The issue, raised by economist Mike Schussler in an article in Business Day, is the apparent switch in import tariff codes after chicken is shipped from Brazil and before it arrives in South Africa.
Is there a simple explanation, he asks, or is there something sinister going on? Could it indicate an attempt to avoid millions of rands in import duties?
That was the situation when the FairPlay Bulletin reported on it three weeks ago. Responses since then from Brazil and from South African importers have only deepened the mystery.
On behalf of Brazilian exporters, Ricardo Santin, president of the Brazilian Association of Animal Protein, said Brazil correctly categorised its exported chicken, according to its own trade code classification. He pointed out that South Africa and Brazil use different trade codes.
“If there are indeed discrepancies, they are certainly not originating at a Brazilian level, and are therefore outside Brazil’s area of control and responsibility.” So, not us but maybe you.
Paul Mathew, CEO of the Association of Meat Importers and Exporters in South Africa, did not directly address the apparent change in tariff codes. He said in essence that Schussler had completely misunderstood a very complicated issue. Matthew also pointed out that South Africa, apparently alone, classifies whole chicken, offal and mechanically deboned meat (MDM) under the same tariff code.
This indicates the need for an urgent harmonisation of tariff codes. If you export whole chicken from Brazil, it should arrive as whole chicken in South Africa, and not as MDM or any other chicken product. There should be no code changes in mid-ocean.
It also indicates a temptation for wrongdoing, particularly as MDM is imported in vast quantities. It comes in tariff-free, while high tariffs apply to other Brazilian imports such as whole chickens (82%) and leg quarters (62%).
Is anything untoward happening? Quite possibly, says David Wolpert, a former head of the importers’ association. His successor says it’s all a misunderstanding.
The issue can only be resolved by a thorough investigation by the SA Revenue Service, to which tariffs are paid, and by corrective action on tariff codes. If any wrongdoing is found, let the law take its course.
A case of carelessness, confusion or corruption?
This is not the first time apparent discrepancies have been reported between what is listed as leaving Brazil and what is listed as arriving in South Africa.
The key seems to be MDM, because it’s the largest single category of chicken imports, and it comes in duty-free. MDM is a paste used in the manufacture of processed meats such as polony.
In 2018 a report by the Department of Trade, Industry and Competition (DTIC) noted that while only 5 000 tonnes of MDM was reported as having been exported from Brazil, some 110 000 tonnes arrived in South Africa, according to official SARS statistics.
That was the year in which South Africa imported a total of 154 507 tonnes of MDM, with an import price of R937 million. Two years later, MDM imports had climbed to 200 723 tonnes, priced at R1.37 billion.
In 2020, a confidential report into import pricing also noted disparities between SARS import statistics and other data sets. That makes it difficult to ascertain whether the difference is wrongdoing, carelessness or simply confusion between two different sets of data for the same chicken product.
Here FairPlay agrees with importers: we have to compare apples with apples. Let’s look at a system where we can track MDM, leg quarters, thighs, drumsticks and wings from Brazil to South Africa. Let’s find out what’s happening, where it’s happening and put it right.
Brazil’s regulatory lapses
Brazil is the world’s largest exporter of beef and poultry, but its meat plants have a troubled history with regulators and food safety.
In 2017, the “Weak Flesh” scandal led to the prosecution of a number of officials for allegedly bribing government officials to approve the sale and export of tainted meat. This scandal led to a number of countries temporarily banning Brazilian meat exports.
It also led directly to further prosecutions in the “Trickery” scandal in 2019, with Brazil’s largest exporter accused of evading food safety checks from 2012 to 2018.
Food safety concerns have also led to other markets banning Brazilian products, including the EU and Saudi Arabia. In 2019, the Guardian newspaper in London claimed that an investigation had shown that a fifth of Brazil’s chicken exports were contaminated with the potentially fatal salmonella bacteria.
While there’s no evidence yet of tariff or price manipulation, this history strengthens suspicions and shows the need for an investigation. Scandals in the meat industry in Brazil relate to regulatory wrongdoing.
The master plan has some of the answers
In theory, the poultry master plan could have solved the problem by now. The plan recognises the potential for “illegal or illicit transactions” and sets out to stop them.
By March 2020, the DTIC and SARS were supposed to have reviewed regulations “to identify more effective ways to prevent incorrect classification of imports (reporting under the wrong tariff heading), under-declaration and other fraudulent practices, and to prevent serial offenders from continuing to trade”.
Under-declaration is when imports are declared at prices lower than their true value, so import duties are paid on the lesser amount. That’s fraud, as the master plan notes. The master plan also seeks action against round tripping, where imports come in tariff free, because they are supposedly for re-export, but in fact they stay in South Africa.
The master plan is behind schedule, mainly because of the impact of the coronavirus pandemic, but efforts are being made to catch up. Tariff investigations are underway by a task team including SARS officials. May they proceed with speed and vigour.
A lose-lose for local industry and consumers
This task team could start by looking at anomalies in the SARS monthly import statistics.
In April this year (the latest figures available) whole frozen chickens from Brazil were imported into South Africa, before import duty, at R13.67/kg. Frozen leg quarters were imported at R13.85/kg. Both prices are way below production costs in Brazil.
However, South Africa also imported Brazilian chicken feet at R14.34/kg – this more expensive than whole chicken and leg quarters, both of which sell at retail level for nearly twice the price of chicken feet.
Similarly, in the same month that South Africa imported chicken feet from Argentina at R13.77/kg and leg quarters at only R12.15/kg, chicken feet from Spain landed at R14.38/kg compared to R14.80/kg for chicken thighs.
The United States, too, provided cheap imports – boneless thighs (R10.27/kg), leg quarters (R12.45/kg), thighs (R9.52/kg) and drumsticks (R14.28/kg).
Unfortunately none of this benefits consumers, because by the time imports reach the shops, prices have risen to close on the prices for local chicken.
Looks like the benefits go elsewhere – to importers and middlemen.