Complexity is the enemy of investment, and the bedfellow of skulduggery.

I promise to explain this clearly, so don’t give up halfway through the italics text below.

A rebate has been created for

“Textile yarns and textile fabrics, classifiable in Section XI of Part 1 to Schedule No. 1 and approved by the International Trade Administration Commission (ITAC) through a Notice in the Government Gazette as qualifying yarns and fabrics that may be imported under this rebate item for the manufacture of apparel and clothing accessories classifiable in Chapters 61 and 62, in such quantities, at such times and subject to such conditions as ITAC may allow by specific permit, provided that –

  1. ITAC or equivalent authority in SACU member states, is satisfied that the apparel and clothing accessories manufactured in terms of this item are supplied to and sold by retailers in the country in which the rebate permit will be issued;
  2. as evidenced in support of (1) above, the application for a permit must be supported by an order/orders from retailers in the country where the application is made; and
  3. the yarns and fabrics are not specifically covered by another rebate provision in Schedule No. 3 for the same industry and purpose.”

Let me break it down. If you import qualifying textile yarns or fabrics and you use these yarns or fabrics to make clothing, then you could possibly get a rebate of the duty on those yarns or textile, but you need to meet a few criteria before you can access the rebate.

Criteria #1: Import, manufacture and sell in the same country

ITAC (or its equivalent in the Botswana, eSwatini, Lesotho and Namibia) must be happy that the clothing manufactured from the imported yarn or fabric will be sold in the country the rebate was issued in. In other words, if South Africa issued the rebate, then the clothing made out of the rebated yarn or fabric, can only be sold in South Africa.

Criteria #2: Prove you will only sell in the country you manufacture in

In order to support the claim that the clothing will indeed only be sold in the country where the rebate was issued, the applicant for the rebate (presumably the clothing manufacturer), must be able produce orders from retailers in countries where the application for the rebate was made. So, in order to get a rebate in South Africa, you have to make the clothes in South Africa and only sell it into South Africa.

Criteria #3: First be sure no other rebate is available

You can also only make use of this rebate, if another rebate doesn’t already cover the yarns or fabrics you are importing (the only part of this rebate which makes sense).

Implication of this rebate

The first problem is that, for all practical purposes, the other SACU countries do not have a working equivalent to ITAC. In fact, their trade policy functions are almost all outsourced to ITAC, so I have no idea how this is going to work in practice outside of South Africa. Countries like Lesotho, who have a fairly well established clothing production industry, will now have to sell 100% of what they produce within Lesotho in order to use the rebate. Given that a significant portion of their market is South Africa, this is not good.

Secondly, this rebate will benefit only companies who can presell their orders and you would need to then be purchasing raw materials in quantities which match the orders being placed. Larger, established, South African producers would love the rebate, as it would lock out smaller competitors, who don’t have a history with a retailer.

Thirdly, it would appear as if any exports of the finished products are prohibited if you use the rebate, not just exports to other SACU states. For a country who is trying to grow exports, this would appear to be an exceptional own goal.

Fourthly, it is anyone’s guess how this will be controlled. If goods are sold from Lesotho to SA, how would the tracing work, so that SARS can determine if those specific clothes benefited from the rebate.

To re-quote myself: Complexity is the enemy of investment, and the bedfellow of skulduggery. I see no way this latest trade policy benefits anyone other than those who figure out how to game the system.

The odious Memorandum of Understanding between SA and China and the state of our textile industry

On the 28th of August 2006, South Africa signed the “Memorandum of Understanding between the government of the Republic of South Africa and the government of the People’s Republic of China on promoting bilateral trade and economic cooperation.” This memorandum was then inserted into our Customs Act, making it part of our domestic law.

There are a number of deeply problematic issues in the memorandum, but as it relates to the textile industry, Article 3(3) of the memorandum says “In view of the arrangement made by the Parties pertaining to the textile and apparel trade, South Africa commits itself to not applying Article 16 of the Protocol of Accession of China to the World Trade Organisation…”

Article 16 of the Protocol of Accession allows countries impacted by surges in imports of goods from China, to impose safeguard duties against China (the reality is a bit more complex, but this is the essence of it).

As it relates to textiles, South Africa deliberately forfeited this right in the MOU and we all know what happened to the import volumes of clothing and textiles from China.

In turn, China promised to to “provide special assistance to South Africa for the purpose of contributing to projects on the training and exchange of information, skills and expertise in the textiles and apparel industry. Such projects will be identified through mutual consultation” Does this sound like a good exchange? Fantastic if you are China.

There is some other waffle and for anyone who wants the full text of the memorandum, click here.

This same memorandum, coupled with a Record of Understanding, which was signed about a month later, automatically grants China market economy status, thus limiting South Africa’s options in anti-dumping cases. I am not arguing for more protectionism, but rather to point out that we agreed to allow China to send their textiles and clothing to SA in very large volumes and not use the instrument specifically created when they joined the WTO because the whole world was concerned about surges in Chinese imports. We also emasculated our anti-dumping instrument and about a decade ago, Rob Davies stated publicly that SA would never bring a countervailing (anti-subsidy) action against China.

Both the MOU and the ROU are both still in place and our solution now is just to keep keep adding complexity through more and more regulations. These agreements barely registered a peep in the media when they were signed off and don’t feature in the industry’s masterplan.

I don’t know if we have much of a clothing and textile industry left to rescue, between the bargaining councils and increasingly bizarre trade policies, but I do know adding yet one more set of complex rebates will not do the job.

Want to know more? Say hello at info@xa.co.za

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