Need to Abandon Reciprocal Agreements for Trade Protection Measures

The landscape of South Africa’s tariff instruments, designed to protect domestic industries, is changing, raising questions about their continued relevance. The most recent report on duty investigations has issued a warning about the deterioration and potential obsolescence of these safeguards within the context of the country’s trade policy.

The role of reciprocal agreements, a stipulation often imposed by the government on struggling industries in exchange for tariff protection, is a central issue highlighted by the report. As a result of this practise, there appears to be a growing reluctance among businesses to use these agreements. The XA Global Trade Advisors Import Duty Investigation Report shows a significant decrease in the number of tariff applications submitted to the International Trade Administration Commission (Itac).

According to Donald MacKay, CEO of XA Global Trade Advisors, these applications have reached their lowest point in a decade. This decline, occurring during times of economic distress, contradicts the expectation that trade policy measures would be used more frequently. Ebrahim Patel, Minister of Trade, Industry, and Competition, jokingly referred to these reciprocal agreements as “bring-and-braai,” emphasising the informal nature of the arrangement.

The basic concept behind reciprocal agreements is that while the government adjusts duties, businesses are expected to reciprocate by committing to specific actions in order to secure concessions. However, media facilitator Michael Avery criticised this approach, comparing it to a lopsided relationship in which one party brings the “peanuts” (government tariff changes) and the other is required to provide the “fillet” (company commitments). Avery highlighted the inequity inherent in this dynamic.

MacKay echoes these concerns, providing a comprehensive critique of reciprocal agreements in trade policy. He contends that trade policy should not be viewed as a panacea for all societal problems, instead emphasising that its primary role should be to improve the competitiveness of South African businesses. It cannot, for example, address issues such as power shortages, port inefficiencies, or infrastructure theft. He expresses concern about the unreasonable expectations placed on struggling businesses to absorb import competition for extended periods of time while also investing additional resources before receiving relief.

Mike Benfield, CEO of Macsteel, provides a pertinent example by rejecting a reciprocal agreement tied to a mere 10% increase in import duty on black bar steel used in critical applications. Benfield emphasises market unpredictability and the inability to predict future dynamics, making such commitments impractical. He makes an important point: while a 10% tariff increase may provide some relief, it is not a comprehensive solution to the complex challenges that businesses face.

Itac’s delay in resolving tariff and rebate investigations exacerbates these problems. Itac’s commitment to complete investigations within six months has been called into question, with the average time for receiving final answers from relevant authorities reaching 25 months. The lengthening timeline introduces another layer of uncertainty, discouraging businesses from participating in the process.

Benfield’s experience and sentiments highlight the disillusionment that can arise as a result of the lengthy nature of these agreements. Despite this, he emphasises South Africans’ collective responsibility to persevere, emphasising the importance of developing a sustainable domestic manufacturing base through protectionist measures. He claims that the short-term discomfort is outweighed by the long-term benefits.

However, there have been instances where these efforts have failed. Nature’s Garden, for example, waited an agonising 52 months for Minister Patel to reject its application. The rejection reasons, which centred on concerns about food inflation, came across as belated and out of step with the company’s requirements. This example highlights the current system’s inherent inefficiencies.

In light of these challenges and the shortcomings of reciprocal agreements, experts and industry leaders like MacKay advocate for a reevaluation of this approach in trade policy. While the government’s intentions to promote economic development are admirable, forcing distressed companies to commit to unrelated actions may be counterproductive. Instead, they propose a shift towards incentivizing economic growth, abandoning burdensome commitments that impede businesses’ agility and adaptability in a rapidly changing global landscape.

Finally, the drop in tariff applications, as well as criticism from industry insiders, reflect growing dissatisfaction with the current system of reciprocal agreements. Domestic industry protection remains necessary, but the approach must evolve to better align with the challenges and uncertainties of today’s economic environment. Shifting the focus from mandatory commitments to fostering competitiveness can potentially offer a more effective and flexible way forward for South Africa’s trade policy toolbox.