Foot-dragging on SA import duty decisions by the dtic and finance ministry costs billions: report

Between 2012 and 2024, investigations were open for an average of 10 months. The oldest open investigation was open for 62 months, says XA Global Trade Advisors' latest report.

By Georgina Crouth

28 Aug 2024

The latest Import Duty Investigations Report from XA Global Trade Advisors reveals that R86bn in customs duties was paid between July last year and June this year — much of it duties that have not been reviewed in more than 20 years.

Foot-dragging on decisions around import duties and questionable political interference from the Department of Trade, Industry and Competition (the dtic), as well as the finance ministry, are hurting importers and domestic producers, costing billions of rands, says XA Global Trade Advisors in its fifth Import Duty Investigations Report.

Its findings revealed that R86-billion in customs duties have been paid from July 2023 to June 2024 — R81-billion, or 93%, which have not been reviewed in more than 20 years, leading to the potential abuse of customs duties and reduced innovation. Only 2% of the tariff codes attracting a duty have been reviewed in the past five years.

The report, a comprehensive analysis of all tariff investigations undertaken by the International Trade Administration Commission of South Africa (Itac) since its establishment in 2003, assessed 107 duty increases, 103 duty reductions, 179 rebate investigations, and 65 duty and rebate reviews.

Over the past two decades, Itac identified 52 products (out of 94 duty increases implemented) that require review. Of these, 34 are overdue according to Itac’s own timelines.

Additionally, tariff investigations are time-consuming, exceeding the stated six-month timeframe, and tariff decisions are frequently imposed with too many conditions.

From a total of 3,537 tariff codes with imported goods in the past year, 3,303 have not been reviewed for more than 20 years. Only 77 tariff codes have undergone reviews in the last five years. This highlights the significant amount of duties being paid without a clear understanding of their current relevance.

“Imagine if just 10% of these duties were outdated; this could potentially inject R8-billion into the economy,” the report suggests.

Read more: After the Bell: Minister Parks Tau’s absolutely enormous in-tray

Donald MacKay, director at XA Global Trade Advisors, explained that while some of these existing import duties may still be justified, the lack of regular reviews makes it impossible to determine whether they continue to provide necessary protection.

“This is quite consequential. We don’t want to be in a position where duty protection is given to a company or an industry, and it simply remains evergreen. You want it to be an incentive to make an investment, for example, but where duties remain in perpetuity, and they simply become part of the budget of the protected sector, it leads to lower levels of innovation. It discourages driving up investment activities, and there’s a greater incentive to just enjoy the fruits of the rent that is being earned.”

Highest completion rate, increased efficiency?

For the first time since August 2022, when XA Global published their first import duty report, there has been some improvement: Between 1 July and 15 August 2024, 11 duty change investigations were completed. This is the highest rate of completion since 2017, which suggests increased efficiency in the review process.

Tariff investigations should be completed within six months, but are taking on average 27 months to complete. Between 2003 and 2011, investigations were open on average for seven months. During that time, the oldest open investigation was open for 40 months.

Between 2012 and 2024 though, investigations were open for an average of 10 months, with the oldest open investigation open for 62 months.

Source: XA Global Trade Advisors fifth Import Duty Investigations Report.

That investigation, an application for an increase in the customs duty of solar modules, was brought to Itac by ARTsolar, a local solar panel producer, with a decision finally implemented on 24 June 2024.

“This alone is not good, but it is only half the story. It took 15 months from when ARTSolar submitted their application to when Itac initiated the investigation. The data supporting the application would have gone all the way back to 2014, or possibly even earlier. It’s hard to tell because we don’t have access to the full application. But when the decision was taken, it was based on information up to a decade old.”

In another example, of a temporary rebate on onion powder — which has not been produced here in more than 20 years — there was no decision for 27 months. MacKay said Itac (whose processes are transparent) took seven months to investigate, but the final decision (which is opaque) by the two ministers took 27 months.

“This is an unopposed application and in that period, it cost the users of this raw material R38-million in duties.”

As a result, while previously most of the time was spent in an investigation with Itac, the majority of time is now spent with the Ministers of Trade and Finance.

Source: XA Global Trade Advisors fifth Import Duty Investigations Report.

Meluleki Nzimande, former Itac chief commissioner, and now partner at Webber Wentzel, explained that tariffs are instruments of industrial policy, managed by the dtic, and finance minister. While they are not economic in nature, they have a huge economic impact and affect foreign relations of a country.

“When they are applied, they are applied by the executive with those considerations in mind. More often than not, (when an industry applies for tariffs) it is under distress, so the longer it takes to address the issue, the more detrimental it is. If you look at it from the stated concern of the government to support industry when required, the risk is that the affected industry, which is already in distress, might then collapse. And if it collapses, it’s not just profits that are lost, also jobs that are at stake, which is critical.”

Professor Lawrence Edwards, from the School of Economics at UCT, said tariffs, while intended to benefit domestic firms, can lead to unintended consequences. They do not confer a price advantage to domestic firms and often benefit a small number of concentrated firms, which comes to be seen as a form of subsidy.

However, tariffs also impose a cost on consumers, so they effectively act as a tax. This can lead to intense lobbying efforts from the benefiting firms, as seen in many industries.

“Industrial policy should be about driving productivity, innovation, competitiveness, so that firms can establish a growing foundation to enter into the global market. Now, tariff policy protecting existing industries, and particularly in the face of job losses, is not going to realise that particular outcome.”

Import duties influence industry competitiveness

As a vital component of South Africa’s trade policy, import duties can significantly influence the competitiveness of industries, which is why their careful implementation is crucial.

Read more: Better late than never — SARS taxes on Temu, Shein to kick off in September

Imposing duties on goods which are not made locally is a loss to the economy, the report notes: “The point of import duties is not to collect revenue. It is to disincentivise importing, and to direct those purchases to the local manufacturers. If there are no local producers, the tax is simply inflationary. Where that tax is on an upstream product, it also makes the downstream manufacturers less competitive.”

Import duties should not provide perpetual protection, which is why regular reviews are essential to ensure that they remain aligned with changing technologies and market conditions.

Citing the example of electric vehicles (EVs), MacKay said despite the rapid growth of the EV market, import duties on EVs remain at 25% (except for Southern African Development Community countries) and 15% (for African Continental Free Trade Area members) — rates that were set over two decades ago, before EVs were even commercially available.

In 2023, only 931 fully electric vehicles were sold in South Africa, which is about 0.25% of the total vehicle market.

To achieve a 5% market penetration, the report says a twentyfold increase is necessary. Eliminating import duties on EVs could be a significant catalyst for this growth, as it would reduce costs for consumers and potentially stimulate local investment. DM

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Highest completion rate, increased efficiency?

Import duties influence industry competitiveness