SACU-USA Negotiations and Report on the WTO Talks: briefing

Chairperson: Dr. R. H. Davies (ANC)

Documents handed out:
SACU-US Free Trade Negotiations ITED, 5 August 2003 (Appendix)

SUMMARY
The Committee was informed that South Africa had reaped immense benefits from the US Africa Growth and Opportunity Act (AGOA ) and that exports to the US increased steadily from R7 billion in 1994 to R30 billion in 2002. The Committee learnt that in 2000, for the first time, the trade balance favoured South Africa noting and that the country had registered surpluses for 2000, 2001 and 2002. The Committee heard that the only way to retain and build on these successes is by strengthening the economic linkages between the region and the powerful US economy through the negotiation of a free trade agreement. The Committee however cautioned the Department to be wary of the US's shifting trade policies and to ensure that regional integration issues were taken aboard the negotiations table. The Committee was particularly concerned that no mention was made on the impact the proposed agreement would have on SADC.

MINUTES
SACU-US Trade Negotiations
Mr Xavier Carim, Chief Director, Multilateral Trade Negotiations, gave a background to the SACU-US trade negotiations and the reason why it was necessary to commence the talks. SACU Trade Ministers arrived at a decision in October 2002 to recommend to their respective governments to enter negotiations with the USA. SACU Ministers recognised the importance of building on the successes of the AGOA by strengthening the economic linkages between the region and the powerful US economy. In their collective view the Ministers reasoned that the best way to achieve this result was through the establishment of a free trade area with the USA.

Mr Carim explained why it was imperative for SACU to enter a free trade agreement with the USA. SACU was looking for a more stable basis for commercial relations with the US. He noted that the US is a leading trade partner currently ranking first as a destination for the region's exports and second as a source of imports. He revealed that exports to the US have increased steadily from R7 billion in 1994 to R30 billion in 2002. He added that in 2000, for the first time, the trade balance favoured South Africa noting that the country has registered surpluses for 2000, 2001 and 2002. He attributed this meteoric rise in trade to the devaluation of the currency and the US initiated AGOA facility.

On the upcoming WTO trade talks in Cancun, Mr. Carim pointed out that a balanced agenda had been produced for the participating 144 countries. The agenda had taken aboard issues of great importance to developing countries while at the same time incorporating issues of interest to the developed world. The important part of the DOHA declaration was to ensure that there were balanced terms of trade. He continued that the critical issue for developing countries that emerged from the Uruguay Round is that the preference regime has become ineffective and DOHA was meant to correct this scenario.

Mr Carim pointed out that another issue of concern revolves around TRIPS and public health noting that developing countries argue that they have a constitutional mandate to provide health services to their citizens at an affordable rate. On the other hand, he said, multilateral drug companies were concerned that generic products would find their way in developed country's markets and thereby wipe out their profit margin. EU's Common Agricultural Policy (CAP) remained unresolved and one did not see the EU market expanding anytime soon.

Discussion
Mr Nefolovhodwe (AZAPO) said that the US policy on trade had always vacillated with the political mood of the country and wondered if the Department had factored the fact of this instability in the negotiations.

Mr Carim said that it was for the reason of the unpredictability of the USA's trade policy that a free trade agreement was important. The current preference system could be withdrawn any time a hostile administration took over but that with a trade agreement the government would be tied to the legal commitments.

Ms Moloi (ANC) sought clarity on the composition of the SACU members on the negotiating team.

Mr Carim replied that the SACU team was composed of 30 people and that each SACU State had sent a representative to the negotiating forum.

Ms September (ANC) asked if the negotiations were sensitive to the current imbalance in the SACU membership and whether anything was being done to address this scenario.

Mr Carim explained that it was agreed among the SACU negotiating team that in view of South Africa's greater capacity it would assume the leadership of the negotiating mandate for the group.

Ms September (ANC) noted that the USA was traditionally a very hostile trade partner and wondered whether the Department had quantified the job creation potential that would result from the settlement of the proposed free trade area.

Mr Carim admitted that it was extremely difficult to quantify the benefits of a free trade agreement at the negotiating table. He noted that the only way one could have a sense of impact was to look at estimates that were made during negotiations but insisted that it was difficult to get the precise quantifiable benefits. The Department planned to carry out studies in the next couple of months to determine the true impact of the proposed agreement.

Ms September asked if the Department had the capacity to handle parallel trade talks - that is the upcoming WTO talks and the SACU-US free trade area negotiations.

Mr Carim admitted that South Africa's preparations for the talks had not been optimal noting that the Department held consultations with Nedlac, which indicated its concerns and interests. The Department was yet to meet people in the industry but that plans were underway to hold this discussions. The Department was still in the process of framing issues in a way that would allow them to proceed with the negotiations on a sound footing.

Ms September questioned the rationale of putting trade in services on the negotiating table when this is not a priority area for the country. She wanted to know whether the Department has considered the impact such a development would have on service providers in the country.

Mr Carim reported that trade in services had seen an exponential increase since the 1980s and currently stood at 20% of the international trade. He observed that banking and financial services comprised the greater component of trade in services. He pointed out that trade in services was therefore a critical element of international trade although unfortunately it was dominated by the developed countries. Despite this fact some developing countries were beginning to see areas of benefit especially in tourism. Studies had been commissioned in this area and noted that in fact trade in services contributes to 5% of the GDP, which was very significant. He pointed out that the Department would talk to service providers in order to identify the areas that were beneficial to the economy in the service trade.

Ms September expressed surprise at the fast pace the SACU-US trade talks were going and wondered what the hurry was all about. The Chair concurred with Ms September's concern and wondered whether in fact the best strategy would have been to stagger the negotiations with a view to check the kind of regime that came in office after the expiry of the term for the Bush administration.

Mr Carim assured members that the objective of the negotiations was to ensure that the deal is beneficial to the country. In the event that matters come to a head then the negotiating mandates would have to be reviewed accordingly and no party would be forced to sign a deal it was not happy with.

The Chair raised the spectre of non-tariff barriers to trade and sought for clarity on how the negotiating team proposes to go about this extremely tricky hirdle. He cautioned negotiators to be wary of regulatory framework that differs from state to state in the US in that what the federal government is prepared to give is not always available in every state.

Mr Carim acknowledged this handicap and said that it is the reason there is an information exchange mechanism to try and understand the way the US regulatory framework works from state to state. He said SACU negotiators are looking at the recently concluded US-Chile free trade agreement for guidance in this regard.

The Chair noted that the US had consistently shown great resistance in the textile and machinery industry in the WTO talks and wondered whether they were willing to relent in the proposed talks for the free trade area. He warned that the US was notorious for forcing onto the negotiation agenda issues that were wholly unrelated to trade and coerces other parties to go by its position. He cautioned the negotiators to be wary of this heavy-handed technique.

Mr Carim acknowledged the fact that the US was indeed cagey about certain sectors just in the same way South Africa would categorise some of its sectors as sensitive and therefore not open to negotiations. Trade negotiations would be structured around these sensitivities.

The Chair pointed out that regional partners had raised serious concerns with regard to the proposed SACU-US free trade area and wondered whether the Department had raised these concerns with the US negotiators.

Mr Carim said that there had not been any discussion between SACU and other SADC members on the status of the proposed SACU-US free trade area. He was not aware of any plans by the US to propose a similar facility to SADC but reported that the US had a programme to extend the same trade instruments to other regions in Africa in particular West Africa. He explained that the main frustration with SADC was its dual membership with COMESA and that the political spectre of President Mugabe would not endear SADC to the US.

The Chair asked if the SACU-US free trade agreement promised similar developmental assistance, as did the EU-SA Agreement.

Mr. Carim replied in the negative noting that there was no provision for development co-operation in the negotiation but hastened to add that the US included developmental assistance in most of its agreements with developing countries. Negotiators were discussing how to deal with the impact of tariff liberalisation on the custom union's revenues and that the US had offered technical assistance in this regard.

Ms Moloi (ANC) asked why SADC had not been briefed on the status of the SACU-US negotiations and yet it would be directly affected by the implementation of the agreement.

The Chair concurred with Ms Moloi sentiments and noted that it was important for the US to give an undertaking not to disrupt but endeavour to promote regional integration processes in the SADC region.

Prof. Turok pointed out that Parliament was concerned with the underlying fundamental principles and that if the proposed Agreement undermined South Africa's capacity to do certain things especially on the regional front then it had to be looked at afresh. He suggested that the Department furnish the Committee regular reports on the status of the negotiations.

Ms September concurred with Prof. Turok's suggestion but added that members need a forum through which they could ensure their own in-puts were incorporated in the agreement. She expressed the view that mere updates would not suffice.

The Chair agreed with member's concerns and noted that it was important to seriously consider how to put some offensive positions on the table. He averred that there was need to discuss the implications of the free trade area on regional integration and recognised the need for input by Parliamentarians. He suggested that the Department supplied the Committee with a written report of every round of negotiation and that depending on the availability of time another meeting should be organised with the Department. He also proposed that an opportunity be created to hear from representatives of Nedlac on this matter.

Mr. Carim promised to attend to all the proposals member have raised and that members' inputs would also be taken aboard.

Ms September asked if South Africa had prepared a concrete position to take to Cancun or would the Seattle debacle be repeated.

Mr Carim admitted that all elements for the Seattle debacle was there and that was why countries had taken to mini ministerial meetings to avoid that eventuality. He explained that what South Africa took to Cancun should be seen in the light of the past experience where alliances had been built with like-minded forces to consolidate the gains that had been made and seek further concessions. He said such alliances had been built especially within the AU and that familiar developing country positions would be re-asserted accordingly.

Mr Rasmeni (ANC) enquired how the Department involves the provincial and local government spheres and made sure that they understood the substance of the negotiations.

Mr Carim reported that the consultative process centres on Nedlac where the Department interacts with commerce and industry. As for the provinces and Local Authorities, he said that provincial DGs for trade and industry attended briefings on trade. He revealed that the Department was proposing for a permanent cluster negotiating team in view of the inter-sectoral nature of issues around trade agreements.

Ms September said she was not clear on what South Africa was taking to Cancun and suggested that the Committee sit down to look into this issue.

The Chair said there was a National Consultative Forum that would take care of Ms September's concerns. He however concurred with Ms September that members need to know what South Africa should secure from the talks.

The meeting was adjourned.

The US Africa Growth and Opportunity Act (AGOA), of 2000, expands the range of preferences previously available under the GSP to eligible sub-Saharan African countries. In the order of 6 100 products, of which 1 800 under AGOA, currently qualify for duty-free access into the USA market. AGOA extends these preferences until 2008. AGOA envisions that the USTR would seek to initiate free trade negotiations with sub-Saharan African countries.

During his visit in to Southern Africa in February 2002, Ambassador Zoellick, USTR, presented a US request for an FTA with SACU. After consideration at several meetings over the course of 2002, SACU Trade Ministers arrived at a decision in October 2002 to recommend to their respective governments negotiations with the US. The decision to enter into the negotiations was based on strategic considerations, in particular, on the importance of constructing a stable, long-term and predictable trade and investment relationship with the US.

SACU Ministers recognized the importance of building on the successes of the AGOA. In their collective view, strengthening the economic linkages between our region and the powerful US economy, through the establishment of a free trade area, could provide additional impetus to our own ongoing efforts to promote economic development and growth within SACU.

Following consultations in Governments across SACU, SACU-US negotiations were launched in January 2003. Since January, SACU and the US have agreed to a Terms of Reference Document (Annex 1) that sets out basic principles and objectives for the negotiations. SACU and the US have held two negotiating sessions (3-5 June, 4-6 August). Two more sessions are envisaged for 2003 (October, December).

Need for a Stable Trade Framework

SACU seeks a more stable basis for commercial relations with the US. The US is a leading trade partner currently ranking first as a destination for our exports and second as a source of imports. Exports to the US have increased steadily from R7 billion in 1994 to R30 billion in 2002. In 2000, for the first time, the trade balance favoured South Africa, and we have registered surpluses for 2000, 2001 and 2002. This can be attributed to our currency devaluation and to AGOA.

As an export destination the US has helped advance our manufacturing strategy. The top export sectors include platinum, vehicles & transport equipment, base metals, products of chemicals or allied industries, machinery, as well as textiles and clothing. The US ranks either first or second as an export destination for these sectors. All sectors mentioned, with exception of machinery, have been targeted in terms of the dti's manufacturing strategy for export and investment promotion as sectors with the best prospects for job creation and economic growth. Imports are dominated by machinery, constituting 32% of all imports from the US. The US ranks second in this regard. Thus, the US plays an important role as a source of production inputs for our economy.

AGOA has helped to boost exports particularly in sectors that are generally highly protected in the US and where, consequently, duty free treatment produced competitive benefits. Thus, 97% of our textiles and apparel exports can be attributed directly to AGOA; for transportation equipment the figure is 89%; it is 62% for agricultural products.

However, AGOA is imperfect and fraught with uncertainties, rendering planning by firms difficult. First, product duty free benefits are reviewed yearly, raising the prospect that a product could be removed from the AGOA list. Second, the measure lapses in 2008 and there is no certainty that it would be renewed. Indeed, current support for free trade in the US Congress is not guaranteed beyond the current Administration. The commitment in Congress to extend preferences without securing reciprocal openings for US exporters will further reduce support for AGOA in future. Third, and more systemically, unilateral trade preferences that discriminate among developing countries are increasingly under threat in the WTO (for example, the EU-ACP Lome Convention).

South Africa is by far the largest recipient of US direct investment in Africa valued at $3 billion or 9% of US assets in Africa for the year 2001. In fact, the investment figures have witnessed little change between 1999 and 2001, sticking to a $3 billion mark. Main areas of investment include chemicals and transportation. There are currently about 900 US companies employing approximately 125 000 people. Companies with investments greater than R1 billion since 1994 are Caltex, Coca Cola, Dow Chemicals, IBM and SBC.

An initial study, commissioned by the dti, suggests not much direct competition between US and South African economies. To the contrary, the US market appears to be important in helping to advance South Africa's manufacturing strategy to accelerate the country's economic growth and development. For example, revealed comparative advantage analysis for US exports to South Africa suggest that the sectors considered critical in relation to South African's manufacturing strategy are not threatened much in terms of competitive pressures from the US. The only exception appears to be the chemicals sector. Thus, overall trade patterns between the two economies appear to be complimentary. This would have made for rather easy negotiations were it not for the fact that the US could be expected to seek to maintain protection in the very areas where it has lost comparative advantage (agriculture, textiles and clothing).

There are a number of benefits an FTA could bring. These include unlocking the potential for greater flows of inward investment and, thus, supporting efforts for job creation. An FTA would "lock-in" AGOA benefits, and we would seek to expand market access. Moreover, an FTA would enhance predictability: no longer would a US company be able to lobby for the removal of a product from the AGOA to protect itself against competition.

The FTA also gives impetus to our efforts to integrate the economies of the customs union and represents part of a wider effort to integrate SACU economies into the global economy in a sustainable manner. As such, the FTA initiative is also an extension of our trade reform programmes that began in the 1990s with the offer we submitted during the Uruguay Round negotiations.

SACU members have strong interest in areas such as exports of textiles and clothing, value added agricultural products, and steel. These are some of the areas where creativity and resourcefulness will be called for, as protection in these sectors is high in the US.

The Status of the Negotiations

Southern African Customs Union (SACU) and the United States concluded their first two rounds of FTA negotiations that lace in Pretoria, from 2-5 June, and 4-6 August 2003.

The first round delivered important achievements aimed at defining the landscape for the negotiations. The adoption of the terms of reference document for negotiations is one such an achievement. The text recognises these are negotiations between countries at varying levels of development and builds in the concepts of special and differential treatment and asymmetry for SACU as essential pillars of the envisaged free trade agreement. (See attached)

The negotiations agenda will be comprehensive covering a broad range of issues. In the light of capacity constraints facing SACU, it has been agreed that negotiations be divided into two phases with market access issues coming first. This is done as a way of managing the negotiations such that all are able to participate fully in the process. These include traditional market access issues in such areas as industrial and agricultural tariffs, rules of origin, product standards, customs procedures, and trade remedies (anti-dumping).

Beyond the traditional market access issues, other matters will include such "new generation" of trade issues as services, investment, intellectual property, government procurement, labour and environment. Aside from services and investment, negotiations on all other new generation issues will commence in 2004, giving time to SACU to prepare common negotiating positions.

The engagements, thus far, have been focussed on exchanging technical information and agreeing to "modalities" of negotiations. We have exchanged information on our respective tariff regimes, trade flows, preferential arrangements, customs procedures, rules of origin, procedures for establishing technical and safety standards, trade remedies etc.. On services, we have engaged to determine an appropriate approach to negotiations, with SACU preferring the GATS-type (WTO) approach of a positive listing. On the newer issues, SACU's approach is still to be defined precisely. Nevertheless, would not compromise current policy, legislation and regulation in areas such as government procurement, investment, labour and environment.

Annex 1

Joint SACU-US Terms of Reference/Framework and Modalities for FTA Negotiations

2 June 2003, Pretoria

The following elements reflect the common understanding of the member countries of the Southern African Customs Union (SACU) and the United States (hereinafter "the Parties") on the terms of reference/framework and modalities that will serve as the basis for negotiation of a free trade agreement (FTA).

General Principles

• The Parties will pursue a comprehensive FTA, consistent with Article XXIV of the GATT 1994;
• Asymmetrical treatment for SACU and special and differential treatment for the BLNS and the LDC;
• The FTA will be a single undertaking with possibility for early harvest;
• To build on the success of the African Growth and Opportunity Act (AGOA) and to develop a stable long-term trade and investment relationship between SACU and the United States