Protectionism no use in long term

21 Nov 2014
Business Day

THE imposition of import duties is a contentious issue because there are always clear winners and losers. For every domestic manufacturer that is struggling to compete with imported products and is feeling such a duty is justified, there is an importer that is sure to cry "protectionism".

For every shareholder whose local investment is saved, there is a consumer who has to pay more for his or her purchases.

In principle, this newspaper believes that the imposition of import duties should be avoided in all but the most dire of circumstances, since there are always unintended consequences when state agencies tinker with the mechanism of the market.

Free trade generates wealth and punishes inefficiencies; artificial barriers to trade merely perpetuate the unproductive use of resources.

Trade is, by definition, a two-way street. When one country imposes import duties it puts pressure on its trading partners to do the same, and before long the world is engaged in a race to the bottom. That is why the World Trade Organisation (WTO) exists — there are rules to the game, and abiding by them is in everyone’s best interests.

However, it would be naive to expect any government to allow a domestic industry to collapse, with associated job losses, if it has the policy tools at its disposal to prevent this. That is why WTO rules allow members a degree of flexibility.

In addition to antidumping provisions, the imposition of ad valorem import duties is permitted under specific circumstances to cushion the blow when import volumes increase sharply, to give domestic industries time to adjust.

That is ostensibly the justification for the doubling of the import duty on certain types of metal fastenings that was announced by the International Trade Administration Commission (Itac) last week.

The ad valorem duty on specific categories of nuts, bolts and screws has been increased to 20% from 10% following an application by local manufacturer CBC Fasteners for a 30% duty — the maximum allowed in terms of WTO rules. In imposing the higher duty, Itac acknowledges that there has been a marked increase in such imports — CBC puts the figure for bolts at 3,896 tonnes last year, from 1,808 tonnes in 2008, for instance — causing domestic production capacity to be cut by 18% and employment by 22% over the same period.

Itac chief commissioner Siyabulela Tsengiwe said the local fastener manufacturing industry was an important link in the domestic iron and steel industry, adding value to locally produced primary steel, and it suffered a "price disadvantage" against products imported from Asian countries in particular.

In addition, there are indications that antidumping duties imposed on particular exporters to South Africa in 2012 have been circumvented by diverting them through other channels and re-exporting via third countries — import volumes dropped at first, but soon returned to their previous level.

However, the imposition of the duty also raises a number of concerns. The weakening of the rand over the past year should have benefited local manufacturers relative to importers, yet it appears this effect has been outweighed by swingeing increases in energy and wage costs.

And, while domestic input costs — steel prices in particular — are directly affected by the dollar exchange rate, factors such as energy and wage costs are influenced by administrative issues.

Import duties are used to compensate for political expedience at a country’s economic peril.

It is also worrying that trade law experts have picked up an increased tendency towards protectionism on the part of government over the past year or two, presumably in response to factory closures and job losses.

Two years ago aluminium producer Hulamin’s request for 10% import duty on semifabricated, rolled products, on much the same basis as that used by the steel fastener manufacturers, was turned down. Was Itac’s response different now because the circumstances are different, or because the political tide has turned?