CASE STUDY :

Cheap as chips? In SA, not quite, if they'refrozen A trade consultancy has called for the scrapping of import duties on frozen fries because of rising food inflation. They're by no means a healthy option, but millions of people in South Africa enjoy them anyway, with lashings of salt, vinegar and sometimes tomato sauce. On their own or with fried fish, burgers or tucked into the mother of all sarmies the Gatsby, or Gauteng's equivalent, the kota potato fries are a staple and, as such, zero-rated for VAT. Imported French fries are currently subjected to heavy import duties, ostensibly to protect the local market from dumping, but a trade advisory says these duties are simply not in the public interest and they've yet to make any difference to local efforts to produce frozen fries in the country. At a media briefing on Wednesday, XA Global Trade Advisors said while potatoes and fries are VAT-exempt, import duties must be reviewed in light of rising food inflation. In July this year, the International Trade Administration Commission (ITAC) responsible for customs tariff investigations, trade remedies and import and export control imposedheavy provisional dutieson frozen fries from Belgium, Germany and the Netherlands, to prevent dumping. These duties, though, which range from about 23% to above 180% for some countries, are harming consumers, believes Donald MacKay, CEO of XA Global Trade Advisors, because they impose "duty-upon-duty" on a staple product. 'Another tax burden' "They are not in the public interest... They are just another form of tax that consumers have to bear, and have the concerning consequence of increasing the cost of food in an already tightly squeezed consumer market. "The time has come to take a hard look at our trade policy and to weigh up its impact on the rising cost of living." MacKay said ITAC had imposed these provisional duties on fries as a protectionist measure to help domestic suppliers, based on assumptions littered with "errors, miscalculations and flawed product comparisons", because the SARS entity is applying duties without factoring in the impact of these on consumers or the current state of the local market, which is unable to meet supply of the required quality of potatoes used to make fries. He asked why the government was imposing duties on VAT-exempt products it knows will result in food price increases, and which will affect poorer communities who rely on the product as cheap food. "This kind of misalignment in government policy reinforces the need for a comprehensive review of our trade policy, especially at a time when consumers are buckling under the strain of a hyper-inflation cycle. "It is evident fromITAC's Essential Facts letterthat it intends to recommend that the provisional duties be made final [effective January 2023]. This is despite the many errors and the fact that the government is alive to public interest considerations. "To this end, in September, [Trade and Industry Minister Ebrahim Patel] suspended the imposition of additional duties on imported chicken from five countries as a way to help cash-strapped South Africans weather inflation. "The same should apply to imported fries; the investigation should be halted and provisional duties withdrawn pending a comprehensive review of the impact of overall duties on the price of food." Bunfight for market share There are three producers of frozen chips in South Africa, with McCain holding 80% market share, and Nature's Garden and Lamberts Bay Foods sharing the balance. In July 2022, ITAC introduced hefty temporary new duties on fries, which are due to expire in January 2023, by which time the commission should have made a final determination on these import taxes. The resultant increase is a burden on consumers, McKay says: fries' prices are up 80%, from R16 a kilogram in 2021 to R30 a kilogram in 2022 with half of the cost of producing a chip arising from the expense of chip-quality potatoes.

In this situation, it's not as if imposing the duties [helped] the domestic industry to pick up extra volume. The shortage is still here." It's not for a lack of local potato supply: in August, the Potato Association toldBusiness Maverickthat there were over 12,000 tons of potatoes in the SA market, which is "more than sufficient". The issue is a shortage of the right cultivars of potatoes that are suitable for fries, said Georg Southey, general manager of food importer Merlog Foods. Southey told the media that the general shortage in fries supply was being compounded by market conduct, forcing other players to import to meet the growing demand for fries in the SA market. "McCain lost 500 production shifts in 2021 due to electricity disruptions, which amounts to just over 4,000 hours of production time. That is substantial and will obviously have an impact on the availability of French fries, which are products that we, as Merlog, produce and supply to the market. "These unnecessary duties account for nearly 20% of the 90% price increase in fries, which could have been avoided." ANational Agricultural Marketing Council competitiveness analysisfound McCain was viewed by producers as an "irresponsible role-player" in the industry: It owns more than 75% of the market for French fries, and thus controls the bulk share of the fries processing sector and the potatoes used to make fries. While producers praised McCain for bringing in better cultivars to the industry, they also accused the company of causing market instability by providing financing to already indebted farmers to help them plant potatoes. This causes problems in the sector because these farmers are not experienced potato producers; they do not plant the correct cultivars and their disease control is inadequate, which results in ultimately low-quality produce ending up at the market. Imposing final duties by ITAC will only help McCain, as the biggest player, consolidate its dominance in the SA market. "Market dominance is in nobody's interest," said MacKay. "This only serves to create the conditions to increase the price that consumers pay for fries."

Earlier Wednesday, Thabile Nkunjana, an economist at the National Agricultural Marketing Council, told Cape Talk that while South Africa was a net importer of fries, the country needed to protect its market from dumping by other countries. "Other countries have imposed import duties against those same countries [Germany, Belgium and the Netherlands], for the same reasons and they've been doing it for some time. "We do have capacity issues with processing fries, but it's not about just having issues with the EU. There is evidence to support these claims [of dumping]." Dumping risk 'real' Asked about the call to scrap import tariffs on frozen fries, Potatoes SA concurred that South Africa faced a real risk of dumping, should Europe have an over-supply of product at any given time. Hanrie Greebe, the association's spokesperson, said extending the duties by five years, which is what they hoped ITAC would do, would encourage the industry to invest in expanding its processing capacity. "The current chips processors prefer to use their own cultivars for specific lines, but there is also more than enough evidence that the current table cultivars produced in South Africa will, to a large extent, meet the requirement for chips," she said, adding that processor capacity expansion falls within the mandate of the currentAgricultural Master Plan. "We, in the potato industry, are already consulting with role players on the implementation of such opportunities. There is sufficient reason to motivate that there are investment opportunities for infrastructure development and production capacity development within the potato environment in relation to processing." MacKay, meanwhile, poured scorn on hopes of expanding local production of these products, saying "processors have not made any developmental progress over the past seven years of protection" what, then, is the point of further protectionism, at the cost of the consumer?

1.1 Taking the article into consideration and with the aid of a graph, critically discuss import duties as a protectionist tool and explain how they may lead to food price inflation in this case.

1.2 Discuss the extent to which successful collusion would be possible in this sector..

1.3 Based on the nature of the product, describe the applicable type of price elasticity of demand.

1.4 Critically evaluate the decision to impose import tariffs on frozen chips, taking into consideration the motivation and consequence of imposing the tariffs.