EU, Mercosur, Nigeria, India, AGOA Trade Negotiations: Progress Reports

Report on South Africa's Trade Negotiations (Appendix 1)

Chairperson: Dr. R Davies

SUMMARY
The Committee heard that overall progress with executing various negotiating mandates on free trade agreement has been positive, with the alignment and harmonisation of existing commitments whilst making room for future engagements. The Committee heard further that the continued building of capacity is going to prove an essential driver to the negotiation processes.

The Department reported that good progress has been made in regard to the EU, with the finalisation of the negotiations undertaken over the last few years. The Committee was briefed on the status of various agreements starting with Mercosur where preliminary discussions took place in the latter part of 2001 and it is envisaged that the next meeting of officials in the third quarter of 2002 will work on the Framework Agreement. India and Nigeria are poised to move beyond the political endorsement to the technical stage for negotiations on the framework agreement that will outline the parameters of the negotiations proper beyond initial political proposals.

MINUTES
The Chair reminded members that briefings on the Ports policy would commence next Wednesday and that the oversight visit to the DTI in Pretoria was in the pipeline. The Chair noted that the briefing by the Department would cover a mixture of geographical areas and on that note he welcomed the presenter Mr. Igbal Sharma to commence his presentation.

International Trade and Economic Development Division: briefing
Mr Igbal Sharma informed the Committee that South Africa finds itself being one of the most courted countries in the world with respect to preferential trade agreements. Mr. Sharma opined that this bodes well in respect of the government's policy of systematically opening the economy to foreign competition and promoting exports and inward investment, to support growth and employment.

Mr. Sharma revealed that the DTI established the International Trade and Economic Development (ITED) division within the Department in 2000 to lead the government's trade policies and strategies. This among other things include negotiating bilateral, regional and multilateral trade agreements aimed at growing and diversifying South Africa's export markets, and encouraging foreign direct investment.

Mr. Sharma pointed out that the daunting task of engaging with the world has to be considered in the context of ever-changing global dynamics with limited institutional capacity, and thus has to be managed in a strategic and efficient manner, so as to maximise the use of limited resources. He explained that the various negotiations in different parts of the world have to be aligned to become part of a holistic trade negotiations agenda and process.

Mr. Sharma noted that in the face of this expanding trade agenda, ITED's capacity has been severely tested. He posited that past experience and new demands have led the division's leadership to developing a world class, best practice-based division with essential competencies, which include cutting-edge knowledge of the economy, industry and trade patterns, as well as superior analytical, strategic, negotiating / diplomatic, information and project management capabilities.

European Union
Mr. Sharma continued that after more than 24 months in operation South African exporters are increasingly benefiting from the Trade Development and Co-operation Agreement (TDCA) with the EU, as exports covered by the agreement have grown faster than imports in Rand terms. He informed the Committee that exports have grown by 50% over this period but pointed out that there are discrepancies between SA and EU figures, which he attributed to different methods used in calculating trade flows.

Mr Sharma informed the Committee that there are technical trade matters that are outstanding that will occupy the attention of the Co-operation Council which include rules of origin, agricultural quotas, pending offers in the auto sector, implementation of the wines and spirits agreement. He reported that negotiations on a fisheries agreement have been suspended, due to a deadlock arising from the EU's insistence on access to South African waters. Consequently, he noted the fishery products are not covered by any of the preferential tariff arrangements of the TDCA.

Mr. Sharma reported that the Wines and Spirits agreements were signed on 28 January 2002 and are provisionally implemented subject to ratification by the SA and EU Parliaments. He continued that this is accompanied by the implementation of the 42 million litre duty-free quota on wine the EU offered South Africa, which is linked to the phasing-out of 'port', 'sherry' and other agreed names with retrospective effect from January 2000. He informed the Committee that a joint task team of DTI and NDA officials is working on the implementation package including a proposal for the release of Euro15 million from EU for the restructuring of South Africa's wine and spirits sector.

Mr. Sharma, again, revealed that so far only four EU countries have ratified the TDCA, that is Sweden, Netherlands, Denmark and Germany but that it is expected that ratification would accelerate with the conclusion of the wines and spirits agreements, but this has yet to be seen.

Mercosur
Mr. Sharma informed the Committee that the exploration of a possible preferential agreement with Mercosur is in terms of a framework agreement signed in December 2000 during President Mbeki`s state visit to Brazil. He pointed out that as part of this process, both sides have undertaken technical team visits to each other during 2001, and relevant information has been exchanged since 2002. He added that in October 2001, the first preliminary meeting of negotiators took place in Montevideo, Uruguay, and discussed proposals on modalities and timetable for the negotiations.

He explained that the next meeting is scheduled to take place in the third quarter of 2002 in Pretoria, and will discuss the architecture of the agreement. He added that the meeting would also flag possible sectors where preferences could be exchanged in the early stages of the negotiations as provided for in the Framework Agreement.

Mr Sharma pointed out that the estimated time frame for completing the negotiations is within 2 years if these commence in earnest by end of 2002 or beginning of 2003. A separate but related initiative is the proposed Mercosur joint trade mission to South Africa on 24-28 June 2002, reportedly the first ever such mission by the Mercosur group. He explained that the aim is to enhance business-to-business co-operation, and encourage the exploitation of opportunities available in the respective markets.

He noted that the Joint Ministerial Commission in India in March 2001, ITED presented the Indian Ministry of Commerce a draft South Africa-India Framework Agreement. The Indian side has not formally responded to the draft, though discussions at the mission level have moved the agenda toward signing the Framework Agreement by end 2002. It is anticipated that this item will form a concrete part of the agenda for the upcoming Joint Ministerial Commission (JMC), to be held in Pretoria in the fourth quarter.

Mr. Sharma noted with disappointment that there have been many multilateral and political interactions over the last twelve months that have diverted the focus of the Indian side. However, the upcoming visit of an Indian business / government delegation led by the Secretary of Commerce will be used to drive the negotiations into a phase of technical engagements outlining the process to be followed. In the interim, ITED is continuing internal analytical work on a possible agreement with India, focusing on automotive; agriculture and food processing; chemicals; capital equipment; clothing, textiles and footwear; ICT; electrical and electronics.

Nigeria
A draft framework agreement was presented to the Nigerian government in March 2001 during the Bi-national Commission (BNC) but that the Nigerian side only responded to the proposal during the fourth session of the BNC held in April 2002 in Pretoria. He pointed out that the respective deputy presidents reiterated their commitment to undertaking a possible FTA negotiation. The Nigerian side has presented its own draft framework agreement, which ITED and relevant stakeholders are studying. It is envisaged that negotiations for the conclusion of a MOU could commence in the third quarter of 2002.

People's Republic of China
During Pres Mbeki's State visit to the People's Republic of China (PRC), in December 2001, the Chinese side proposed a possible FTA to South Africa. Minister Erwin had met with his counterpart Minister Shi Guangsheng, and an agreement was reached for the establishment of two expert groups under the Joint Economic Trade Commission (JETC) to deal with various multilateral and bilateral economic issues between South Africa and the PRC.

Mr Sharma pointed out that key amongst these issues was the evaluation of a possible FTA between the two countries. ITED undertook a technical visit to China in April 2002 to gain a comprehensive overview of China, province by province and matched it with South Africa's national competencies. Additionally, consultations with SACU would form an integral part of SA's analysis and that the investigation process into the feasibility of a FTA with China would take approximately 12 -15 months, culminating in a report on the viability of a FTA. This report would then be tabled for political consideration.

AGOA (African Growth and Opportunities Act)
Mr. Sharma noted that South Africa was included as a beneficiary of AGOA in 2000 in spite of the fact that South Africa enjoyed preferential treatment in the US under the GSP system. AGOA has increased the products enjoying preferential access to the US market from 4500 (under GSP) to 6100. AGOA also improves on the GPS's annual renewal, by extending the duration of preferences to 8 years - hence it is set to run until September 2008.

He said that AGOA has great potential for boosting South Africa's exports to the US and attracting investments. The bulk of the preferences are in areas in which South Africa has a strong manufacturing capacity such as textiles and apparel, footwear, base metals and articles, chemicals and agro-processing. However, although AGOA grants preferences to 358 tariff lines in the base metals and articles sector, the latter have performed less impressively, and this could be due to the widespread use of anti-dumping in this area.

Early results from AGOA suggest that there is great scope to deepen penetration of the US market, and therefore merit to giving the USA's proposed FTA consideration, as a medium-term undertaking. While AGOA could help establish market presence in the US, an FTA could serve to lock-in the preferential treatment. He emphasised that AGOA in itself asks for reciprocity to be negotiated at the end of the AGOA term with the beneficiary countries. On a visit to South Africa in February 2002, USTR Ambassador Zoellick again emphasised Washington's desire to engage South Africa on a FTA. Mr. Sharma pointed out that a decision has been taken to examine the FTA and proposal as SACU, and a formal response to the US request would be made in due course.

Discussion
Mr. Bruce (DP) wanted information on the size of budgetary allocations the unit works with and the type of skills it has within its ranks.

Mr. Sharma said that the budget for the Department is R2.4 billion and that the ITEDD division was allocated 46 million, the bulk of which went to personnel who are 58 in number with 30 vacancies still vacant.

Mr. Sharma explained that his division's skills base is multifaceted and comprises of managers - most of whom have studied abroad and have been involved in trade policy for some time. He pointed out that the skills development component was one of the Department's critical success factors.

Mr. Bruce (DP) wanted to know whether there is any liaison between the Department and Foreign Affairs and how this relationship has been streamlined to meet the needs of businesses.

Mr Sharma replied that his division had close working ties with the Department of Foreign Affairs and that its staff is attached to various embassies abroad. However, the size of personnel in embassies has been scaled down from ten to five - a measure necessitated by the cost factor.

Mr. Redcliffe (NNP) sought to know the kind of relationship the Department had with the business community.

As for relationship with businesses, Mr. Sharma explained that his division acts on the mandate given by of stakeholders who include the private sector and government department. These mandates are then prioritised and any negotiations proceed on the bases of these priorities. There were various business forums that are set to engage the local business with their foreign counterparts, which lay a basis for future trade negotiations.

Mr. Redcliffe wondered if it is possible and permissible for the USA to abruptly withdraw AGOA benefits wholly or partly.

Mr Sharma replied in the affirmative and explained that AGOA was not an agreement but a GSP, which the USA has extended to Africa hence its susceptibility to a unilateral withdrawal of benefits. AGOA was an initiative by some Africa-American congressmen in 1994 but that so far only nine countries in Africa have the capacity to benefit from its liberal trade preferences. He reported that in 2000, African foreign ministers met to review the implementation of the AGOA and made overtures on how it should be structured but that there are no guarantees that the American administration would implement these recommendations.

Mr.Ripinga (ANC) requested trade statistics to demonstrate the impact of the various free trade agreements on the South African economy. He specifically wanted to know how much the EU imported from South Africa.

As for the sectors that have been impacted positively by the implementation of the TDCA, Mr. Sharma said that industrial goods have reaped significant benefits. However, he could not avail the relevant statistics which he said would be made available by the trade development and economic policy division within the Department. This division would also furnish the Committee with relevant figures on the jobs that have been created under this facility.

The Chair said that the EU was claiming that the pendulum of trade imbalance had swung to South Africa's favour. He asked the Department to confirm or deny this allegation.

Mr Sharma confirmed that the trade balance between EU and South Africa had tipped to the latter's favour to the tune of 9:7 in 2000 and 8:4 in 2001.

The Chair wanted to know how much of the trade terms improvement with the EU should be attributed to the devaluation of the Rand and what role other factors may have played.

Mr. Sharma said that it was difficult for him to check whether the improved trade terms were due to the devalued Rand or indeed the implementation of the TDCA.

The Chair noted that while tariffs have been going down, technical barriers are cropping up to impede trade flows. He wanted to know whether there were any concerted efforts at addressing this problem.

Mr. Sharma concurred with the Chair that technical barriers to trade are certainly a very problematic area and that these obstacles stand in the way of the smooth implementation of the TDCA. Consultations are on-going through the Co-operation Council to address this problem but technical barriers were not unique to the TDCA alone but that the same problem afflicted other free trade areas.

The Chair wanted to know what level of interaction South Africa maintained with SACU in relation to the negotiations of free trade agreements. He noted that there were plans to sign a trade instrument with Nigeria yet there appears no indication of a continental free trade agreement with the rest of Africa.

Mr. Sharma pointed out that Africa was a priority focus area for the Department and that whenever the country had preferences, these would go to Africa in the first instance and more so to SACU and SADC before extending the same to the outside world. Mr Sharma said that with the NEPAD initiative it is hoped a treaty policy regime would be developed for the continent to usher in a free trade market for the continent.

Ms September (ANC) noted that the Department had adapted a cautionary approach to signing up on free trade areas and that this was a good strategy. She sought to know the lessons the Department had learned from its engagement with the EU and what yardstick does the Department employ in seeking a FTA relationship with other countries.

Mr. Sharma replied there were many lessons learned from the EU-SA engagement but that the foremost of them all was the capacity that has been built to take on any future trade negotiations. Every trade instrument carried its own unique experience but that the EU experience has broken new ground in the Department's ability to undertaken trade negotiations.

Mr. Rasmeni (ANC) wanted to know the sectors that have benefited from the EU-SA trade agreement and whether there have been any jobs created thereby.

On job creation, Mr. Sharma clarified that his division does not enter trade talks so as to create jobs but rather to create a conducive environment for investments and therefore the Department takes a holistic view on trade engagement. He however pointed out that many jobs had been created as a result of AGOA and that the relevant figures would be made available to the Committee within the next twenty-four hours.

Mr. Rasmeni (ANC) sought to know whether AGOA has improved South Africa's exports to the USA and whether the country has thereby witnessed an inflow of foreign direct investments (FDI).

Mr. Sharma pointed out that there were no hard and fast rules on the indicators for a successful FTA noting that even NAFTA ,the best known trade instrument, was not much of a success for Mexico as was expected but that it instead benefited the USA.

Mr. Lockie (ANC) observed that the USA was the largest market in the world with a 17 percent foreign direct investment. He opined that South Africa had the right economic fundamentals to attract foreign investment but wondered why there was no influx of foreign investments to the country.

Mr. Sharma concurred that indeed the country had the right climate but that it was disappointing to see the slow rate of FDI inflows. He however contended that there were other factors unrelated to trade that came into play to dissuade FDI inflows. He pointed out that sentiments about crime, HIV/AIDS, the situation in Zimbabwe were some of the negative feelers that discouraged investment inflows to South Africa in particular and to the region in general.

Mr. Lockie contended that it seems the country is rushing into all manner of FTAs without first trying to consolidate the little ground it has gained in other areas, a scenario he said was clearly inimical to trade and development in the country.

Mr. Sharma explained that a FTA was merely an access framework for South African industry and that the importance of engaging in a variety of FTA was mainly to spread the wings in every corner that presented synergies for industrial growth.

The Chair said that it was important for the Department to avail to members data on recent indicators on the performance of these agreements clearly showing which sectors of the economy have benefited and those that have taken a beating. If NAFTA had only benefited the USA and not Mexico, the targeted beneficiary, he then wondered why South Africa should be interested in signing a FTA with America.

Mr. Bruce (DP) wanted to know the impact political instability in some African countries would have on Nepad.

Mr. Sharma replied that Nepad was an integral part of South Africa's trade agenda and that to that extent it is essentially the Department's vision. There was a peer review mechanism within Nepad, which is separate from the trade negotiation, and whose mandate is to attend to and resolve issues of political nature. The predominant view within Nepad was that the entire continent should not be crucified at the cross because of a few offending nations.

Meeting adjourned.

South Africa finds itself being one of the most courted countries in the world with respect to preferential trade agreements. This bodes well in respect of the government's policy of systematically opening the economy to foreign competition and promoting exports and inward investment, to support growth and employment.

The dti established ITED in 2000 to lead the government's trade policies and strategies, including negotiating bilateral, regional and multilateral trade agreements aimed at growing and diversifying South Africa's export markets, and encouraging foreign direct investment.

The daunting task of engaging with the world has to be considered in the context of ever changing global dynamics with limited institutional capacity, and thus has to be managed in a strategic and efficient manner, so as to maximize the use of limited resources. All the various negotiations in different parts of the world have to be aligned to become part of a holistic trade negotiations agenda and process.

South Africa's trade negotiations agenda has been expanding, and includes explorations/negotiations towards improved market access with:

• South America's common market (Mercosur), viz. Brazil, Argentina, Paraguay, Uruguay;
• EU
• Nigeria, India, and China;
• USA

In the face of this expanding trade agenda, ITED's capacity has been severely tested. Past experience and new demands have led the division's leadership to developing a world class, best practice based division with essential competencies, which include cutting-edge knowledge of the economy, industry and trade patterns, as well as superior analytical, strategic, negotiating / diplomatic, information and project management capabilities.

Since its creation ITED has been building institutional capacity to meet the increasing demands of South Africa's growing trade agenda. This started in 2000 with the appointment of the ITED's deputy director-general, followed by that of three chief-directors, respectively responsible for bilateral/regional, multilateral and African trade strategies and negotiations, multilateral trade strategies. During 2001 ITED appointed nine of the eleven programme leaders (directors) in the division, most of them in the second half of the year.

The vision for ITED is of a flexible, multi-disciplinary agency that will act as an offensive 'strike force' in South Africa's trade agenda. To this end, ITED is fostering a matrix, cross-functional method of operation, to maximize on its human resource.

This will be deepened by the cross-functional sector teams being established in the dti, as well as by the government's inter-departmental clusters, particularly the economy and employment and international relations clusters. In addition, strong institutional links with industry and labour stakeholders, including through, but going beyond, Nedlac, are critical to ITED's leadership responsibility in the execution of South Africa's trade strategy and negotiating agenda