This is the contention of a study by Econex, an economics consultancy in Stellenbosch.
The researchers, under Econex director Cobus Venter, compare official Chinese export data on clothing to SA from China with corresponding import data from the SA Revenue Service (Sars), going back 10 years.
They find a steep deviation between the exports and imports from 2006, ostensibly because importers sought to evade the introduction by SA of quotas designed to limit cheap Chinese clothing imports.
This discrepancy, however, persisted in 2009 and 2010 after quotas ended. "It appears that importers figured out a way to circumvent quotas and are now circumventing import tariffs," the report contends.
In 2010, Chinese customs recorded 68% more SA-bound clothing exports than Sars received as imports. Had Sars been able to apply the general clothing excise tax of 45% to all these missing products, an additional R2bn in tax revenue would have been realised in that year.
According to Sars, several means of circumventing customs duties exist:
The Department of Trade & Industry is well aware of this scourge. Its industrial action plan contains a firm commitment to clamp down "on illegal imports which are flooding the country" so as to level the playing field for domestic clothing manufacturers.
An acknowledgment of the scale of the problem is in the fact that the clothing sector is one of the few sectors of the economy to have its own dedicated Sars forum, supported by a Sars secretariat. Its aim is to try to improve customs compliance, among other things.
According to Johann Baard, executive director of Apparel Manufacturers of SA, "the single most important thing that could have a huge impact on the sustainability of the industry is to deal with the scourge of illegal imports and underinvoicing".
But while it is the serious intent of government to protect domestic manufacturers against illegal clothing imports, Econex argues that the phenomenon of unregulated retail trade has not been addressed. In fact, it observes a clear trend involving the emergence of informal "China shops" clustering around established formal retailers.
Econex conducted a month-long field study around three stores belonging to a formal retailer at Cape Town's Golden Acre Centre in the CBD, the Parow train station, and the Stellenbosch taxi rank.
At the Golden Acre, 14 foreign national-owned, low-cost clothing stores are clustered in a 300m radius of the focal formal retailer's store. At Parow station there are 17 foreign national-owned stores in a 350m radius of the focal store, and in Stellenbosch there are 11 within a 300m radius.
Based on these densities, it estimates that there could be more than 6000 of these foreign national-owned China shops in SA.
From talking to shop assistants in the foreign-owned stores, Econex established that the typical wage was about R300/week for a 45-hour working week. The highest wage paid was R380/week and the lowest R200/week.
The legislated minimum wage for shop assistants in the retail sector is R594 for a 45-hour week. This means that these outlets, paying only half of the minimum wage, are breaking the law.
The study deduces from this pervasive noncompliance with labour law that these stores probably also do not make Unemployment Insurance Fund contributions for their workers or contribute to the skills development levy.
Furthermore, none of the foreign-owned stores at which Econex purchased goods issued an invoice with the name of the store and/or a Vat number. Purchasers are given a cash slip. This was taken by the researchers as suggestive of the likelihood that these stores do not pay Vat, are at least partially unregulated and possibly form part of the black market.
This places the formal retailer at a distinct cost disadvantage since it must carry the cost of meeting all these labour-related regulations, as well as paying Vat at 14%. The formal retailer must also pay 45% customs duty on imports and 28% income tax on corporate profits.
"It becomes clear that there exists a discriminatory and unfair environment where formal retailers are at a distinct and substantial disadvantage to their unregulated competitors," the report says.
Given the uneven playing field, one would assume that the foreign-owned stores would be much cheaper. The Econex field study found that comparable goods sold in both types of stores were actually fairly evenly priced.
In fact, across a typical basket of eight standard items of men's and women's clothing, the study found the formal retailer to be slightly cheaper (see table).
Since these China shops don't offer meaningful savings to consumers or comply with many local rules and regulations, "They do not provide the economic welfare gains that could justify their existence," says Venter.
Moreover, given the potentially large profits being made by the Chinese shops, the researchers fear that there is "substantial scope for the predatory crowding out of legal formal-sector retailers by possibly criminal operators that contribute little or nothing to the domestic economy".
The potential impact of what appears to be the unchecked growth of this blackmarket economy should be of concern to several stakeholders in SA. Not only do unregulated retailers take a potentially large share of sales away from formal retailers, but the fiscus also loses out, as do local manufacturing industries which cannot compete with cut-price imports that displace their products due to the nonpayment of tariffs.
Jobs are lost as domestic manufacturing shrinks over time.
"We've taken an indicative approach," says Venter. "This doesn't pretend to be a robust study. We can't quantify this phenomenon accurately because, to do that, you'd need the authority to go in and check. But our study does seem to indicate that there's a substantial problem."
Michael Lawrence, executive director of the National Clothing Retailers' Federation, says the problem is every bit as serious as the report makes out. "Sars is working hard to address this issue and the systems to address the problem are getting better, but our sense is that we are only at the very early stage of dealing with this problem. We still have a long way to go."
The study concludes that the solution doesn't lie in further regulation but in the expansion of enforcement capacity to prevent further potential harm to the formal retail sector.
Source: Financial Mail
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