Tariffs in SA's Industrial Policy: The Role of ITAC

1. Tariffs in SA’s Industrial Policy: The Role of ITAC Moses Obinyeluaku 06 April 2017 TILSS

2. Outline • Why renewed interest in industrial policy? • What is the role of trade? • Theoretical underpinning • East Asia versus Latin America • Benchmarking South Africa • Prioritising the agro-allied sector • Tariff as a policy tool for implementing successful industrial policy ‒ The role of ITAC TILSS

3. Why renewed interest in industrial policy? • Following the economic crisis of 2008-09 (market failure), past growth being jobless and vulnerable, policy makers are looking for new sources of economic growth and employment creation • But economic development is closely associated with industrialization (Lewis, 1954) • Evidence has shown that rapid economic growth and employment typically occurred where most structural change has taken place and where manufacturing continues to play a substantial role in production (Obinyeluaku, 2015) • As labour and other resources move from traditional into manufacturing and other modern economic activities, overall productivity rises and incomes expand • New industrial policy to attain industrial development, which is an effective and sustainable means to economic transformation TILSS

4. Trade as a potential driver of structural change • Trade promotes manufacturing structural transformation through: • Demand-side effects: International trade offers opportunities for export growth, successful countries have taken advantage of this to expand their manufacturing products rather than focusing only on exports • Supply-side effects: There is potential for replacing imports as local producers capture market initially served by imports, thereby exposing local firms to foreign competition and technology, which may lead to significant productivity gains • It improves quality and raises productivity as foreign suppliers exert pressure over domestic suppliers TILSS

5. The contrasting experiences of East Asia and Latin America Value added by sector as share of GDP at current prices, 1960-2012 Average annual per capita GDP growth (in 2000 US$) Source: World Bank Source: UN Statistics Employment share • Rapid GDP per capita growth between 1960 and 1970 (1980 and 2012) witnessed in LAC (EA) was accompanied by structural change, however, the pace of structural change slowed afterwards following a shift in production structure towards services Source: Groningen Growth and Development Centre (GGDC) TILSS

6. Cont. • The rising role of many Asian countries in international trade reveals high industrial performance and trade-induced structural transformation. In the case of Latin America, this was explained by a greater propensity to export rather than an expansion of domestic manufacturing products Technology composition of exports (US$ b Value added share in manufacturing Share of manufactured exports to total Source: COMTRADE • Regional production sharing played a key role. Intra-regional trade in manufacturing goods as a share of total trade was 70% in EA but 10% in LAC • The more EA connect to the world, the better they connect to each other TILSS

7. Cont. • Both Latin America and East Asia have opened their markets and reduced tariffs, but this was much faster in the former, achieving comparable levels of protection • Tariffs were initially lower in EA than in LAC in the mid-1980s, but not so afterwards Average applied tariffs • As a matter of fact, 79 per cent of all structural adjustment loans of the World Bank with Latin American countries between 1982 and 1989 enforced trade liberalisation in Source: UNCTAD and World Bank databases • the region (Edwards, 1995; Bora and Neufeld, 2001) TILSS

8. Benchmarking SA’s trade • Between 2000 and 2011 South Africa’s trade has grown nearly twice (1.95 times) as fast as output • But the RCA indices are still highest for mineral products, suggesting that there has not been a significant change in the evolution of its comparative advantage • There is only a limited number of manufactured products that the country can prioritise to increase the pace of transformation TILSS

9. Prioritising Agro-processing sector • A lot has been said regarding the level of poverty in Africa. But why are we poor? • The NGP, together with NDP, the IPAP and the SATPF acknowledges agro-processing as one of the vital sectors in accelerating the pace of industrialisation • South Africa has comparative advantage in 29 of the 77 agro-processing products, which accounts for 88.4 per cent of its total agro-processing exports ITAC’s quarterly report, 2016 • SA is importing more intermediate products than it exports, but exports more consumer products than it imports, suggesting that the latter are relatively internationally competitive, though with less policy space TILSS

10. Tariff as a policy tool ‒ The role of ITAC • There is need to lower tariffs on imported intermediate inputs into manufacturing, to avoid, cost raising effects to downstream manufacturers ─ Where tariffs exist for relevant inputs, industrial rebate supports (4703, 52100, for exports, and other specific rebates, where there is no local manufacturer, for domestic markets) • ITAC amended the rebate item 316.17 in 2009 to support the Vetronix television manufacturing firm based in East London: • The rebate facility allowed the industry to enjoy a full rebate of the duty for investing locally in machines that insert components onto circuit boards instead of importing circuit boards already fully populated with components from Samsung Thailand, and moved from a Semi-Knocked Down (SKD) to a Completely Knocked-Down (CKD) assembly • With the rebate amendment, the firm commenced the local manufacture of flat-panel televisions (LCD and plasma) • The firm created 87 additional direct jobs during 2010-2012. This rose to 150 jobs in July 2013. Further 43 indirect jobs were also created in the following contracting firms: Isolite, Coral Print and Shave and Gibson. TILSS

11. Cont. • In 2010 ITAC amended the rebate item 311.42 on certain fabrics used in the manufacture of linens, interior blinds, mattress and articles of bedding to support the Home Textiles sector • The creation of the rebate has seen the production of items covered by rebate overtaking the total production of other items, from 44% before the support to 78% after the support • However, illegal imports of finished products and a shortage of skills in design are some of the challenges still facing the industry • Rebate 470.03 to Aerosud Aviation, a manufacturer and exporter of light aluminium and composite parts for passenger aeroplanes • The estimated customs duties rebated and therefore saved by Aerosud is about R16.9 million on average each year over the past five years • Exports increased almost 4 times more. Aerosud exports accounted for 43% of SA’’s total exports of light aluminium and composite parts for passenger aeroplanes after the support compared to 12% before the support • The rebate has contributed to the employment of 33 additional people in Aerosud • Clustering of high-tech new manufacturing enterprises still critical TILSS

12. Cont. • There is also need to strategically adjust tariffs and explore the water between bound and applied rates in support of manufacturing sectors • In 2013 ITAC increased the general rate of customs duty on frozen meat and edible offal of chicken to support the Poultry sector • Rapid growth in production volume culminated in employment of 1 570 addition people in Astral, also 535 additional people in Rainbow Farm, though not sustainable, given a 4.7% loss of post-support production and underutilisation in consequential chicken production, • Despite tariff support and depreciation of rand, imports are landed on South African market at prices below domestic ex-factory prices, implying that tariff support alone may be inadequate to resolve many of the challenges faced by poultry industry • ITAC increased the general rate of customs duty in 2013 on uncooked pasta, not stuffed or otherwise prepared to support pasta industry • To address underutilisation and job losses, the industry plans to increase its export base through a brand awareness marketing campaign, as South African retailers take advantage of the growing African markets • Despite tariff support and depreciation of rand, imports are landed on South African market at prices below domestic ex-factory prices TILSS

13. Cont. • Some of the critical issues ITAC considers when adjudicating tariffs or rebates applications: • What market shares the applicant controls as opposed to the domestic industry and imports to ascertain whether the applicant is losing its market share to other local firms within the same industry or to the importer • Analyse together the domestic demand and supply, applicant's production and import volume; sales and investment; production and employment • What is export share to total production to determine the export potential of the applicant, also industry-wide • When a huge price disadvantage occurs, the possible reasons for such an occurrence • Further verification on what has been the main cost driver (input cost and/or administered prices or labour cost due to above inflation wage increases or administration inefficiencies; costs could also be high due to a failure to invest in machinery upgrading and other supply-side factors) and whether it could have been avoided • Should the support not be enough any further potential plans in place to cover the difference • Should the support be granted what is the impact on the downstream industry or consumer prices (for sensitive applications only) • TILSS

14. Cont. • Non-tariff barriers: anti-dumping duties, countervailing and safeguard • Anti-dumping duties: a situation where goods are sold in a foreign market at prices lower than in the country of origin: • Dumping: whether a product is sold in the SACU market (export price) for less than it is sold in the domestic market of the foreign producer (normal value) • Injury: domestic output, investment, sales, productivity, employment, profit etc. • Causality: there must be evidence that dumped imports are causing or are threatening to cause material injury to the domestic industry or are materially retarding the establishment of a domestic industry • Countervailing measures are used against subsidised imports that threaten and/or cause injury to the domestic manufacturer • Safeguards are used against an unforeseen surge of imports that threatens and/or causes injury to the domestic producers ITAC Strategic Planning Session

15. Lessons to be drawn • Despite trade support, imports can still be landing at prices below domestic ex-factory prices, indicating that trade support alone may be inadequate to resolve many of the challenges facing domestic industries • Illegal imports and a shortage of skills in design are some of the challenges facing the Home Textile industry • It takes SA companies 56 days to go through the production process, but 14 days for a company in Mauritius. The EU want it in 10 days • The SARS modernisation system is expected to take care of imports which are directed through Lesotho to take advantage of the existing SACU free trade agreement since all imported goods whether from BLNS or otherwise into South Africa are now to be declared ITAC Strategic Planning Session

16. Cont. • For some capital intensive sectors, the co-location of all supplier tiers as well as new entrant SMME’s becomes imperative. It offers opportunities for incubation, technology localisation and innovation, tooling engineering, skills training, supply chain competitiveness enhancement and access to the sharing of costly capital equipment and infrastructure • The success of most industries and/or firms has revealed how co-operation between government institutions could help promote industrialisation in South Africa • Economies of scale also become more and more important, a lack thereof which tends to reduce the competitiveness of firms operating in South Africa. African regional economic integration is therefore particularly vital in order to create larger markets for the domestic firms ITAC Strategic Planning Session

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