South Africa’s citrus industry faces a major challenge as the EU imposes strict rules on exports. According to agricultural economist Robert Matsila, navigating trade disputes requires smart compromises.
South Africa has a globally competitive commercial agriculture sector, with the citrus industry being a prime example. Ranked 10th globally in terms of production, it is the world’s second-largest exporter of citrus fruits, following Spain.
Annual exports average 2.3 million tonnes, which represents 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 tonnes. The industry is well-positioned for the future, with significant planted hectares that are less than a decade old, particularly in the case of mandarins and lemons, which are in high and growing global demand.
To further secure the industry’s future and strengthen its comparative advantage, the state-owned Agricultural Research Council (ARC) recently launched the world’s first seedless lemon variety, Eureka. Consequently, the industry is well-prepared 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 the EU market is increasingly under threat from abrupt, stringent, and costly changes to phytosanitary requirements imposed on citrus fruits from the Southern African Customs Union (SACU). These new measures are being enforced despite South Africa developing a “citrus system approach” to ensure that fruits exported to the EU are free of false codling moth (FCM) and citrus black spot (CBS).
The new phytosanitary measures
The new phytosanitary measures are purportedly intended to protect the EU’s borders from the possible spread of FCM and CBS. Unhappy with these measures, the South African government approached the World Trade Organisation (WTO) for dispute resolution, arguing that the measures imposed lack a scientific basis, have no technical justification, and are not fit for purpose.
This situation is reminiscent of the story in John Kotter’s book, Our Iceberg Is Melting, where penguins helplessly watch their iceberg – and thus their home – melting, except in this case, the government is choosing to take action.
To understand this dispute, it is important to consider developments outside the citrus industry, particularly in the poultry sector. Here, the EU and South Africa have had trade disputes concerning the latter’s anti-dumping duties imposed on poultry products from the former.
For years, South Africa’s poultry industry has petitioned 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.
Initially, the government intended to impose similar anti-dumping duties on poultry imports from the US but was made to realise that such a move would imply the repeal of an agreement reached under the African Growth and Opportunity Act (Agoa), which could have led to South Africa’s automatic exclusion. As an alternative, South Africa and the US created a Tariff Rate Quota (TRQ), currently set at 71.963 tonnes.
Anti-dumping duties are waived on TRQ, with a flat duty applied to excess volumes. The creation of the TRQ is significant as it provides a glimpse of what South Africa can do to appease the EU without imposing significant costs on the South African poultry industry.
SA’s trade policy and Agoa
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. This is why the South African government opted for the TRQ instead of anti-dumping duties.
However, unlike the trade policy position adopted by 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 total poultry imports.
Spain and South Africa are the world’s leading citrus exporters. To a layman, these two countries might be seen as competitors, but they are not, 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, resulting in higher citrus prices to the detriment of European consumers. South African farmers and workers, on the other hand, bear the costs through reduced prices, high compliance costs – estimated by the CGA 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, effectively forces producers to subsidise household consumption in another country, in this case, South Africa.
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Faced with anti-dumping duties, the EU has three options. Firstly, it could choose to do nothing, implementing no countervailing measures. Economists refer to this as 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 challenging. European consumers prefer white portions (breasts) while South African consumers prefer brown portions (e.g. drumsticks, thighs, wings). White portions, which are in high demand in Europe, are premium priced, enabling the subsidisation of brown portions.
Europe ends up with surplus stock of brown portions, which are in high demand in South Africa, where production capacity falls short of total domestic demand. Premium pricing of white portions delivers profits to 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 barriers.
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.
Finding a compromise
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 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 have increasingly become interventionist and mercantilist to protect domestic economies.
So, what can be done to ease the impasse? Both the revised Medium-Term Strategic Framework 2019-2024 (MTSF) and the Agriculture and Agro-processing Master Plan (AAMP) highlight policy incoherence, ambiguities, and contradictions as some of the constraining factors holding back the sector, which need to be resolved. Furthermore, Pillar 5 of the AAMP speaks to facilitating market expansion, improving market access, and promoting trade.
The above policy inconsistencies demonstrate the need for a compromised system solution that can deliver benefits to both the poultry industry (i.e. some level of protection) and the citrus industry (i.e. continued unfettered access to the EU market), while considering the EU’s interests. By its nature, a compromised solution carries minimal costs to the parties involved.
To this end, the South African government could negotiate a similar TRQ with the EU on poultry imports, based on, say, a three-year average volume of EU imports. Such a TRQ would also align with the Most Favoured Nation (MFN) principle of the WTO, which requires that countries offer similar trade concessions on similar products to trading partners. Anything less may lead to escalating trade tensions, with worse consequences for both SACU and the EU.
- Robert Matsila is an agricultural economist and sector specialist: agriculture and agribusiness at the Public Investment Corporation. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Food For Mzansi.
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