NOT A FREE LUNCH: The Implications of Increased Import Tariffs on South Africa s Chicken Market

Transcription

1 RESEARCH NOTE 31 OCTOBER 2013 NOT A FREE LUNCH: The Implications of Increased Import Tariffs on South Africa s Chicken Market Helanya Fourie (helanya@econex.co.za) The recent decision by the South African government to increase import tariffs for five categories of frozen chicken imports has led to a heated media debate. The imported value of these five categories of chicken accounted for 75% of the total value of frozen chicken imported to South Africa in Chicken producers argue that the chicken industry is threatened by low-cost imports, and that this holds a risk for employment as well as food security within the SACU region. It is further widely acknowledged that the increased tariffs will lead to a rise in food prices with a direct impact on consumers. This note considers the validity of these claims. It argues that while South Africa s poultry industry is increasingly hampered by factors which affect its ability to compete with imports, the higher tariffs are unlikely to mitigate these supply side constraints. Instead, the note concludes that the tariff increase weighs disproportionately heavily on the poorest consumers, increasing their vulnerability to hunger and malnutrition. 1 Introduction In March 2013 the South African Poultry Association (SAPA) submitted an application to the International Trade Administration Commission (ITAC), requesting an upward adjustment of import duties on selected frozen chicken products. The application listed three primary reasons for the requested increase in import duties: (1) concerns about the survival of the local chicken production industry; (2) forecasted job losses resulting from a reduced demand for locally produced chicken; and (3) concerns about food security within the Southern African Customs Union (SACU) region. In response to the SAPA application, Minister of Trade and Industry Rob Davies announced on 30 September 2013 that based on recommendations made by the ITAC, South Africa will increase import duties on five categories of frozen chicken. The decision came into effect on the same day through Notice 715 in Government Gazette No Table 1 illustrates the increased duties for each of the five categories of frozen chicken. The tariffs bind any countries that export to the SACU 1, except those that have trade and co-operation agreements with South Africa, which includes the European Union (EU) and the Southern African Development Community (SADC). Compelling arguments have 1. The SACU is made up of South Africa, Namibia, Swaziland, Lesotho and Botswana. 1

2 been made to support the increase in import duties. As with most protectionist policies, however, it is often easier to frame an argument around protecting a well-identified industry, than to argue in favour of agents who are widely dispersed (i.e. the consumers in this case) 2. This research note serves to emphasise the latter. It notes that while there may be reason for shielding South Africa s poultry industry from competitive imports, the costs to consumers are large and fall disproportionately heavily on the poor. While increased import duties seem to provide an easy way to protect the poultry industry in the short Table 1: New import duties on selected products of frozen chicken term, it is unlikely to provide a sustainable solution for encouraging efficiency within the industry. This research note speaks to these and other issues by listing some characteristics of South Africa s market for frozen chicken, followed by an assessment of the impact that the increased import duties is expected to have on South African chicken producers and consumers. 2 The market for chicken in South Africa HS Code Article description Statistical unit Previous duty Not cut in pieces, frozen Carcasses (excluding necks and offal) with all cuts (e.g. thighs, wings, legs and breasts removed) Production as well as consumption of white meat (poultry) has increased continuously since the end of Apartheid, when trade embargoes on South Africa were lifted. These trends are illustrated in Figure 1. From 2001 to 2010, the average annual increase in the production and consumption of chicken was 6.2% and 7.1% respectively. The gap between the production and consumption of chicken is filled by importing chickens. Estimates for 2013 suggest that imports of broiler meat will account for almost 22% of local broiler meat consumption. 3 Prior to the increased tariffs, growth forecasts for the chicken industry from 2012 to 2021 showed an annual average growth in production Rate of duty (increased duty) General EU EFTA SADC kg 27% 31% free 31% free Other (whole bird) kg 27% 82% free 82% free Cuts and offal, frozen Boneless cuts kg 5% 12% free 12% free Offal kg 27% 30% free 30% free Other (bone-in portions) kg 220c/kg 37% free 37% free Source: Compiled from Government Gazette 30 September 2013, No and Government Gazette 12 April 2013, No Econex was commissioned by the Shoprite Group to submit an economic report to ITAC on the economic effects of the proposed tariffs. Consumer effects were also emphasised in this report.. 3. TradeMark Southern Africa. (2013). South Africa Poultry Update. February. Available at: Source: STR Global 2

3 of 2.8%, and an annual average growth in consumption of 4.5%. Based on these forecasts, for as long as chicken producers are unable to increase production at a faster rate, South Africa is expected to remain a net importer of chicken. 4 On aggregate, the five categories of chicken to which the increased import duties apply account for 75% of total value of poultry meat imports (0207) 5. Figure 2 displays the disaggregated imports by country-of-origin of the selected chicken products for which import duties have been increased. Of the five categories on which higher tariffs were implemented, Bone-in cuts ( ) is the largest imported category, constituting 54.7% of the imported value of total frozen chicken imports. The Netherlands is the largest exporter to South Africa in this product category. The second largest category is Boneless cuts ( ), which makes up 11.5% of the value of total frozen chicken imports, and of which the majority was imported from Brazil. On aggregate, Brazil accounted for the largest quantity of exports of the five categories of frozen chicken to South Figure 1: White meat (poultry) consumption, production and implied net imports (1000 tons) Total Consumption Total Production Implied Net Imports Figure 2: Imports of chicken by country and category, 2012, and growth rates, % 700% % 600% 487% 500% 397% 401% % % 208% 300% % % -5% 21% 6% 3% 28% 28% 100% 0% 0-100% (Cuts and offal, frozen: other (bone-in portions)) (Cuts and offal, frozen: offal) (Cuts and offal, frozen: boneless cuts) (Whole, frozen: other) (Whole, frozen: carcasses with all cuts) Growth Source: DAFF (2013) Source: TradeMap (2013), Econex calculations Notes: Graph excludes Austria, Chile, China, Israel, New Zealand, Singapore, Suriname and Uruguay. 4. Bureau for Food and Agricultural Policy. (2012). BFAP Baseline: Agricultural Outlook , p Trademap. (2012). Econex calculations. 3

4 Africa in However, the rise of European chicken exports to South Africa is evident in Figure 2, showing the growth rate of imports by country (on the secondary y-axis) for the period Although this growth is from a low base, imports from a selection of EU countries show remarkable growth (notably countries such as Denmark, Germany, Hungary, Ireland, the Netherlands, Spain and the United Kingdom). As shown in Table 1, South Africa imposes zero import tariffs on these countries, having signed a free trade agreement in Even when disregarding the impact of the increased custom duties, if such a high rate of growth is to continue over the next number of years, the European Union will soon be the largest exporter of chicken to South Africa. It is anticipated that the immediate impact of the increase in import duties will lead to an even greater shift in imports. While the tariffs will impose heavy penalties on Latin American producers, for example, imports from European countries will be unaffected by the tariff increase, meaning that European chicken imports will in all likelihood substitute chicken imports from elsewhere. There is thus little reason to anticipate that higher tariffs should protect South African producers, especially given the rate at which European chicken producers are becoming increasingly competitive. 3 The market impact of increased custom duties This section will focus first on the anticipated impact of increased import duties on South African chicken producers. Secondly, the impact on consumers will be considered; specifically the effect on the poorest South Africans. 3.1 Impact on South African chicken producers The call from chicken producers for an increase in tariffs was based on concerns about the survival of the industry due to low-cost imports, which could simultaneously lead to job losses and, as producers claim, poses a risk for food security within the SACU region. The SAPA application lists a number of problems in South Africa s chicken industry that are unrelated to chicken imports and are instead lodged in the economic structure of the industry, including 1) high raw material (maize) costs that stem from better growing conditions in other nations, resulting in higher yields and sometimes the ability to double crop within a single calendar year (p. 19), 2) high logistics costs because of the long distances between urban centers and an ineffective rail system (p. 19), 3) economies of scale (p. 19), 4) rapid electricity cost increases in South Africa (p. 20), 5) low labour productivity (weak skills and high remuneration) (p.20), 6) the very high social cost experienced by business in South Africa (HIV and crime) (p. 20), and 7) higher ECONEX Services Econex has extensive experience in competition economics, international trade and regulatory analysis. We have an established reputation for providing expert economic advice in high profile mergers and complaints that appear before the competition authorities. Some of the highlights include the complaint against British American Tobacco, the merger between MTN and italk, the complaint against Senwes and the acquisition of KayaFM by Primedia. More recently, Econex acted as expert economists in the Glencore/Xstrata merger. Apart from competition work, we have also been involved in trade matters, including the analysis of the effects of tariffs, export taxes and anti-dumping duties. As a result of our work in competition proceedings we have invaluable experience in some of the sectors of the South African economy where regulation continues to play an important role, e.g. the telecommunications, health and energy sectors. We use economic knowledge of these sectors to analyse specific problems for some of the larger telecommunications, health and energy companies. 4

5 cost associated with monitoring and containing diseases (p. 20). The SAPA lists these factors as reasons why South Africa s chicken industry struggles to compete with chicken imports and requires support. However, a striking feature of the protectionist attitude adopted through the increase in tariffs is that it fails to address any of these debilitating characteristics within the industry. It also fails to provide any incentives for producers to develop solutions to these challenges and to further improve the efficiency of the industry, thereby further diminishing the competitiveness of South Africa s chicken industry in the long run. duties suggest that 2013 will see the highest production of broilers on record, equating to 1.42 million tons of meat. 7 Moreover, according to the baseline projections presented in the Agricultural Outlook , chicken production in South Africa is set to increase by 29% over the next decade, from 1.4 million tons (in 2012) to 1.8 million tons annually. 8 In his media briefing about the increased tariffs, Minister Davies stated that, within the SACU as a whole, the production of poultry products dropped by 9.5 million kilograms between 2010 and 2012, whereas imports increased by 61 million kilograms.the SACU produced million tons of chicken meat in , suggesting that, based on Minister Davies statement, production dropped by a mere 0.63%, while chicken imports in the region increased by 4.07%. Whereas the demand for chicken within the SACU has clearly increased, the impact of imports on production seems to be small and less apparent. 3.2 Disproportionate impact of import duties on the poor The analysis below provides a brief discussion of the con- Figure 3: Proportion of household expenditure spent on chicken by income and expenditure decile, 2009 It is worth noting that the state of South Africa s chicken industry is not as delicate as the SAPA holds forth. The South African poultry industry has a gross value of more than R27 billion and contributes almost 17% to the total gross value of agricultural products. 6 While slow economic growth and high feed prices are said to have suppressed production, estimates that were made prior to the increase in custom 16% 14% 12% 10% 8% 6% 4% 2% 0% Total Household income decile Household expenditure decile Source: NIDS 2009, Econex calculations 6. Esterhuizen, D. (2013). South African Poultry Update: the supply and demand for broiler meat in South Africa, USDA Foreign Agricultural Service. 7. Esterhuizen, D. (2013). South African Poultry Update: the supply and demand for broiler meat in South Africa, USDA Foreign Agricultural Service, p Bureau for Food and Agricultural Policy, (2012). BFAP Baseline: Agricultural Outlook , p South African Poultry Association. (2012). Annual Statistical Reports - SAPA Industry Profile Available online: industry_profile.php#q3. 5

6 sumers who will carry the cost of the increased custom duties, and suggests that the increased tariffs will disproportionately affect the poor. As a relatively cheap source of protein, chicken plays a particularly important role in the diet of poorer South Africans. This is illustrated in Figure 3, which shows both the proportion of household income and household expenditure that is spent on chicken by different deciles. Decile 1 represents the poorest 10% of people in the South African economy, while decile 10 represents the most affluent. The most affluent spend less than 1% of household income on chicken, while the poorest 10% of South Africans spend almost 15% of their household income on this source of protein. When analysed in terms of household expenditure (which is often regarded as a more accurate reflection of living standards in the National Income Dynamic Study (NIDS) 10 than reported income), the trend remains similar. In his media briefing, Minister Davies stated that the increased tariffs should strike an appropriate balance in limiting the price-raising effects on poor households while ensuring that domestic producers are placed on an improved competitive footing as compared to their foreign counterparts. He claimed that by increasing the duties on whole birds (which is predominantly consumed by people within higher income deciles) to 82%, and implementing lower increases on other chicken categories, the policy ensures that the increase does not disproportionately disadvantage the poor. However, in the same instance he acknowledged that whole bird imports constituted less than 1% of all chicken imports over the past year. 11 Considering the higher consumption of chicken by poor households and the limited alternatives to protein that the poor have (as opposed to more affluent households who can substitute chicken with other sources of protein), the logic appears to be flawed. The lack of costeffective substitutes in turn leads to inflationary pressure as the poor are forced to accommodate the higher prices. The disproportionate impact of increased food prices on the poor has also been confirmed in other research. Kirsten (2012) 12 found that food price increases have a disproportionate effect on the poor in South Africa. The paper analyses the effects of two significant food price rises in 2002/3 and in 2007/8. In 2007/8, the increase in food expenditure by the poorest consumers was equivalent to 12.8% About ECONEX ECONEX is an economics consultancy that offers in-depth economic analysis, covering competition economics, international trade, strategic analysis and regulatory work. The company was co-founded by Prof Nicola Theron and Prof Rachel Jafta during Both these economists have a wealth of consulting experience in the fields of competition and trade economics. They also teach courses in competition economics and international trade at Stellenbosch University. For more information on our services, as well as the economists and academic associates working at and with Econex, visit our website at With the purpose of understanding changes in poverty trends, NIDS is the first national panel study on households in South Africa. Since 2008, the survey has been repeated with the same household members every two years, and is implemented by the Southern Africa Labour and Development Research Unit (SALDRU) at the University of Cape Town ( 11. Business Day Live. (2013). Rob Davies raises chicken import tariffs. 30 September. Available online: trade/2013/09/30/rob-davies-raises-chicken-import-tariffs. 12. Kirsten, J. F. (2012). The Political Economy of Food Price Policy in South Africa. UNU WIDER: Working Paper No. 2012/102. 6

7 of their income, while for the wealthiest consumers it was only 0.7%. More generally, the 2012 Global Monitoring Report from the World Bank 13 found that the food price spikes in 2010/11 prevented millions of people from escaping poverty because the poor spend large shares of their incomes on food. Besides inflationary pressure, higher food prices can translate into undernourishment amongst the very poor. The SAPA argues that chicken imports threaten food security within the SACU by threatening local chicken producers. In an article in the Mail & Guardian of May 2013, Mr Kevin Lovell (Chief Executive of the SAPA) claims that [s]hould the industry not be safeguarded, South Africa s national food security is at risk. Being able to feed its own population is key to a country s stability. Imports of food will only last for as long as the exporting countries are happy with the prices paid. The minute they are able to get a better price elsewhere, they will sell their produce to that country. 14 What Mr Lovell s statement fails to address is the fact that food security has as much to do with the supply of food, as with consumers having the ability to acquire food at an affordable price. This is emphasised by the definition of food security as adopted by the Food and Agricultural Organisation of the United Nations, which states that food security occurs when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life (own emphasis). 15 Given the important role that chicken plays as a source of protein for South Africa s poor, the South African government is correct in striving towards a sustainable chicken industry. However, a correct understanding of food security emphasises the need for achieving this aim with the least impact on food prices. Based on our findings that the increased import tariff is likely to lead to a shift rather than a reduction in imports, and that it fails to provide an incentive for chicken producers to improve the efficiency of production, the desired benefits of the tariff increases will in all likelihood be curtailed. The main impact will be seen in an increase in food prices, which will consequently make South Africans more vulnerable to poverty and malnutrition. 4 Concluding remarks The increased import duties on frozen chicken that were brought into effect at the end of September draw a clear divide between those who called for protection in the hope to draw benefit, and those who will bear the cost. While the poultry industry has made a number of claims about the potential negative effect of frozen chicken imports, the industry has shown consistent growth amidst various other constraints, such as the high price of feed. In the event that these constraints are a threat to the sustainability of the industry (as the SAPA claims), our brief analysis has shown that the increased import duties are not the correct mechanism by which to address these issues: in addition to the observation that imports from Europe are quickly becoming an equally large threat, the duties eliminate any incentive for South African chicken producers to 13. Food and Agricultural Organisation. (2012). The State of Food Insecurity in the World Available at: i3027e00.htm. 14. Lovell, K. (2013). Poultry imports slaughter industry. Available at: See Carlo Cafiero, What do we really know about food security? NBER Working Paper No National Bureau of Economic Research. 7

8 come up with innovative solutions to address some of the core issues that threaten the industry. This further reduces the industry s ability to compete with international players. Most profoundly, however, it is clear that the current increase in tariffs will affect South Africa s poor to a much greater extent than it will affect the rich. It is little consolation that the duty increase for whole birds ( ; that are predominately consumed by the more affluent) was relatively higher than that of other categories, as a more vulnerable and larger share of the population is affected to a much greater extent by the lower tariff increases. Based on our findings, it is expected that the tariff increases will hold minimal benefits for the poultry industry, while imposing an unduly high cost on the poor. It is hoped that alternative solutions to the constraints facing the industry will be sought to avoid a further need for policies that come at such a high net cost to the economy. More Information ECONEX regularly publishes Research Notes on a range of relevant issues in South African competition, trade and applied economics. For access to previous editions of these Research Notes, or other research reports and published articles, please visit: If you would like to add your name to our mailing list, please send an to iris@econex.co.za. 8