Trade Commission votes to Protect Wheat Farmers

As of the beginning of May 2010 wheat farmers in South Africa will enjoy an increase of 40% in the basis of their level of tariff protection from foreign wheat imports. From a consumer perspective this may seem at odds with the lingering memories of the commodity spikes of the global food crisis still fresh and ongoing policy interventions across the continent to address high food prices. However, the result in the detail is somewhat less dramatic than the headlines suggest.

Clearly the South African government has decided that there is actually a logic in protecting some level of food self sufficiency in pursuing food security.

The government’s 2009 draft ‘South African Trade Policy and Strategy Framework’ indicted that tariff policy would be applied strategically, i.e. with an interventionist leaning. This means that for agricultural tariffs the levels will be considered and applied on a case by case basis, supported by evidence, to maximise the potential for value addition and employment generation. The policy states that the intention is to ‘strike an appropriate balance’ between the profitability of farmers and consumer prices (including addressing supply side constraints and competition issues).

Perhaps what the 2008 global food crisis did show was that ‘trade’ cannot be relied upon to feed a nation, as when it came down to the hard decisions in the crisis, many suppliers simply cut off their exports with bans and restrictions meaning that some could not buy food even if cash flush. None of this was really at odds with the WTO’s rules. In fairness it is not ‘free trade’ that is the problem, but rather the manner in which countries saw fit to encumber free trade that has and will lead to self sufficiency responses from buyer nations. In the local case the rationale was that the wheat sector was ‘distressed’ due to the recession, had little up- and down- stream market bargaining power, faced unfair international competition and had good employment potential – hence increasing the base level of wheat tariff protection from US$157 per ton to US$215 per ton.

Note that the South African tariff applies to the Southern African Customs Union (SACU) as all SACU countries have a common external tariff. So how does the wheat protection work? Since 1999 wheat imports have been protected at US$157 per ton. Under this regime there has not been a wheat tariff in SACU for some years now, as global wheat prices have been well in excess of this level. The latest adjustment brings the level of protection in line with more recent levels of global commodity prices. The US$157 level represented a 10 year average price while in 2010 the authorities have taken a more short term view and halved the historic calculation basis to a 5 year average, resulting in the US$215 level, after adjustments for inherent transport protection and some international market distortions.

In technical terms the South African wheat price band model will operate on a reference price model which essentially aims to protect domestic wheat production at a long term average fob price of US$215 / ton fob and is based on a US hard red winter (HRW) no. 2 wheat. The model charges high duties when international prices are low and low duties when international prices are high. In this sense the system is superior to a straight ad valorem duty which is calculated as a straight percentage on the fob value of the wheat. Under an ad valorem duty system low international prices (which indicate that farmers are likely suffering) are under compensated with a low duty and high international prices over protect the domestic industry with high duties. In other words a percentage duty under protects when protection is justifiable and over protects when prices are high and protection is not needed. In this sense a model that affords protection when prices are low and stops this protection when prices are high is preferable. The disadvantage of the model however, is that it is difficult to understand and adjustments to the duty have historically been slow due to administrative inefficiency. This is what trade practitioners would classically refer to as a ‘sticky tariff’.

Despite the theoretical logic behind a price band tariff, South Africa prefers the ad valorem route and only 3 products wheat, maize and sugar use these models. The wheat model operates by tracking the weekly price of HRW no. 2 wheat on a 3 week moving average, and comparing this to a reference price which equates to the value of the 3 week moving average applicable at the last event of a duty trigger. The trigger of a revision in duty occurs when the difference between the reference price (on which the previous adjustment was based), and the latest 3 week moving average price, amounts to more than US$10 for 3 consecutive weeks. A new tariff is then calculated and a new world reference price will be set in order to monitor future price movements. This complexity is the reason why the trading system usually just accepts the inefficiency of an ad valorem tariff – the inefficiency buys a huge simplicity. The methodology has led to an initial specific duty of ZAR140.70. Any interested party (including a foreign exporter of wheat) is free to request a revision of the duty from the SACU tariff board (whose function is currently performed by ITAC) based on the operation of the model.

Is this all a big deal as far as current protection levels are concerned? Well not really. At current prices the ad valorem equivalent of this new wheat tariff is only about 6%, which is hardly significant, especially in the realm of global agricultural tariffs. Indeed ITAC estimated that the duty would raise the bread price by just under 3%.

The interesting aspect in setting the new level of protection is that the authorities have specifically built in an additional 10% level of protection to negate the effect of what they refer to as ‘OECD distortions’ – in other word subsidies provided to 1st world farmers that are seen to depress the international price of wheat. This is an interesting turn of events as the authorities seemed averse to this in the past preferring industries to deal with this through more direct approaches, being countervailing duties. Perhaps there is a recognition of Africa’s inability to influence the Doha negotiations in agricultural subsidy reform in any meaningful way to date; and the observed reticence to take direct action to address agricultural subsidies via WTO dispute settlement had some influence on this decision. Logically there is little point in protecting farmers if the protection can simply be circumvented by importing the processed product. The wheat flour duty is thus maintained at 1.5 times the wheat tariff as a flanking duty.

Some of the other countries in the customs union have not been happy with the decision. For example the government of Botswana objected to the amendment based on concerns of effects on consumer prices. This is somewhat strange to understand however as Botswana and the other ‘junior’ partners in the customs union receive a rebate on the duty of wheat as they do not produce much wheat, if at all. This is itself an anomaly as these countries enjoy net positive transfers from the customs revenue pool – in other words South African taxpayers fund the wheat duty which is then pooled and in large measure given to the smaller countries as part of the revenue transfers to them albeit in an aggregated manner. These countries thus have a double win – they do not contribute to the duty and they then receive a portion of the duty that South Africans pay. Special and differential treatment practiced in its purest form. Nobody has denied that at 100 years old, celebrating a centenary in 2010, SACU remains an extremely odd example of the text book definition of a customs union in practice. The wheat example is a clear indicator that the neglected collaborative agricultural policy making obligations in the SACU treaty need to be actioned with some urgency.

What might be interesting is the influence that other pending free trade agreements might have on wheat imports. We note that India is in the queue for an FTA with SACU and the failed USA-SACU FTA is showing flickers of revitalization. Both these countries are wheat exporters that would benefit from having duty free access under an FTA in face of the new MFN tariff. This is especially so in view of the fact that under existing FTA arrangements wheat has been a sensitive product. One thus sees that the present introduction of the MFN duty is applied equally to the EU and to EFTA both of which have FTA’s with South Africa/SACU. It is however technically notable that SADC has duty free access to the SACU market. Practically this is a moot point as it is unlikely that anybody in SADC will have spare wheat to deliver into the SACU market.

Finally the trade lawyers’ question will always be ‘Are SACU’s WTO commitments being met?’ Well indeed they are. There is still plenty of upside on the WTO tariff commitment with South Africa’s bound rates on wheat and flour pegged at 72% and 99% ad valorem respectively. Plenty of policy space exists and plenty of head room is present, room in which farmers may be wondering if their 6% protection is all that ‘hype-worthy’ after all.