Customs bid won't stem imports

Sactwu's application to raise tariffs on 35 finished clothing products from 40% to 45% — the maximum permissible to SA under World Trade Organisation rules — was gazetted by the International Trade Administration Commission of SA (Itac) for public comment on 19 June 2009. The move was mooted in the industry rescue plan crafted earlier this year. It also takes its cue from the framework agreement at the National Economic Development & Labour Council on how SA should respond to the global crisis.

In its application, Sactwu argues that the main cause of job losses over the past six years has been cheap imports, both legal and illegal. While there has been a decrease in the pace of job losses over the past two years, it says this was mainly as a result of the introduction of quotas on Chinese clothing. But now, with the end of the quotas, Sactwu fears that tens of thousands more jobs may be lost.

According to the SA Revenue Service (SARS), there was a 31% increase in the value of clothing imports into SA in the first two months of 2009 compared with the previous year. From January to March, the industry shed a further 3261 jobs.

Sactwu believes that increasing duties will stem the flow of imports, providing space for industry restructuring while also injecting some confidence into domestic manufacturing. “Just the act of increasing the duties could save jobs, should manufacturers who are contemplating retrenchments or even closure decide against such drastic action.”

However, Jack Kipling, who heads Clotrade, a national body representing clothing manufacturers, says raising the duties could make matters worse by increasing the level of criminality in the industry.

“The real problem is not that the current 40% duty is too low; it is the extent of customs fraud in the form of underinvoicing,” he says. “This is seriously undermining tariff protection.”

According to a DTI report, imports from China last year were underdeclared by over 50%. SARS data on clothing imports reveals the extent of the problem, quoting average unit prices of R1,18 for women's knitted skirts from Malaysia, R17 for men's woven trousers from Indonesia and R5,37 for women's woven blouses from Pakistan.

Kipling fears that, like the Chinese clothing quotas, the proposed trade remedy could backfire as importers seek to evade the higher duties. This would make the job of the Sars task team that was appointed to address the issue last year even more challenging.

For Kipling there are only two things that could make a material difference to the industry's prospects. The first is to address customs fraud. The second is to remove duties on fabrics not produced in commercial quantities in SA. “With fabric making up 50% of the cost of a garment, it simply doesn't make sense for clothing manufacturers to be paying 22% duty on fabric they have to import because it is not produced locally,” he says.

Peter Draper, trade programme head at the SA Institute of International Affairs, points out that at 40% the industry already has high levels of protection. Furthermore, the recent extension by Sars of the rebate on the 20% duty on textiles from local clothing exporters to all domestic manufacturers producing for the local market has already raised the effective protection for manufacturers.

The move also runs counter to SA's obligations as a member of the G20 group of countries “to maintain and promote open markets and reject all protectionist measures in trade and investment”.

Draper rejects the argument that SA can and should raise tariffs because other G20 countries are doing it, arguing that a better alternative would be for SA to impose countervailing duties on the imports of only those countries that raise trade barriers.

National Clothing Retailers' Federation executive director Michael Lawrence likens the trade proposals to “throwing a brick through a window when you don't know whether the problem is that you need fresh air”.

“It assumes that retailers import because it's cheaper,” he says. “They don't. The problem is that we don't get the quality, quantities, service delivery, reliability, rapid lead times, and ability to do detailed work from the local industry.”

The customised sector programme for the clothing sector, developed by the trade & industry department and industry stakeholders, endorses the use of trade measures but notes that “they are at best a temporary shield” and says “the industry must break with a history of reliance on protectionism”.

According to research undertaken by B&M Analysts, the average SA manufacturer takes 142 days to make a garment in response to an order from a local retailer, compared with the 167 days it takes from China. But then China is at least 30% cheaper.

B&M Analysts chairman Justin Barnes, the chief facilitator of the Cape and KwaZulu Natal clothing and textiles clusters, has found that for local manufacturers to compete with China they will have to reduce their lead times to 56 days. “It's not about competing with China on cost, because you can't, but on speed and on flexibility,” he explains.

Given this reality, raising duties by 5% is unlikely to affect the volume of imports from China or other low-cost destinations by much, especially if retailers just pass the additional cost on to the consumer, as Lawrence says they will.

In a recession a country needs to encourage spending. “Increasing the cost of clothing imports, at a time when the consumer is less willing to spend, will dampen spending on clothing as a whole, also reducing demand from local manufacturers,” he warns.

“If we're going to further tax the consumer we at least owe it to them to make sure that it is going to make a difference to our economy, whether in terms of creating jobs or developing local manufacturing,” he adds.

“We just don't get it.”

Source: Financial Mail

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