Recent talk of government raising tariffs to protect certain industries deemed strategically important seems to have gathered pace despite significant evidence that higher tariffs would do more harm than good to the economy, and despite more appropriate policy tools being available.
The Mail & Guardian last month highlighted the apparent willingness of the DTI to raise tariffs in support of certain strategic sectors deemed “job creators”, and referred to a study by the South African Institute of International Affairs (SAIIA) which indicates that there is significant policy space for such increases.
The figures quoted from the SAIIA study are somewhat misleading, however, and greatly overstate the scope that exists for increasing tariffs - at least in certain industries. For instance the study claims that the average applied tariff for clothing and textiles is 22.4%, while the average bound tariff is 35.9%. This difference is meant to imply that there is significant room for tariff increases on clothing and textile imports.
All clothing imports into South Africa are subject to a bound tariff of 45%, however, with applied rates averaging 37.3%. Significantly, almost 90% of clothing lines are subject to an applied tariff of 40%. Clearly there is not that much scope for increasing tariffs on clothing imports. The story is the same for textiles other than clothing items. Here the average applied tariff is 14.8%, with an average bound tariff of 21.8%. These figures show that the claim by SAIIA that significant scope exists for an increase in tariffs on these goods is incorrect.
Raising duties on textiles other than clothing items makes little economic sense anyway, as a significant proportion of textile (and other) imports are used by local manufacturers as inputs in the production of clothing and other products. Higher tariffs would simply result in greater costs for these producers, which would, in turn, result in higher prices for local consumers and lower profits for manufacturers.
A further consideration is that while government would be able unilaterally to increase most-favoured-nation applied duties to bound rates, this would have no effect on duties imposed under South Africa’s various preferential trade agreements, including the agreement with the European Union — South Africa’s largest trading partner. These duties would have to be renegotiated.
Raising tariffs would also result in a number of indirect costs to the South African economy, including lower profit margins for retailers, higher prices for consumers (with resulting inflationary pressure) and a greater incentive for unscrupulous traders to avoid paying customs duties altogether. Given that 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 as the country loses out by failing to increase applied tarrifs to their bound limits.
Finally, raising tariffs would contravene the G20 Agreement signed by South Africa earlier this year. While we would not be the only country to renege on the agreement, such a move would harm the country’s reputation as a reliable partner in international trade. This seems a significant price to pay given the lack of real benefits that would accrue.
There are other, more appropriate ways to protect vulnerable sectors. Safeguard measures such as duties applied at the border are provided for under WTO rules, and would be more effective in providing the local clothing and textile industry with temporary protection from the current surge in imports from the likes of China.
Unfortunately such trade remedies require a significant amount of institutional capacity, and given the current state of the body tasked with overseeing their implementation, the International Trade Administration Commission (ITAC), it is perhaps no wonder tariffs continue to be the proposed policy of choice. That doesn’t mean they are the right one.
Sean Woolfrey is a researcher at the Trade Law Centre for Southern Africa