South Africa has a globally competitive and domestically significant citrus industry ranked 10th in the world in terms of production.
It is the world’s second largest exporter of citrus fruits after Spain, and yearly exports an average 2.3 million tons or 75% of production. According to the Citrus Growers Association (CGA), the value of exports in 2023 amounted to R31 billion. This year’s export volumes are projected to increase by 11% to 2.7 million tons.
The industry is well invested for the future with significant planted hectares that are less than a decade old. This is particularly the case for mandarins and lemons, which are in high and growing global demand. To further position the industry for the future and entrench its comparative advantage, the state-owned agricultural research agency, the Agricultural Research Council, recently launched the world’s first seedless lemon variety, Eureka. This industry is fit for the future.
As an export-oriented industry, shifting geopolitical tensions present constant risks. In 2023, the European Union (EU) accounted for about 40% of total citrus exports while the United Kingdom and North America accounted for 8% and 6%, respectively. Continued access to EU market is increasingly coming under threat from abrupt, stringent, and costly changes to phytosanitary requirements imposed on citrus fruits from the Southern African Custom Union (SACU). These new measures are imposed even though South Africa developed a ‘citrus system approach’ to ensure fruits exported into the EU are free of false codling moth (FCM) and citrus black spot (CBS).
The new phytosanitary measures are said to protect the EU borders from the possible spread of FCM and CBS. Unhappy with the measures, the South African government approached the World Trade Organization (WTO) for dispute resolution, arguing that the measures imposed lack a scientific basis, technical justification, and are not fit for purpose. This is reminiscent of a tale told in a book ‘Our Iceberg Is Melting’ by John Kotter wherein penguins looked on haplessly as their iceberg, and thus their home, was melting except that the government is choosing to do something about it.
To understand this dispute, it is important to look at the developments outside the citrus industry, specifically the poultry industry. Here, the EU and South Africa have had trade disputes relating to the latter’s anti-dumping duties imposed on poultry products from the former. For years, South Africa’s poultry industry has been petitioning the government for protection against cheap imports from Brazil, the United States (US) and Europe. Relenting, the government imposed anti-dumping duties on imports from Brazil and Europe. The government initially wanted to impose similar anti-dumping duties on poultry imports from the US but was made to realise that such a move would imply a repeal of an agreement reached under the African Growth and Opportunity Act (AGOA), which could have led to automatic exclusion of South Africa.
As an alternative, SA and the US created a Tariff Rate Quota (TRQ), which currently stands at 71 963 tons. Anti-dumping duties are waived on TRQ with a flat duty on excess volumes. The creation of TRQ is significant as it provides a gleam of what South Africa can do to appease and please the EU without imposing significant costs to the South African poultry industry.
South Africa’s exports under AGOA were over US$3.6 billion in 2023 with the automotive industry being the biggest beneficiary. Two-thirds of South Africa’s agricultural exports to the US are under AGOA. It is for this reason that the South African government opted for TRQ instead of anti-dumping duties. However, unlike the trade policy position adopted for the US, South Africa opted for a different policy involving anti-dumping duties on poultry imports from Spain and Denmark. Spain accounts for less than one percent of the total poultry imports.
Spain and South Africa are the world’s leading citrus exporters. To a layman, these two countries can be seen as competitors, but they aren’t as their marketing windows do not overlap. South Africa, a Southern Hemisphere producer, competes with other Southern Hemisphere countries such as Chile and Argentina. Therefore, import restrictions imposed on South Africa create supply and demand imbalances in the EU, with effects showing up in the form of higher citrus prices to the detriment of the European consumers.
South African farmers and workers, on the other hand, bear the costs through reduced prices, high cost of compliance that the CGA puts at R4 billion, reduced employment and ultimately reduced profitability. A policy designed to force household consumers to subsidise production in one country, in this case the EU, has the effect of forcing producers to subsidise household consumption in another country, in this case South Africa.
Faced with anti-dumping duties, the EU had three options. Firstly, the EU could decide to do nothing, implementing no countervailing measures. Economists call this the ‘free market’ or ‘free trade’ option. Under this scenario, both South Africa and Europe benefit, each playing to its comparative advantages.
Secondly, the EU could force Spain and Denmark to stop dumping or exporting poultry products below cost onto the SACU market. However, supply and demand dynamics between SACU and the EU make this option tricky. European consumers prefer white portions (breasts) while South African consumers prefer brown portions (e.g. drumsticks, thighs, wings etc). White portions, which are in high demand in Europe, are premium priced, enabling subsidisation of brown portions. Europe ends up with surplus stock of brown portions, which are in high demand in South Africa, whose production capacity is below total domestic demand. Premium pricing of white portions delivers profits to the European producers, enabling them to dump surplus stocks in South Africa and the SACU market.
Thirdly, the EU could opt for retaliation, invoking ‘beggar-thy-neighbour’ trade policies. These policies are aimed at expanding domestic production behind protective trade walls. South Africa’s anti-dumping duties were designed to give the domestic poultry industry protective cover to increase capacity and gain market share against imports. Therefore, the new abrupt phytosanitary measures on SACU’s major agricultural export commodity, citrus fruits, can be seen as retaliatory.
It should be noted that in a hyper-globalised world, every country is affected by policies and conditions initiated abroad. When one country boosts its production relative to domestic demand and if that country can freely export its excess production, its trading partners must reduce their production relative to their own domestic demand. This is because supply and demand must balance globally. Since the global financial crisis (GFC) of 2007/08, countries are increasingly becoming interventionists and mercantilists to protect domestic economies.
So, what is to be done to ease the impasse? The revised Medium-Term Strategic Framework 2019-2024 (MTSF), which is on its last year, notes that one of the key underlying constraints to the economy is policy incoherence and contradictions, among others. The above demonstrated that policy inconsistences require a compromised system solution that can deliver benefits to both the poultry (i.e. some level of protection) and citrus (i.e. continuing unfettered access to the EU market) while taking into consideration the EU’s interests. By its very nature, a compromised solution carries minimal costs to parties involved. In this case, the South African government can negotiate a similar TRQ with the EU on poultry imports based on, say, a three-year average volume of EU imports. Such a TRQ will also be aligned with the Most Favoured Nation (MFN) principle of the WTO, which requires that countries offer similar trade concessions on similar products to the trading partners. Anything less may lead to escalating trade tensions with worse consequences for both SACU and the EU.
Disclaimer: The views expressed in this article is solely that of Independent Agricultural Economist, Robert Matsila, and does not necessarily reflect the views of Mzansi Agriculture Talk, his employers, or other associated parties.
