Quotas on Chinese imports of textiles and clothing

It has been over a year since the South African Department of Trade and Industry (DTI) introduced quotas, restricting the amount of clothing and textile imports entering South Africa from China. And according to industry bodies the quotas have not made the struggling clothing and textile companies more competitive because “the two year period (January 2007-December 2008) is too short for them to earn a return on investments in new machinery”.

The basic objective of the quota was to curb the amount of imports from China and provide a brief window of opportunity for SA manufacturers to become more efficient. However, retailers have circumvented the process by re-routing Chinese goods through other countries or by simply importing from other Asian economies. In response to the failed policy Iqbal Sharma, the acting deputy director-general of the DTI recently suggested that, “A review process of the quotas with all stakeholders will be started probably around the middle of the year to discuss whether to extend them for another year.”

But quotas are a particularly damaging form of intervention because governments arbitrarily decide the level of control that they deem necessary to protect local manufacturers. Furthermore, the evidence shows that protected industries never become more efficient. Indeed, they have no incentive to do so and persistently appeal for extensions of protection. In the interim, poor consumers at the low end of the market, the ones that have typically benefited from cheaper imports, have to pay for the inefficiencies of South African manufacturers.

The restrictions open the door for corruption because customs officials are given the power to decide which importer’s goods will be allowed entry and the quantities each will be entitled to import. The result is that certain influential importers are given preference over others. Quotas are also set without any scope for changes in demand so some importers, realising the potential to fill a gap in the market, may resort to smuggling to accommodate the increased levels of demand. Not surprisingly, industry sources have pointed out that illegal imports and under-invoicing have continued despite the efforts of the South African Revenue Service.

Subsidies and artificial barriers such as tariffs and quotas only serve to harm the majority of South African citizens. When trade is open, domestic and foreign consumers decide which industries will prosper and the increased competition leads to greater efficiency overall. If government has the interests of all its citizens at heart, especially the poorest, it should reconsider this measure, which cannot fail to do considerable harm.

According to Morgan Stanley imports from China have saved American consumers more than $600 billion dollars over the past decade or so. Similarly, it is the majority of South African’s who benefit from savings on imports from China and are adversely affected by quotas. If the government really wishes to help South African manufacturers of clothing and textiles it should make the environment in which they operate more conducive to doing business. This could be achieved by substantially reducing the taxes it imposes on clothing and textile manufacturers, and reducing the costs of doing business in South Africa.

Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article/ 19 February 2008