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New rebate on certain imported yarns and textiles is complex

Created on the back of a directive from dtic Minister Ebrahim Patel, it is supposed to support localisation of manufacturing.
This latest trade policy is described as a step in the right direction but is not without its flaws and critics. Image: Karen Dias, Bloomberg

A recently created rebate for certain imported yarns and textiles used in local manufacturing has been described as overly complex and its intentions as “ambitious”.

The rebate, created on the back of a policy directive from Minister of Trade, Industry and Competition Ebrahim Patel, is supposed to “support localisation of manufacturing”.

The International Trade Administration Commission (Itac) published the rebate and its strict guidelines, rules and conditions to minimise rebate abuse or misuse earlier this month.

FC Dubbelman, owner of FC Dubbelman & Associates, says although these rules and conditions will impact especially smaller players it is important to prevent abuse given the number of “creative importers” and “stakeholder parties” in SA.

The rebate and its intentions are ambitious, and although it could benefit the clothing industry it will depend on effective administration and policing, he adds.

Donald MacKay, director of XA International Trade Advisors, writes in his regular trade insights that complexity is the enemy of investment and “the bedfellow of skulduggery”.

He doubts whether the rebate on imported yarns and textiles will benefit the failing textile and clothing industry in South Africa.

“Between the twin evils of bargaining councils and terrible trade policies, I think we have already killed the industry.”

SA has a Retail, Clothing, Textile, Footwear and Leather (R-CTFL) Masterplan where retailers have committed to increase the level of locally produced goods sold in stores from 44% to 65% over the next 10 years. The plan was signed in November 2019 and envisages the creation of 120 000 jobs in the CTFL value chain.

The rebate

Several large players in the clothing and textile industry, including the SA Clothing and Textile Workers Union, supported the creation of the rebate on certain imports. The imported yarns and textiles covered by the rebate carry tariffs ranging from zero to 30%.

South Africans are paying duties of up to 40% on imported fabrics and clothing.

The country’s textile and clothing industry was highly competitive until 1994 when it joined the World Trade Organisation. It lost ground when tariff protection decreased, causing a flood of low-priced imports and a decrease in local production with subsequent factory closures, says Dubbelman, a member of the recently established customs tax work group of the South African Institute of Tax Professionals (Sait).

The rules

Clothing manufacturers with compliance certificates from the National Bargaining Council for the Clothing Manufacturing Industry can supply retailers who are signatories to the masterplan with clothing made from the fabrics imported under the rebate.

The same applies to textile mills that add value and supply clothing manufacturers that have the necessary compliance certificates, and which in turn supply retailers who are signatories to the masterplan.

One of the Itac guidelines dictates that rebated textiles will not be transferred to Botswana, Eswatini, Lesotho and Namibia “or any other country outside SA” for further processing.

Dubbelman says the idea is that the rebated item that is allowed by Itac in SA should benefit SA and the benefit should not be “transferred” to other countries in the region.

MacKay has expressed concerns about the impact the complexity will have on compliance.

“I have no idea how this will be enforced,” he says.

“I suspect the smaller producers and the producers who do not ‘play ball’ will feel the brunt of this. This would suit the big companies perfectly, of course.”

To get the rebate will take some doing

In order to qualify for the rebate, the manufacturers must pre-sell their products, they must ensure that their offtake agreements with local textile mills guarantee the same uptake as the previous year’s volume and value, and the products that are produced with rebated yarns and textiles are only sold in the country where the rebate was issued.

MacKay says the rebate will only benefit companies that can pre-sell their orders and are able to then purchase raw materials in quantities that will match the orders that are being placed.

“Larger, established South African producers would love the rebate, as it would lock out smaller competitors, who do not have a history with a retailer [to secure orders] … I see no way this latest trade policy benefits anyone other than those who figure out how to game the system,” says MacKay.

Sait CEO Keith Engel says he is pleased to note that government is aware of the need for businesses to be competitive. However, he questions whether government is not merely acting emotively without understanding the industry.

“Legal requirements for access need to be utilised with care [without prejudicing certain players] or the proposal will not work as intended,” he adds.

Benefits

Dubbelman does see it as a step in the right direction to incentivise the industry to increase its significance in the economy and jobs market.

He explains that the import of woven staple fibres for the manufacturing of “Articles of Apparel and Clothing Accessories, Knitted or Crocheted” [Chapter 61 of the SA Customs Tariff Schedule] and “Articles of Apparel and Clothing Accessories, not Knitted or Crocheted” [Chapter 62] will be 22% cheaper because of the rebate – reducing costs by 22%.

The rebate savings should lead to lower prices, higher sales and increased turnover which should pave the way for increased job creation and investments.

“The textile and clothing industry will have to consider investment in production processes, training of employees and an increase in productivity to address costs amidst increased imports and the trend of international clothing retailers not to buy local.”

At the same time government would have to ensure that illegal imports and manufacturing activities are addressed, says Dubbelman.

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