The Tax That Failed Us
03 June 2016
Posted by: Author: Leigh Schaller
Schaller (Assistant Editor)
put in place to protect South African chicken broilers against US imports have
been scrapped. But what effect will their absence have?
As any child
with a neighbourhood clan and some ball-sense will tell you, the first rule of
backyard cricket is that you allow the kid whose bat and ball you’re playing
with some leeway when it comes to obeying the rules that dictate the sport.
Failure to do
so will probably result in Johnny or Jane storming off, bat in hand and
screeching something along the lines of, "you’re not nice, you can’t play any
So when Barack
Obama issued South Africa with an ultimatum in November 2015, the South African
government wisely began to show signs
that it would step away from what it believed was a justified position with
regards to how it taxes and tests chicken imports.
Ultimatum, Obama stated that within 60 days the US would rescind South Africa’s
tariff free privileges on agricultural products that stems from the AGOA Act
unless South Africa stopped, among other things, applying an anti-dumping
tariff on US chicken imports entering South Africa.
US may see this as a necessary step to "open up” South African markets there
are many who believe it a case of applying undue influence.
pretty heavy-handed tactic, and it reveals the ugly, raw truth about US trade
policy: even our trade programmes meant to assist developing countries are
often thinly-veiled efforts to promote US commercial interests,” according to
an article published by Oxfam, an international NGO that focuses on food
Where it all started
from the US surrounding South Africa’s chicken industry is broader than merely
getting anti-dumping duty on chicken imports removed. The impasse also involves
barriers put in place against US beef, pork and chicken imports and extends to
health concerns, with the US taking issue to the food safety checks that South
Africa performs on US meat entering the country. Currently mutually agreeable food
safety checks are being negotiated.
issue that was a thorn in the side of the US poultry exporters to South Africa for
the longest time is the anti-dumping duties that South Africa imposes on US
such as the US and the EU, demand for bone-in portions (drum sticks and wings)
is weak relative to chicken breasts, for which producers obtain a premium.
Consequently, bone-in portions can be sold at a reduced cost into markets such
as South Africa,” according to a report written by the Bureau for Food and
Agricultural Policy (BFAP).
is not the only country that struggles with the inflow of cheap US bone-in
chicken portions. India and China have taken the US to the World Trade
Organisation and lost high profile cases involving chicken imports.
As a result,
since 1999, South Africa has imposed heavy anti-dumping duties on the US
effectively excluding them from the market.
advantage that US chicken has, is that the price of chicken feed in the form of
corn and to a lesser extent soya, is artificially driven down thanks to
subsidies from the US government.
Each year, US
taxpayer’s dollars are spent supporting a Federal Crop Insurance Programme which
protects farmers against unforeseen losses.
"What the US
does by having subsidised crop insurance, depending on the level that you take
the insurance at, is to reduce your costs of financing,” says Kevil Lovell, CEO
of the South African Poultry Association.
the State is covering most of your policy and secondly, your general risk
profile now drops so the cost of production finance also drops. What it does
indirectly, because it makes grain farmers in the US more secure, is that it it
might lead to increased production, but more importantly it leads to sustained
production,” says Lovell.
According to Professor Vincent
Smith, an agricultural economist from the University of Montana, "In previous World
Trade Organisation (WTO) cases (cotton for example) dispute resolution and
appellate committees have determined that subsidised crop insurance has a
production increasing effect and that programs similar to price loss coverage
and agricultural risk coverage violate the US' WTO commitments under the
WTO Agricultural Agreement.”
the other hand the US Poultry and Egg Export Council believes that the real
subsidies go to the ethanol companies thanks to a government mandate that stipulates
that around 40 per cent of US corn must be blended into the US’ petrol supply
in the form of ethanol. This, "results in actually higher prices for corn, than
otherwise would have been the case.” Arguably mitigating some of the benefits that poultry farmers would
get from subsidised corn.
making US chicken importers to South Africa unhappy, one of the problems of the
tariffs is that while all dumpers and subsidisers might hurt South Africa
industries equally, some were less equally tariffed.
Dr Ernst Idsardi, an agricultural economist at the North West University’s
Potchefstroom Campus explains, South Africa and the European Union (EU) have a
free trade agreement in place and "most of the agricultural imports from the EU
already enter our country duty-free.”
words, unlike US chicken, EU chicken which benefits from the same phenomenon of
weak local (EU) demand for bone-in portions, is not tariffed.
The EU also subsidises
their farmers and farm industries to the value of 59 billion Euros
annually. Some of this investment may be
making their poultry cheaper. For example Groupe Doux, a French chicken
processor, received 62.8 million Euros in 2009 and the EU.
Who cares about chickens anyways
big business in South Africa. Not only is it the country’s biggest source of
protein, but demand grew by 12 per cent between 2010 and 2014. Despite this, local
chicken production has struggled to keep up with growing demand, with the
industry only growing by 8 per cent during the same period.
South Africa’s craving for chicken is increasingly being satisfied by imported
poultry. Clearly the South African broiler industry, which claims to employ
more than 56 000 people, is struggling to remain competitive.
One of the
claims that the US government made last year, was that if South Africa were to
remove its dumping duties on US chickens, it will not impact South African
antidumping duty against US chicken were removed, it wouldn’t mean that US
producers would replace the South African poultry industry, but merely that the
US would compete against the other foreign producers already in the market,”
according to a press release by Jack Hillmeyer a spokesperson of the US
that the validity of this statement is difficult to verify.
portions will be significantly cheaper than current imports originating from
the EU. Hence the extent to which US imports will displace current imports
originating in the EU will be largely dependent on quota allocations,”
according to the BFAP report.
chicken prices are set to get cheaper for South African consumers. In a
scenario where anti-dumping tariffs on US chicken is removed and a quota of
50 000 tons is imposed, (currently a quota of 65 000 seems to have
been agreed upon as a compromise), chicken is likely to be 3.6 per cent cheaper
per annum when compared to a situation where nothing changed according to the
BFAP report. The report does not take into account the impact of the latest
drought or the decrease in value of the volatile Rand against the Dollar.
The impact that
cheaper chicken would have on local producers is not discussed in the paper.
Although, it would not be a stretch of logic to assume that producers would
either have to cut their profit margins in order to supply chicken at the lower
prices or broilers would have to reduce costs, in other words jobs, to compete.
broilers and politicians may feel that the US’ tactics are just not cricket, in
all likelihood South Africa will complete its prolonged bow to US demands. This
year, when SA does allow 65 000 tons of US chicken to enter the country, prices
will indeed come down. But for those people who may lose their jobs as a
result, cheap chicken is still unaffordable.
This article first appeared on the May/June 2016 edition on Tax Talk.