PRESENTATION TO THE PORTFOLIO COMMITTEE ON AGRICULTURE FORESTRY

PRESENTATION TO THE PORTFOLIO COMMITTEE ON AGRICULTURE, FORESTRY AND FISHERIES THEME: TARIFFS AND SUBSIDIES IN AGRICULTURE, FORESTRY AND FISHERIES BILLY MOROKOLO DIRECTOR: MARKETING AND PART TIME COMMISSIONER AT THE INTERNATIONAL TRADE ADMINISTRATION COMMISSION (ITAC) 18 SEPTEMBER 2012

CONTENTS q LEGAL BASIS FOR TARIFF ADMINISTRATION IN SOUTH AFRICAN CUSTOMS UNION (SACU) q INTERNATIONAL TRADE COMMITMENTS q INTERNATIONAL TRADE POLICY LANDSCAPE q REWIND BACK TO 1994 – URUGUAY ROUND: AGREEMENT ON AGRICULTURE q SOUTH AFRICAN AGRICULTURAL TARIFFS: BOUND APPLIED q SOUTH AFRICAN AGRICULTURAL IMPORTS: 2010 q PRODUCER SUPPORT ESTIMATE (PSE) BY COUNTRY [SUBSIDIES] q FAST FORWARD TO 2000 – RSA/EU TDCA [TRADE DEVELOPMENT COOPERATION AGREEMENT] q INDUSTRY COMMENTS ON TARIFF LEVELS q DAFF’s TAKE ON THE TARIFF LANDSCAPE q WALKING THE TIGHTROPE q SUMMARY AND CONCLUSIONS 2

LEGAL BASIS FOR TARIFF ADMINISTRATION IN SACU THE INTERNATIONAL TRADE ADMINISTRATION [ITAC] ACT. Act No. 71, 2002 The object of the Act is to foster economic growth and development in order to raise incomes and promote investment and employment in the Republic and within the Common Customs Area by establishing an efficient and effective system for the Administration of international trade subject to this Act and the SACU agreement Ø The object is achieved through the implementation of the following measures: § Customs tariffs – focus of the presentation § Import and export control, § Administration of Trade Remedies such as: − Anti-Dumping [DA] – recently applied to dumped whole chicken and chicken portions from Brazil − Countervailing [CV] and − Special Safeguards [SSG].

INTERNATIONAL TRADE COMMITMENTS IMPACTING ON TARIFF POLICY ADMINISTRATION IN SACU § South Africa has formal trade agreements with a number of countries and economic blocks. § These trade agreements are aimed at improving market access to specific countries and usually includes the lowering of customs duties and other impediments to trade. § The following trade agreements are currently in place: § SACU: This is a customs union and no duties apply. § SADC [SOUTHERN AFRICAN DEVELOPMENT COMMUNITY]: Free Trade Agreement, all tariffs at 0% § EU [EUROPEAN UNIUON] (27 member states): Free Trade Agreement, most tariffs at zero, except sensitive products such as wheat, sugar, maize, dairy and meat. ü 96% of imports from the EU are currently duty free with very little chance of increasing those tariffs. § EFTA : European Free Trade Agreement, most tariffs at zero.

INTERNATIONAL TRADE POLICY LANDSCAPE § The TDCA included a “standstill” provision. This provision prevented tariffs from being increased beyond the basic rate that was agreed at the start of the negotiations for the TDCA in 1996. § Certain tariff lines, including maize, wheat and sugar that are subject to a tariff formula and are excluded from the standstill up to a certain limit. § In general, South Africa has a fairly open market and approximately 40% of agricultural imports from all destinations enter the country duty free. § South Africa has 996 agricultural tariff lines, of these, 396 currently carry a 0% duty. § At the beginning of 2012 when the final stage of the TDCA is implemented, the number of lines at zero duty with regard to the EC [EUROPEAN COMMUNITY] will be 881. § The lines subject to a formula duty (maize, wheat and sugar) are currently also at zero

REWIND BACK TO 1994 – URUGUAY ROUND: AGREEMENT ON AGRICULTURE [URAA] § URAA codified and disciplined border measures and all trade distorting domestic measures to establish a fair market oriented agricultural trading system § Nearly all quantitative import restrictions were converted into tariffs – Amendment of Marketing of Agriculture Products Act, No 47 of 1996 a response to URAA. § During process of conversion, aim was to maintain same level of protection as was the case under import control § All agricultural tariffs were bound and SA’s applied rates for agricultural products were set at levels well below bound rates i. to. WTO [WORLD TRADE ORGANIZATION] commitments, § Comparatively, SA still has a relatively low level of tariff protection on agriculture, § The SA average tariff on imports is 9% while 17% at the OECD [ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT] and 14% in non-OECD, § Import tariffs are in the main lower than what South African agricultural products experience in the export markets (export tariffs)

SOUTH AFRICAN AGRICULTURAL TARIFFS: BOUND APPLIED, 2004 Average (%) per Harmonized System [HS] Chapter 39. 70 9. 40 av av

South African Agricultural Imports: 2010 FTAs: EU, SADC, EFTA Envisaged FTA: Comesa, EAC Preferential Agreement: Mercusor

PRODUCER SUPPORT ESTIMATE (PSE) BY COUNTRY, EU AND OECD AVERAGES § The calculated support is expressed as a percentage of gross farm receipts, § Following are examples of PSE extracted from a report published by the OECD in 2006: Ø EU 34% Ø OECD 31% Ø JAPAN 58% Ø US 20% Ø CHINA 6% Ø SA 5% (mainly border measures or tariff protection). § The percentage indicates the extent of policy intervention by the state in the sector and contribute about 10% depression in world prices of commodities – mainly due to subsidies, § Level of global support is gradually rendering unsubsidized production unsustainable and unprofitable,

FAST FORWARD TO 2000 – RSA/EU TDCA § South Africa signed an FTA with the EU – RSA/EU TDCA that removed policy space that was in our schedules. § most tariffs will be zero this year with the exception of sensitive products such as wheat, sugar, maize, dairy and meat. § But sensitive products also have limits beyond which tariffs cannot increase (a bit of policy space to increase tariffs exist) – standstill clause- examples: § Dairy – R 5/kg § Wheat – 50% ad valorem On specific duties, effective protection eroded over time as prices increased § Meat – 50% ad valorem, § Sugar – 105% ad valorem § WHERE IS THE TARIFF POLICY SPACE AGAINST CHEAP IMPORTS? § Policy space generally tight and reduced by TDCA, EFTA, SADC commitments and WTO bound rates, § Need to renegotaite the new standstill provision in the TDCA [Economic Partnership Agreement] to remove upper technical limit.

INDUSTRY COMMENTS ON TARIFF LEVELS § Industry arguments against improved access for the EU includes the Ø following: Ø EU producers are subsidized. Ø Applied rates are generally low and the EU is already a big player on our market such as in dairy products [powder milk and cheese] Ø Protection offered by specific duties is generally very low as duties do not keep trend with price and cost increases – See graph below Ø The TDCA was asymmetrically in favour of the EU and must be rectified. § Policy space: consideration for the conversion of specific duties to ad valorem to preserve protection over time

Selected Dairy Products: Ad Valorem Equivalents % Tariffs Product Milk Powder: Whey Powder: Butter: Cheese Bound 96% 79% 95% Applied R 4. 50/kg R 5. 00/kg Standstill Clause: TDCA: As applied

DAFF’s TAKE ON THE TARIFF LANDSCAPE § DAFF’s tariff policy approach proposal to dti and ITAC was informed by the “Sector Plan” need for a clear and equitable tariff policy dispensation to address trade distortions at international markets caused by a range ofsubsidies that unfairly compete with our unsubsidized products, § Took note that SA liberalized trade and deregulated markets faster while the multilateral trading rule system established to reduce distortions got stuck in slow movement – WTO impasse on agriculture, § Realization that tariff dispensation as applied may not be sufficient to encourage expanded domestic production of some agricultural products, § That agriculture still remains an exception in the multilateral trading rules system. Much higher distortions are tolerated compared to the industrial sectors and therefore the sector deserves differentiated treatment

DAFF’s TAKE ON THE TARIFF LANDSCAPE § That the tariff dispensation then considered market price disadvantage and did not broadly consider other factors such as subsidies [govt. support] into the agric sector as well as overall fragility of the sector. § Noted that the application of tariff policy was generic across sectors and did not take into consideration the special socioeconomic importance of the sector, § DAFF supported by sector players argued for a differentiated tariff policy framework to take into account the special features of the sector [food security, rural development, absorption of low skilled labor, high labor absorption rate per Rm invested than any other sector, source of raw material for downstream agroprocessing, etc] § The case by case argument for flexibility in the application of tariff policy on agricultural products is incorporated in the National Industrial Policy Framework [NIPF] and applied by ITAC,

DAFF’s TAKE ON THE TARIFF LANDSCAPE § DAFF and NAMC are now playing an advisory role on all tariff applications for agric, forestry and fisheries products, § Implementation of policies and instruments such as a tariff policy must take a strategic approach and generate wider impact on the broader agricultural development, § Application of tariffs must be geared towards achieving certain long term outcomes such as industry growth, competitiveness, jobs, exports, etc and be linked to development policies and programs and not be implemented in isolation § Noted that the importance of the sector must be seen to be broader than its contribution to Gross Domestic Product [GDP] – importance always downplayed.

WALKING THE TIGHTROPE § Applications for tariff increase by primary producers always generate a negative reaction from downstream players within same value chain, § Tariff increases on imported raw agric products have a potential to increase food prices – negative welfare effects in the face of high global food prices, § Low tariffs on primary products have an effect of discouraging expansion of domestic production – crowd out primary producers [dairy industry an example]. § Applications for tariff reduction always met with negative reaction from primary producers within same value chain, § Given the above scenario, ITAC is expected to perform a balancing act to straddle the two divides – farmers on one side and downstream industry and consumers on the other side. § An industry based approach to tariff setting looking at the broader interests of the entire industry value chain is essential though a challenge.

SUMMARY AND CONCLUSIONS § ITAC operates under a prescribed legal framework (ACT) and within the bounds on Free Trade Agreements that SA signed – implements what has been negotiated and agreed to, § The sector to use tariff policy as a strategy to derive certain socioeconomic such outcomes such as increasing production and competitiveness, ensuring food security, profitability, sustainability, contribution to rural development, etc rather than a narrow focus on protection, § Urged to also use Government policies such as New Growth Path [NGP], Industrial Policy Action Plan [IPAP], NIPF as a basis for arguments, § Tariff setting is like walking on a tightrope attempting to balance two countervailing forces, § Note that in the long run, the world might move into a FTA as such tariffs may no longer be an effective tool to address distortions in global trade, § Available policy space is tight but could consider conversion of specific duties to ad valorem as well as the renegotiation of the ‘standstill clause”. § Tariffs not only available tools – AD, CV, SSG though complex to use for now.

BRIEF ON THE CHICKEN IMPORTS FROM BRAZIL • In February 2011, the South African Poultry Association [SAPA] submitted an application to ITAC alleging dumped chickens from Brazil, • A full scale investigation on the application was initiated in June 2011 • In January 2012 and based on evidence, the dumping allegation was confirmed and ITAC recommended the imposition of preliminary dumping duties of 62. 93% and 46. 95% on whole birds and boneless cuts imported from Brazil [provisional for 6 months to allow parties to resolve disputes], • In June 2012, the Government of Brazil requested consultations with the Government of South Africa to try to resolve the matter, • Consultation took place in July 2012 in Geneva, • During the consultative meeting, Brazil raised issues on information used to arrive at the dumping decision, material injury, as well as procedure followed, • The outcome of the bilateral was referred to Minister Rob Davis who then referred the matter back to ITAC, • ITAC will relook at the issues raised by Brazil and correct where appropriate and resubmit its findings, • Currently, the provisional anti-dumping duties have lapsed. 18

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