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24 July 2017 18:42 (South Africa)
Opinionista Ivo Vegter

Cowardly farmers’ chickens come home to roost

  • Ivo Vegter
    Ivo Vegter

    Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

Last year, South Africa’s chicken farmers successfully lobbied for tariff protection from competitors in the United States, Brazil, and elsewhere. Red Rob Davies agreed to steal from the poor to give to the rich. But now, the snubbed exporters are getting irate, and are threatening revenge.

In trade lobbying circles, they use a term: “dumping”. This is short-hand for “annoying competition from foreigners who are prepared to sell things for less than we want to charge our customers”. It is a term that is designed to make “lowest discount prices!” sound like a bad thing.

Usually, if Alice wants to sell me something for less than Bob charges, I’d consider it a good thing. Alice probably spent money advertising her wares as the best deal in town, to make sure I know to buy from her. If all goes well, that means I won’t buy Bob’s overpriced junk. This sucks for Bob, but the competition benefits me, as the consumer.

For some reason, the notion has arisen among legislators that all this changes if Alice is not South African. If she’s a filthy foreigner, Alice’s aggressive pricing is called “dumping”, and threatens Bob with material injury.

In fact, cheap imports are no different from any other competition, of course. Alice still has to make a profit, eventually, and lower prices still benefit me, the consumer. However, now Bob can appeal to the chief commissioner of a bureaucracy called the International Trade Administration Commission of South Africa, for relief. That relief, if granted, usually takes the form of import tariffs raised on Alice’s goods, to make it harder for her to sell her wares, and improve the chances that I’ll prefer Bob’s overpriced junk.

The reason they call it “dumping” is because the World Trade Organisation (WTO) agreements to which South Africa is a party explicitly prohibit countries from taxing imported goods any more than they tax domestic goods. The exception that is carved out is for cases in which, by some obscure formula, it is determined that the goods are being sold at less than their “normal value” in the country of origin. In addition, the WTO rules to which South Africa agreed say that anti-dumping tariffs may only be levied in cases where the imports cause or threaten injury to a domestic industry, or materially retard the establishment of a domestic industry.

Of course, all price competition causes or threatens material injury. That’s kind of the point of competition. You’re not supposed to benefit your competitors. You’re supposed to eat their lunch. But if you do, the losers get to go to the teacher to complain about how much you are benefiting your customers, at the expense of their fat profit margins and low productivity.

In practice, because real prices are notoriously hard to compare between countries, claims of dumping are usually based on the difference between import pricing and domestic pricing in the destination country. That is, if you can import stuff for less than I can make them at, I would complain about “dumping” in the hope of protecting my inefficient business from your ruthless competition.

There’s a domestic version of this kind of complaint, in which Alice’s pricing is called “predatory”. It is just as bogus, of course. Again, this is what competition is all about. If we just nicely split up a market among a cartel and grant all of them a statutory right to profit, why would anyone bother to compete for market share by offering customers better quality at lower prices?

There’s a theory that such protectionism protects not only the profits of the industrial or agricultural capitalists, but the jobs of those who work for them. The lobbying argument for protection is usually stated in those terms, because nobody cares about fat-cat capitalists. Still, I have yet to hear a good argument for why it is any more moral to charge millions of poor people 40% more for textiles, for example, just to protect the jobs of 12,000 people in our failed textiles industry, than it is to do the same to protect corporate profits. Import competition sucks for that industry, but if they cannot produce adequate quality at a low enough price, why should consumers sacrifice their hard-earned money to keep them in business?

Should trade policy not be designed to benefit the millions of poor people, rather than a few inadequate producers? (It’s not just about the poor, of course. There is no reason why rich consumers should suffer to subsidise producers who can’t cut the mustard.)

If domestic producers cannot be globally competitive, either we’re better off importing those goods and letting our producers focus on what they’re good at, or there is something else wrong with the conditions of trade in South Africa. Expensive labour laws, high taxes, lack of innovation, or bureaucratic red tape can all make business uncompetitive. By what logic do we remedy conditions that cause higher prices by slapping tariffs on top of those prices? Why would we charge the poor more to protect unproductive jobs, and place barriers in the way of redeploying those people (and that capital) to where they might be more competitive?

In recent years, chicken farmers have provided a great case study on so-called “anti-dumping” tariffs. This industry is the largest domestic agricultural sector, comprising about 17% of total agricultural output and employing some 100,000 people. For many years, it was a fairly healthy sector, supplying about 80% of Southern Africa’s chicken and growing at a rate of more than 5% per year. It was also the least expensive meat on the market, making chicken a huge factor in the household budgets of the poor.

This changed after the 2008 economic crisis, however. Although the industry did not shrink, slow economic growth and high feed prices have kept a damper on production growth. Imports increased sharply while our currency remained strong, but in recent years, the weaker rand has slashed import growth too.

Chicken farmers, however, have not been brave in the face of economic adversity. They did not work hard to improve efficiency and reduce costs. They did not take their losses like the rest of us had to do. Instead, they ran to the government to protest against imports from countries such as the USA and Brazil. And the government complied, imposing import tariffs of up to 82%, which is the maximum allowed under WTO agreements.

As a consequence, chicken is rapidly catching up in price with other meats. Direct comparison is difficult because of varying cuts and quality, but chicken mince is now more expensive than lean beef mince, for example.

Red Rob Davies, the communist in charge of the Department of Trade and Industry, is quite clear about the implications for the poor. “The level of the tariff increases strikes an appropriate balance in limiting the price-raising effects on poor households while ensuring that domestic producers are placed on an improved competitive footing as compared to their foreign counterparts,” he told Reuters last year.

That’s like limiting robbery to a level at which the victim is not hurt too much, but the profits of the robber are adequately protected. And still, the chicken farmers are not satisfied. “We remain concerned that this is insufficient to stem the massive amount of imports reaching our shores,” Kevin Lovell, head of the South African Poultry Association, reportedly said at the time.

Of course they “remain concerned”. Although the weaker rand should restrict imports and encourage exports, feed prices remain high and economic growth remains sluggish. There is no reason why chicken farmers would want to agree to lower tariffs. Higher import prices can only benefit them. The consumer suffers, but that’s not the SA Poultry Association’s problem. There is no Poultry Consumer Association to lobby Red Rob’s army of commissars to take pity on them.

The chickens are coming home to roost, however. (I know, I know, that’s an awful pun.)

There are many complex negotiations going on between industry lobbyists and bureaucrats who claim to have jurisdiction over who gets to sell what to whom at what price. Every country has versions of our Poultry Association, and our International Trade Administration Commission. At the expense of consumers and taxpayers, they’re all frantically flying about between expensive hotels in foreign cities, lobbying for protection against foreign competitors.

But when foreign trade partners get upset, they can get nasty. Brazil has already taken South Africa to the WTO over its chicken import duties, and the USA is also starting to throw its weight around. When it comes to tit-for-tat trade wars, America carries the biggest sticks.

In 2000, the US passed the Africa Growth and Opportunity Act (AGOA). This was aimed at improving trade ties and strengthening the economies of sub-Saharan Africa. AGOA is up for renewal this year. It is expected to be renewed without much ado, but with some changes that further improve the conditions of doing business in Africa. Eligibility for inclusion in AGOA is not automatic, however. Although few countries get excluded, there are some conditions attached to the trade concessions AGOA contains.

Now, there are rumours that South Africa might get excluded from a renewed AGOA, over our chicken protectionism. The governments of both countries have bravely abrogated their responsibilities towards their citizens, and have left it to poultry producer associations in each country to come to some mutually acceptable arrangement. If their collusion succeeds, one can safely assume that they have merely divvied up the rights to shaft consumers. If they fail, however, the fall-out could be felt far further than the poultry industry.

On top of the tariffs that “balance” how much consumers get robbed, many of our export industries will be harmed by the re-imposition of trade barriers that were reduced or eliminated under AGOA. While AGOA has benefited many African countries, nobody’s export growth to the US has been more diverse than that of South Africa. All of those exports are now at risk, because of chicken. Do you think the Poultry Association has counted the number of jobs at stake in those industries? Do you think Red Rob has? I don’t.

Trade tariffs always hurt consumers and efficient producers, to protect inefficient producers. They are, to mix meat metaphors, pure pork. Tariffs only benefit corporate, and, if you’re lucky, some jobs in industries that perform below-par. The motor industry is a prominent example of a sector that actually shed 25% of its jobs in the 20 years of “temporary” protectionism it has enjoyed.

Counting the cost to the consumer, there is no net economic benefit to tariffs, even if it were fair to impose them. It is cowardly (and greedy) for industries to run to government for protection. It is immoral for governments to grant it.

I wish the US would teach South Africa’s chicken farmers a lesson in “fair trade”, if only they could do so without harming the interests of innocent consumers and producers. Either way, you and I are getting robbed. DM

  • Ivo Vegter
    Ivo Vegter

    Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

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