Trade Seminar: Doha, Customs Union and EU Interim Partnership Agreement, South-South Partnerships, impact of multi and bilateral trade agreements on labour & business

Meeting report

Doha Development Agenda: Opportunities and Challenges for South Africa
Mr Xavier Carim, Deputy Director General, Department of Trade and Industry's International Trade and Economic Development Division, began with an overview of the World Trade Organisation's (WTO) Doha Round of negotiations. He noted that the negotiations had been characterised by a number of missed deadlines and impasses, with negotiations suspended on at least two occasions. Key issues addressed by the Doha Round included negotiations around industrial tariffs, agricultural tariffs and support measures, anti-dumping, countervailing measures, liberalisation of services, intellectual property rights, the environment, and trade facilitation.

He said that since 1994, South Africa had been a strong proponent of multilateralism, deepening interdependence among nations, and managing the effects of globalisation through a rules-based trading system. However, the existing rules had been shaped by and reflected the trade interests of the more powerful players of the international community, and thus exhibited a series of imbalances and inequities. South Africa supported the launch of the 2001 Doha Round of negotiations largely as a possible site where these inequities could be addressed.

He said South Africa's broad objectives included the aim of enhancing market access for products of export interest to developing countries, to eliminate industrial country subsidies, and support to inefficient producers, particularly in agriculture, to renegotiate the rules that perpetuated imbalances in international trade, and to ensure policies that encourage developing countries to realise developmental objectives through a meaningful application of the provision for special and differential treatment.

He noted that throughout the negotiations, South Africa had argued that the developmental mandate set out in Doha needed to be respected and preserved, and to ensure that the Round's developmental promises were met. However, over the course of the negotiations, these objectives had been steadily eroded. One of the core developmental objectives of the Round was in the sphere of agriculture, which was largely seen as a crucial platform for developing countries to promote economic development. Yet instead of seeing a significant reduction in the subsidies and support measures enjoyed by industrialised countries, these distortions had been stubbornly defended, and ambitions for their cutback had waned. At the same time, growing pressure had been placed on developing countries to further liberalise their markets to goods and services.

He further noted that last year in July, an attempt was made to conclude what was known as the modalities phase of negotiations; 'modalities' referring to the parameters and scheduling for reduction in industrial tariffs and support structures for agriculture. However, this and subsequent attempts had so far been unsuccessful, having concluded without resolution of the modalities, and negotiations had been adrift. In recent months there had been some impetus to revive the negotiations with calls for its resolution emanating from various meetings. These had included the G20 summit declarations in November last year and April this year, the July G8 summit in Italy, a July meeting of the Cairns group in Indonesia, and an Organisation of Economic Cooperation and Development (OECD) meeting in June. Most recently the Indian government had agreed to convene a WTO G20 meeting in New Delhi to address these issues.

He also said that a further point of pressure expounded on by WTO Director Pascal Lamy was that the Round needed to be concluded by 2010, after which the United States of America (US) would be engaging in midterm elections and Brazil in national elections. Failing to resolve these issues by this time could further distance the Round from resolution, and modalities would thus need to be concluded by the end of this year.

He said that overall the implications for South Africa would be particularly harsh. South Africa stood to gain very little in terms of obtaining new market access for agriculture, with most of its products already scheduled under existing preferential agreements. About 65% of South African exports entered the EU with low to zero rates of duty under the Trade Development Cooperation Agreement (TDCA), as well as US and Japan under other preferential agreements such as African Growth and Opportunity Act (AGOA), and that better market access for other agricultural goods had been categorically excluded from tariff phase-downs by developed countries.

He further added that South Africa had also been asked to offer a reduction of industrial tariffs that surpassed what had been asked of any other member in both scope or range of products affected, and the depth of the reductions themselves. Fulfilling these commitments would require reductions on thirty% of South Africa’s industrial tariff line, currently at applied rates, and two-thirds of these would be cut by more than 30%. Clearly this would have significant implications for centres of industry, particularly labour intensive industries such as textiles, which would bear the brunt of these cuts.

He said the main reason for this pressure was that in the Uruguay Round of negotiations, South Africa was classified as a developed country, and as a result, the difference between its bound rate and applied rate, as compared to any other developing country, was very small. Therefore the cuts which would have to be taken on its bound rate would have serious implications for its applied rate.

He noted that over the last two years the Department had lobbied hard in Geneva for South Africa's particular position to be recognised and accommodated. While at a political level some sympathy had been generated from WTO members, the numbers put on the table so far had  been inadequate. The Department had argued for flexibility on at least 16% of its tariff lines, and that at least 3% be exempt from tariff cuts at minimum. Nonetheless, this still meant that South Africa would still be making significant cuts.

He said that a number of other developing countries had  been under similar pressure, and it was imperative that South Africa build alliances and solidarity with these countries in order to resist the demands of the developed world. Some dialogue with India and China had been forthcoming in this regard.

He also noted that a determining factor in whether this Round was started soon would be the role of the US. To a large extent the Department had been waiting for the new American administration to indicate when and how it sought to reconvene the negotiation process, though there had been no clear signal or proposals in this regard.

He concluded by saying that while it was important that these negotiations conclude soon, and the multilateral system be strengthened, negotiations should not be concluded at the expense of its developmental content.

Discussion
Mr Z Ntuli (ANC) asked whether South Africa was considered to be an agricultural country, and what percentage of Gross Domestic Product (GDP) must agriculture contribute to for a country to fall into this category.

Mr A Williams (ANC) asked what the implications of South Africa being recognised as a developed country were, whether they served the national interest or not, and whether China, India and Brazil were similarly recognised as developed countries.

Mr A van der Westhuizen (DA) asked whether South Africa’s status as a developed country was something technically correct in terms of WTO rules or if it could be appealed.

Mr van der Westhuizen queried what the acronym TDCA referred to. He further asked whether developed countries were sympathetic to the need of developing countries to grow and were meeting requirements for that, or if they were simply protecting their own interests, and what the general mood was.

Mr S Njikelana (ANC) noted that he understood the urgency in finalizing the Round, but asked why Pascal Lamy had tried to allow the US and Brazilian elections to determine the pace of negotiations when their outcomes would transcend specific administrations.

Mr Njikelana also asked for clarification on what exact WTO protectionist measures were permitted.

Mr Njikelana further asked for a frank assessment of the possibility for the members of Southern African Customs Union (SACU) and Southern African Development Community (SADC) to establish a regional alliance with South Africa.

The Chairperson expressed her concern about South Africa's status as a developed country, noting that while it was one thing to be mistakenly classified as a developed country, it was another matter to be locked into that categorisation. She asked how and why this had happened, and what criteria were used.

The Chairperson noted that in the sphere of agriculture, South Africa was one of very few countries which was not protectionist, and that it tended to believe that others would behave in the same way as it did itself, whereas the reality of behaviour in international trade negotiations was not so simple.

The Chairperson then inquired as to what measures the Department could take in pursuing South Africa’s interests, whether it was in fact as powerless as countries such as Lesotho and Swaziland, and whether, if these measures existed, they were too sensitive to publicly disclose.

Mr Carim firstly addressed the issue of whether South Africa was an agricultural country, noting that though agriculture only accounted for about 7% of GDP, it remained an area crucial to issues of rural poverty and food security. Investment in agriculture tended  to produce more employment than similar investments in manufacturing, and that it carried critical forward and backward linkages with the rest of the economy. Nonetheless, whilst noting that some sectors were internationally competitive, such as fruit, sugar and wine, South Africa was not a great agricultural exporter compared to many other countries. He noted that this situation was exacerbated by unbalanced trade barriers and subsidies afforded to agriculture by many foreign countries, but that there was some room for South Africa to improve agriculture's contribution to the economy.

With regard to South Africa's status as a developed country, he noted that in principle classifications were self-designated, though there were clear definitions of what constituted a Least-Developed Country based on certain key UN indicators. South Africa was a founding member of the General Agreement on Trade and Tariffs (GATT), and its designation at the Uruguay Round was the product of self-designation by the apartheid regime. In the final days of the Uruguay negotiations, there was a committee comprised of Congress of South African Trade Unions (COSATU), the ANC and the NP which attempted to change South Africa’s classification, but this was resisted by South Africa’s major trading partners, the US and EU.

He then noted that the key disadvantage of being classified as a developing nation had to do with the scope and depth of tariff cuts. He noted that developed countries were expected to make an average of 30% tariff cuts on all of their goods over five years, while developing countries were expected to make 20% reductions over ten years. Thus the advantage of being labelled as a developing country would be the expectation of making fewer tariff cuts over a longer period. Over the course of this Round, South Africa may be able to renegotiate its status, but this would not have an impact on the cuts it would be expected to make to industrial tariffs.

TDCA was clarified as referring to the Trade Development Cooperation Agreement, a free trade agreement South Africa shared with the EU, which began in 1996, and was concluded in 2000, and whose full implementation should occur between 2010 and 2012 to free 80% to 90% of trade.

In regard to protection afforded by the WTO, Mr Carim said that some 38 Lesser Developed Countries (LDCs) had been exempted from making any tariff commitments, and unofficially small and vulnerable countries, notably of the African / Caribbean / Pacific (ACP) group, had been granted some relief from making significant tariff reductions. The remaining developed and developing countries were, however, expected to make cuts during this Round, and were receiving pressure in this regard.

He said that the rush to conclude the Round was based on a number of factors. Some members had  calculated that concluding the Round on its current terms would be advantageous to them, particularly those countries with low tariff and support structures who were not expecting any payments from the Round. A range of other countries was willing to conclude the Round if they could establish greater market access and reduce the potential of further payments. For instance, US was seeking greater market access, but was not willing to reduce support to its agricultural sector. Furthermore, generally there was a fear that a failure to conclude the Round after repeated attempts would pose a threat to the multilateral system. Moreover, there was a view, in the context of the current financial crisis, that concluding the Round would reduce the impetus for protectionist measures, add to global economic welfare, and help lift out of the downturn. However these arguments were contestable, particularly as all G20 countries, except for South Africa and Saudi Arabia, had  resorted to protectionist measures, exhibited largely in many stimulus packages.

He said that as far as legal WTO measures went, the developing countries were arguing that countries which were not able to supply the same kind of fiscal support as the developed world, such as South Africa, should be legally permitted to raise their tariffs to the bound rate, without being seen as transgressing the rule-based system.

With regard to the US election cycle's impact on Doha, he noted that there had been an attempt in the past by those states integral to the system to use elections as benchmark for establishing deadlines, particularly as liberalisation could be a hot topic in an election year.

With regard to questions around solidarity with SACU and SADC, he noted that, like many African countries, many SADC countries would not be required to make extensive tariff cuts, excluding countries in SACU. So South Africa could expect Swaziland, Botswana, Namibia, Lesotho and South Africa to collaborate on industrial and agricultural tariffs. Aside from Namibia, this had been very difficult, particularly in industry, where a common position had not been established.

SACU/EU Interim Economic Partnership Agreement: Implications for Regional Integration
Mr Peter Draper, Trade Project Head, South African Institute of International Affairs (SAIIA), began by offering a caveat to his presentation, noting that it represented an outsider's perspective, and that therefore he was not in a position to place blame on any particular agent.

He then went on to give an overview of the existing position. Initially only 8 of previously 14 SADC members joined the SADC negotiating group. Seven stayed the course, while Tanzania opted out instead to join the East African Community (EAC), with others joining the Eastern Southern Africa (ESA) group, of which five actually initialled an Interim Economic Partnership Agreement (IEPA), specifically, Madagascar; Mauritius; Seychelles; Zambia; and Zimbabwe.

Of the seven SADC group members, five initialled the text in 2007, while South Africa and Angola did not, and four had moved on to actual signature, specifically Botswana, Lesotho, Namibia and Mozambique. The remaining countries, Angola, Namibia and South Africa (ANSA group) requested to negotiate separately from the signatories, but were allegedly declined by the EU; though Mr Draper confessed he was not sure of the accuracy of that last point.

On the implications for SACU/SADC, he noted that there existed four key trade regimes with the EU that were relevant to the region. The first, the Everything But Arms arrangement, essentially a duty-free quota-free market access scheme for LDCs, involved SACU participants, including Lesotho, Angola and Mozambique. The implication of this was that these countries would not, in principle, be required to sign any EPAs, although Mozambique had opted to sign anyway.

The second scheme, of which there were variations, was the Generalized System of Preferences, to which South Africa and a number of other developing countries had access, although the conditions were not as favourable as the Everything But Arms arrangement. The uptake of this scheme was not clear, and an analysis had not been conducted.

The third and fourth schemes included the Interim Economic Partnership Agreements and TDCA, which was specific to South Africa.

However despite South Africa's plans within the region, within SACU and between SADC, COMESA and EAC the bulk of South Africa’s investment, imports and exports were sourced from and destined for the EU.

On the question of the tariff structure of SACU, he said a key point was the degree of convergence between South Africa's trade regime under the TDCA and the degree of access to EU markets enjoyed by the BLNS group, their relative liberalisation schedules, and the final Economic Partnership Agreement (EPA). As a customs union, SACU by definition set a common external tariff, and thus market access conditions for the EU across the region must be harmonised.

He also noted that his impression was that there was sufficient convergence, but that this would have to be determined over the course of negotiations. However, he noted that a key problem seemed to be that while South Africa treated all EU goods the same way, regardless of the actual country from where they came, the EU treated the goods of the various members of SACU differentially, and this undermined the integrity of the customs union.

He said a further important issue was the revenue implication for reducing tariffs of the BLNS, because, as SACU was fundamentally a revenue sharing arrangement drawing funds from import taxes, a reduction in tariffs would mean a reduction in revenue for the BLNS. However, this was not a new issue as South Africa had been seeing tariff phase-downs under the TDCA anyway.

New generation issues encompassed services, investment, government procurement, intellectual property, and competition policy. Within the SACU, Botswana, Lesotho and Swaziland had opted to negotiate with the EU, whilst South Africa and Namibia had opted out, as permitted by the IEPA. This raised the question of harmonising agreements, whether this was desirable, and how appropriate were EU regulatory norms. Flowing from this were two larger questions: namely, how wide economic integration in SACU should be, how many countries should be involved, and how deep policy regulation and harmonisation in SACU should go. The second important question was how South Africa should react.

Mr Draper then tabled a comparison by which to judge the positive and negative implications of the SADC EPA for SACU. On the negative side were the observed perforations in the common external tariff regime, the problem of different rules of origin; differential degrees of harmonisation with the EU within SADC; and entrenching an overall EU orientation. Positive or offsetting factors included the reality that there was a potential convergence towards the TDCA, with the question being whether this was sufficient; that within the customs union there was not free trade in agriculture anyway; that harmonization had been sluggish for some time; and that North-South integration was economically beneficial.

Mr Draper then discussed the implications for SADC. He noted that his impression was that the existing SADC Free Trade Agreement (FTA) would not be affected unless SACU imploded, which was possible, but unlikely. In trilateral negotiations between SADC, COMESA and EAC, there was also the question of whether SADC would have a weaker hand than the other two as a consequence of its divisions. He had the impression that COMESA's own internal divisions would prevent it from gaining an upper hand, and that the entire project was not feasible.

He did note that this would necessarily imply that deeper integration in SADC would be threatened, but did not think that this was necessarily a bad thing, particularly as this might force the region to rationalise its overlapping memberships and agreements. He noted his favourite example of Swaziland, which held contradicting memberships in SACU, SADC, and COMESA. He noted that new bilateral access might drive this rationalisation, but the contours were not yet clear, and may drive more divisions, for instance with Botswana.

Whether the EPA ultimately caused havoc would depend on whether or not SACU imploded, which could result in regional trade wars, and raise tensions in SADC security structures, though again he noted his impression that this was a remote possibility.

He said that when coming to some resolution on the issue, the key was incorporating South Africa and its complicated bi-lateral and multi-lateral arrangements, and being aware that what was conceded in the bilateral sphere would likely have to be conceded in the multilateral sphere as well. Another key issue was the Most-Favoured-Nation (MFN) clause, which would oblige signatories to the EPA to offer the same market access that they enjoyed by developing countries to the EU.

On new generation issues, he offered his own personal opinion that a circumscribed liberalisation of services, particularly in telecommunications, energy, transport and finance, might be in the national interest. He questioned the ability of these country-wide services to offer efficient cost-structures as they were presently structured. In these sectors there were typically large industries and public enterprises with high cost-structures, within which there was room for competition. Services liberalisation could be beneficial to the country, could fit in with the policy objectives of ASGISA and be used as a bargaining chip in negotiations to unlock further EU concessions.

A decision would also have to take into account whether the regime of SADC or SACU, would be more beneficial to South Africa, and how to improve relations with neighbours, particularly Botswana.

Discussion
Mr Ntuli asked whether South Africa was getting fair treatment within SACU from the EU.

Mr L Mphahlele (PAC) asked, on the issue of revenue-sharing, what formula was used, and whether it was fair and equitable.

He then asked why it was said that relations between South Africa and Botswana were off-track and what the cause was.

Mr Williams noted that economic influence of the EU was huge, to the point that it seemed that South Africa was something of an “economic colony” for the purposes of European accumulation, and asked why this was the case, and whether anything could be done about it.

Mr S Marais (DA) asked what approach should be taken on the EPA generally and with specific relation to economic relations between South Africa and Namibia.

Dr P Rabie (DA) noted his concern about liberalising services, as the EU presented a very formidable opponent, and asked whether it would not be wiser to protect South Africa’s service industries from potential decimation, and to retain autonomy, despite their higher cost-structure.

Mr Njikelana asked why some countries did not sign the IEPA, what their rationale was in making this decision, and why it did not apply to South Africa.

Mr Njikelana then asked why the EU operated so many different trade regimes, and whether this complicated matters for countries with little capacity.

Mr Njikelana also asked what was meant by Mr Draper's comment that relations between South Africa and Botswana could be improved.

He then expressed his pessimism about expecting any further concessions from the EU, considering their self-interest and inflexibility during previous protracted trade negotiations, and expressed his reticence about agreeing to negotiate on new generation issues before the Doha Round was resolved.

Mr Carim noted that South Africa and Angola's request to negotiate separately was not an attempt to break unity within SACU, but only to face some country-specific issues.

He further noted that while there was some convergence between the EPA and TDCA, there still existed some substantial five hundred differences on tariff lines and points of origin that were unresolved.

Mr Carim said that while it was true that some tariff lines in agriculture were restricted within SACU, it would be an exaggeration to say that trade was not free.

He then pointed out a subtle but crucial contradiction in Mr Draper's presentation, where on one slide he had advocated taking a regional approach to the development of services, whilst on the other had advocated liberalisation. While it was not a controversial issue that services were an important aspect of economic development, it was one thing to advocate their further development, and another to advocate making liberalisation commitments with a trade partner.

He said a deeper analysis of the relative costs and benefits of liberalisation to national services needed to be made, particularly for services markets in SACU, and a serious problem with scheduling services in the EPA would be that such an option would be foreclosed before a sober assessment could be made. He further asserted that South Africa's efforts within SACU needed to be orientated towards preserving a common external tariff in engaging the EU, and to that end to minimise the differential on rules of origin to preserve a common trade identity.

He also noted that some legal provisions of the EPA had remained problematic and needed to be addressed. The steps in entering into an EPA include initialling, signing, and then signing into law by national parliaments, upon which the EPA came into force. If these outstanding issues on how SACU would function, what the external tariff would be and other matters were not resolved before the EPA came into force, there was a great potential that there would be violations of the agreement.

Mr Njikelana noted his belief that there was great potential in North-South trade relations, and asked for Mr Draper’s comments on the Government seeking alternatives to South-South relations.

Mr Draper first responded to the question of differential treatment and said the main motivating reason was EU economic interests. As there were twenty seven EU states, there were many differing internal economic interests who saw certain South African products as a threat, particularly agricultural products and processed minerals. While it did not make sense, objectively, that the EU should distinguish between Southern African products whilst SACU made no such differentiation in respect of European goods, it was a reality of power politics and there was little which could be done to change that.

On the point of whether South Africa was an economic colony of the EU, he said this would depend on the definition of colony. However, on the question of dependency to European member states, he noted that the bulk of investment stock across South African sectors did originate from the US and Europe. In the automotive sector, for example, there was no strict South African industry as it was dominated by foreign multinational corporations. However the picture was changing, insofar that other investors and trade partners such as India and China were playing an increasingly important role.

On the issue of whether South Africa's trade profile should be primarily North-South or South-South, he said neither was mutually exclusive, and that South Africa should be pursuing all options vigorously.

On the issue of whether there was any threat to South Africa if it did not sign this agreement, he said he did not think so, primarily because market access under the TDCA would still be guaranteed, unlike some countries. The Namibian beef industry, for example, would suffer as prohibitive import tariffs were raised to MFN levels to replace the existing duty-free quota arrangement, and this industry would likely collapse.

On the question of why only three SACU countries signed the agreement, he noted that it was interesting that Namibia, despite the economic threat of withholding its signature, did not sign. Botswana, Swaziland and Lesotho, however, did sign for various reasons. Botswana signed largely because of the economic threat of not signing, and had particular interest in opening access to its services sector to encourage competition in a sector largely dominated by South African firms. Lesotho's interest in signing stemmed largely from a desire to diversify its textile exports to the EU, of which 90% had  gone to the US under the AGOA arrangement. He said he was however unfamiliar with Swaziland's rationale.

On services liberalisation, Mr Draper said that while he was not categorically opposed to protection, the industry tended to be dominated by large firms, either State-owned enterprises, or, in the case of the financial sector, big banks, which were investing around the world and were competitive enough to withstand new market entrants. The question of liberalisation also entailed other questions of how fast and to what degree it should be done. Whatever the case, it was his opinion that working towards liberalisation and building competitive efficiencies would be economically beneficial.

He said, however, that a trade agreement with the EU was not necessarily the best vehicle to by which to go about liberalisation, and that most economists would agree that liberalisation was something which was best done unilaterally, and for South Africa’s own national interest. He did not know whether this would unlock further European concessions, though it was an issue in which the Europeans were deeply interested.

On the complexity of European trade regimes, Mr Draper said this was largely a reflection of the real capacity of exporting countries and the EU's history with them, and was simply a reality that must be dealt with.

On the equity of revenue sharing, he said whilst he was not sure of the exact formula, it did have a strong redistributive component from the South African fiscus. The rationale of its recipients was largely that they required compensation for the polarised forms of development that had occurred as a result of participating in SACU. However the reality was that this transfer was under pressure from the recession, and the amounts being transferred had dropped dramatically.

With regard to South Africa-Botswana relations, he noted that whilst all bilateral arrangements were important, Botswana was singled out was because it was this relationship where the most problems had emanated, particularly as Botswana was reconsidering its membership of SACU.

Trade Agreements and South-South Partnerships
Mr Mmatlou Kalaba, Trade Economist, Trade and Industrial Policy Strategies (TIPS), began by giving an overview of the impetus behind growing South-South relations. The main catalyst had been initiation of multilateral negotiations at the WTO and the imperative of increasing the competitiveness of South African industries, increasing investment, and decreasing general cost-structures.

He noted that the current major parties with which South Africa was engaged in important trade relations with included the MERCOSUR group, which includes Brazil, Argentina, Paraguay, Uruguay, Bolivia, and Chile under various preferential trade agreements, the EU under the European Free Trade Agreement, SADC states, and informal arrangements with India and China.

In regard to South Africa's TDCA with the EU, which was launched in 2000 and focused on trade in goods and services, he said the EU had pledged to reduce all of its tariffs on South African goods by 95%, with South Africa likewise reducing its tariffs on EU goods by 85% by 2012.

In relation to the SADC trade protocol, he said the FTA launched in August last year focused on 85% of goods, with services having been shelved for the moment, though some SADC members, such as Angola and the DRC, did not ratify the agreement.

He further noted that the European Free Trade Agreement worked to establish free trade for industrial goods between the EU and SADC member states, with most SACU members entering into bilateral arrangements for agricultural goods. However, SACU would phase down its tariffs as units over a period of nine years.

He also said that a preferential trade agreement covering a limited range of goods had also been entered into between SACU and MERCOSUR, in the hopes initialising and later deepening trade relationships between the two groups.

He said that negotiations on launching an EPA between SACU and the US had  failed up to this point, largely due to the US's insistence on including a wider range of issues than the SACU members were prepared to accept. However the induction of a new administration may bring a renewal in negations.

He added that trade arrangements with China and India remained informal, but remained important in global trade, particularly as competitors in labour-intensive industries, and formalising relations in the future may be an option.

He then noted that in recent years there had been a considerable diversification in the composition of imports to South Africa. In 2000 the SADC accounted for only 1% of imports, the EU 39% and other developed countries accounting for 12% and China for 4%. Last year, however, though absolute values of trade increased, the EU and US lost 20% and 25% of their share of the South African market, with SADC's share growing from 1% to 6% and China's share growing by 300%.

However, the composition of South Africa's exports had not changed substantially. In 2000, 31% of South African exports were destined for the EU, 20% to the US and 2% to China. In 2008 the percentage of South African exports to the EU remained the same, those to the US dropped by 10% while those to China grew to 5%. However, while the share of South Africa's exports to the North had remained fairly stationary, expanding South-South trade relations could assist South Africa in diversifying its export composition.

Discussion
Mr Njikelana asked overall to what extent had South-South trade relationships been beneficial to South Africa.

He then asked how trade policy should be linked to industrial policy.

The Chairperson asked why agriculture was excluded from the EFTA, and whether this was due purely to EU national interests.

Mr Kalaba said there had  been some observable changes in South African imports, particularly in terms of surges in imports from China and India, but without seeing a clear change in the composition of South African exports.

He said it was important that industrial and trade policy be coherent, and whereas the ideal was that trade policy created demand-driven opportunities for industry to respond to, up to this point trade policy had been affecting, rather than leading or supporting industry. Thus one of the underlying explanations as to why the composition of South Africa's exports had remained static, consisting primarily of mineral resources, was that macroeconomic and industrial policies were not effectively geared towards lowering unit costs, and did not adequately respond and adapt to changes in South Africa’s trading regimen.

In regard to EFTA, Mr Kalaba noted that the official reasoning had been that the European countries involved did not have a common agricultural policy, and would thus negotiate trade in agricultural products bilaterally, but it was hard to say for sure to what extent European self-interest played a role.

Impact of Multi- and Bilateral Trade Agreements on South African Labour
Mr Tony Ehrenreich, COSATU General Secretary, began by noting that any discussion about trade and industrial policy must begin by acknowledging the context and the many deep challenges facing South Africa’s people. Although the South African context was incredibly complex, it was imperative that governance institutions exhibited their legitimacy by addressing varying and prevalent kinds of social injury, perhaps most dramatically demonstrated by huge levels of unemployment, ranging between 25 and 35%, depending on the source, particularly compared to 1996 figures of 16 to 20%.

He said that accompanying the rise in unemployment had been a marked rise in inequality, partially demonstrated by significant decreases in the proportion of national income received by the bottom 60% of society from the late nineties. Despite the strides of government in addressing absolute poverty through the provision of basic services, rising inequality had seen the deepening of national poverty levels. Thus while the economy had significantly grown in absolute terms, it had not fostered employment opportunities, a key objective of the country. This indicated that the structure of the South African economy had not sufficiently changed and that the systemic imbalances of apartheid had persisted. Thus, as articulated at the Polokwane Conference, industrial and trade policy must be aimed at creating decent work through expansion of labour-absorbing sectors and diversifying South Africa’s industrial and services base.

He said that while pursuing issues such as beneficiation, the translation of South Africa’s raw materials into opportunity, and their use in supporting the establishment of a sustainable export industry, the priority of expanding production for domestic and regional consumption must not be ignored. The imperative was thus the creation of a coherent industrial policy environment which allowed role players within the sector to identify their objectives, and Government must be able to respond with an appropriate institutional structure.

He said that the degree of social injury in South Africa’s society had been exacerbated by certain policy choices, particularly the manner in which much of South Africa’s economy had been liberalised and integrated into the global economy. While South Africa was incredibly resource rich, the bulk of South Africa’s exports had been dominated by commodities and low value-added products, while the bulk of South Africa’s imports, particularly from China, India and many EU countries, tended to be high value-added products. This situation had created a number of problems, particularly in South Africa’s balance of trade and broader macro-economic challenges.

Of critical importance, however, had been the way in which this situation had impacted upon the real economy and how it had contributed to industrial and economic development. South Africa had witnessed huge swathes of de-industrialisation, especially in the rural areas, had seen key labour intensive industries decimated by the effects of cheap imports, and the lack of a coherent strategy that informed the relationship between trade strategy and industrial policy.

This had been particularly marked in the textile and clothing industry, where at least thousands of jobs had  been lost. A further threat was that with the collapse of the sector below a certain point, where key inputs were unable to be manufactured due to suppressed demand, the possibility of maintaining a coherent industrial strategy would unravel.

Ultimately he said this was about sober policy choices, about choosing between allowing consumers access to cheaper products or preserving jobs. At the juncture of clothing manufacturing and retail, for example, the experience of retailers suggested that the simple fact that imported clothes came in cheaper would not automatically translate into a benefit for the consumer. Many imported clothing products were sold, at huge profit to retailers, at levels far below local manufacturing costs.

He said that in the whole process of industrial development and economic repositioning, and in a context of accelerated globalisation, commitments made under the WTO and GATT, to a certain extent, had  constrained and undermined South Africa's ability to utilise the same kind of industrial support mechanisms that industrialised countries had used over the course of their development. Thus a key point in building a coherent industrial policy platform would be to preserve the autonomy of the State, so that it was capable of intervening to coordinate industrial policy and help to support emerging industries as part of a national strategy. The conventional model of liberalisation followed thus far had seen levels of inequality increase. The process had been neither just nor fair, and was a clear sign that South Africa, and the world more generally, needed to take a different approach in defining policies which responded to the needs of companies but also assured that this was balanced with international obligations and expectations. In short, as acknowledged at Polokwane, the State must play an active role in addressing imbalances in trade and industrial policy, and must engage in a way that met the needs of the people and stemmed the tide of economic marginalisation.

At a more specific level, he noted that it was essential to establish a strategic plan on what industries South Africa wanted to support, how it was going to achieve this, establish where support would come from and what institutional arrangements and vehicles would be used to this end. Customised sector programmes that looked at developing strategies, based on consultations between government, business and labour to establish coherent but flexible forward and backward linkages between industries, would be essential.

By way of example he noted that the television manufacturing industry had suffered from the existing tariff structure and imported knock-down and semi-knock down goods, and that this had threatened productive capacity. In order to defend this productive capacity it would be essential to examine the relationship and develop compatible linkages between television manufacturers, computer manufacturers, and emerging initiatives such as satellite box manufacturers. It was also essential for institutions such as this Portfolio Committee to monitor public funds to assure that they were directed towards local initiatives and not used to increase capacity overseas, and that they were linked coherently to Government's overarching objectives. Development finance must also be directed to sustain and expand manufacturing capacity and South Africa’s industrial base. Institutions such as the Industrial Development Corporation and Development Bank of Southern Africa should extend prompt support to emerging industry, particularly during periods of financial shock.

Similarly if the capacity of crucial forward and backward linking industries was allowed to be lost, such as in the foundry industry where steel parts were cast, it would be of great detriment to entire sectors. In this case, because the advantage of having an abundance of steel ready to hand would be lost, moulds would no longer reproduced, imports relied on, and what would otherwise be a short-term “blip” would have considerable negative long-term consequences.

He said that market share manufacturing capacity, jobs, and South Africa’s ability to develop its economy sustainably must be protected domestically, and to expect South Africa’s defensive interests to bring opportunities in other countries.

He also said that a critical examination of South Africa’s institutional arrangement must be made, and competition policy must be equipped to adequately respond to cases of anticompetitive behaviour. He cited the recent high-profile exposure of price-fixing of basic foodstuffs which effectively not only sapped money from the poor, but ultimately sucked money out of productive ventures. Corporate reform would be necessary to curb such unethical practices, particularly such cases which acted to undermine South Africa’s competitiveness as well as national economic and social cohesion.

He said that labour supported a rules-based trading system insofar that this provided far more prospects than bilateral arrangements where imbalances in power inevitably fell to the industrialised world. It was important to support the formation of trade blocs among developing countries to pursue a progressive agenda and undo prevailing inequities. The slogans of the WTO were often fantastic, and although supposedly Doha was to represent a 'developmental round' of negotiations in terms of non-agricultural goods, in fact if South Africa were to implement the kinds of cutbacks in tariffs and support that were envisaged then there would certainly be accelerated de-industrialisation, not only in the rural areas, but at the heart of industrial areas. It was thus essential for South Africa to find a way maintain flexibility and defend the development of full value chains.

He then noted that historical injustices had also played a part, particularly the role of the apartheid State, which, in its arrogance, had South Africa classified as a developed rather than developing country, and which in turn had seen higher expectations placed on it. Some, however, were starting to recognise the reality that South Africa's commitments and tariff cuts had  been overly extensive. He noted that this Round would still be very painful for South Africa and that it would be important to uphold the developmental promises which had  been made. Importantly, while market access for non-agricultural goods remained one of South Africa’s core strategic objectives, it was important that agriculture was not ignored, and that pressure was placed on developed countries to abandon their existing double standard, and for a broader progressive developmental agenda.

He said that while services were not on top of the agenda, South Africa must still be prepared to assert a strong position on these issues. A lesson of the global financial crisis and resulting depression, although South Africa had been sheltered from its worst effects, had been that the same rules governing capital flows that allowed this crisis to occur could not be allowed to persist or deepen, particularly in terms of government procurement and investment.

In terms of bilateral arrangements, he urged caution, noting that many of South Africa’s potential partners, such as China, or those at similar levels of development to South Africa, shared interests in developing certain sectors. South Africa’s national interest in creating work opportunities and unravelling the legacy of apartheid must not be threatened. He also urged the equitable resuscitation and resolution of South Africa’s regional arrangements, noting that South Africa's national fate was closely tied to that of the continent in general and the region in particular.

Mr Ehrenreich concluded by pleading for caution and critical examination against a number of institutions, some using government funds, who were promoting a dogmatic free-market agenda that undermined an appreciation of the integral role of the State in guiding, directing and regulating the economy for the benefit of the country and its people. He also stressed that short of singling anybody out, a closer examination and monitoring of ITEC was necessary to ensure accountability and instill a sense of urgency so that measures did not get left behind.
 
Discussion
Mr van der Westhuizen said that on the previous day, the Committee was informed that saving one job in the textile industry, which was valued at around R70 000, would in fact cost the taxpayer R3 million in protective tariffs. He asked whether this what Mr Ehrenreich was proposing, or whether there was another way to approach the issue.

Dr Rabie noted that he had recently heard from the Chairman of the Manufacturers Association that South Africa's only piston factory had closed down. He noted that many of South Africa’s industries, like the canning industry, were sunset industries, and asked whether COSATU believed that South Africa should artificially sustain these industries with taxpayer money or replace them with more viable globally competitive industries.

Mr Njikelana asked for elaboration on the issue of low and high value added products in terms of government strategy.

Mr Marais asked for Mr Ehrenreich's view of the movement in the rest of the world towards utilising subsidies and rebates as against the argument that all support structure must be abolished. He then asked for his opinion on the idea that South African industries were largely uncompetitive because of internal inefficiencies, such as the inability to properly manage under-invoiced or un-invoiced goods, rather than simply low tariff structures.

The Chairperson noted that on the previous day, Professor Don Ross presented his opinion that the decline of the clothing and textile industry was due more to fluctuations in the weakness and strength of the rand as opposed to an influx of cheaper imports. She asked for COSATU's view on that opinion. She then noted that the decline of the canning industry had recently been traced to culprits in the metal and steel sector, who had  raised prices outrageously, as noted by the Competition Commission and media, and wondered whether their deterioration could really be attributed to their status as so-called “sunset industries”.

The Chairperson asked whether changing the classification of South Africa as a developed country could translate into increased opportunity in negotiations.

Mr Carim clarified two points on the earlier presentation. He noted that whilst SACU had launched negotiations with India around preferential trade agreements, there had  been no similar moves with China. Whilst there had  been some discussions around market access, no moves had been made towards launching preferential trade agreements or FTAs.

He also noted that in the MERCOSUR agreement, the number of product lines covered had been about a thousand both ways, making the total amount of products covered about two thousand.

Mr Ehrenreich said the point about lines was important and illustrative of the need for labour, business and government to engage and become clear on a shared economic vision and trade strategy for negotiations based on the national interest, and particularly based on creating jobs and reducing poverty. This discussion would help to identify what industries were those of the future, and which were just sunset industries. 

He noted that there was not anything automatic about this process, because it was unlikely that any industry in South Africa would survive if Chinese products were openly allowed into this country, so the choices made about what industries to protect needed to be strategic.

He said that he was not sure he would agree with the point that saving one textile job would cost the taxpayer R3 million, but would agree that at certain points the consumer might miss on savings because of a choice to invest in productive capacity. These kinds of choices were made across the world, and an effort needed to be made to move away from ideologically-driven debates. There were many who disagreed with Professor Ross, and he said that although currency fluctuations had created problems across South African industries, it was recognised that pegging the currency would be impossible in the current climate. It was thus also imperative that the relationship between the exchange rate, interest rates and balance of payments and other macroeconomic instruments was made to ensure a combination appropriate to supporting industrial strategy.

He said that the example of the failing piston company was a good example of an area where capacity should not be allowed to be lost, because of its knock-on importance to other sectors such as manufacturing and engineering. Defending these areas was integral to the national interest, and moving higher up the value chain. These and similar decisions were choices which must be made by the Government, IDC and other partners. While the market was an important and powerful instrument, it had failed spectacularly to create prosperity and could not be allowed to be the final arbitrator of economic decision making. In some instances, artificial sustaining of industries for a period would be necessary. It was used by the US and Japan in their competition in the automotive sector, and was a strategy that many developed and developing nations had  used. These could be interventionist tools for South Africa to use to give its industries some space.

He also said it was important to move up the value-added chain, as South Africa’s current export strategy was unsustainable. Furthermore it was also important to recognise that some of these measures would require government regulation. If Government could insist that Anglo-American must take on a Black Economic Empowerment (BEE) partner, which would account for 17% of their share-holding and impact their profits, than government could also insist that before South African steel was exported, more stages of production must be added. The question was thus not about capability but about political will to rearrange the institutional structure so that industry was serving South African national interests, not individual vested interests.

He also said that ultimately this was a question of stability, and that those who were not prepared to give up anything now would see their interests threatened by growing political instability. It was unsustainable to operate the revolution if there was not the honouring of promises made in negotiations to address the inequities of apartheid, and at the moment policy was benefitting those with wealth and not the citizenry as a whole.

He said that the tools used to evaluate South Africa’s trading relationships must be tightened to help meet difficulty of analysing trade. In the instance of SARS, he said it was a reality that many invoices were difficult to track, though there were alleviating measures South Africa could take in certain circumstances. In the case of the television industry, where there were only a few companies in the world that manufactured picture tubes, this was a clear indication of a problem as imports were entering South Africa at prices cheaper than the global market price for tubes. SARS had so far been unable to deal with this. It was thus important that business set indicative prices and that goods which fell suspiciously below that price should be returned.
These trade issues were not questions of morality for the Committee, but questions of how South Africa could best serve the interests of its people.

Mr Ehrenreich reiterated that the historical injustice of South Africa’s inappropriate classification as a developed country had resulted in untold missed opportunities, but that its redress might be able to be quantified in some way as to allow greater flexibilities in the next Round.

He concluded by noting that while there were certain opportunities, there remained incredible risks and challenges. In the past South Africa’s industries had  been decimated by legitimate and illegitimate imports and Government must engage and apply South Africa’s minds to develop a creative response, and ensure that these trade agreements worked in the interest of all.

Impact of Multi- and Bilateral Trade Agreements on South African Business
The Chairperson noted that due to financial constraints, there had been a need to approach an organisation to sponsor these two-day hearings, and that this year that sponsor had been Standard Bank.

Ms Catherine Grant, Director of Trade Policy, Business Unity South Africa (BUSA) began by giving a general overview of the attitude of South African business towards South Africa’s multilateral agreements, noting that South African business supported a rules-based trading regime in its contribution to transparency and certainty in global economy, its help in levelling the international economic playing field, and its use as a source of information and understanding of the workings of other countries' trade regime, and it was thus important that South Africa maintain its position as an active member. Furthermore, South African business had been pleased with Government's unique approach in including all stakeholders in the negotiating process.

She said that multilateral discussions were the only way to address some issues, such as export subsidies, where bilateral and regional negotiations were insufficient to address issues. It was also recognised that over-arching support mechanisms were necessary if developing countries were going to participate meaningfully in global trade. To this end it would also be necessary to take a firm stance against some of the more severe distortions emanating from the industrialised world, particularly in the sphere of imbalanced agricultural subsidies.

She said that the WTO had an effective dispute settlement mechanism, which developed countries had used in the past, and that it was important that, as a developing country with sufficient legal expertise, options on how this could be used to South Africa’s benefit and to hold South Africa’s trading partners to their commitments should be explored.

She said from the perspective of business, the issue of tariffs was declining in its importance, and that the challenges of competitiveness were encapsulated more by other issues, such as trade in services, investment and competition policy.

She said that BUSA represented a wide range of sometimes conflicting business interests, some which imported, exported and produced for the domestic economy. Nonetheless BUSA believed that its members had identified key strategic areas on which business was united for the purposes of the Doha Round of negotiations, and that within National Economic Development and Labour Council (NEDLAC) there had been similar support on these points. In respect of agriculture, BUSA was supportive of the effort to pressure the US and EU to decrease the level of support to their farmers, and in the non-agricultural market access BUSA agreed that South Africa had already taken great strides in liberalising, and that at this Round should  minimise South Africa’s commitments to protect more sensitive industries.

Elaborating on the point of moving beyond tariffs, she said that tariffs had  been unilaterally decreasing over the past fifteen years as a result of WTO and bilateral agreements, and that as a consequence the preferential margin accruing as a result of tariff reductions was low. Important contemporary competitiveness factors focused on non-tariff barriers. Widely defined, these included issues such as construction constraints, transport costs, customs procedures, sanitary and technical standards, and private standards, such as the movement in the EU insisting that distances travelled by a product be clearly printed on labels. Moreover, these issues could not be addressed by intergovernmental negotiations, and were becoming a point of great concern.

With regard to bilateral agreements, she noted that there existed some room for preferential agreements to enhance competitiveness. It was noted that under AGOA the Lesotho textile industry did receive some preferential tariff reductions, allowing it access to retailers such as GAP, which would otherwise be taken by industries in other countries such as Bangladesh, Cambodia and Vietnam. However, on the whole, bilateral agreements had been limiting, and particularly since so-called sensitive products in which South Africa was most competitive were often excluded. She used the case of the exclusion of agriculture from European-SACU relationships as an example. Moreover, preferential trade agreements, such as those between South Africa, India, and various South American countries, tended to include a very small range of goods and did not present real potential to expand or diversify trade.  By way of demonstration, she noted that the value of trade between South Africa and MERCOSUR covered only 0.5% of existing trade between the two partners.

Ms Grant said that BUSA would like to see greater engagement with business in bilateral arrangements in order to address the issue of non-tariff barriers. In the fruit sector, for example, exporters said that while tariffs were not much of a concern, it was of major concern that entire shiploads of goods could perish due to delays at customs. BUSA would thus like to see greater cooperative arrangements to implement mechanisms to minimise these kinds of costs.

She also noted that the proliferation of bilateral agreements around the world had complicated how industries viewed their own competitiveness. Chile, for example, operated hundreds of bilateral agreements in the fruit sector and it was thus difficult for South African exporters to gauge what the real levels of their respective competitiveness were. It would be helpful for the Department of Trade and Industry to provide reliable information detailing these bilateral arrangements, to help ameliorate this situation.

Moving to regional concerns, she noted that BUSA, which sat as the Chair and Secretary of the SADC business forum and employers group, would like to see the full implementation of pending trade agreements which had struggled with implementation and stifled industries with strong regional interest. Shoprite was cited as one example of a firm which had not enjoyed the full benefits of a SADC FTA, due to constraints in meeting rules of origin criteria.

She also noted that it would be beneficial to consider the possibility of equipping customs officials with electronic access to tariff schedules. At the moment customs officials were supplied with printouts supplemented by hand-written data, which was not only cumbersome but often out of date.

She emphasized the importance of regional trade by noting that a Wits University study had shown that South African exporters fell into one of two categories; those that exported exclusively to the SADC region, and those whose prime interest lay in international markets but who retained export interests in the region. The importance of regional trade to South African exporters meant that strengthening this type of trade should be put at the core of the trade agenda.

She was heartened to see that discussions about the possible establishment of a SADC customs union by 2010 had been shelved. BUSA had been of the view that concentrating on such an endeavour would be a misuse of resources which should be primarily directed at finalizing the establishment of a SADC FTA.

She then noted that the issue of the SACU EPA had been divisive, and within BUSA there were chiefly two views. Some elements of business would not be badly affected by a SACU implosion, insofar that it had imposed certain limitations on some firms. Frustration was expressed that it had taken 18 months for the SACU FTA to be ratified by member countries, with similar delays in the pending ratification of the SACU-MERCOSUR agreement. In regard to the movement towards a SACU board of tariffs, BUSA concurred with the frustrations that COSATU had expressed about ITEC, and had serious reservations about the efficiency and effectiveness of operating tariff policy at SACU level. However, BUSA was prepared to accept SACU to the extent that it was necessary to preserve stability. Some of the difficulties that BUSA experienced in the trade policy debate included the effect on commercial decisions, the fact that many directors were not fully aware of what was happening internationally and the need to communicate these issues and hear concerns.

Ms Grant concluded by saying that BUSA was pleased to be included in a review of the system of trade and industrial policy, and emphasised that the previously blunt instruments had failed, such as with import quotas on Chinese goods, and now there was scope for new creative approaches. She said that it was particularly important to examine the needs of exporters, and generally create an enabling environment for South African industries with growth potential, such as those in telecommunications and support services, reduce red tape, and review competition policy.

Discussion
Mr Mphahlele asked, if SACU were to implode, what kind of tariff system should replace it, if any at all.

Mr Marais noted that BUSA had often requested support and protection and asked whether this because BUSA had  been unable to adapt to the rigours of global competition. He asked what was so vulnerable about South African businesses that prevented them from competing and creating sustainable jobs.

Mr Njikelana asked what kind of measures could be taken to reduce non-tariff barriers, besides business investing in those specific areas in the SADC region.

Mr Njikelana asked whether preferential trade agreements were beneficial in building confidence between national and regional partners. He then asked what the business community's perspectives on the so-called new issues were.

The Chairperson asked what kind of support did BUSA afford its members in addressing non-tariff barriers.

Ms Grant said that even if SACU were to disband, certain elements would need to be preserved, particularly the revenue-sharing systems which were essential for Southern African stability. The trade aspect of SACU was still very new, so that there was much to be learned, and its development could take any number of forms, perhaps under President Zuma's newly announced South African Partnership for Development Agency.

She said that it was unlikely that the common external tariff was so deeply imbedded in the Southern African institutional framework that it would be impossible to remove it. BUSA's difficulty with the common external tariff stemmed largely from the constraints of collective negotiation with all member states.

Ms Grant said that she could not explain adequately why South African business was not globally competitive enough, and why it had found it difficult to create jobs. Some general reasons included low levels of productivity, an uneven global playing field, and the complexity of international market dynamics, although South African business was committed to the objective of creating employment.

With regards to emerging issues, she said trade facilitation was fundamental and was at the core of problems relating to non-tariff barriers. In terms of services, BUSA diverged from its NEDLAC partners and saw liberalisation as key to economic growth, but felt that this should exclude essential basic services such as water. The service sectors in which BUSA advocated liberalisation include those supportive of industrial growth and trade. Transport was cited as one inefficient sector in which liberalisation could assist the reduction of transaction costs for social benefit, particularly in reducing its 40% share of food prices.

She also noted that South Africa's competition policy was functional, well developed, and of a high international standard. She noted that South African business was highly involved in developing infrastructure in the SADC regions, citing Spatial Development Initiatives, Private-Public-Partnerships, and a project to create a transport corridor linking South Africa to its Western neighbours. She then said while preferential trade agreements might build confidence at a vertical level, that this was not particularly pertinent to commercial relationships.

Ms Grant confirmed that BUSA was planning to be more active in training, to host courses at the regional level to familiarise and inform its members with the language of trade, how to link developments in trade to commercial activity, and on new technological developments. Furthermore South Africa had a well established network of Chambers of Commerce, as well as an Exporter council and Exporter Club, but that often companies tended to only be reactively active, coming forward only after something had happened, such as a license being revoked.

Committee Business
The Chairperson then noted that Committee's agenda for Friday 25 September would be compromised as this was the last day of Parliament, and proposed that the items be rescheduling to Friday 18 September.

The revised programme was adopted by the Committee

The Chairperson  then moved for the approval of the Department of Trade and Industry's Strategic Framework, and Committee Members agreed to its adoption.

The meeting was adjourned.