First safeguard application awaits response

The textile industry has taken a hammering in the recent past. FTW finds out the extent of the damage and the outlook for the future.
Import undervaluation rubs salt into the wound Brian Brink … ‘We need Sars to challenge undervaluation, which is costing government lost revenue in the form of duty and VAT .’ JOY ORLEK GOVERNMENT’s indecisiveness combined with a range of factors beyond its control have created a gloomy scenario for South Africa’s export industry, and nothing paints a more explicit picture than recent statistics released by the Textile Federation (See overleaf). The industry was on a roll until the end of 2003, says the Federation’s executive director Brian Brink. “Exports were flying, it was relatively difficult for imports because of the weakness of the rand, and China was still inhibited by quotas into the US and EU. “But that changed as the rand strengthened. We now believe it is over-valued, causing imports to become much cheaper, and our export drive to start tapering off.” The final removal of all quotas in terms of the WTO agreement on textiles and clothing at the end of last year however unleashed the full power of China’s unfettered force. “SA was now not only affected by the strong currency but also by a new aggressive competitor,” said Brink. “We predicted this outcome at the end of 2003 and approached government to take some action. Our original tack was to revalue the rand, but in retrospect we concede that that was not the right approach and have changed it to a safeguard-type proposal.” But Brink believes that the industry has suffered because valuable time has been lost in putting together a workable solution. In early 2004 a task team was appointed to look into the impact of China on the domestic and export markets. China was initially approached by government to impose voluntary restraints, but this was clearly not an acceptable option for the Eastern super-power. The task team met in May last year and then lapsed for six months. In August government published safeguard regulations, but the industry had already lost a year in putting together safeguards for the sector. Five meetings have been held since February this year, and FTW believes that one application has so far been made, but no response has been forthcoming. The Textile Federation has submitted its first application, and is in the process of finalising a second, but in the interim factories are closing on a regular basis. It’s also not clear whether safeguards are indeed the way to go. Submission of safeguards is a lengthy process and closing all the loopholes is a difficult task, but in the absence of any other workable alternatives, it’s the best option right now. Cost comparisons provided by the Textile Federation illustrate the gravity of the situation. According to Brink, SA like China is a net importer of cotton. “SA pays a world price for its cotton of around R8-9/kg, as does China. But whereas our price for yarn rises to R15/kg, based on the value added components, fabrics to R25/kg and T-shirts to around R40/kg, in the case of China the reverse is true, with the end product being sold more cheaply than the original cotton.” It’s an anomaly for which Brink has no explanation. Further aggravating the flood off cheap Chinese imports into South Africa is SA Revenue Service’s difficulties when it comes to obvious undervaluation of goods to escape VAT and duty. Brink refers to a recent example of denim jeans imported into South Africa at R2 a pair. “Clearly this is a deliberate undervaluation by the importer who wants to evade duty and VAT. And even though the paperwork might appear to be in order, a more robust approach by Sars is called for in instances like these.” A recent survey revealed that the average price of clothing imported into SA last year from China was $1.30 to $1.50 dollars a piece (R7-8). The same average price into the US was $3.50(R21) and that’s because of more rigorous customs controls in the US, says Brink. The industry is therefore not only up against a strong currency and the removal of quotas, but a super-efficient China and import undervaluation supported by a corrupt relationship between importer and exporter. A lethal combination in anyone’s language. “The solution,” says Brink, “lies partly in safeguards and anti-dumping duties. But more importantly we need Sars to challenge undervaluation, which is costing government lost revenue in the form of duty and VAT .”