South African Customs Union Agreement: briefing by Department

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE; FOREIGN AFFAIRS PORTFOLIO COMMITTEE; AGRICULTURE AND LAND AFFAIRS PORTFOLIO COMMITTEE: JOINT MEETING
12 June 2002
SOUTH AFRICAN CUSTOMS UNION AGREEMENT 2002: BRIEFING BY DEPARTMENT

Chairperson:

Briefing by the Department of Trade and Industry on the SACU agreement

SUMMARY
The Department of Trade and Industry was invited to attend a joint meeting with the Portfolio Committee of Trade and Industry, the Portfolio Committee of Agriculture, and the Portfolio Committee of Foreign Affairs, in order to give them an update regarding the Southern African Customs Union Agreement of 2002.

MINUTES
Dr Davies, Chair of the Trade and Industry Committee, explained that this briefing was part of a cycle of briefings on trade negotiations. He explained that the cycle began with a briefing from the World Trade Organisation during the previous week. In addition, he stated that there would be a briefing on the SADC trade protocol on Tuesday 18 June 2002, and that this would then be followed by a progress report from MERCOSOR on Wednesday 19 June 2002. He stated that the meeting would simply be a briefing on SACU. The Committee would be expecting the final agreement to come before them at some stage to formally ratify the agreement. In that regard, he pointed out that the visiting committees would also be invited to take part in the process. He noted that the Commission on International Trade Bill (CITA Bill), although not yet formally tabled in Parliament, would be linked to the agreement. He said that the draft Bill would be made available to the Committee on a confidential basis.

The Chair introduced Mr Motona, the Acting Director General of the International Trade Division (ITED), and Mr Ngwenya, a Director in the same division. Mr Motona began by giving an outline of the content of the presentation, and explained that he would be dealing with:-
-The rationale behind the SACU agreement.
-The key provisions in the agreement.
-A demonstration of the relationship between the agreement and the CITA Bill. He pointed out that the Bill was on its way to Parliament because Cabinet had approved it together with the SACU agreement.
-Transitional arrangements because the agreement was still to be implemented. In that regard, he explained that they were currently operating under the 1969 agreement.

Mr Motona considered the rationale behind the agreement. He pointed out that the agreement would have both economic and geo-strategic value for South Africa. One of the reasons for this would be the fact that South Africa sells four times more to the bigger countries than the bigger countries sell to the country. He highlighted the importance of the fact that there was already a fairly integrated economic region and that they were increasingly working with the governments of the other countries in order to establish relations with the rest of the world. Thus he stated that it was a strategic imperative for the Republic to negotiate the agreement. He noted that the past customs union was deformed in so far as decision making was concerned, thereby making it necessary to revisit the democratic and political implications of the union.

Mr Motona then listed the key provisions of the agreement:
-Free Trade.
-All countries being subject to one tariff, and the existence of a common excise union.
-An amendment of the Revenue Sharing Formula.
-The establishment of institutions. He pointed out that this was an important innovation.
-Provision for common policies, such as competition and agriculture.

Mr Motona explained that there were three parts to the Revenue Sharing Formula (RSF).
-Customs component. This would include duties received from imports, and the distribution would be in proportion to the total percentage of imports by each country.
-Excise component. This was made up of taxes collected and distribution would be on a GDP/capita basis.
-Development component. This was an important innovation, and would be funded as a fixed percentage of the total excise kitty component. Distribution would be on a GDP/capita basis, and this component would offer aid to the union.

Mr Motona referred to the new SACU institutions: -
-The Council of Ministers. It would be the supreme decision making body of the union. He added that this would be on a consensus basis, and pointed out that the union would have to be pragmatic regarding economic development in the union.
-The Tariff Board. The current position was such that tariffs would be set by a process that was more or less driven by the South African Board on Tariffs and Trade. The partners in the union were obviously unhappy with the situation. Trade experts recruited from the countries within the union would constitute the Board.
-The Tribunal. It would be dealing with disputes and would be an independent body constituted by appropriately qualified persons.
-The Commission of Senior Officials. This institution would have the task of giving advice to the Ministers.
-National Bodies. He noted that the possibility existed that these would be existing bodies, and explained that in the case of South Africa, it would be the current Board as amended by the CITA Bill.
-The Secretariat. He stated that this was another important innovation, and explained that this would be an administrative body. He added that it had been proposed that the body would be headed by an Executive Secretary.

This concluded the core content of the agreement. Certain matters would obviously require further elaboration as the result thereof. The rules of procedure and the protocols, for example. However, he explained that these matters would still have to be discussed. Nevertheless, he stated that the important point was that the main agreement had been reached. In that regard, the Minister had finalised seven years of discussions and the process was now within each of the countries.

Mr Motona referred to the CITA Bill and explained that it would create the bridge between individual member states and the new SACU establishment. He said that this is because the Bill recognised SACU as a juristic person in the Republic. In addition, the Bill would provide Ministerial authorisation to determine trade policy in terms of the Imports and Exports Act of 1963. He added that the essential features of the previous Board would be maintained.

Mr Motona dealt with the relationship between the agreement and the institutions. In that regard, he explained that an important distinction would have to be made between tariff investigations and decision. He added that the trade policy would become more co-ordinated.

Mr Motona showed the Committee a diagram illustrating the SACU agreement. He pointed out that the Tariff Board would be at the centre of operation.

Mr Motona concluded his presentation by mentioning the transitional arrangements. He explained that until the ratification of the SACU agreement, the situation would be such that the Board on Tariffs and Trade would conduct the investigations with the involvement of the Minister.

Discussion
A Member wanted to know how the SACU agreement would affect the SADC trade protocol.

Mr Motona responded that the SACU agreement co-ordinated quite closely on the SADC protocol. The agreement had been negotiated as a collective entity. Thus in their view there would be no adverse effects between the two.

A Member asked for clarification regarding the concept of an ad hoc tribunal.

Mr Motona explained that this tribunal would only convene in the instance of a dispute. This was the practice in international trade. Although the dispute settlement procedures would be entrenched, the persons that dealt with them would depend on the nature of the dispute. This would involve the use of experts in the relevant areas, thereby emphasising the ad hoc nature of the tribunal.

Mr Masutha enquired into the role that Parliament would have to play in the process.

Mr Motona explained that as he understood the process, the negotiated agreement would only become law once ratified by Parliament. This did not mean that Parliament would have an obligation to ratify the agreement. Thus Parliament would be able to refer the agreement back to the Department. He pointed out that the Parliaments in each of the countries within the union would have to ratify the agreement.

Adv Madasa stated that his understanding of the presentation was that this would occur.

Mr Motona responded that his impression was that ultimately Parliament would have to ratify the agreement. This is what he had meant in his presentation. Although there was a radical change in the decision-making process, this would be in the interest of the country.

Mr Masutha referred to the agricultural agreement between South Africa and BLNS, and he wanted to know how this related to the SACU agreement.

Mr Motona said that he was not aware what the agricultural agreements were about. Nevertheless, he emphasised that the existence of a common market meant that it would ultimately become unavoidable such that all policies would have to be harmonised. Therefore he imagined that the agricultural agreement sought to achieve greater co-ordination as proposed by SACU.

Mr Ngwenya added that there were no other agreements outside of the SACU agreement. However, there were articles within the agreement that dealt with agriculture. In the new agreement, BLNS would have to consult the Council before imposing any restrictions. He noted that this was a new feature.

Mr Kasman wanted to know whether any monitoring mechanisms would be provided for revenue sharing in order to ensure that the funds would be used for economic development purposes. This point was important because it would be necessary to ensure that the SACU countries were developing, thereby making them less dependent on international trade.

Mr Motona explained that although no explicit provisions existed in the agreement with which to monitor the use of funds, the Council of Ministers would have a role to play in that regard. The ultimate aim of SACU would be to ensure regional development. Thus it would be incumbent on the Ministers to ensure that the objectives are achieved. As a result, he felt that a sufficient framework certainly existed within which to evaluate the process on an ongoing basis.

Mr Ngwenya added that this was a very difficult issue. Monitoring had been rejected by the countries within the union, and a major objection was the fact that the other countries are not provinces of South Africa. Thus they will use the money as they see fit.

Adv Madasa felt that the development issue had been answered. He reiterated that the countries had objected to being imposed upon. Nevertheless, the weakness probably lay in the fact that the agreement was contractual. This meant that underlying development would have to be built into the agreement, as is the case with NEPAD. He stated that it would not be acceptable to say that Parliament should not be concerned with where the money goes.

Mr Motona stated that NEPAD would apply and that in the absence of express provisions, the matter would rest on negotiation.

A Member asked whether other Ministers would be able to sit on the Council of Ministers.

Mr Motona responded that they would convene either as Ministers of Agriculture or as Ministers of Finance, as the case may be. However, he emphasised that it would be a Ministerial body.

The Member referred to the structures that were to be established under the agreement, and wanted to know how the additional costs would be offset.

Mr Motona explained that it had been broadly agreed that the EU would assist the countries in adjusting to the new proposed tariff agreement. Nevertheless, he stated that this had not been implemented for a number of reasons. One of the reasons was the fact that the countries had not yet given their concurrence, and this would be required in order to co-ordinate trade policy with the rest of the world.

The same Member wanted to know how the existing agreement would be affected by the fact that the individual countries would not have capacity to act.

Mr Motona responded that it was anticipated that over time, as the economies develop, they would become less reliant on customs revenue. He pointed out that the current dependence on the customs revenue was extremely high, and that the result was that this would often become a constraint on trade liberalisation. He emphasised that the policy vision was therefore to bring about less reliance, although he conceded that this would take time.

Mr Ngwenya added that current trade agreements would remain in place. However, each country would then have to notify SACU of that position.

The Chair asked for clarification regarding the decision-making formula in relation to resolving disputes.

Mr Motona said that decision-making would be by consensus. He added that in the event of a deadlock, matters would then be referred to dispute settlement. He pointed out that this was not an unusual feature in international agreements. One country would have one vote, and this would tend to be a more pragmatic approach.

Mr Motona added that the Committee of Senior Officials, as an advisory body, would then ideally advise Ministers on relevant matters.

The Chair wanted to know whether any studies into the efficacy of the RSF had been carried out. In particular, he wanted to know whether there had been any attempt to calculate the results of the formula if the formula was applied this year. He added that should an EU agreement become forceful, and should it affect the Board, it would be necessary to know whether any calculations had been made in that regard.

Mr Motona replied that they had not undertaken any studies on the impact of the formula. Nevertheless, he explained that the effects would not differ substantially from those of the previous formula, with the exception of the development component.

The Chair did not feel that the response was adequate. The Committee would need an idea of the short-term impact of the formula in order to find comfort in the fact that no unpleasant results could occur.

Mr Ngwenya explained that a few projections had been done using the current formula. South Africa was currently receiving 55% of the total pool. However, this would decline if one projected the situation using the current formula. With SACU, the South African share would not decline significantly, almost remaining stable. Unlike the present situation, South Africa would no longer receive the balance. Therefore, declining South African shares would be an indication of the fact that the shares belonging to the other countries were also declining.

Mr Eglin could not see how South Africa would receive the residue through the formula.

Mr Ngwenya explained that the residue referred to the current formula through which South Africa would receive the balance of the common share. He added that this had been ranging around 40%.

The Chair asked for a clearer explanation regarding the new arrangement in relation to the regulation of agricultural products.

Mr Motona stated that the recently introduced rebate issue was clearly untenable because it would introduce extreme uncertainty into the market place. This could then lead to restrictive trade practices. He noted that they had not previously had a framework within which to debate such issues. Thus the SACU agreement would therefore make that possible. Nevertheless, he emphasised that the rebate agreement would have to be changed.

The Chair wondered whether setting a timetable against the process by virtue of the need to pass the CITA Bill would be correct.

Mr Motona responded that it would be ideal if the agreement could be implemented as soon as possible. They had started with the CITA process in anticipation of the agreement becoming operative at some stage. Nevertheless, he stated that any lags would not be long, and that some aspects of the Bill could be implemented upon ratification. He added that in the interim, the current Board on Tariffs and Trade procedures would apply.

A Member wanted to know the intention behind the development component of the RSF.

Mr Motona explained that the component was introduced in order to ensure much more balanced development within the countries. He stated that this would be an instrument to encourage greater development. He pointed out that currently the South African economy was dominating the union. Thus it would be necessary to change that position.

Mr Ngwenya added that the component was introduced in order to assist the countries whose level of development was lower than that of other countries. He referred to Swaziland and Lesotho, and stated that it was for this reason that distribution would depend on GDP per capita.

Mr Eglin stated that GDP figures were not a totally accurate indication of wealth for various reasons. He gave an example of one such reason and said that the figures could be driven by the population figures.

A Member asked why the Department had decided on 15%.

Mr Ngwenya explained that they had considered a figure between 10% and 20%, and that the Ministers had ultimately agreed upon 15%. However, they agreed that this could be increased to 20% should there be a need. He emphasised that 15% meant 15% of the total excise duties, and this is where 80% of the South African share came from. This meant that the level of the development fund would be important to the country by having the potential to significantly affect the South African share.

Mr Motona added that this was an important issue because it raised questions as to the ultimate co-operation to be achieved, and the instruments thereof. However, he firmly stated that they were dealing with sovereign states. Nevertheless, he added that the fact that the states belonged to the common entity meant that the Ministers would be able to oversee all issues.

A Member sought clarity on the location of the Secretariat.

Mr Motona stated that the body would be small, and that it would take care of the purely administrative functions. The body would be funded from the revenue pool.

Ms Thuli sought clarity on page 3 of the briefing with regard to the concept of trade liberalisation. She wanted to know how they would ensure the accommodation of micro-traders.

Mr Motona explained that the agreement did not directly address this issue. Nevertheless, he said that trade liberalisation would occur irrespective of scale.

Ms Thuli wanted to know what the exception in relation to the marketing regulations on the free trade of agricultural products referred to.

Mr Motona responded that the exception was in the same vein as infant industries. However, this would also be subject to consultative processes.

Ms Thuli asked whether there was a standard for measuring infant industries, or whether eight years represented the yardstick.

Mr Ngwenya responded that they had decided on eight years because the current agreement was silent on the matter. Eight years was a reasonable time period for a business to develop itself.

The Chair stated that they would need to follow up on certain matters. Nevertheless, he explained that it was clear that: -
The three committees would have to work together as far as ratification was concerned.
There was a clear need for the Committee to inform itself with the existing customs union because some of the issues had history attached to them.

The Chair added that Mr Motona was correct in that ratification would result in a yes or no answer. Nevertheless, he pointed out that this would be unfortunate because Parliament was increasingly trying to influence the content of the agreement. The Committee would have to compile a report as the result thereof. He concluded by saying that he hoped that they would be able to deal with the issues more thoroughly on the next instance.

The Chair thanked the team from the Department.

The meeting was adjourned.

Appendix:

INTERNATIONAL TRADE AND ECONOMIC DEVELOPMENT DIVISION, SOUTH AFRICA
SOUTH AFRICAN CUSTOMS UNION AGREEMENT, 2002: BRIEFING

1. BACKGROUND

SACU Ministers provisionally accepted the New SACU Agreement in October 2001. In February 2002, SACU officials met to draft a legal text to be submitted to the respective legal processes of the Member States. In South Africa, this Agreement is currently serving before Cabinet, before going to the State Law Advisers.

The DTI has drafted a new bill, the International Trade Administration Act of 2002. This bill will give effect to Article 14 of the New SACU Agreement, National Bodies. It establishes a Commission for International Trade that will replace the current Board on Tariffs and Trade. The CITA Bill is also currently serving before Cabinet and will be forwarded to the State Law Advisers together with the New SACU Agreement.

Once the State Law Advisers return the Agreement and the CITA BILL, they will be submitted to Parliament.

2. DISCUSSION

The New SACU Agreement replaces the current agreement of 1969 establishing the Southern African Customs Union. This agreement was concluded in recognition of the fact the current agreement no longer adequately caters for the needs of a customs union in the 21^st century. It should therefore be aligned with current developments in international trade.

The New Agreement consists of nine parts;

Part 1 Definitions and objectives:
The objectives of this agreement include the facilitation and promotion of cross-border movements of goods and services under conditions of fair competition, the economic development of the region, the promotion of investment the equitable sharing of customs and excise revenue.

Part 2 Establishment and Legal Status
Part 2 establishes SACU as a legal entity with permanent headquarters. It also deals with membership issues.

Part 3 Institutions
The following institutions are established:

a) Council of Ministers
The Council consists of at least one Minister from each Member State and is the supreme decision making authority on SACU matters. It will be responsible for overall policy direction, as well as the functioning of SACU institutions. It will also oversee the implementation of policies.

b) Customs Union Commission
This Commission consists of senior officials at the level of Permanent Secretaries, Directors-General, Principal Secretaries or other officials of similar rank. It is responsible and reports to the Council and takes care of the implementation of the Agreement. It will also be responsible for overseeing the management of the revenue pool. It supervises the work of the Secretariat.

c) Secretariat
The Secretariat becomes a permanent SACU institution. It will be responsible for the day-to-day administration of SACU. This includes providing administrative support to the other SACU institutions and to assist in trade negotiations. It will be headed by an Executive Secretary and can have its own staff complement. Finally, the Secretariat will be the depository of all SACU records. It will be located in Windhoek, Maseru or Mbabane.

d) SACU Tariff Board
The Tariff Board will consist of experts drawn from Member States. It will be an independent institution made up of full-time or part-time members or both. It basically replaces and takes over the functions of the current Board on Tariffs and Trade. It is therefore responsible for tariff policy and will make its recommendations to Council. The latter will make the final decision.

e) Technical Liaison Committees
Four technical liaison committees are established: Agriculture, Customs, Trade and Industry, and Transport. They will assist and advise the Commission in its work. The Council may establish additional technical liaison committees.

f) Tribunal
There will be an ad hoc Tribunal that reports directly to the Council. It consists of three members. It can, at the request of Council, consider any issue and furnish the Council with its recommendations. However, the most important function of the Tribunal is that is acts as a dispute settlement body.
(g) National Bodies
Each Member State has to establish a National Body or nominate an existing institution. This Body or institution will be entrusted with receiving request for tariff changes or other related SACU issues. They will carry out the necessary investigations and recommend any tariff changes necessary to the Tariff Board. They are also tasked with continuously evaluating the impact of tariffs within respective Member States and propose any changes deemed necessary to the Commission.

For all these institutions, work procedures and rules of conduct still need to be determined and approved by the Council. Once this has happened, these procedures and rules will be annexed to the Agreement.

Part 4 Meetings
This part deals with meetings and quorums for meetings.

Part 5 Trade Liberalisation
This section deals with an important aspect of the Agreement. It ensures the free movement of domestic products within the Common Customs Area, as well as goods imported from outside the Common Customs Area. It also covers the treatment of nonAariff measures, including technical barriers to trade and sanitary and phytosanitary issues. Basically it obliges Member States to adhere to international norms and standards, including the relevant WTO agreements when applying these measures. Article 26 recognises the right of each Member State to prohibit or restrict imports or exports of goods for economic, social, cultural or other reasons as agreed upon by the Council. Part five also ensures the freedom of transit of goods and enshrines the principle of non-discrimination as far as rail and road transport is concerned.

Three issues included in part five need special mention;

a) Arrangements for regulating the marketing of agricultural products. As in the old agreement, Member States are allowed to implement regulations for the marketing of an agricultural commodity. This has to be done on a non-discriminatory basis to similar commodities produced in other areas of the Common Customs Area. Member States agree to consult from time to time on matters affecting the production of agricultural products within its borders and the improvement and extension of marketing arrangements for such commodities. Any marketing regulation may not restrict the free trade of agricultural products except when it is aimed at the emergent agricultural sector and agro-related industries or for any other purpose as agreed upon between Member States. Each measure has to be subject to a sunset clause outlining its period and conditions. Finally, agricultural trade formalities and documents should be simplified and harmonised, while all Member States should work towards the harmonisation of standards for agricultural products.

b) Trade relations with third parties: Member States may maintain existing trade and other related agreements. However, for any new agreement, a common negotiating mechanism has to be developed, while no Member States may enter into new agreements with third parties or amend existing agreements without the consent of other Member States. This implies that in future, all trade agreements have to be between SACU as a unit and a third party.

c) Protection of infant industries: The BLNS may implement infant industry protection to help with economic development in their countries. This applies to industries that have been established in the BLNS for not more than eight years. Protection afforded under this measure will be for eight years, unless Council determines otherwise. The latter may also impose additional terms and conditions. In the past, the BLNS often used this instrument. It required consultations, but not consent from other Member States. Under the new Agreement, Council has an input into the matter, significantly decreasing the ability of the BLNS to act unilaterally

Part 6 Revenue Sharing
Part six outlines the revenue sharing formula. It also specifies that the financing of the Secretariat, the SACU Tariff Board and the Tribunal will be deducted from the customs and excise duties collected before distribution to Member States. The formula consists of three components:

a) The Customs Component consists of customs duties and ad valorem excise duties collected on goods imported into the SACU area, as well as any other duty collected on imported goods. Each Member State's share will be calculated from the cost-freight-insurance (CIF) value of imports recorded by each Member State expressed as a percentage of the total CIF-value of imports into SACU.
b) The Excise Component consists of excise duties collected from goods produced within the SACU area. Generally, excise duties make up the largest part of all revenue collected. Each Member State's share will be calculated from the value of its GDP in a specific calendar year expressed as a percentage of total SACU GDP for that year.
c) The Development Component is a new feature. It will be funded from a fixed percentage (initially 15%) of the excise component. Each Member State will receive a share of this component, based on GDP per capita. The distribution will be weighted in favour of the less developed Member States of SACU.

Part 7 Common Policies
This part aims at establishing a framework for harmonisation of policies in the SACU region. This includes the development of common industrial policies, co-operation on agricultural and competition policies, and the development of measures that deal with unfair trade practices within SACU.

Part 8 Final Provisions
This section deals with the establishment of Annexe, which will form an integral part of the Agreement, even if annexed after the signing and implementation of the Agreement. It further covers amendments, signature, ratification (in accordance of each Member State's constitutional procedures), entry into force, withdrawal, accession and depository (Executive Secretary). It also provides for a transitional period where existing institutions, obligations or arrangements can continue, provided that they are not in conflict with the Agreement. This has implications for agriculture, where the BLNS have implemented several marketing regulations that still apply. These have to be tested against the conditions that they should not be in conflict with the provisions of the new Agreement. Finally, Article 51 provides for the termination of the 1969 Agreement.

3. THE WAY FORWARD

The new SACU Agreement was tabled before Cabinet during May 2002, with a view to Parliamentary ratification in the second half of 2002. Once ratification has occurred, South Africa will be in a position to implement the Agreement. However, the timing of implementation largely depends on the status of ratification by the BLNS. No indications have been received on when this process will be completed or when the final signing ceremony will take place.