Is SA making a wise economic decision by imposing tariffs on European chicken? Should consumers not benefit from the cheaper chicken that the European imports provide? These are two of the questions posed by those who have spoken out in defence of the dumping of leg quarters, which has plunged the South African chicken industry into a bare-fisted battle for survival.
Consumers want the cheapest price, while producers want reasonable profits and when the two meet and agree on a price that both can live with, that is what makes for demand-and-supply equations. However, there are never just consumers and producers in the picture: in any market, there are also importers and retailers and policy, which all play a role in the demand-and-supply equation. It is complicated and in the case of European agricultural products, the matter is further complicated by agricultural subsidies and many other EU policy regulations and rules.
As an economist, I believe in free trade, but I also know when one deals in the real world simple concepts become complicated and lobby groups on all sides have their own agendas. What happens is that free trade, especially in agriculture, becomes distorted.
The principle of fair trade implies the same rules apply in both trading partner countries. Ironically, the European Commission is very clear on this policy, as stated on its website’s introduction on the poultry trade: it is “essential to guarantee a fair competition between EU and third countries”.
“Further market access or lower import levies granted to countries that do not meet our standards will continue to weaken the competitive position of the EU poultry meat industry and will put at risk a sector employing more than 300,000 EU citizens.”
To answer the two questions, data, policy and regulation in home markets as well as producer situations and consumers in both sets of countries have to be considered.
As for the data, international studies by European universities have shown that South African producers are producing chicken cheaper and more efficiently than their European counterparts. This is borne out by the fact that South African whole fresh chicken in the country’s shops is cheaper than that in most European countries, while chicken breasts sell for less than half the price the Europeans charge for theirs. One cannot compare legs and wings, as those pieces are not measured by Euro Stats, possibly due to EU consumers’ preference for breast meat.
So, if South African producer prices and shop prices are generally lower, how then does European chicken meat enter SA cheaper than last-mentioned bloc can produce it? Surely South African producers cannot be selling the chicken at a loss to spite the Europeans?
The answer, of course, is they are not. The European poultry industry has benefits and advantages that have to be considered. The Common Agricultural Policy provided R800bn in subsidies to European agriculture in 2014. That is about 80% of our national budget that year and in 2017.
That means the grains and cereals European chickens eat that make up to 70% of the price, are subsidised, as are new material input costs. Even with these subsidies and a market of 500-million consumers providing scale, the European chicken industry is not competitive.
And do not take South African producers’ word for it. Here is what the North American Meat Association had to say in the run-up to the transatlantic trade negotiations with the EU: “US meat and poultry access to this market is severely limited currently due to a number of controversial policies.”
Europe wants “fair competition” at home and so they have set in place quotas and tariff levels that can be triggered on price and import volume levels on trading partner countries. The EU ambassador recently pointed out that SA “only” imported 21% of its chicken in 2015 (although this increased to 30% in 2016) and said that it was not a large amount and that the imports are not a big enough portion of the market to make a difference.
How ironic then to note that the EU only imports 7% of its poultry, yet that has triggered set quotas and tariff levels against countries such as Thailand and Brazil. The South African industry cannot just ship high-earning chicken breast to the EU, in which case the rest of the bird could be sold cheaper in the local market, allowing the industry a way to thrive.
This says something about what the EU expects from SA, a developing market, and itself. They want SA to allow imports while they themselves do not even have a quarter of the level of current SA relative import penetration.
The European Commission itself states its problem with imports as follows: “Today, the large majority of imports is under a quota licence system with firmly reduced or no import duties. Changes in the existing situation will impact the competitiveness of the EU poultry meat. A scenario with a 50% reduction shows that Argentina, Brazil, Ukraine and Thailand may offer breast meat at a lower price than the EU producers can [deliver].”
SA produces chicken at a similar price level as Thailand and so it, too, should be able to be competitive in European markets. In fact, the EU industry cannot compete on its own against the majority of countries that produce chicken at scale. Even with subsidised cereal production direct export assistance is more than 40% for their poultry industry, according to the Transnational Institute.
So without tariffs SA, the world’s fifth-most efficient poultry industry, would lose out to one of the world’s higher-cost industries.
EU producers receive direct and indirect subsidies, export assistance and quota protection in their home market for their higher-margin white meat and have complicated animal-health and animal-welfare measures in place to provide protection. These barriers trigger protection when imports are barely 7% of the total market, but the EU wants SA to accept far higher levels.
Is this then a fair trade? Certainly not, by any measure. Several European countries have been found guilty of unfair trade practices and have been accused of destroying chicken industries in countries such as Ghana, Benin and Nigeria since 2000.
Small-scale family farmers and industrial farms alike were driven to closure, even if they produced at efficient levels — none could compete with subsidised chicken.
So what will happen if measures are not taken to protect SA’s poultry industry? South African consumers might initially have a short spell when slightly cheaper brown meat is available. The local poultry industry will go the route of some other countries in Africa, where small farmers found that they could not compete and went out of business.
Poultry is the biggest agricultural industry in SA and provides more than 100,000 jobs. Most of those jobs in the chicken industry will be lost. Moreover, soy and yellow maize farmers will also hurt as they sell most of their production to the chicken industry. So jobs will be cut drastically in these industries, and this will mostly happen in rural areas, which have very few job opportunities as it is.
The job losses in the chicken and related industries will add to the 9-million people who are jobless and would probably also result in more people claiming social grants and other assistance from the state.
This will mean extra state expenditure, while the tax base will suffer too.
The balance of payments will suffer as the total boiler-meat market turnover is in the order of R40bn a year at producer prices. If these volumes were imported at the same price the balance of payments would decline by 1% of GDP. SA already has a 4% — at times 6% — deficit and as this one-percentage point change would be relatively permanent, it is likely to lead to more pressure on the rand. Inflation would increase, too.
When the local industry has been shut down, consumers who want chicken breast would have to pay more for it. As chicken breast prices are generally much higher elsewhere than in SA, it would be sorely felt by middle-class South African consumers.
With no local industry to speak of, poorer consumers will find that brown chicken meat is no longer that cheap. Due to a weaker rand and because export assistance to SA will no longer be needed, the result would show in higher thighs and drumsticks prices, too.
It will be a disaster. In the final equation, the government really does not have a choice but to intervene. If the EU wants to import into SA, the country must have a fair fight and apply the same relative quotas and tariffs to European chicken meat that they would apply on others.
What is good for the goose has to be good for the gander.
by MIKE SCHUSSLER
Schussler is chief economist at economists.com.
This article was first published on www.businesslive.co.za on 14 March 2017