecy, the Report reveals a fundamental misunderstanding of this aspect of ITAC’s investigations. The genesis of reciprocal commitments by firms in tariff amendment investigations is a 21 April 2016 Trade Policy Directive (‘the Directive’) from the then Minister of Economic Development (now the Minister of Trade, Industry and Competition), issued to ITAC in terms of section 5 of the Act.
The Directive, read with the 2021 Trade Policy for Industrial Development and Employment Growth framework, is aimed at ensuring that ‘tariff support (does) not blunt competitive pressures on firms’; and such measures ought to be building firm level capabilities, competitiveness and aligning firm level to national interests. Once again, the Report in choosing a selective sample of cases dismisses a series of measures and commitments made by firms which have yielded recognizable gains in production, employment, investment, pricing and exports in many firms who have made such undertakings.
The basic idea behind reciprocal commitments is straightforward. Duties are ‘economic rents’ that firms apply for, to which they are not entitled nor ought to claim a right to. These rents, while they have a targeted firm benefit, visit a ‘diffuse set of costs’ across different economic actors. As such, those who receive the benefit are ‘encouraged’ to reciprocate (or align their private benefit with the national interest) through increased production, investment and employment. Not just in their own self-interest, but also in the interests of society. That is, companies make reciprocal commitments based on their financial and market position, existing expansion plans and projected demand growth. Here it is important to understand that an applicant cannot, in the words of XA, ‘buy bad decisions’ by making favourable commitments.
Why is this the case? Firstly, because the law requires that ITAC’s decisions must be fact-based (rational and not arbitrary) and, secondly, because such questionable decision-making would inevitably be litigated and ventilated in a court of law, as sections 46 and 47 of the Act allows for. Secondly, reciprocal commitments are not the sole criterion on which a duty-related decision rest. They are ‘but one’ of many considerations within the broader trade case that each applicant makes in an application. To suggest they are some kind of extortionary measure beyond scrutiny is at best ill-informed if not outright slanderous.
Finally, XA talks of the process of the negotiation of reciprocal commitments not being open to comment or scrutiny. This is odd coming from an organization that is frequently involved in matters before ITAC on behalf of their clients and one that knows only too well the highly sensitive commercial nature of the data disclosed by companies in the process. Such data may include investment levels and plans, production costs and other sensitive business information.
CONCLUSION
ITAC welcomes the scrutiny of interested members of the South African public. It is important. It keeps us honest and ensures that we continue to discharge our obligations with the greatest sense of duty, professional regard and care. However, where such engagement shifts from the constructive to rhetoric and bluster, we are obligated to respond.
Indeed, while we acknowledge that there are areas where ITAC’s work could improve, it is worth pointing out that the processes by which ITAC conducts its work are complex and challenging. Also, its decisions are often contentious because there are opposing interests in nearly all of ITAC’s investigations. Here is where discussion and debate are needed without resorting to sensationalism.
ITAC will continue to efficiently administer trade instruments in support of South Africa’s industrial and trade policy, to drive economic growth and development, promote investment and employment opportunities.
ISSUED BY THE INTERNATIONAL TRADE ADMINISTRATION COMMISSION OF SA