I was struck by Ayabonga Cawe’s recent take-down of the World Bank report, Unlocking SA’s potential, which you can find here. You can read Cawe’s full article here.
Cawe, as the chief commissioner at the International Trade Administration Commission (Itac), would understand the ins and outs of SA’s trade policy better than anyone else, but I disagree on something important in that article.
Ayabonga Cawe notes:
“The International Trade Administration Commission (Itac) issues scores of rebates, offsetting customs duties across different industrial sub-sectors precisely because SA trade policy recognises the balance required between imports and the need for machinery (we even issue permits for second-hand imports of agricultural and mining machinery), or component imports duty free for instance, to enable industrial value addition and exports on more cost-competitive terms.”
This is only partly true. There are two instruments created to incentivise adding value to imports, so that more complex products can be exported. These are the 470.03 export rebate and the 521.00 drawback, and they work as follows. If you import a raw material, which attracts a duty, you can clear the import under rebate item 470.03 and not pay the duty, as long as the finished product will be exported outside the Southern African Customs Union (Sacu). The 521.00 drawback is similar, except you do the export first and then claim back the duty. Both of these instruments require Itac to issue a permit before the benefit can be realised, and here is where a problem arises. Starting a few years ago, Itac started refusing permits in certain sectors, such as chicken and steel, if the product was available locally. This is problematic as both instruments assume there is local production (because of the duties). The point is to not burden our exports with these duties. By rejecting the permits, Itac assumes the applicant will still do the export, but now with local raw materials, but this is unlikely. The reason the exporter uses imported raw materials is usually because they are more competitive that way, not because they don’t want to buy locally. By forcing them to use local materials, it’s likely the export won’t happen and nor will the local sale. The refusal to issue the permit simply leaves everyone worse off.
This is how localisation is viewed in South Africa. It is about import replacement, rather than being export focused, an approach which requires companies to be competitive. But import replacement and export focus do not easily coexist, no matter how many times this is written into a policy document. Import replacement removes competition from the market, lowering competitiveness, while exports require high levels of competitiveness to be able to succeed globally. Although we pay lip service to developing competitive industries, there is very little evidence of this in how our policies are implemented.
There are three types of rebates of importance for this discussion. The first, export rebates, we’ve discussed above. The two others are manufacturing rebates, where duty relief is given on raw materials used in the manufacture of something specific. If SA produces a chemical with an industrial application but no version of that chemical for food manufacturing, then this would be a good reason to create a manufacturing rebate. Temporary rebates are used when the product is made locally, but not in sufficient quantities. Historically, most temporary rebates were for seasonal products, but this is no longer the case.
Before 2016, rebates were granted on all types of duties (normal, plus anti-dumping and safeguard duties), but this is no longer the case. In 2016, an Itac minute from the chief commissioner to then minister Davies, stated:
The Commission is concerned that duties levied against unfair trade practices may be rebated under schedules 3 [manufacturing rebates} and schedule 4 [temporary rebates] of the Customs and Excise Act. The protection afforded to manufacturing and agricultural enterprises against unfair trade practices could be eroded.
Since then, rebates are not granted on anti-dumping and safeguard duties, which may seem to make sense, but actually cause harm. No import duties should be paid when goods are not available locally, and if goods can be rebated then they are not available locally by definition. Insisting on the duties being paid, even for unfair trade, is counterproductive when you can’t buy the goods locally, yet this policy remains.
Increasingly, when duties should be removed, they are instead replaced by rebates. The thinking seems to be that even though there is no local production now, it may come later, and so rather than removing the duties, a rebate is instead created. The importer still needs to get a permit, and even though these are usually issued, the fact that the duty relief is not certain is a disincentive to investment.
ArcelorMittal shut down its tinplate steel line years ago, yet the duties persist, coupled with a temporary rebate. On other products, companies are being asked to sign reciprocal agreements, committing to future local procurement of products from potential suppliers who are not yet manufacturing and whose identities are not revealed, in return for a temporary rebate. And even when those agreements are signed, it will still take years for the rebates to be granted. This is an incredibly unhealthy trade policy system. There are currently 23 temporary rebates on agricultural (seasonal products), but 83 temporary rebates on primary steel (mostly hot rolled). One of those steel rebates is the one I mentioned on tinplated steel, but there are others, which are so technical only a metallurgist could make sense of them. Such incredibly technical rebates are difficult to monitor by both customs and Itac officials, opening the door for circumvention.
Rebates, as now implemented, create unnecessary complexity. Because all new rebates are connected to a permit, there is always the uncertainty of whether the permit will be granted. When there is a local alternative, this is less of a problem, but when there is no local manufacturer, these duties should simply be removed. Conditions can be attached to issuing a permit, adding another layer of potential problems.
What we want is predictability. If there is a duty on a product and it is not made locally, the duties should be swiftly removed. This should not end up as part of a haggle running over years.
