Patel is powerless to stop Chinese e-commerce tsunami
I see trade, industry & competition minister Ebrahim Patel is finally cottoning on to Shein and Temu scuppering any hopes he had of revitalising SA’s moribund clothing and textiles industry.
It is well documented that cheap Chinese imports picked at the seams of the industry in the late 1990s, causing it to unravel.
Despite increased tariff and trade protection and a flurry of localisation master plans since, more than half the textiles sold by SA retailers are imported and about 60% of imports are from China.
During a visit to a local clothing factory in Epping recently, Patel called for an urgent levelling of the fashion playing field, saying Chinese ecommerce platforms should pay equitable import tariffs and VAT to balance the clothing retail sector’s performance. It is astounding to me that Patel used the word “urgent” given that in July 2023, when he disclosed the findings of the Competition Commission’s market inquiry into online platforms at a media launch, he pledged an investigation into Shein.
The commission’s market inquiry focused only on certain global (mostly US) online platforms such as Google and Amazon, which act as intermediaries between businesses and customers. But it didn’t consider the far broader effect of SA consumers switching to purchases online from large offshore suppliers, mainly in China, including via social media sites such as Facebook.
Patel’s inquiry focused on import tariffs, but he will struggle here. You’ll not hear these words coming out of my mouth very often: I think to be fair to Patel he is trying to address the issue, but the problem is incredibly complicated.
What Shein and Temu are doing — this is not just an SA issue — is exploiting the global provision in most countries’ customs laws called the de
minimis rule. It says if a package coming into the country has a value below a certain amount it has an automatic exemption from import duties. The problem is, if you fix the law you also have an effect on other traders that are not doing anything dodgy but fall into the same net.
The other thing you’ve got to be careful of is this reflex reaction to protect the incumbents. Shein and Temu are clearly disruptive, but they’re also akin to the physical goods manifestation of a Netflix or Amazon Prime. They are taking a service directly out of wherever they are situated to the consumer without going through the intermediaries, where the big rents have traditionally been earned.
The internet allows you to remove the middleman, and with it all of the costs that go with those intermediaries. This, of course, is the issue.
LIABILITIES
Patel argues that we should be adding up the value of all of Shein’s shipments, for example, and then basing duty calculations not on a parcel worth, say a few hundred rand, but on shipments worth R20m a month. However, you can’t really do that because that’s not what’s happening. The import duty liabilities are not payable by Shein or Temu, but by the importer: you and me. I don’t know what the solution is.
Meanwhile, dLocal, a Nasdaq-listed company, has established a subsidiary in SA to facilitate payments to offshore retailers. It describes itself as enabling “global merchants to connect seamlessly with billions of emerging-market users”.
In December the Competition Tribunal upheld an application for interim relief by dLocal, which required that credit card company Visa stop applying its anti-money-laundering rules to prevent dLocal from processing credit card transactions in SA for Shein, in the same way Visa processes local sales. This is despite Visa’s insistence that the transactions violated exchange control regulations. These transactions run to millions, if not hundreds of millions, of rand.
It is unclear whether Patel has asked the Reserve Bank to investigate whether it’s unlawful for dLocal to process these transactions and remit large amounts in bulk to suppliers based offshore, as alleged by Visa. In the meantime, Shein and Temu are steadily eating the lunch of local retailers such as TFG and Mr Price. Not only clothing but also homeware is increasingly imported by South Africans rather than bought in local shopping malls.
This is fantastic news for those consumers who want inexpensive fast fashion and home décor but loathe shopping malls. It is clearly not good news for the domestic manufacturing sector or retail property owners, which must deal with loadshedding, dysfunctional ports and unreliable logistics, and adhere to Patel’s ambitious (and growing) targets for local procurement.
These are outlined in the department’s master plans and reinforced by merger decisions by the competition authority. Global fast fashion merchants, as well as the online payment processors that support them, face no such constraints.
On paper — especially just before the election — the government is committed to protecting local textile workers and maintaining SA’s exchange controls. In reality, SA consumers are swiftly switching to buying online from global market. Patel is powerless to do much about it.