SA Customs Union's five point plan and proposed regional industrial plan: briefing by Minister on Trade & Industry

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Trade, Industry and Competition

29 July 2013
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Minister of Trade and Inductry presented the five-point plan of the South African Customs Union (SACU) to the Committee, starting with a brief overview of the historical aspects. Established in 1910, the Union carried with it a long trail of colonization and apartheid arrangements.  In 1994, South Africa had initiated re-negotiation of the agreement, which had been adopted in 2002 and implemented from 2004 onwards. Within the new agreement, trade relations had been democratised between South Africa, Botswana, Lesotho, Namibia and Swaziland.  Revenue generated from the customs union played a different role for each member country. Some countries, such as Swaziland, were heavily dependent on the income from that revenue. Most importantly, it was pointed out that none of the revenue made was put towards development projects and integration.

In 2011, the first ever South African Customs Union summit had been held to address implementation challenges. There were two major challenges that threatened the Union: significant disagreements between members during negotiations, and a major decrease in customs revenue during the global economic recession. The summit had provided the basis for a plan for achieving progress. The five-point plan included the following:
• Review of the Revenue Sharing Agreement.
• Prioritise work on regional cross-border industrial development.
• Work to promote trade facilitation border measures.
• Develop the institutions for the South African Customs Union.
• Strengthen unified engagement in trade negotiations.

The Minister said progress on this plan was currently uneven, in particular with regard to the review of the revenue sharing agreement, which had a direct impact on the progress of development projects, due to a lack of change in the financial flow of the revenue. Current policy debates included the role of tariffs, promotion of industrialization, and the lowering of tariffs. The next steps for progress included a re-assessment by South Africa on how to advance development objectives, open discussion among SACU members, the development of a common approach to trade and industrial policy, discussion on appropriate decision-making procedures, as well as progress on the five-point plan.

Members’ questions included topics such as skills development and the capacity of the department; conditionality for the use of the income from revenue; the development of trade negotiation skills of other countries in the Union; new cross-border projects; acceleration of progress; agreements between the European Union and other countries within the Union; level of expertise; the smuggling of skin lightening cream; and funding issues relating to the National Empowerment Fund.

Following the discussion, the Chairperson reported back to the Committee regarding an International Accreditation Forum (IAF) Conference she had attended, along with the Chairpersons of Rural Development and Land Reform, as well as Science and Technology. The conference had focused on the space industry and the role that South Africa played within this industry. The key aspect emphasized was an upcoming conference taking place from 23 to 27 September 2013 in China.   The Chairperson requested that the Committee attend the event as a team.

Meeting report

Opening
The Chairperson opened the meeting by welcoming the Minister of the Department of Trade and Industry. The agenda for the meeting was adopted.

Briefing by Minister of Trade and Industry
Dr Rob Davies, Minister of the Department of Trade and Industry (DTI), began the presentation by stating the importance of discussing the South African Customs Union (SACU), as there were a large number of decisions that had to be made in the forthcoming months. Currently, the DTI was busy with the implementation of the new SACU agreement. In order to understand the new developments, one needed to understand the history of the SACU. The SACU had a long history of colonial and apartheid arrangements, which were first established in 1910 to serve the British colonial interests. The SACU had been brought into existence to deal with trade relations and in particular, the movement of products. In 1994, South Africa had initiated re-negotiations which had concluded in 2002, and the new SACU agreement had been put into force in 2004. Within this new agreement, trade relations were democratised between South Africa, Botswana, Lesotho, Namibia and Swaziland (BLNS).  The new Agreement led to the establishment of a Council of Ministers in which decisions were made through consensus. A common external tariff was maintained under the agreement, which allowed for free trade within the SACU market.

Dr Davies said that the revenue generated from the customs union was a significant percentage of the smaller economies within the BLNS, such as Swaziland. Since 1994, the overall tariff in South Africa had decreased and the majority of the tariffs enforced were used as a tool for industrial development. The tariffs were, in one way or another, set to benefit the South African industry as the most industrialised country in the SACU. The attached document outlined the ways in which the revenue from trade customs and tariffs are shared amongst the BLNS. South Africa was the biggest contributor to the pooled revenue, with approximately 98% of contributions; however, the BLNS often received more than half of the proceeds.

In 2011, the first ever SACU Summit had been held to address the challenges that had emerged from the implementation of the new agreement. Dr Davies pointed to two main challenges that had threatened the SACU.  These were significant disagreements among SACU members during the Economic Partnership Agreement negotiations with the European Union, and a major decrease in customs revenue during the global economic recession, which had severely impacted BLNS due to their dependence on customs revenue.
 
The summit had provided the basis for a process that was to allow the SACU to progress towards a deeper development and integration project.  A major challenge was the lack of funds available for development initiatives. As such, the summit had resulted in a five-point integrated plan, which included the following:
• Review of the Revenue Sharing Agreement (RSA) – was there a part of the customs revenue that could be put towards development projects?  The review would provide a basis for how the plan would be financed
• Prioritise work on regional cross-border industrial development – what was the significance of being part of the SACU?  Was the plan able to develop cross border regional programmes that allowed for regional value chains?  An example of a Phillips company in Lesotho was provided, in which the establishment of that company had led to the opening of a lights recycling company in Johannesburg   During debates, there had been a suggestion that a SACU-wide termination of ongoing industrial policies must be terminated and a new unified industrial policy was necessary across the region.   This suggestion emerged from the view that South Africa’s industrial policy was working to its own advantage and in turn, to the disadvantage of BLNS
• Work to promote trade facilitation border measures – there was a large amount of smuggling that took place within borders, and work had to be accelerated to deal with trade facilitation and trade provisions
• Develop SACU institutions – an example of the need to develop a secretariat was provided.
• Strengthen unified engagement in trade negotiations.   A formula was suggested -- to have one country that led the negotiations, or the possibility of a body resembling the European Union -- but further discussions raised challenges to this form of representation, such as the need to have a full time commission.

For South Africa, a key aspect of the plan was to adjust the RSA in a way that it maintained stable disbursements to the dependent nations of the BLNS, but in a way that also allowed for the allocation of a portion of the funds toward regional infrastructure and industrial development projects.

With regard to progress on the 5-point plan, Dr Davies outlined that progress had been rather uneven. Thus far, there was a greater unity of purpose secured with regard to third party negotiations. However, little progress had been made on the review of the RSA, which was directly impacting on any progress on regional development projects, due to the lack of change in the financial flow of the revenue. It was indicated that a key reason for the lack of progress was because of divergences in policy perspective and priorities among members of SACU.

Moving on to emerging policy debates in SACU, Dr Davies stated that were differences in the approaches to tariff setting. These differences were emerging as a result of different views on the role of tariffs, as South Africa viewed tariffs as tools of industrial policy, while for other countries, tariffs were viewed as a source of revenue. A key problem that had led to differences was the proposal by one member for lower tariffs to import goods from global sources that were cheapest, which ultimately undermined the industry of another member. This was primarily an issue of countries who viewed themselves as consumers, rather than producers. In addition, without common industrial and trade policies among SACU, consensus decision-making was at risk of gridlock.

Two core challenges remained unresolved within SACU. First, the development of common policies among countries that varied dramatically in terms of economic size, population as well as levels of economic, legislative and institutional development. Second, there was a lack of an effective decision-making procedure that was able to take into account the aforementioned differences among the SACU. As such, the next steps were extremely vital. The next steps included the following:

• Re-assessment by South Africa on how best to advance development and integration in SACU.
• An open discussion among SACU members.
• Development of a common approach to trade and industrial policy was the most urgent
• A discussion on appropriate decision-making procedures on sensitive trade and industry matters.
 
Progress across all pillars of the 5-point plans remained an important step to advance development integration

Discussion
Dr W James (DA) stated that perhaps SACU should aim to resemble the Southern African Development Community (SADC), rather than the African Union. Dr James asked if the Minister was confident that getting SACU on the right track was the first important step in extending the free trade area of SADC as a whole, given that South Africa was the biggest contributor?  Did the Department have the capacity for that long-term goal?

Dr Davies replied that he was not necessarily implying that SACU was the most important entity, but rather that it was an important aspect of the broader goal. The real priority for regional integration was the creation of large regional markets that could serve industrial integration. A successful market was not only dependent on exports, but also on a efficient internal market. In line with SADC, free trade across the African continent or the SADC region was achievable and would help with the implementation of trade development. There was a need to increase inter-African trade. With regards to the required expertise, Dr Davies replied that he believed that the DTI was always able to obtain more expertise and skills.  However, in terms of the current team, they were able to hold their own during negotiations with other countries in the region, as well as with the European Union. It was certainly a team that had shown stability.

Mr G Hill-Lewis (DA) pointed out that the presentation document stated that on average, 55% of revenue was allocated to BLNS.   However, the projected allocation of R48 billion out of R70 billion in 2013-14 was closer to 70% than 55%.  Mr Hill-Lewis asked if there were any sources of revenue that were excluded from the pool.  Was there any conditionality on the ways in which the funds were used?

Dr Davies that for the particular year of 2013-14, the percentage allocation was in fact closer to 70%, although 55% was a general figure, based on the average. Customs revenue was a very volatile aspect of the trade industry, constantly fluctuating. This current year, there was a report that indicated that the revenue was above expectations, while in the past the revenue was down. As for any revenue excluded from the pool, there was none.  All the duties collected by each country were required to be added to the pool, which was then divided by the council. In terms of conditionality, it was never part of an arrangement and was currently not a part of the deal. The transfer of customs revenue was not seen as a transfer of development funds, despite the fact that it was more than any other development aid the BLNS countries received. BLNS did not perceive the transfer of revenue as a transfer from South Africa, but rather as their right and as such, each country believed that it was their sovereign decision on how to use the allocated funds.

Mr B Radebe (ANC) asked if there was any way that the trade negotiating skills of neighbouring countries could be improved through the help of South Africa. This question emerged from observations of lack of competency made at discussions with the European Union. South Africa as an independent nation had the skills required, but other SACU countries were lacking. Mr Radebe also asked if there were any new cross-border projects happening.

Dr Davies replied that the issue was not a matter of skills or confidence. He also pointed out that he was not criticising the neighbouring countries for signing the agreements with the EU, but was rather pointing out challenges. In a way, he believed that the other countries were left with little choice but to sign the agreements as a figurative ‘gun was held to their head’. As for cross-border projects, it was clarified that it was not that there was no cross border projects taking place, but rather that none of them involved the SACU.

The Chairperson stated that the issue of little meaningful progress in revenue distribution had also been raised four years ago -- was it accelerating in any way?

Dr Davies replied that the Chairperson had hit the nail on the head. SACU was on a faster track to develop the common decision-making institutions than it was with the rest of the programme of cooperation.

Mr Hill-Lewis asked why the other countries felt compelled to sign the agreements with the EU if they were receiving a better opportunity to sell anything they wanted to sell in the “everything but arms” deal. In other words, where was the ‘gun’ if the deal was beneficial to the countries?

Dr Davies replied that the “everything but arms” deal was only for least developed countries, which in SACU was only Lesotho. If the agreement was signed, then the country received duty and quota free trading. Otherwise, the duty without signing the agreement was 90%.

Dr James was concerned that the level of expertise would be stretched. Was there a pipeline of graduates that the Department had established?  Given the growth in trade, was there an associated growth in jobs?  He was also concerned about a skin lightening cream that was being smuggled into South Africa from Zambia, as it contained mercury and was a cause of skin cancer.

Dr Davies replied that there were two divisions within the Department that dealt with trade matters: International Trade and Economic Development (ITED), and Trade Investment South Africa (TISA). Both divisions contained skilled and capable employees. There was a need to strengthen capacity, and investment in skills development was a requirement. He acknowledged that a constraint was being faced the Department. As for the skin lightening cream, he was not aware of the matter, but requested any more information on the issue so that action could be taken.

Mr Radebe expressed concern regarding a matter not directly related to SACU, but he wanted to take advantage of the presence of the Minister.  He referred to the ongoing funding issues with the National Empowerment Fund (NEF). As an executive authority overseeing that institution, what took place and what was being done to avoid repetition in the future?

Dr Davies replied that this issue seemed to be heading in the right direction. There was a need to address the mandate of the organisation and assess the alignment of their goals and objectives. It was important to address this issue quickly, due to the possibility of capitalisation at the NEF.

The Chairperson thanked the Minister for the presentation and reiterated that there was some progress made, but the challenges raised required close monitoring.

Committee Report on International Astronautical Federation (IAF) Congress
The Chairperson added discussion of the IAF conference report to the agenda, in order to take advantage of the excess time. This conference took place a year ago, and was attended by the Chairperson, along with the Chairperson from Rural Development and Land Reform, as well Science and Technology. Each year, there was a different focus at the gathering, and this particular one was focused on the space industry. The Chairperson explained that this topic fell under the jurisdiction of this Committee, because anything that took place in space was considered to be an industry. The key aspect that emerged from the report was the 64th International Astronautical Congress that was to be held in China, from 23 to 27 September 2013. The Chairperson requested that the Committee attend the event as a team, with at least one representative from both the DA and the ANC.
 
The report also made reference to a space law study that South Africa was currently busy with, in order to identify ways to contribute to the development of various components within the industry. South Africa was identified to have many comparative advantages when it comes to the space industry, as it lies near the oceans and has an observatory, which is why other agencies and nations were adamant to engage with South Africa.  Another aspect raised in the report was the international regulatory challenges, trends and developments, as well as the lessons learnt from the Canadian, Korean and Indian space arenas, which were potential partners for South Africa.

The meeting was adjourned.
 

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