(The Global Economy) South Africa suspends chicken tariffs to ease price pressures

South Africa has halted tariffs on poultry for 12 months as part of measures to ease food inflation

 

The government suspended duties on imports of the protein from Brazil, Denmark, Ireland, Poland and Spain because of the impact they may have on the price, according to a gazette published Monday. Chicken is one of the more affordable protein sources in South Africa.

 

The annual inflation rate reached 7.4% in June, the highest level since the global financial crisis, with food prices rising 9%. The price of 10 kilograms (22 pounds) of frozen chicken pieces increased almost 14% in June from a year earlier to 383.53 rand ($23.31), according to the Household Affordability Index compiled by the Pietermaritzburg Economic Justice & Dignity Group, a prominent anti-poverty organization

 

The South African Association of Meat Importers and Exporters, which called on the government in April to consider a moratorium on tariffs on imported chicken to help curb inflation, said the decision would help consumers.

 

“Chicken is the most affordable, and therefore vital source of protein for South African consumers, especially those living below the poverty line,” Paul Matthew, chief executive officer of AMIE, said in an emailed statement.

 

Mexico and South Korea have also removed import tariffs on poultry to contain inflation in recent months. The US is also considering lifting tariffs on various goods and last month said it would not impose any on Russian and Trinidadian imports of urea ammonium nitrate, which is used in liquid fertilizers.

 

Tariffs are an important component of South Africa’s so-called “master plan” to protect local poultry producers from a flood of cheap imports and save jobs in an industry that employs about 100,000 people.

 

The government drew ire from trading partners such as the US in March 2020, when it raised duties on frozen bone-in and boneless chicken pieces to 62% and 42% respectively. It also imposed provisional anti-dumping levies of as much as 265% on countries including Brazil in December.

The Bloomberg Article illustrates the South African (SA) Government suspending poultry tariffs for 12-months to ease food-inflation. A tariff, a form of protectionism, is a government-imposed levy on imports to protect domestic industries through making foreign-produced goods more expensive. With rising inflation rates and chicken being one of the more affordable protein sources, suspending tariffs illustrates the key-concept of economic well-being. This refers to the levels of prosperity, economic satisfaction and living-standards among consumers, through directly reducing consumer costs.

Before the tariff-suspension, poultry producers will supply at QS2 and SAconsumers will consume at QD2 at Pw+t and import QD2-QS2 as they have a comparative disadvantage compared to other poultry-producing countries. After tariff-suspension, the world supply will shift from Sw+tariff   to Sw, corresponding to the tariff %, allowing SAconsumers to import at the free-trade world price (Pw). Thus, SAconsumers poultry consumption will increase from QD2to QD1 as they have greater consumer choice to import from overseas at a lower price. As importers meet demand, imports will rise from (QD2-QS2) to (QD1-QS1). However, domestic producers suffer as more SAconsumers import chicken rather than purchase it domestically. This deviates from SA's “plan to protect local poultry producers' as the decreased domestic chicken production from QS2 to QS1 results in a revenue drop (Pw+t*QS2→Pw*QS1) as domestic firms find it less profitable to produce chicken. This will increase unemployment in the SA poultry industry as producers lay-off workers to decrease total costs.

 

The SAGovernment will no longer receive a tariff revenue (e) from SAconsumers who chose to import from foreign nations prior to the tariff-suspension. The use of this revenue could have been spent on public-expenditures to aid economic development and growth.  Nevertheless, the impact will be minimal due to the welfare-loss elimination (dandf), demonstrating efficient resource allocation. With f illustrating the welfare-gain for consumers having to pay a lower price of Pw and d illustrating the welfare-loss to society created by inefficient SA producers who may be using more resources than would otherwise be used by foreign-produers.With yearly inflation peaking at "7.4%" and 10kg frozen chicken prices climbing by "14%," this makes it difficult for consumers, especially those below the poverty-line, to purchase chicken as it takes up a higher proportion of their disposable-income. Because "chicken is the most affordable" poultry in SA, postponing the levy will lower prices, benefiting low-income individuals. The tariff-suspension can assist domestic producers (i.e: restaurants, hotels) who use chicken, seen in Figure#2. As SRAS1 shifts outwards to SRAS2, cost-push inflation effects will decrease (PL1 to PL2). Now that chicken is cheaper (Pw), producers will beincentivized to boost output Y1→Y2. Altogether, increasing employment levels and Real GDP (Y1→Y2) whilst reducing inflationary pressures, achieving SA’s aims and improving SA’s households economic well-being as living standards improve. Deferring the tariff may strengthen trade relations by making it easier to export or import goods and services from foreign nations and may encourage removal of barriers of SA exports, allowing resource relocation between SA and its trade partners, whilst promoting efficient production globally.

The SAGovernment must examine the consequences of the tariff-suspension on "Brazil, Denmark, Ireland, Poland, and Spain" after 12 months to decide whether to continue. Domestic consumers may become reliant on the reduced price (Pw), making it difficult to return to original prices after 12-months because their real-income may not be adapted to buy the same amount of chicken, restricting their purchasing power. Since people expect cheaper prices, it would also be unpopular.Originally, the tariff was a provisional anti-dumping levy on Brazil, which sold chicken cheaply to attract foreign consumers. The protectionist-tariff discouraged anti-dumping and encouraged SA poultry production and consumption. However, with the tariff-suspension, domestic producers are no longer sheltered from anti-dumping measures and SAconsumers can import chicken from more affordable countries like Brazil. Due to the decline in production, producers may lay off workers to reduce expenses as their revenues fall, withdrawing from SA's plan aimed at protecting the chicken industry that “employs about 100,000 people”. Ultimately, deteriorating economic well-being of SA poultry workers as living standards decline when income declines.

 

This article outlines the key concept of economic well-being, where in the short-run, falling inflationary-pressure will provide a temporary relief for consumers as they benefit from lower prices. Since the suspension is only 12 months, in the long-run inflation may return. In defiance of the revenue drop, domestic producers may also wait out the tariff-suspension rather than lay off people, unaffecting SA unemployment-rates. Therefore, the tariff should remain to protect domestic producers, consumers and the economy from facing recessionary effects as aggregate demand shifts to the left. However, if the tariff is reinforced, the SA Government can allocate the tariff revenue to implement subsidy-grants to help curb food inflation to aid SAconsumers economic well-being.