Economics IA - International Economics PDF

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Submitted IA about South African poultry trade, relating to the International Economics section of the course....

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International Economics IA

Protectionism in South Africa’s Chicken Market

This article1 describes the request of the South African Poultry Association (Sapa) for increased tariffs on imported frozen chicken portions. Sapa claims imported chicken affects its domestic industry’s competitiveness, as chicken, mainly from Brazil, is dumped in South Africa. Dumping is ‘selling... goods to another country at a price below the original domestic production costs’2, affecting balance of trade. Sapa calls for chicken tariffs to increase to 82% - a protectionist measure taxing imported goods to reduce their consumption domestically.

Market for Chicken in South Africa

Price of chicke n ($/kg)

S (domestic)

PE S (world + tariff)

P2

b

a

d

c

e

f

S (world)

P1

h

g Q1

i Q3

j QE

k Q4

D (domestic) Q2

Quantity of chicken (kg)

The diagram shows the effects of Sapa’s proposed tariff. Dumping from foreign markets 1 Siseko Njobeni, ‘SA poultry industry wants hefty increase in tariffs to protect local industry’, BusinessDay, 16 January, 2019, https://www.businesslive.co.za/bd/companies/land-and-agriculture/2019-01-16-sa-poultryindustry-wants-hefty-increase-in-tariffs-to-protect-local-industry/. 2 Sean Maley and Jason Welker, Pearson Baccalaureate: Economics (Great Britain: Pearson, 2011), 433.

means domestic producers producing at (PE) struggle to compete with foreign producers selling at (P1) - countries like Brazil import at a comparative advantage. However, a tariff on imports would cause prices to increase to (P2) because of the government-added import tax, of 82% in this case. Eliminating cost advantages of dumped imports means domestic producers’ revenues increase from g to a + b + c + g + h. Imports are more expensive to buy, so domestic firms have a larger share of demand (0-Q3). Also, overall quantity demanded falls from (0-Q2) to (0-Q4) because raised prices make chicken less attractive to consumers, who could potentially favour cheaper substitutes like vegetables. Additionally, foreign producers’ revenue falls from h + i + j + k to just i + j (due to quantity being reduced from (Q1-Q2) to (Q3-Q4)), and the government receives the tariff imposed: d + e. Welfare loss is also a result of imposing the tariff. Importers produced (Q1-Q2) at h revenue, but now relatively productively inefficient domestic producers need h + c revenue, meaning c shows the waste of world resources. Another deadweight loss is f: it is no longer purchased, as (Q4-Q2) is not demanded, so represents a loss of consumer surplus.

International trade involves many stakeholders, here including customers with different incomes, South Africa’s government, foreign producers and - most significant in this article domestic producers, represented by Sapa. A tariff increases chicken price for all consumers. According to the article, 100,000 South Africans are employed directly and indirectly by the poultry industry. If, as a result of the tariff reducing the availability of relatively cheap imports, many people turned to chicken substitutes, many of those 100,000 workers could become unemployed, with subsequent negative consequences on personal, local and national productivity. However, if chicken is more price-insensitive - due to few cheaper alternatives - increased domestic production could lead to multiplier effects in communities, increasing national GDP. Conversely, price inelasticity could mean demand reduction is minimal, meaning the tariff is ineffective as many imports are still consumed. It also affects secondary domestic producers using chicken in food production, like fast food. As this is an inferior good, increased prices of ingredients have disproportionate impacts on low-

income families and those with already limited opportunities, widening South Africa’s already-large wealth disparity (with the highest Gini coefficient globally) 3. If equality rather than protecting domestic economies is the government’s priority, this may be a negative decision. Foreign producers face a smaller impact relative to domestic producers, because importers here, mostly Brazil - do not make a full return on profits, as they sell surplus goods at a loss. Despite still suffering the tariff’s adverse effects - including a loss of trade, leading to reduced revenue and potentially increased unemployment and losses in the sector - changes like reducing supply levels to reduce surplus goods could mitigate its loss of the South African market. The government collects the tariff, adding to its revenue. It can therefore invest more into social programs like quality education, increasing long-term productivity, and infrastructure like transport and irrigation, decreasing domestic costs of production. The article gives examples of Mexico, Japan and Korea’s tariffs of 109-193%, significantly higher than South Africa’s proposed 82%. This suggests that it relies on importing Brazilian chicken to meet domestic demand, resulting in less bargaining power than higher-income countries with less dependency. It could also be a measure to limit international retaliation. However, by introducing this protectionist measure South Africa could reduce dumping, and its current account deficit 4: imports fall and revenue expands, reducing dependency on loans. However, deadweight losses of welfare reduce the tariff’s applicability: consumer surplus decreases, affecting consumer choice, and world inefficiency is detrimental to the world’s resources. A tariff may benefit South Africa - but this is dependent on chicken’s price elasticity. An alternative solution is subsidising domestic production. Introduced alongside a tariff, tax revenues from the tariff could be invested in domestic agriculture, thus improving the quality and competitiveness of South Africa’s chicken industry in the long-run.

3 ‘Inequality index: where are the world's most unequal countries?’, The Guardian, accessed January 31, 2019, https://www.theguardian.com/inequality/datablog/2017/apr/26/inequality-index-where-are-the-worlds-mostunequal-countries. 4 ‘South Africa Current Account’, Trading Economics, accessed January 31, 2019, https://tradingeconomics.com/south-africa/current-account.

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