Taxing Question

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The programme to reform South Africa's tariff system has been given fresh impetus, heralding a renewed drive for the policy backed by Finance Minister Trevor Manuel and first promoted by him when in charge of the department of trade and industry (DTI).



Manuel has been a long time champion of slashing tariffs, and oversaw a major programme to cut protective taxing on imports during his time at the DTI in the second half of the 1990s as a means to build a foundation for a diverse manufacturing sector oriented towards exports.



However, after Manuel's departure from the DTI to move to the finance ministry, there had been a scaling back of the pace of tariff reforms, with his successors Alec Erwin and the incumbent, Mandisi Mphahlwa, adopting a different tack to drive growth through industrial reform.



The DTI has put in place a tariff policy, endorsed by the cabinet, which favours financial incentives and support, along with strategic tariff reforms, to encourage industrial development and economic growth.



Manuel re-entered the fray at the end of October, when he handed down the treasury's medium-term budget policy statement in parliament. The minister said high tariffs amounted to protection that reduced the profitability of exports. He cited the cost of supporting industries this way as a burden on the economy.



Delivering the statement on October 30, Manuel said there needed to be a simplification and reform of the tariff system to ensure competition.



"This requires competitive input costs, markets that are open to foreign competition to create innovation incentives, and addressing market failures where they occur," he said. "Trade liberalisation on its own will entrench specialisation in commodity-based production and undermine our objectives to broaden and upgrade our industrial base to achieve new competitive advantages."



And trade is an area where South Africa needs to lift its game. The World Bank's annual Doing Business report, released at the end of October, ranked South Africa 35th overall out of 178 countries but 99 rungs lower for ease of cross-border trade. The report said South Africa's trade restrictions were stifling its competitiveness on the world stage and its tariff reform process was falling behind those of other developing countries.



However, it is not as if South Africa has not made progress in liberalising its trade tariff regime, having struck an agreement with the EU that will see tariffs on 86% of imports from the bloc's member countries phased out by 2012. Overall, the average tariffs levied on imports have been reduced from around 23% to 8.2%, according to DTI figures.



Despite this, some remain high, such as the tariffs on textiles, which are 22%. Critics have said this level puts pressure on clothing manufacturers, who face competition from an influx of cheap ready-to-wear products and who have to import material local mills are unable to provide.



Reform proponents got some encouragement on November 9, when the DTI announced its International Trade Administration Commission would be conducting a review of tariffs on textiles, chemicals and plastics and aluminium.



In its statement announcing the reviews, due to be completed before next June, the commission said its findings could result in the reduction or even removal of tariffs in the interests of lowering input costs for downstream manufacturing.



However, any resulting reforms may not herald the dawning of a new phase of trade liberalisation. Two days before the review was launched, the trade and industry minister said that while some tariffs had been lifted completely, such as those on steel, a blanket removal of all tariffs was not under consideration.



Tariffs remain an important instrument of industrial policy, and the competitiveness of the country's economy was not just about such barriers, he said November 7.



"Proposals for unilateral trade liberalisation, outside of a coherent industrial and trade policy, represent a fundamental misreading of the South African and international empirical evidence," Mphahlwa said in an article in a local financial paper.



The minister also took a swipe at his cabinet colleague Manuel by saying that, despite significant cuts in tariffs since the mid-1990s, the restructuring of the industrial economy had not bought about the changes needed to radically alter South Africa's export basket.



A cutting of protectionist measures and scaling back on support and incentives for industry, as called for by Manuel, would be unpopular in many circles. Unions have said they fear possible job losses resulting from cheaper imports will force the closure or downsizing of local producers. Meanwhile, there are certain sectors, such as the automotive industry, which would like to see state programmes that prop up their businesses remain in place.



Both Manuel and Mphahlwa said they want to see the base of the South African economy broadened and strengthened, but they diverge greatly on how this is to be done and who is to bear the cost.

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