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The Tax That Failed Us

Friday, 03 June 2016   (0 Comments)
Posted by: Author: Leigh Schaller
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Author: Leigh Schaller (Assistant Editor)

Duties 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 more”. 

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. 

In the 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. 

Although the 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. 

"It’s a 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 security.

Where it all started

Concerns 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. 

However the 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 chicken. 

"In regions 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). 

South Africa 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. 

Another 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. 

"So firstly, 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.” 

On 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. 

Besides 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. 

Instead as 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.”

In other 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

Chicken is 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.  

Instead, 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 broilers.

"If the 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 embassy.

It seems that the validity of this statement is difficult to verify. 

"US bone-in 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.    

Significantly, 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. 

Although 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.



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