New Assistance Programme for the SA Clothing and Textile Industry – A Stitch in Time?

South Africa currently has one of the highest unemployment rates in the world. While the South African economy fared reasonably well during the recent worldwide financial crisis, it still shed around one million jobs. Job creation is therefore now even more than before a top priority for the South African government.

Traditionally the South African clothing and textile industry was one of the main employers in manufacturing, especially in the Western Cape Province. However, since South Africa’s reintegration into the international economy post-1994 the industry has been in rapid decline. South Africa liberalized its import duties quite aggressively in the Uruguay Round of international trade negotiations and since the expiry of the Agreement on Clothing and Textiles in 2005, which meant the end of worldwide quotas in the clothing and textile trade, it has been facing increasing competition from low cost producers in the Far East, especially from China. In the period from 1996 to 2005 alone the South African industry lost more than 85 000 jobs.

While many critics argue that China’s export success is mainly a result of subsidization in violation of the rules of the World Trade Organization (WTO), there can be no doubt that it does have a comparative advantage over countries such as South Africa. South African manufacturers simply cannot compete with the low labour costs enjoyed by their Chinese counterparts, even with the current import duties on most clothing and textile items being as high as 40 to 45%. Furthermore, South African firms enjoyed protection from international competition for many years prior to liberalisation, but many of them failed to invest in new technologies during that period.

Despite facing increased competition, the clothing and textile industry remains an important employer in the South African economy. Many local manufacturers have moved away from low cost articles to instead focus on niche markets, producing value-added products with shorter lead times and in many cases focusing on synthetic materials for the sportswear and protective clothing markets. Improved market access for South African exporters in terms of the South African free trade agreement with the European Union, the Trade, Development and Cooperation Agreement (TDCA) and the free trade agreement with the Southern African Development Community (SADC) has also contributed to keeping the sector alive. In this regard the African Growth and Opportunity Act (AGOA), a unilateral preference programme extended by the United States (US) to certain African countries, has especially been responsible for huge growth in South African exports to the US market.

In an effort to stem the increased inflows of cheap textiles and clothing products from China, South Africa’s Department of Trade and Industry (dti) introduced a quota system on Chinese imports in 2007. The aim of the quota system was to increase domestic manufacturing, but its effectiveness was limited as total imports into South Africa did not decrease. The quota system simply caused importers to replace their Chinese imports with imports from other low cost producers in countries such as Malaysia, Vietnam and Bangladesh, while it prevented certain domestic manufacturers from sourcing the textiles required for their manufacturing. It also led to an increase in customs fraud, especially cases of illegal transshipment of Chinese imports. The quota system was phased out in 2008, despite a push for its renewal by some local manufacturers.

Even without the quota system in place one of the big remaining obstacles for the domestic industry remains customs fraud, with manufacturers complaining of widespread under-invoicing of imports and other forms of illegal imports. In response South African Customs has established a dedicated task team to deal with customs fraud in clothing and textile imports. While this has led to some successes in customs enforcement, fraud remains a critical challenge.

In 2009 in an effort to improve the competitiveness of the domestic clothing industry the dti, through the International Trade Administration Commission (ITAC) ) in 2009 undertook a review of the import duties on textiles not manufactured locally or that are in short supply. As a result the import duties on certain fabrics not manufactured locally and/or fabrics that are not available in sufficient quantities were reduced through the implementation of a duty rebate system. ITAC has also raised the import duties on a number of clothing and textile tariff lines to their bound rates, the highest applicable duties allowed in terms of South Africa’s commitments at the WTO. While this provides some additional protection to domestic manufacturers, it did not have a huge impact as the applied rates in most cases were already very close the bound rates.

In the latest effort to boost the sector’s international competitiveness the dti last month launched the Clothing and Textile Competitiveness Programme (CTCP) and its core funding mechanism, the Production Incentive (PI). These two programmes form one of the six projects of the Clothing and Textile Customised Sector Programme (CSP), which is the dti’s new strategic approach to restructuring the sector with the main objective of ensuring long term sustainability and competitiveness. The other five projects within the CSP are the Skills Development Plan, Broad Based Black Economic Empowerment, the Technology & Innovation Plan, the ongoing review of import tariffs on raw materials and the Combating of Customs Fraud. The CSP as a whole is meant to assist industry in upgrading its processes, products and people, and to reposition itself in the market to compete more effectively both in the domestic and global markets.

The CTCP consists of three components, the first being the Capital and Technology Upgrading Programme, with two sub-components, the Manufacturing Investment Programme (MIP) and the Preferential Financing Scheme from the Industrial Develoment Corporation (IDC). The second component is the Competitiveness Improvement Programme (CTCIP) and the third the Production Incentive (PI). The PI provides funding assistance to the clothing, textiles, footwear, leather and leather goods manufacturing industries to invest in competitiveness improvement interventions. The PI consists of two components, namely an upgrade grant facility and a facility consisting of an interest subsidy for working capital. Anyone interested in making use of these programmes can find more detailed information on the DTI website

While this new assistance programme has been welcomed by industry, it is unlikely to completely halt the decline of the clothing and textile sector. Compared to their global competitors many South African manufacturers will still have a lack of competitiveness, due to factors such as the inflexibility and high cost of labour, illegal subsidization by competitors, the impact of the strengthening Rand and the increasing cost of inputs such as electricity. The industry should continue to put pressure on government to step up its efforts in fighting customs fraud and it should investigate the possibility of taking action against illegally subsidized imports by means of countervailing duties. Finally, it will also have to continue to focus on innovation to ensure that it can create a competitive edge for itself in value-added niche markets that are less attractive to low cost producers.