Zimbabwe Bilateral Investment Treaty; SACU/Mercosur Trade Agreement; Revised Industrial Policy Action Plan (IPAP): public hearings: Day 7

Meeting report

The Chairperson paid tribute to the late Hon. Dr Molefi Sefularo, Deputy Minister of Health, who had died tragically in a road traffic accident on Monday, 05 April 2010, and who had served the Portfolio Committee on Trade and Industry with distinction for many years. She conveyed the Committee’s condolences to his family, his comrades and colleagues.

 

The Chairperson referred to the Committee’s annual report, which had been the subject of discussion in Business Day, Tuesday, 06 April 2010, pages 1-2, with reference to the recapitalisation of the Industrial Development Corporation (IDC). Business Day had also referred to other Committee resolutions, including the Committee’s position on gambling. The Committee had envisaged the IDC as the driver of the turnaround strategy with regard to the Industrial Policy Action Plan and job creation. 

 

South African Reserve Bank. Presentation

Dr Johan van den Heever, Deputy Chief Economist, South African Reserve Bank, conveyed the apologies of Ms G Marcus, Governor, South African Reserve Bank. He briefed the Committee on National Treasury’s observations on the exchange rate of the rand, and on the cost of capital in South Africa.

 

In 30 years the cost of one United States dollar had on balance risen from less than R1 to more than R7. This movement had unfortunately not increased the international competitiveness of South African goods, since inflation complicated competitiveness along with many other factors. If prices in the United States stayed unchanged, but South African prices rose sevenfold, the rand price of one US dollar should increase roughly sevenfold all other things being equal. However, to determine if competitiveness had really changed, economists calculated the real exchange rate between two currencies by means a formula (slide 5, page 3). 

The real exchange rate was also known as the inflation-adjusted exchange rate.

 

Although more competitive than in the early 1980s, the real exchange rate of the rand against the dollar was currently close to its 30 year average. Not just against the US dollar, but against a basket of currencies, the rand had depreciated considerably in the 1980s and 1990s. It was helpful to study the recent movements in the nominal effective exchange rate more closely (slides 7-8, page 4).

 

For a long term analysis of competitiveness, the real effective exchange rate was also a useful tool. Numerous forces and events had an effect on the exchange rate, of which those indicated were just a few examples. In 1995 the financial rand had been abolished. (Slides 9-10, page 5).

 

Drivers of the exchange rate of the rand included export commodity prices, which were currently strong (slides 11-12, page 6). 

 

Changes in non-resident investor interest in South Africa also influenced the exchange rate: annual cumulative monthly net purchases of shares and bonds by non-residents were illustrated. (Slide 13, page 7).

 

Recent movements in the exchange value of the rand traced the movements of other commodity countries and of Brazil, Russia and India, with China being an exception (slides 14-15, pages 7-8).

 

While a lower level of the real effective rand should boost manufacturing production, other factors seemed to have been more important. Real Gross Domestic Product (GDP) growth in manufacturing seemed more sensitive to local and international income and expenditure than to the exchange rate. (Slides 16-17, pages 8-9).

 

Capital expenditure in manufacturing was partly on imported capital goods. Capital spending was often lower when the exchange rate was weak. The fall in manufacturing production and exports in 2008 and 2009 was driven by the global economic crisis, not by the exchange rate. (Slides 18-19, pages 9-10).

 

With regard to maintaining a stable and competitive level of the exchange rate of the rand, both the stability and level of the exchange rate were important for sound resource allocation and sustainable growth. The problem with stability was not with frequent smaller fluctuations, but with large ‘order of magnitude’ changes in exchange rates. It was impossible to have a constant exchange rate against multiple currencies in a world of floating and constantly adjusting exchange rates. There were instruments such as forward foreign exchange contracts available to hedge against exchange rate volatility. South Africa had made progress in reinforcing the robustness of its financial system, strengthening its international financial ties and raising its foreign exchange reserves. This contributed to reducing exchange rate volatility. Standard deviation of real effective exchange rate volatility calculated on monthly data was given for 1994-1999, 2000-2004, and 2005-January 2010: 8.8, 11.0, and 8.4 respectively. (Slide 20, page 10).

 

There had been a reduction in the volatility of the real effective exchange rate, as illustrated (slide 21, page 11).

 

With further regard to maintaining a stable and competitive level of the exchange rate of the rand, there was a problem with ‘major overshooting or undershooting of the exchange rate’. The equilibrium level of the exchange rate was a moving target which constantly adjusted to changes in the economic environment, such as changes in the terms of trade and changes in foreign appetite for acquiring assets in South Africa. Recognising misalignment was difficult. The authorities could contemplate various courses of action if misalignment of the exchange rate was suspected, including disseminating factual economic information; official pronouncements, guidance or warnings; exchange control relaxation or restriction; purchases or sales of foreign currency; and policy interest rate changes. (Slide 22-23, pages 11-12).

 

South African Reserve Bank (SARB) purchases had increased the country’s gross reserves from $8 billion to almost $40 billion since early 2004 (slide 24, page 12).

 

If the SARB purchased foreign currency, it had effects on the money-market. These effects had to be countered, as was explained in some detail. (Slide 25, page 13).

 

Sterilising the money-market effect of foreign currency purchases had been costly, with lower interest rates on international reserves than on sterilisation instruments (Slide 26, page 13).

 

Attempts to influence the exchange rate through official purchases or sales of foreign exchange should take account of the size of the foreign exchange market. The relationship of the exchange rate to inflation was also important. (Slides 27-28, page 14).

 

With regard to the cost of capital in South Africa, there were various instruments through which capital could be raised, for example loans, debentures, share capital, retained earnings, and hybrid instruments. In the case of loans and debentures, it was helpful if interest rates did not fluctuate excessively; it was also helpful from a cash flow viewpoint if nominal interest rates were lower rather than higher. Sustainability was very important: a very low interest rate environment which could not be sustained and gave way to a high interest rate environment was very damaging. (Slide 29, page 15).

 

The nominal rate on long-term bond financing had been high from the mid-1970s to around 2000; but much of this was because of high inflation (slides 30-31, pages 15-16).

 

Real or inflation-adjusted bond yields had not been very high in recent years despite rising capital expenditure in South Africa. The example of the real yield of the Eskom bond was given (slide 32, page 16).

 

Short-term nominal lending rates were often very volatile and often very high in the 1980s and 1990s. The real or inflation-adjusted prime overdraft rate had also been less volatile and well-below previous highs in recent years. Real central bank interest rates depended on country circumstances. (Slides 33-35, pages 17-18).

 

Dr Van den Heever noted that South Africa had become more competitive, and duties had been gradually reduced to lower levels. It took time to develop markets. One could say that since democracy there seemed to be some reduction in the volatility of the rand. It was to be noted that South Africa had a savings shortfall. Instability and high inflation was to be avoided.

 

In conclusion, a stable and competitive exchange rate was an important component of an appropriate industrial strategy for South Africa. Ensuring financial robustness and building foreign-currency reserves, when the supply of foreign currency was strong, reduced volatility. It also and moderated undue appreciation of the rand. The Reserve Bank was doing this currently, mindful of the importance of the exchange rate. Such intervention was not the same as targeting a specific rate of exchange. The latter was not advisable, given the size of the relevant market, the cost and risk of such a policy, and the international and domestic experience with such attempts. Supply-side measures and programmes to build industry should simultaneously be vigorously pursued; the exchange rate was no substitute. The cost of capital should not be unduly volatile or high. An environment of financial stability and low inflation reduced the uncertainty and inflation premia built into interest rates. It also countered volatility and brought down the level of nominal interest rates. The South African Reserve Bank was committed to promoting financial stability and maintaining low inflation, in conformity with its mandate. Its prime contribution was therefore to create a stable platform for sustainable growth and development.

 

Discussion

Prof B Turok (ANC) welcomed the Reserve Bank’s appearance before the Committee. He commented that portfolio investment operated under different conditions from industrial investment. He asked what South Africa’s priority was. It was not possible to say that one balanced the other. He noted the experience of some countries such as Chile and Malaysia. He commented on the issue of competitiveness, and asked Dr Van den Heever to comment on China’s ‘pegged’ exchange rate to the United States dollar. 

 

Dr Van den Heever replied that China’s exchange rate ‘pegged’ to the United States dollar had created  great stability but at the cost of suppressing domestic consumption. China was a producer-friendly country. If the United States dollar depreciated, there was a cost borne by the Chinese tax payer, but in the Chinese system, that was not a great concern. Not many countries followed China’s example, which was an exception that created excitement. It was possible to achieve China’s stability, but at a price; ‘the sky is the limit’ – however, not many countries had an appetite for such policies. An exchange rate ‘pegged’ to the United States dollar helped those who used dollars, but it did not help importers. It was better not to peg the rand. Whatever system was used, one was still floating against others. He would prefer to leave further explanation on the Chinese economy to experts on China.

 

Prof Turok said that the real exchange rate was of critical importance and that the Reserve Bank should give this the highest priority. He asked if a dual exchange rate would not be useful.

 

Prof Van den Heever did not recommend dual or multiple exchange rates, since these did not help to promote exports. When South Africa had had a separate financial and commercial rand, the difference had been in the wrong direction. As a buffer in extreme situations, it had helped, but it would have itself become a problem if it had become entrenched.

 

Mr S Marais (DA) observed that South Africa had depended for too long to an excessive extent on portfolio investment to fund its foreign reserves. He asked Dr Van den Heever’s opinion on foreign and fixed investments. Also South Africa currently depended too much on commodity trading. He fully agreed that South Africa needed a stable exchange rate.

 

Dr Van den Heever replied that one would welcome direct investment, whereas portfolio investment was at arms’ length. He deplored examining the exchange rate alone. He said that South Africa had a savings shortfall. It was therefore necessary to use foreign savings, either direct or portfolio investments. One had to accept what was offered.

 

Mr Marais asked about the inflation rates of countries like Brazil. From a nominal point of view, small business men were not in a position to offset against inflation. He agreed with Prof Turok that to grow industry South Africa needed a lower interest rate.

 

Dr Van den Heever said that a very important point was that low inflation countries were those with low rates of interest. 

 

Mr S Njikelana (ANC) asked what an acceptable level of exchange reserves would be, and what advantage this had for the IPAP.

 

Dr Van den Heever replied that there were a number of guidelines with regard to reserve issues. A ‘pegged’ exchange rate required far more exchange resources than a floating exchange. South Africa’s situation was well-contained. Long term interest rates were generally more relevant than short term rates. South Africa had travelled from a period of very weak foreign exchange reserves. With more in reserve, there was less volatility.

 

Mr L Mphahlele (PAC) asked if South Africa had some interventionist policies. Secondly, he asked to what extent neighbouring countries influenced the strength or the weakness of the currency.

 

Dr Van den Heever replied that bad news from Zimbabwe did have a bad effect on the rand.

 

Mr X Mabaso (ANC) asked how to broaden the savings base of South Africa. He asked how interest rates advanced South Africa’s course as they increased or decreased.

 

Dr Van den Heever replied that South Africa should do more to encourage savings in a variety of ways by providing a stable financial environment. This involved containing inflation, and establishing tax laws that were fair. Most importantly, there should be a growing economy.

 

Dr Van den Heever said that it was an unfortunate fact that if a country had a lucrative exchange rate, but its ports were not functioning, then it had a serious problem. The exchange rate was but one link in a chain of m any links. It was most important that the exchange rate should not be a broken link. In most instances, countries had moved to a single exchange rate.

 

Dr Van den Heever observed that in other continents, there were currency blocks or a common monetary area. However, if countries were far apart, it was difficult to have a common exchange rate. Even if they were neighbours, it was also difficult if they had different methods of production. Inhabitants might be forced to relocate, and this was not such an easy thing. Conflicts could thus be escalated. Dissimilar production structures were a problem.

 

National Treasury presentation

Dr Christopher Loewald, Deputy Director-General, Economic Policy, National Treasury, briefed the Committee on the rate of exchange and its implications. He noted that Dr Van den Heever had been thorough in his observations on recent movements of the exchange rates. Movements, comparing Australia, New Zealand, Brazil, and South Africa, from January 2008 to September 2009 were indicated (slide 2).

 

Long term nominal and real effective exchange rates were compared, from January 1990 to January 2009 (slide 3).

 

Long term trends in nominal exchange rates of the rand against the Sterling Pound, the Euro, and the United States dollar, were compared from January 1990 to January 2010(slide 4).

 

The trend against other emerging market currencies – the Brazilian Real, the Renminbi, and the Rupee, was depicted from January 1990 to January 2010 (slide 5).

 

Exchange rate movements and manufacturing production were indicated from March 1999 to March 2009. The period November 2001 to November 2003 inclusive was a period of severe international financial crisis corresponding with a slower growth in manufacturing production. (Slide 6)

 

The mechanism for defining the exchange rate and the course of events during and after a nominal depreciation, and also after exchange rate depreciation, were explained (slides 7-10).

 

The macroeconomics of real depreciation and why inflation was important were explained (slides 11-12).

 

A growth in productivity meant that more was created with fewer inputs at a constant price and profit. Higher productivity growth enabled lower price inflation and resulted in real depreciation. China’s real exchange rate was low because consumption was low relative to income growth. Also China had a surplus of labour that was mobile; this equated to low labour costs and high productivity. (Slide 13).

 

A managed float enabled greater flexibility for the central bank to sustain economic growth, with less volatility of growth. Floating allowed the exchange rate to adjust to external shocks. An escape or explanation clause enabled the central bank to offer flexibility to address external or supply shocks to inflation, again without major changes to interest rates. The forward book was ‘closed’ to reverse net negative foreign exchange position and build reserves in 2001. A net deficit of United States $25 billion was reversed to a positive balance of United States $39 in 2009. The purchase of reserves ‘leaned’ against an appreciating rand: United States dollar exchange rate. (Slide 14).

 

The risks of depreciation included the possibility that once-off gains to competitiveness would not be followed up by sustained investment and productivity gains; that higher export prices would exacerbate ‘Dutch disease effects’ [‘the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves’ – Financial Times Lexicon] with no export depreciation; and that higher inflation in the wake of depreciation would follow Latin and Southern European approaches. Runaway inflation would necessitate further depreciation and greater use of fiscal expansion to increase GDP growth. To create a real depreciation of 10, the nominal exchange rate would need to depreciate by 10%, then by higher rates afterwards. Inflation would explode from this continuous depreciation, and almost double from the baseline. While exports might benefit, consumption and investment would decline.

 

To achieve real depreciation had the following implications for macroeconomic policy: to increase savings and investment; to put more emphasis on counter-cyclical fiscal policy; to achieve a more active accumulation of foreign exchange; to achieve lower inflation more consistently; and to have more active communication on the exchange rate.

 

For microeconomic policy, achieving real depreciation had the following implications: incentives for productivity growth; lower costs and raising productivity of inputs such as labour and transport in order to increase efficiency and utilisation of capacity; and strengthening competition and reducing licensing and other barriers.

 

Discussion

Prof Turok said that, given the complexity of all the variables, Government had to take decisions all the time. The secret of the ‘Asian tigers’ was that they were not afraid of making decisions, even if cutting one variable impacted on other variables. He asked Dr Loewald if Parliament should take a particular view on how to shift the balance at any particular time. Secondly, it was well known that South Africa was plagued by consumer debt.  Much consumer spending was financed by credit, a great deal of which was irresponsible. This had distorted investment in the economy; he requested Dr Loewald to confirm this and asked him what should be done about it. Thirdly, he asked about savings, and, in particular, how the savings invested in pension funds should be protected, while not being over-cautious. He referred to the example of Brazil. He then asked if South Africa was moving in the right direction in regard to the services sector; this was important, since it was now a time for decisions. 

 

Mr Marais asked about the graph indicating exchange rate movements in manufacturing production. In 2001-2003 it seemed as if confidence in manufacturing was relatively high irrespective of movement in the exchange rate. However, in 2007-2008 manufacturing fell in step with the exchange rate, whereas one would have expected the opposite. He asked if this indicated a lack of confidence in manufacturing industry. He acknowledged that the global economic crisis had probably contributed. He felt that that South Africa was loosing out ‘enormously’ in terms of manufacturing capacity and competitiveness, and asked for Dr Loewald’s views.

 

Mr Mabaso asked that Members be provided with copies of the graphs in colour and asked for more focus on education, training and empowerment, in particular with respect to that huge segment of the population who had been disadvantaged by apartheid-era education. If this imbalance remained uncorrected, South Africa would continue to be one of the most unequal societies in the world. It was necessarily clearly to define what was being done in the medium and long term to include those who had been disempowered by the previous regime.

 

Mr Njikelana endorsed Mr Mabaso’s requests. He said that some Members were ‘novices’ when it came to the more advanced aspects of economic theory. Acronyms were a particular problem. He asked about public procurement in relation to IPAP.

 

The Chairperson agreed with Mr Mabaso that it was most helpful to receive the graphs in colour and asked Dr Loewald to send the electronic version of his presentation to the Committee Secretary.

 

Dr Loewald replied that before taking a view it was necessary to explore all aspects and become as fully informed as possible. His presentation had been an attempt to simplify some very complex material. He did not think that there had been ‘a credit bubble’, though the rate of growth of credit had been a concern, and warnings had been issued. He thought that the National Credit Act had been a step in the right direction. National Treasury had acted to reduce the fiscal gap. He said that over the past 20 years manufacturing industry had grown, although not as fast as the service sector. Possibly confidence in manufacturing had been higher in 2003. The recent economic turmoil had been an unprecedented shock and it was hard to make comparisons. Education and training were very important as a means to increasing productivity. Demographic changes had to be taken into account. If people lacked skills, their productivity would be low. He acknowledged the difficulties experienced with economic terminology. He did not know if the current financing of IPAP, which involved various programmes, was adequate. Procurement leveraging was not really his area within the National Treasury, but there was an ongoing process that was robust and vigorous. There was discussion as to how to regulations of the procurement system needed to be realigned. On the issue of synchronisation of policies, ongoing industrial development projects would generate higher employment.

 

Prof Turok remarked that Dr Loewald and Dr Van den Heever had not addressed employment in their presentations. It was vital to increase employment, which was Government’s current focus, and Parliament’s mandate. If the variables mentioned were adjusted, but without increasing employment, then Members were left ‘in a limbo’.  He hoped that Government Pension Fund (GPF) monies would be invested in a form that would increase employment, while bringing better returns. 

 

Dr Loewald acknowledged this, but said that economic growth and employment growth went together.

 

The Chairperson said that the Committee would correspond with National Treasury on matters requiring further clarification and would expect National Treasury to send ‘a collegiate response’.

 

Department of Trade and Industry (DTI) briefing on Zimbabwe Bilateral Investment Treaty

In the presence of the Second Deputy Minister of Trade and Industry, the Hon. Ms B M Ntuli, Mr Xavier Carim, Deputy Director-General, International Trade and Economic Development Division (ITED), Department of Trade and Industry, briefed the Committee on the Zimbabwe Bilateral Investment Treaty. Its aim was to provide an enhanced degree of investment, while supporting the economic reconstruction of Zimbabwe. The process had begun in 2002. However, South Africa had struggled to obtain an agreement. In March 2009 there had been an agreement to restart the process with a view to concluding it as soon as possible. 

 

Mr Carim gave details of the context and nature of the Zimbabwe Bilateral Investment Treaty. Promotion and Reciprocal Protection of Investments Agreements, also known as Bilateral Investment Promotion and Protection Agreements (BIPPAs) or bilateral investment treaties (BITS) were agreements that provided an enhanced degree of security to investors from the parties to the agreement wanting to invest in the territory of the other.

 

South Africa considered a bilateral investment treaty with Zimbabwe as an important instrument to encourage and protect South African investments in Zimbabwe. Since the political settlement in Zimbabwe, the Department believed that a bilateral investment treaty with Zimbabwe that encouraged South African investment into Zimbabwe would provide support for the broader processes of economic reconstruction currently underway.

 

Negotiations on an investment treaty with Zimbabwe had been ongoing since 2002 when such negotiations were mandated by the South Africa–Zimbabwe Joint Permanent Commission for Co-operation on 21 November 2002. An agreement had been concluded in December 2003, and the Department had obtained a Presidential Minute authorising the Minister of Trade and Industry to sign the Agreement in June 2004. However, attempts to agree to a time and venue for signing the Agreement were unsuccessful.

 

Negotiations resumed in March 2009 during the Third Session of South Africa- Zimbabwe Joint Commission. Zimbabwe proposed amendments to Article 11 of the Agreement, entitled ‘the Scope of the Agreement’. This amendment concerned investments related to Zimbabwe’s Land Reform Programme. The Third Session of South Africa-Zimbabwe Joint Commission recommended that both Parties finalise negotiations on Article 11 in order to conclude and sign the Agreement. Beyond Article 11, this Agreement was a standard bilateral investment protection agreement in terms of format and content used by South Africa.

 

Following a series of engagements in 2009, the parties agreed on the wording: ‘This Agreement shall apply to all investments, whether made before or after the date of entry into force of this Agreement, but shall not apply to any property right or interest compulsorily acquired by either Party in its own territory before the entry into force of this Agreement.’ The clause reflected a compromise that provides enhanced protection for South African investors in Zimbabwe (and vice versa), and was in line the Global Political Agreement (GPA) which established an inclusive Government in Zimbabwe.

 

South Africa and Zimbabwe concluded negotiations on the Promotion and Reciprocal Protection of Investments Agreement in October 2009. The Hon. Dr R Davies, Minister of Trade and Industry, received the President’s approval, in terms of section 231(2) of the Constitution, to sign the Agreement after consultation and concurrence from the Department of Justice and Constitutional Development (DoJ&CD) and the Department of International Relations and Cooperation (DIRCO). The Agreement was finally signed on 27 November 2009 during the Trade and Investment Seminar held in Harare, Zimbabwe, which was attended by more than fifty senior executives from South African companies.  

 

To enter into force, both sides now need to submit the agreement to their respective Parliaments for ratification. Once ratified by both Parliaments, the Agreement will enter into force. The Agreement will provide enhanced security for South African investors in Zimbabwe and contribute to the ongoing programme of economic reconstruction in this important neighbouring economy.

 

Discussion

Mr Marais asked if Article 11 protected investments that had not been ‘grabbed and nationalised’ and were still in the possession of the investors. He asked further if it was known how much was still in the possession of the investors and how much had been taken into the possession of the government of Zimbabwe. He asked for a definition of ‘compulsory’. It was important when entering into a treaty to know exactly what one was protecting.

 

Mr A van der Westhuizen (DA) also asked about this specific clause and asked particularly about protection of previous investments.

 

Mr Carim gave an explanation of Article 11 in ‘non-legal’ terms. He understood that once the Treaty came into force it would apply to all South African investments in Zimbabwe that had been made before the Treaty came into force and to future investments in Zimbabwe. However, agricultural interests that had been compulsorily acquired previously, by either party, were not protected, while future agricultural investments would be protected. The only investments that were not protected were those lost through appropriation under Zimbabwe’s land reform programme prior to the enactment of the Treaty. Zimbabwe’s land reform programme could not be challenged by this agreement. He could not give figures for the amount of land that that had been appropriated.

 

Mr Mabaso complimented the Department on the steps that it had taken to enhance the development of Africa as a continent, and in particular Southern Africa, since South Africa could not develop in isolation. He referred to land issues in the Western Cape. With regard to Zimbabwe’s economic revival, he said that it was important to seize new opportunities that might arise not only out of South Africa’s own situation, but which might arise because of what one could obtain from Zimbabwe.

 

Mr Radebe agreed with Mr Mabaso, while pointing out that investors from South Africa must be aware that they must comply with Zimbabwe’s laws.

 

Mr Carim replied with regard to the effect of the Treaty on national law. It was necessary for investors to follow the law, but Article 8 provided that a solution existed in recourse to international arbitration.

 

Mr Radebe was worried about the attached properties of Zimbabweans. It appeared that this Treaty did not affect land reform.

 

Mr Carim replied that attached properties of Zimbabweans in South Africa were a different process. The Southern African Development Community (SADC) Tribunal was a different forum for investors. The one did not preclude using the other. According to the SADC Tribunal, compensation would need to be provided.

 

The Chairperson asked for clarification on some issues. She said that some South African investors had not been partial to supporting such a Treaty, but had changed their minds to the extent that they wished it had been brought into force already. She asked for the Department’s views on what had changed perceptions on the matter.

 

Mr Carim replied that the business sector had recognised that such a Treaty would provide it with increased security.

 

Mr Njikelana asked about Articles 3 and 5.

 

The Department gave more detail on Article 5. All investors were treated in an equitable manner.

 

Mr Marais asked what happened between the signing of the Treaty and its ratification. It was necessary to take judicial precedents into account. He asked about implications for current South African investors and for the future. More than agricultural land was likely to be affected.

 

Mr Carim replied that the fact that an agreement such as the Treaty was negotiated and was required to be acceptable to both sides would provide additional protection for investors. It provided a vast improvement on the protection that South African investors would receive.

 

Mr Mphahlele understood Mr Marais’ concerns, but pointed out that the Zimbabwean government’s policy was not ‘a land grab’ but a land reform programme. The greatest land grab had been that of the colonists, who had seized the land that had belonged to the people before colonisation.

 

Mr Njikelana asked if it was about providing investment.

 

Mr Carim replied that it was difficult to comment on Zimbabwe’s indigenisation legislation. In a sense it had some similarity to South Africa’s own land reform programme.

 

Mr Carim said that the Treaty did provide protection against appropriation.

 

Mr Carim said that the Treaty was one of three investment treaties in southern Africa, but he suspected that the others had not yet been ratified. The Treaty was a SADC–wide initiative that was ‘another step in the process of deeper integration’.

 

Mr Van der Westhuizen asked why the Treaty had only now been discussed in South Africa’s Parliament.

 

Mr Carim explained procedural and Constitutional requirements. He could not comment on Zimbabwe’s equivalent processes.

 

The Chairperson asked for clarification on the protocol to the Treaty.

 

The Department elucidated and gave some explanation of the implications of exchange control and differing regulations for non-resident foreigners and permanent residents.

 

Department of Trade and Industry briefing on the SACU/Mercosur Trade Agreement

Mr Carim briefed the Committee on the SACU/Mercosur Trade Agreement. This was a preferential agreement between the Common Market of the South (Mercosur) and the Southern African Customs Union (SACU). Argentina, Brazil, Paraguay and Uruguay constituted Mercosur, while Botswana, Lesotho, Namibia, South Africa and Swaziland constituted SACU. The agreement was now awaiting ratification.

 

Article 2 of the agreement provides for the establishment of fixed preference margins as a first step towards the creation of a free-trade area between SACU and Mercosur.

 

Mr Carim referred to an explanatory note. As Members were aware, the Department placed great emphasis on expanding the market for South African goods. The Department had been working for a number of years on the India-Brazil initiative.

 

Initial discussions between South Africa and Brazil had begun in 2000. For a long time the focus had been on promotional issues and reciprocal visits of delegations. When South Africa had signed the framework agreement in 2000, an intention towards a free trade agreement was indicated by means of a more limited preferential trade agreement. It was apparent that such negotiations could not be conducted by Brazil and South Africa alone, but would have to involve regional partners.

 

More detailed negotiations began in 2002 and the first stage of these was completed in 2004. It was realised, however, by both sides that there were other elements that would have to be negotiated. Both sides thought that the Agreement could be expanded to include more preferential trade. This process continued for four years, and addressed the difficulties of negotiating between nine member states. At a technical level, this process was completed in April 2008. The Agreement was signed by the Mercosur side in December 2008, and by the SACU side in April 2009.

 

This Agreement was the first trade agreement concluded by SACU as a single entity with another developing region.  SACU had negotiated an agreement with the European Free Trade Association (EFTA) in 2008.

 

The importance of this Agreement was that it created a basis for further growth in trade and tariff concessions in future. It currently covered some 2 000 products.

 

It was important to note that it established a legal framework for governing trade relations, so that any friction could be taken up in the institutional and legal framework that the Agreement established.

 

The main text comprised a set of overarching obligations. There was a safeguard clause in case of a surge in imports.

 

All members of SACU and Mercosur had signed the Agreement, which was now ready for ratification. Mr Carim was uncertain of how far South Africa’s neighbours in SACU had progressed towards ratification. He had been advised by Mercosur that its members would need at least a year before they could complete their ratification processes. The Department, however, believed it advantageous for South Africa to ratify it early.  

 

Discussion

Mr Njikelana again complimented the Department for its ‘sterling’ work. He asked for clarification about a reference in the explanatory notes. He asked to what extent the Agreement would assist economic integration in SADC.

 

The Chairperson asked about the paragraph which referred to a trade deficit with Brazil and Argentina. She asked exactly how this agreement would assist.

 

Mr Carim admitted that the explanatory note might be confusing. It was a reciprocal agreement. The fundamental point was that in order to address these deficits South Africa had to become more competitive.  

 

The Chairperson asked, without wishing to commit the Department, about time frames. She observed so many technical terms in the Agreement, and asked what support the Department received in order to obtain a clear understanding of the terms and implications of the Agreement, and avoiding creating any risks to South Africa’s own manufacturing and industrial interests.

 

Mr Carim assured the Chairperson that the Department had the full co-operation of other governmental departments.

 

Mr Marais asked when the Agreement would take effect. He was concerned that South Africa would bind itself to the Agreement while waiting a long time for the other parties to commit themselves. He asked about cross-border trade, by sea and by land, since he feared illegal imports, an inflow of inferior products, and other goods from questionable sources, such as countries with unacceptable labour practices. 

 

Mr Carim said that this did not only apply to preferential trade agreements but to all international trade. One of the elements of the IPAP was to strengthen the South African Revenue Service (SARS) to improve controls at the borders.

 

The Chairperson asked if the agreement included the automobile sector. With regard to the 12^th round, ‘it sounds like a boxing match to me’. 

 

Mr Carim responded that the Department had found agreement between SACU and Mercosur without recourse to argument. One of the advantages of a preferential trade agreement was that it could be pursued amongst developing countries. In the World Trade Association (WTO) there was provision for such agreements between developing countries, whereas developed countries would be required to negotiate a free trade area. A more limited preferential trade agreement could be pursued with developing countries with agreement on the extent to which member countries could agree to give each other preference. The reason for this was quite important. South Africa and Brazil were at similar levels of development, and felt some need to protect their industries, and to shield each other from direct competition. It was possible to give varying preferences. The automobile industry, and other sectors, were included, but without opening up the market to an excessive extent or to destructive competition.

 

The Chairperson thanked Mr Carim and his colleagues.

 

The meeting was adjourned.