A Customs Union is formed when a group of countries agrees to charge the same import duties as each other, on top of having a free trade area. The Customs Unionwas launched in June 2009 with a three year transition period for tariff alignment. The common external tariff stipulates that a rate of 0% will be applied to capital goods and raw materials, 10% to intermediate goods, and 25% to finished goods by all member states.
It should be noted that 17.5%of Zimbabwe’s tariff lines already comply, 18.6% are below and 63.9% are above and will have to be reduced. Zimbabwe’s readiness to join the Union becomes dubious when one looks at the current policy environment and the challenges facing industry – such as inadequate capitalization; liquidity constraints; high operating costs; insistent power outages; competition from cheap imports, antiquated machinery and depressed demand. All these negatively impact on export competitiveness.
Increased power tariffs since September have aggravated the problem – the cumulative effect of which has seen capacity underutilization of around 42.7%. These factors are making it difficult for the manufacturing sector to compete with imported products.
Research shows that 81% of firms are facing competition from imports, and 48% of the products manufactured locally are not competitive with imported ones. These are not good conditions for opening up ourborders. The majority of firms indicated that they require at least five years of protection for their products to becompetitive.
To prove that they are not crybabies seeking to enrich themselves with protection, the majority of firms have concrete plans, such as retooling of equipment; measuring efficiencies against world class benchmarks and closing any gaps; up-skilling employees; mechanization to improve production efficiencies and reduce costs; new product development; product quality improvement; increased marketing and advertising.
The positive side of joining the Union is increased capital investment, by 5-10%, because of the 0% CET on capital goods. Some firms are currently paying punitive duties for importing capital goods. The 0% CET on raw materials will also improve performance, as manufacturers will be able to source raw materials more cheaply.
The biggest impact of joining the unionis in thetrade of finished goods. The influx of cheaper imports that will take place when we join the Union, will not only catalyze deindustrialization, but will result in Zimbabwe becoming a supermarket for other economies. This will result in the prices of locally manufactured products going up even more.
In the mid-term fiscal policy review of 2011, government took a protective stance on the manufacturing sector, by increasing import duties on selected food products. This was aimed at increasing capacity utilization, promoting value addition and creating employment. So one wonders if they now want to join the Union, which will undo all this.
Our trade deficit is widening cataclysmically. In 2010 our trade deficit was $2.2 billion, and in 2011 it surged to $5.5 billion. It is obvious that we are not ready to join the Union and government should consider remaining in the COMESA free trade area and focus on capacitating local industry.
As Zimbabweis also a member of SADC, which is also in the process of transforming into a Customs Union, it needs to carefully decide which one to join. A country can only belong to one Customs Union. There are also efforts to have a Grand FTA which brings together COMESA, SADC and the Eastern African Commission.Post published in: Opinions & Analysis