. . . Reduction from 50 to 15% won’t change trajectory
. . . Kenya and Ethiopia enjoy 5% lower tariff at 10%
. . . Logistical costs add more hurdles on Lesotho
Mathatisi Sebusi/Mohloai Mpesi
DIRE consequences a set to imperil the country’s textile industry despite the United States reducing Lesotho exports tariff from 50 percent to only 15 percent, experts warn.
Lesotho was slapped with the tariff last week under an Executive Order issued by US President Donald Trump aimed at modifying reciprocal trade tariffs as part of efforts to reduce the persistent US trade deficit.
The new tariff follows an earlier 50 percent duty imposed on Lesotho’s exports on US Liberation Day in April.
Although the new 15 percent rate is a drastic reduction from the previous 50 percent, economists argue it still severely undermines Lesotho’s competitiveness in the US market, especially when compared to regional rivals such as eSwatini, Kenya and Ethiopia which face only 10 percent tariffs.
Analyst Robert Likhang said because Lesotho exports textiles to the American market, any tariff imposed significantly reduces the country’s trading power and competitiveness.
Given Lesotho’s low economic capacity, it cannot afford to absorb any level of tariffs without adverse effects.
“Tariffs harm Lesotho’s economy, regardless of the percentage,” said Mr Likhang.
Competitors such as Kenya and Ethiopia are currently subject to a 10 percent tariff.
This translates to increased competition for Lesotho’s textile sector because their prices are relatively lower, and they already enjoy a geographical advantage by being closer to the US market, which comparatively reduces their transportation costs.
He added that while a five percent tariff difference might seem small, when combined with higher logistics and production costs, the actual disadvantage for Lesotho is much greater.
Mr Likhang said the current 15 percent tariff places Lesotho at a serious disadvantage, potentially leading to loss of business. However, said there is a silver lining as this challenge presents an opportunity for Lesotho to rethink its reliance on the US market and explore alternative markets, instead.
“Had such tariffs been imposed 20 years ago, the impact would have been disastrous but today, the situation is different. Lesotho and its Southern African neighbours have made progress in developing the Southern African Customs Union (SACU) market.
“This offers a regional alternative for trade, reducing dependence on the US. This is an opportunity for Lesotho to review its export strategies beyond the US market,” Mr Likhang said.
He drew a comparison with China, which 40 years ago was a poor country but today it is the second-largest economy in the world.
This is a call for Africa to start thinking differently about trade, he said, because Africa has the potential to become its own a strong internal market, just as China did.
Africa has a total population of over 1.5 billion or about 18 percent of the global population, which is a huge potential market.
“To achieve this, African countries need to review trade laws, ease the movement of goods and labour, and work toward the vision of ‘One Africa, One Market’. This would reduce dependence on foreign markets and the damaging impact of tariffs.
“These tariffs are bad for Lesotho, but they also present a chance to learn and explore new market opportunities.”
Mr Likhang warned that the 15 percent tariff could lead to further job losses, though not as severe as when Lesotho previously faced tariffs as high as 50 percent.
He stressed the urgent need for diversification of Lesotho’s export markets to minimise the impact on employment and the country’s GDP.
Economist Majakathata Mokuena criticised the 15 percent tariff imposed by the United States on Lesotho’s textile exports, calling it abnormal and inconsistent with World Trade Organisation (WTO) rules.
“Trade issues between and among countries are usually negotiated at the WTO, of which the United States is a member,” Mr Mokuena explained.
He said the US’s imposition of such tariffs on other countries without proper negotiation violates WTO protocols.
Mr Mokuena highlighted that Chinese investors came to Lesotho to open factories specifically to take advantage of the profit margins enabled by the African Growth and Opportunity Act (AGOA). However, now that a 15 percent tariff has been introduced, these foreign investors may no longer see Lesotho as a viable destination for their capital.
“With the new tariffs, there is no longer a compelling reason for Chinese firms to continue operating in Lesotho. They (investors) risk losing buyers due to reduced demand,” he said.
He explained that it is the American buyers who import goods from Lesotho that must pay the tariff.
These buyers now face two choices: either absorb the added cost themselves or pass the cost on to their customers.
“If they choose the second option, the increased retail prices will erase the price competitiveness that AGOA originally provided, putting them at a disadvantage compared to domestic manufacturers in the US.
“This means their ability to sell cheap goods is eliminated. As a result, they may decide to stop buying from Lesotho altogether and switch to local US suppliers.”
He said such a shift would cause a drop in demand for Lesotho-made products, reducing or eliminating the number of orders sent to the country.
Mr Mokuena said without those orders, foreign-owned factories in Lesotho may close, unless the government steps in and negotiates alternative market opportunities.
He stressed that Lesotho does have potential export markets but lamented what he said was the lack of skilled negotiators.
“We need people who can negotiate effectively. Unfortunately, many individuals get close to power not because of their skills, but because of political affiliations.”
He noted that the South African market was a viable alternative but with an important caveat.
He said trade with South Africa is conducted in South African rands, not in US dollars which would mean Lesotho would lose out on foreign exchange earnings that it previously enjoyed under AGOA, where trade was conducted in US dollars.
Yet another economic analyst, Nkareng Letsie, said Lesotho’s export products are largely going to be affected as they would be more expensive compared to competitors like Kenya, eSwatini and Ethiopia which now have 10 percent tariffs on their exports to the US market.
“This means competition is going to be stiffer for Lesotho. But if they are equal, the competition remains the same as before the tariffs were imposed,” Mr Letsie said.
He added that the new tariff could prompt investors to relocate to other countries that enjoy lower tariffs.
“If it is stiffer, it means Lesotho’s products would be more expensive on the market compared to competitors. This might even cause investors to relocate to other countries, just like they had already moved to eSwatini complaining that Lesotho’s border processes are too long and that they do not have alternatives since we only work with South Africa.
“While on the other hand, when South Africa gives them problems, they (textile operators in eSwatini) can use Mozambican borders,” he said.
He said the five percent difference between Lesotho and her competitors gives those competitors a significant head start.
“That five percent margin means they will be better off, even though they were already competitive with wages and other factors. Now that their tariff is lower than the one applied to Lesotho, it means Lesotho will suffer.
“Remember, Kenya was already at a higher level of development than Lesotho, so this is going to negatively affect our export industry,” he said.
Asked whether it could help if the government subsidised products going into the US market, he said subsidies are not sustainable. Instead, he said the government must negotiate its trade relationship with the US to secure lower tariffs.
“Subsidies are not sustainable. How long are you going to subsidise? What has to happen is relationship negotiations so that our tariffs are not that high,” he said.
According to the Chief Executive Officer of the Private Sector Foundation of Lesotho, Thabo Qhesi, the tariffs have already led to significant order cancellations by US importers, causing factory closures and layoffs.
For example, one clothing manufacturer sent home most of its 1300 workers due to diminishing new orders.
“There is no way we are going to survive this. Even Chen of the Lesotho Textile Exporters is complaining that they won’t compete with their competitors, eSwatini and Kenya.
“We should expect closure. Another thing which is going to complicate things is that Maersk is going to close from the 1st of October. They are going to leave the Mediterranean Shipping Company, which might increase prices when there is no competition. This is another risk for Lesotho,” Mr Qhesi said.
He said it was possible to expect an exodus of investors to other countries that have been given a 10 percent tariff.
“We are expecting relocation, either going to eSwatini, Ethiopia, or Kenya, because I realised that Ethiopia also received 10 percent.
“I do not think the government did enough, although they want to say they did their best, hence we received 15 percent. I am not convinced,” he said.
