South Africa's Trade Agreements and Relations: workshop

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Trade and Industry

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

The Trade Law Centre (TRALAC) said the establishment of the World Trade Organisation (WTO) was a focal point for the multilateral trade governance agenda that focused much on what was happening in terms of production, distribution and trade in unfinished products. Importantly, the focus of the WTO agenda was on trade tariffs liberalisation – the reduction of import duties to facilitate cross border trade. At this stage for the global development, tariffs were particularly important in restricting international trade. But what had been realised was that the WTO had not kept pace with developments in the 21st century. This resulted in WTO engaging bravely in a new trade agenda in 1996 in Singapore on such issues as investment, competition policy, governments’ procurement and trade facilitation. These became known as the “Singapore Issues”. Shortly after, these were dropped from the WTO agenda. This led the WTO agenda to continue being preoccupied and focusing on trade policy issues of the previous century. In fact, trade liberalisation currently took place only in Geneva, particularly in the regional trade agreements concluded through major trade deals. She cited the European Union-US, and the Trans-Pacific Partnership.

The 21st century trading agenda, being pioneered through regional trade agreements, was a reflection of what happened in the global economy. The global value chain was one of the defining features of the agreements. These global value chains were not an innovation of the 21st century, but the complexities and sophistication and the role that technological developments, innovation, smarter approaches to production, and an increasing fragmentation of production across locations, were. It had been realised production process were divided across the globe. The connection between the different stages of production had become increasingly important. This was where efficiencies and competitiveness were realised. Smart governance, as well as a different thinking about trade and industrial policies were required in the 21st century. These would be issues around investment and competition policies, services sector regulations and border regulations reform and intellectual property governance. This would eventually define competitiveness, and give the country a competitive edge in the world market. It was noticeable in the developed world that the private sector led the debates and the pathway on new trade policy. SA had got to also think on how it engaged the private sector as a leader of the trade and industrial policy. SA’s trade strategy as it related to import tariffs needed special attention. The country was a member of the Southern African Customs Union (SACU) and did not articulate its own trade policy. This work had been ceded to SACU and, in fact, the important tariffs charged on goods imported to the country were actually SACU tariffs. SA’s trade agreements negotiations indicate a reflection of the domestic inward-looking agenda. The country’s approach was very limited, only focused on goods. The services agenda was important given the context of services in the domestic economy. The country should be looking at non-tariff measures. In some cases it might be that the non-tariff barriers were associated with legitimate public policy goals. However the implementation might translate into a non-tariff barrier. In some cases these policies might be used to frustrate trade rather than support it. In the 21st century, global industrial organisations, trade investment linkages, competitiveness in the global value chain were all important issues to ponder. SA was involved in some values chains, and needed to look at the governance of those value chains. The interface between industrial and trade policy was crucial.

The South African Institute of International Affairs (SAIIA) said SA’s trade policy was largely driven by its industrial framework. The Department of Trade and Industry's Trade Policy Framework indicated unilateral trade liberalisation had failed and decisive state intervention was required to shift the growth path away from commodity dependence. Trade had to “serve” industrial policy, especially design of tariffs on a per sector basis. Manufacturing, particularly value-added products, was the central thrust. Services were notably not prioritised and this was a serious gap.

Global value chains were very much about inputting into the production of final outputs. If one wanted to be successful in manufacturing exports, one had to input the intermediate products. Trade was very much about promoting inter-coordination in the global value chain through a task perspective. The country could for example start by producing car parts, and invite competitive Trans National Companies (TNCs) so that it could produce certain components. The process would involve building capacity and specialise in certain parts of the value chain; the country could then integrate into the TNC networks. If one wanted to be competitive in manufacturing exports, then one should have access to a whole range of competitive services. These included distributing goods; transport services; electricity and cheap telecommunications. Networks services are particularly important to attracting global value chains. Manufacturing as a percentage of GDP in SA was very small; the economy was largely a services economy. When looking at implications for the country on trade negotiations with developed countries, one ought to ask if it was appropriate to focus solely on the manufacturing sector.  This would not solve the challenges the country faced. The competitive advantage for the country was on the resources and the services sectors. The financial services sector had recently been ranked fourth in the world; but this was not the case with manufacturing. Job creation at the scale needed in the country would not come from the manufacturing sector, rather services.

SA needed to dramatically improve its approach to attracting the TNCs investments and particularly in global value chains. The country thought  narrowly about this, and was under the impression that it was under siege. Although understandable, this was the mindset that SA ought to break away from. Developed countries were still the major source of TNCs; they drove the global value chains on which 80% of the world economy was concentrated. Most of the developed countries were services economies, and were not in any way threatening the manufacturing sector. If these TNCs invested in one’s economy, they promoted exports; technology transfer and value addition. These companies were the best employers, in other words, they promoted decent employment. The country had a duty free access to the US market, but that could not be sustained indefinitely. BRICS had a limited contract zone in negotiations.  Tighter alliances were needed with  US, Europe and Japan.

Trade and Industrial Policy Strategies (TIPS) said SA’s total exports for 2012 amounted to R700 billion, while imports were at R833 billion. Trade imbalance between imports and the exports was at its largest in 2012, recording a R132 billion difference. SA’s leading import and export destination was Asia, closely followed by the European Union. Following the economic crisis in Europe, there had been a diversification of SA’s exports. SA had a positive trade balance between 2004 and 2009, and the country was the largest supplier to the US and the EU. SA’s manufacturing exports grew in 2011 by 11 percentage points. SA exploited the African Growth and Opportunity Act (AGOA) to a great extent. There were a lot of threats associated with the AGOA in that it was a unilateral declaration by the US Congress; at any time the country could lose the benefits of that agreement. Negotiations were ongoing to ensure that agreement was extended with SA included in it.

The Department of Trade and Industry disagreed with those presenters that had said focus should be on the services sector rather than the manufacturing sector. In comparison to its trading partners SA was relatively an open economy. The country had reduced tariffs barriers. Services commitments were on par with the developed nations. The Department was very clear about its trade policy and strategy that were deliberate and calculated. Overarching was that the trade policy should support industrialisation with view to creating jobs. The economy of services sector had not been a sustainable source of decent employment and growth. The Industrial Policy Action Plan (IPAP) tried to shift focus away from the non-tradable services more towards the manufacturing and non-services sector, which had historically been the source of decent work. The economy had been heavily tilted towards services, and yet the character of the services sector had not been the real source of decent work. The trade policy and strategy should support the objectives of job creation.

dti said a lot of good points had been made around the global value chains, and it did not necessarily disagree with the statements made. But the Department took a more cautious approach. Also it was clear that the country needed to liberalise tariffs, services, reduce non-tariff barriers and escalate trade facilitation. This would lead to benefits for the country’s economy. SA was a strong supporter of multilateralism, and believed that the Doha Round should be continued and concluded. dti took a very clear view in the IPAP that foreign direct investment should support domestic industrial development. The country remained an open economy on condition that foreign direct investment contributed to the production of the economy. A lot more could be done to make the economy more attractive. This was a wider policy area of government that was being addressed through policies like the National Development Plan (NDP), the new Growth Path and capital expenditure in infrastructure. The inputs were highly appreciated and were constructive.

AgriSA said that current trade agreements impacted on the agriculture value chain. Agriculture could do a lot of producing intermediary products as had been suggested but would require more fixed stock. If stock declined the number of suppliers declined as well, and that made it difficult for the suppliers to increase intermediary processing as well as manufacturing on top of other competing interests such as feeding the people. Agriculture in SA had been too liberalised. Farming units were decreasing and a lot of it had to do with consolidation. The sector competed with other developing countries like Chile, Brazil and Peru who received a lot of support from their governments. South Africa did not give the kind of budgets availed to agriculture in those countries. Until recently, the country had a trade balance between exports and imports, but now it was importing more agricultural products. Europe was a major trading partner for South Africa in agriculture. There was a view to move away from Europe in order to diversify the market. The US was becoming a difficult market for the sector with all its bio tariffs and security measures. A preferential trade agreement as opposed to a free trade agreement was preferable. If Africa wanted to be a major trading bloc these were things that it had to consider. The country had enormous policy space to support agriculture. The sector was a platform for intermediary production. The market was not big enough to absorb the production that was there. The country should build partnerships. Government should put more money into agriculture.

Business Unity South Africa (BUSA) said the free trade agreement (FTA) route was not the only thing that could address the trade related challenges the country faced. There was a need for preferential trade agreements (PTAs) as opposed to FTAs. The country had been absorbed with the EU, and needed to consider Asia, but such a position needed to be thought through. BUSA supported the strategic way in which the trade policy had been addressed. BUSA welcomed the approach of putting emphasis on regional integration. There was a need to look at the how trade operated. Opportunities were there in the regional approach. Tariffs were a tool but not the only means to solve the trade related issues. This was a problem and often led to protectionism. Trade could be a driver for both growth and investment. Some TNCs set up shops in the country and then exported to nations that SA had trade agreements with. BUSA supported efforts to address non-tariff barriers as well as inter-departmental cooperation to facilitate trade.

Meeting report

Opening remarks
The Chairperson extended a word of thanks to the organisations present at the Workshop – Trade Law Centre (TRALAC), South African Institute of International Affairs (SAIIA), Trade and Industrial Policy Strategies (TIPS), Business Unity SA (BUSA) and Agri SA – and handed over to the presenters.

Trade Law Centre (TRALAC) presentation
Ms Trudi Hartzenberg, TRALAC Executive Director, said the presentation reflected on the global economic arena, looking closely at crucial developments in trade policy and trade negotiations. South Africa’s policy agenda was located within this context. The question of where the country was headed in terms of trade strategies for the 21st century was also addressed.

In the latter part of the 20th century, developing countries had become particularly important, not only as traders but also as investors. During this period a significant restructuring took place in the global economy, with new clusters of excellence such as the clothing and textile and automotive manufacturing. These sectors relocated to developing countries like India, Brazil and China.

The 20th century very much focused on the finished products but more and more, this had shifted to developing countries. The international trading agenda saw the establishment of the World Trade Organisation (WTO) which was a focal point for the multilateral trade governance agenda that focused much on what was happening in terms of production, distribution and trade in unfinished products. Importantly, the focus of the WTO agenda was on trade tariffs liberalisation – the reduction of import duties to facilitate cross border trade. At that stage for the global development, tariffs were particularly important in restricting international trade. But what had been realised was that the WTO had not kept pace with developments in the 21st century.

This resulted in WTO engaging bravely in a new trade agenda in 1996 in Singapore on such issues as investment, competition policy, governments’ procurement and trade facilitation. These became known as the “Singapore Issues”. Shortly after, these were dropped from the WTO agenda. This led the WTO agenda, to continue being preoccupied and focusing on trade policy issues of the previous century. In fact, trade liberalisation currently took place only in Geneva, particularly in the regional trade agreements concluded through major trade deals. She cited the European Union-US, and the Trans-Pacific Partnership.

The 21st trading agenda, being pioneered through regional trade agreements, was a reflection of what happened in the global economy. The global value chain was one of the defining features of the agreements. These global value chains were clearly not an innovation of the 21st century, but the complexities and sophistication and the role that technological developments, innovation, smarter approaches to production and an increasing fragmentation of production taking place across locations. It had been realised the production processes were now divided across the globe. The connection between the different stages of production had become increasingly important. This was where efficiencies and competitiveness were realised.

The linkages had to do with the services agenda, communication, IT, financial services, transport, and intellectual property issues. The new industrial organisation and the sophisticated values chains were about coordination efficiencies, management of new technologies and many other new science developments. Important for SA, was the questions of what the international developments meant for trade policy; what should a trade policy agenda be in the 21st century. This was fundamental for the country as a giant in the African continent; in the BRICS (Brazil, Russia, India, China, SA) configuration; and among the various other new trade partners.

An important inclusion was trade governance, and by extension, investment governance. Across the different stages of production processes that took place across the globe, investment decisions were also involved. Trade investment linkages were increasingly becoming important. Any talk of a trade agenda that was only focused on traditional trade policy instruments such as import tariffs, would no longer put the country on the cutting edge of global trading investments development. This should influence the country’s thinking about trade policy for the 21st century. Consumers were increasingly influencing that agenda, and were legitimately concerned about public policy objectives. This translated to the need for new trade agenda focusing on standards and regulations on domestic governance issues, including what happened on the labour market and education.

The new thinking was evident in various major trade deals. Under discussion though had been whether to include financial services in the negotiations; some US institutions seemed keen on this but their government was holding back. These were the kind of debates that had to be engaged in the 21st century. The new agenda was about not only looking at what happened at SA’s borders in terms of import duties but broader. This was not to say border matters were entirely off the agenda.

Important though was what happened in the domestic economy. Smart and intelligent governance, as well as a different thinking about trade and industrial policies were required in the 21st century. These would be issues around investment and competition policies, services sector regulations and border regulations reform and intellectual property governance. This would eventually define competitiveness, and give the country a competitive edge in the world market.

It was noticeable in the developed world that the private sector led the debates and the pathway on new trade policy. SA had also to think about how it engaged the private sector as a leader of trade and industrial policy. SA’s trade strategy as it related to import tariffs needed special attention. The country was a member of the Southern African Customs Union (SACU) and did not articulate its own trade policy. This work had been ceded to SACU and, in fact, the important tariffs charged on goods imported to the country were actually SACU tariffs.

A lot of work still needed to be done on behalf of SACU in terms of institutional development. This remained, after ten years, work in progress. SACU tariffs articulated SA’s trade and industrial policy interests. The import tariff was recognised in SA’s trade and industrial framework as a cornerstone of SA’s trade policy strategy. This meant SA’s trade policy was predominantly focused on a trade-in-goods agenda. Reflecting the flip side on industrial policy would still give a predominant focus on the manufacturing sector. This was despite the composition of the Gross of Domestic Product (GDP) largely accounted for by the services sector. Currently the country did not have a well developed and articulated trade strategy.

As far as trade strategy was concerned, there were trade liberalisation and trade reform legs. This remained very much work in progress and reflected the complex domestic economic gain. SA’s domestic trade policy was well developed and very complex. Articulation of the current trade policy reflected the interest of key stakeholders. There were risks associated with the current complexities in the political economic gains. The risks related to policy capture and diversion in terms of policy on choices that would take SA industries to new levels of competitiveness on the global economy. The focus at the moment was inward-looking and very protectionist in approach.

The WTO was still looking at trade policies that were relevant for the 20th century, but this was not saying the WTO was no longer important. SA was defensive in its trade strategy and in articulating its positions with partners. The country had turned down requests to negotiate modern free trade agreements. SA’s trade agreements negotiations indicate a reflection of the domestic inward-looking agenda. The country’s approach was very limited, only focused on goods.

The services agenda was important given the context of services in the domestic economy. The country should be looking at non-tariff measures. In some cases it might be that the non-tariff barriers were associated with legitimate public policy goals. However the implementation might translate into a non-tariff barrier. In some cases these policies might be used to exclusively frustrate trade rather than support it. In the 21st century, global industrial organisations, trade investment linkages, competitiveness in the global value chain were all important issues to ponder. SA was involved in some values chains, and needed to look at the governance of those value chains. The interface between industrial and trade policy was crucial.

South African Institute of International Affairs (SAIIA) presentation
Mr Peter Draper, SAIIA Senior Research fellow, said SA’s trade policy was largely driven by the industrial framework. The Department of Trade and Industry's Trade Policy Framework indicated unilateral trade liberalisation had failed everywhere including SA. The framework emphasised employment and diversification of exports. Decisive state intervention was required to shift the growth path away from commodity dependence. Trade had to “serve” industrial policy, especially design of tariffs on a per sector basis. Manufacturing, particularly value-added products, was the central thrust. Services were notably not prioritised and this was a serious gap.

He said that he disagreed with this view.

East Asia countries had benefitted from the manufacturing export business although Japan and South Korea had given up on manufacturing export share. Multinational corporations from the two countries had made large investments particularly in China. This pattern also applied to Europe, with Germany giving up manufacturing export share. Germany and other European countries’ multinational companies opted to invest in Eastern Europe and North Africa. The US had gained manufacturing export share during this period, and indications were that this was likely to continue. The biggest benefiter was Mexico, due to its free trade access to the American market. The rest of the world were not significant manufacturing exporters, and particularly did not participate or benefit in the global value chain.

The global value chain was very much about inputting into the production of final outputs. If one wanted to be successful in manufacturing exports, one had to input the intermediate products. Import and export products were inextricably linked. There had been a consistent increase in the import content of exports except in the United Kingdom. Reasons for this were not very clear, but could be that the UK was primarily a financial services centre. This was despite the fact that the UK was the sixth largest manufacturing exporter in the world. Geographic proximity to developed countries, most of whom were manufacturing giants, mattered a lot.

The implication for developing countries was that they had to achieve proximity to the developed countries in order to access the markets and participate in the global value chains. For SA that would be difficult to change as the country could not change its geographic location, but could certainly change its trade policy and its investment strategy. This was the area where trade policy and trade agreements became particularly important. SA had to make its economy attractive to the multinational corporations (MNCs) or Transnational Corporations (TNCs) if it wanted them to invest in the country. The MNCs matter most because 80% of global trade was controlled by MNC’s networks; they dominated global trade. To be a player in the global trade, one had to find accommodation with the TNCs.

The shifting geography of manufacturing created opportunities for developing countries. The China story was a typical case where many TNCs were leaving China and looking to take their investments elsewhere. Could SA take advantage of this relocation process, if so what could be done? An answer to this question came down to reducing transaction costs. No TNCs would want to relocate to the country if the cost structure was ineffective. The cost structure could take various forms.

He said exporting countries worried about infrastructure – both soft and hard - at the border. This extended to such issues as customs authorities, and other hard infrastructure like roads, telecoms networks, and electricity. The golden thread that linked all of this was transport. The current trade policy was focussed at the border, and this was where one encountered a whole range of administrative costs. By far, the most important of these was beyond the border issues including regulations that affected trade relations, institutions that managed the processes, and a broad array of services including transport, logistics, finance, cost of telecommunications, and availability of skilled personnel. These were all service issues.

Trade was very much about promoting inter-coordination in the global value chain through a task perspective. The country could for example start by producing car parts, and invite competitive TNCs so that it could produce certain components. The process would involve building capacity and specialising in certain parts of the value chain; the country could then integrate into the TNC networks.

But the country obviously would not want to start at the bottom of the value chain, and the question was how upward movement was achieved overtime. This required promotion of horizontal issues like technology development, education, and skills. Immigration policies ought to be effective and skilled workers should be allowed into the country. Trade agreements with developed countries or the triad economies, could serve these objectives. An agreement ought to be reached on how to structure trade agreements.

If one wanted to be competitive in manufacturing exports, then one should have access to a whole range of competitive services. These included distributing goods; transport services; electricity and cheap telecommunications. Networks services are particularly important to attracting global value chains. It ought to be born in mind that manufacturing as a percentage of GDP in SA was very small; the economy was largely a services economy. Services in the value chain become very interesting.

The country’s economy was focused on manufacturing and very little from services. There was a huge gap. The pending trade agreements that involve trade with the US and various other developed countries were crucial. If these agreements were concluded, they would be hugely significant. Thinking around this was about forging tighter alliances among liberal democracies: US, Europe and Japan. If this happened then global security would be improved, particularly that of the West. These would also promote more open foreign trade direct investments; stronger intellectual property rights; and a boost to competitive liberalisation.

He said BRICS had a limited contract zone in negotiations. There was a shared desire to block some Western prerogatives; this was a mutual view. Focus should be on high politics or international coordination in key negotiating forums such as the WTO. A trade agreement agenda was not likely to come out of the BRICS anytime soon due to a number of reasons, including differences in interests among members of the bloc.

When looking at implications for the country on trade negotiations with developed countries, one ought to ask if it was appropriate to focus solely on the manufacturing sector. He said in his view the answer was no, as this would not solve the challenges the country faced. SA’s economy was much reliant on the resources sector. The competitive advantage for the country was on the resources and the services sectors. The financial services sector had recently been ranked fourth in the world; but this was not the case with manufacturing. The manufacturing sector in the country was a giant in the 60s when it recorded up to 15% growth rates. The country would not experience such growth rates again; it would be historically unprecedented. Job creation at the scale needed in the country would not come from the manufacturing sector, rather services.

SA needed to dramatically improve its approach to attracting the TNCs investments and particularly in global value chains. The country narrowly thought about this, and was under the impression that it was under siege. Although understandable, this was the mindset that SA ought to break away from. Developed countries were still the major source of TNCs; they drive the global value chains on which 80% of the world economy was concentrated. Most of the developed countries were services economies, and were not in any way threatening the manufacturing sector. If these TNCs invested in one’s economy, they promoted exports; technology transfer and value addition. These companies were the best employers, in other words, they promoted decent employment.

The country had a duty free access to the US market, but that could not be sustained indefinitely. For too long now the US congress had been threatening to graduate SA from the Generalized System of Preferences (GSP) list. Such action would impact the overall total of exports to the US. Some significant agreements with countries like Japan and Singapore had been rejected. The challenge was to overcome the country’s defensive mindset. Even if the country overcame the defensive mindset, the country would still confronting demanding approaches to trade agreements. It would therefore become more difficult to negotiate these trade agreements.

Trade and Industrial Policy Strategies (TIPS) presentation
Mr Evans Chinembiri, TIPS Economist, said SA’s total exports for 2012 amounted to R700 billion, while imports were R833 billion. Trade balance between the imports and the exports in 2012 was the largest, recording R132 billion difference. SA’s leading import and export destination was Asia, closely followed by the European Union. Following the economic crisis in Europe, there had been a diversification of SA’s exports.

SA had a positive trade balance between 2004 and 2009, and the country was the largest supplier to the US and the EU. SA’s manufacturing exports grew in 2011 by 11 percentage points. SA exploited to a great extent the African Growth and Opportunity Act (AGOA) with the exception of Angola and Niger. There was a lot of threats associated with the AGOA in that it was a unilateral declaration by the US Congress; at any time the country could lose the benefits of that agreement. Negotiations were ongoing to ensure that the agreement was extended with SA included in it.

SA had signed a Trade and Investment Framework Agreement (TIFA), amended in 2012, and the country was part of the US-SACU Trade, Investment, and Development Cooperative Agreement (TIDCA) in 2008. This served as forums for the US and SA to improve cooperation and enhance opportunities and investment.

SA mainly exported precious metals to the EU. Germany was SA’s most important trading partner, followed by the UK. SA’s exports were driven by mining and whole vehicle and automotive component exports to Germany. SA also exported refined petroleum products and agricultural products although relatively smaller amounts as compared to the mining and automotive sectors. The major threat associated with EU trade was that the country was viewed by EU as a developed country. Amount of trade to the country had been reduced by the EU due to the status it had acquired.

Department of Trade and Industry (dti) input
Dr Brendan Vickers, dti Chief Director: Research, said that in 2010 the Department adopted a trade strategy framework that was updated in 2012. The document was a result of an intensive and extensive consultative process. In comparison to its trading partners SA was relatively an open economy.

The country had reduced tariffs barriers. Services commitments were on par with the developed nations. The Department was very clear about its trade policy and strategy that were deliberate and calculated. Overarching was that the trade policy should support industrialisation with a view to creating jobs.

Some of the presentations dismissed the importance of industrialisation and manufacturing. On the basis of economic evidence in the past 300 years, all the countires that had made some catch up on income distribution, all had manufacturing in their economies. The economy of services sector had not been the sustainable source of decent employment and growth.

The Industrial Policy Action Plan (IPAP) tried to shift focus away from the non-tradable services more towards the manufacturing and non-services sector, which had historically been the source of decent work. The economy had been heavily tilted towards services, and yet the character of the services sector had not been the real source of decent work. The trade policy and strategy should support the objectives of job creation.

People needed to avoid the obtuse approach to trade agreements as they could be valuable. It was glaringly missing from the presentations that some countries were exporting their way out of the economic crisis. These countries were externalising their own burden adjustments onto the trading partners, particularly targeting relatively open economies like SA. This explained the rise in imports into the country.

A lot of good points were made around the global value chains, and dti did not necessarily disagree with the statements made. But the Department took a more cautious approach. There were three ways in which the debate on value chains could be critiqued. Firstly, was how the country updated its trade data and statistics. Also it was clear from the debates that the country needed to liberalise tariffs, services, reduce non-tariff barriers and escalate trade facilitation. This would lead to some benefits for the country’s economy. Industrial development was missing in the equation.

SA was a strong supporter of multilateralism, and believed that the Doha Round should be continued and concluded. The objective was to impose standards and regulations onto developing countries. But the question ought to be asked whether standards should be imposed the same way on countries that were at different levels of development. If not, how then would the differences be accommodated?

Lastly, dti took a very clear view in IPAP that foreign direct investment should support domestic industrial development. The country remained an open economy on condition that foreign direct investment contributed to the economy. A lot more could be done to make the economy more attractive. This was a wider policy area of government that was being addressed through policies like the National Development Plan (NDP), the new Growth Path and the capital expenditure in infrastructure. Trade policy certainly had a role to play in that process but was not the only means to drive the economy. The inputs were highly appreciated and were constructive.

Discussion
Rev W Thring (ACDP) sought clarity on a statement that SA had ceded tariffs to SACU, especially that there appeared there were challenges. How did such ceding affect the import/export duties and the economy of the country as a whole.

Rev Thring sought clarity on the liberalisation of tariffs. One had challenges when looking at the US and EU; the US had quantitative easing and for a number of months it had been walking a tightrope and headed toward explosion. Very much the same could be said about the EU despite the long trade involvement with them. It seemed logical for SA to move and look to Asia. SA should protect its industries and its assets by looking to the right direction – Asia. He asked if the presenters were suggesting that the country ignore the Asia route.

Mr B Radebe (ANC) commented that the role of TNCs was worrisome when it came to multilateral agreements. The TNCs were only accountable to their boards and not the people. He cited the example of Walmart, which had left a trail of disastrous effects in Bangladesh and Vietnam. He asked if the presenters believed the view that the TNCs needed to be allowed to continue doing business if they were the ones determining the pace of negotiations. That troubled him as most of the companies were only interested in their bottom line in the balance sheet.

Mr Radebe said SA could be a lion and counteract the international force, but all the presentations lacked explicit articulation on whether SA, acting with Africa, could influence the trend of TNCs dictating terms. African resources were the ones that boosted the manufacturing sectors of the booming countries. Control of the resources and a tighter squeeze on control would mean the tide could be turned.

Mr Radebe said multilateral institutions would control the trade agreements better. The European and the US agreement would be big, and needed to be ratified through the WTO; the challenge would be how the country ensured that the WTO remained relevant.

Mr G Hill-Lewis (DA) said the practicalities mattered most when it came to high policies and high politics. He requested that the presenters assess the performance of the International Trade Administration Council (ITAC) in the country. ITAC played a critical role in the country but at times it looked as though it did not perform optimally.

Mr Hill-Lewis said when it came to cost-structure; it appeared sometimes there was a cognitive dissonance between dti and the rest of government. The idea that the country could become competitive in manufacturing while it had the most expensive electricity in the world and the most bureaucratic processes pointed to dissonance. These things made the country uncompetitive. It was high aims but it did not seem dti had focused strategies to effect actual changes in other areas of government. If cross border bureaucracy, red-tape and double digit electricity price increases happened as they did now, nothing would be achieved.

Mr Hill-Lewis said it appeared there was a coordinated effort among the bigger trading partners to use Sanitary and Phytosanitary (SPS) barriers to block developing countries. He cited an example of ostrich meat that remained banned following one sick bird that was found five years ago. This was clear the case had nothing to do with health; this was a trade barrier. And yet there was no coordinated effort from dti to attack the SPS barriers.

Mr N Gcwabaza (ANC) sought clarity on a statement that the financial sector sought participation in trade negotiations. What would drive the financial sector to want to be involved in trade negotiations. He wanted clarity on the statement that the WTO was still locked up in the previous century's kind of issues. He requested that the real issue that should be at the centre stage of the WTO negotiations, be explained.

Mr Gcwabaza said he had a problem with the statement that emphasis on industrial policy was misplaced. All developed economies developed from manufacturing, value addition and beneficiation of their raw materials. How else could any country grow its economy without developing its manufacturing sector?

Mr Gcwabaza sought clarity on liberalisation. Countries who championed liberalisation had gone back to protecting their economies and trade. Trade liberalisation was not an instrument that had shown success.

Mr Z Wayile (ANC) said the world today was confronted with a serious challenge of power balance. This was an important context. Recently, at the UN, in a number of forums there was an agenda of changing the global institutions. How was the current discussion located within those structures?

Mr Wayile said proximity to Europe was a challenge, and had often led to SA being characterised as a low cost production area. Multinationals had been moving from high to low production areas, resulting in the challenge of transport logistics. How was that being addressed? This was also linked to the fact that companies came only when there were prospects of investing and making returns. He asked if there were safety valves, so as to prevent a situation where companies came for cheap production costs.

Mr Wayile commented that he had hoped presenters would clarify the post global economic crisis economy. What were the lessons for developing nations following the economy downturn? Trade relations would definitely have changed and would not be the same as in the past ten years. There were new paradigm shifts and developments, from which the country ought to draw some lessons.

Mr T Magama (ANC: Chairperson: Portfolio Committee International Relations) said an impression was created that SA operated in the optimal developed market, where if one operated or liberalise, everything would be perfect. This was not correct and tantamount to protectionism. The bashing from EU was protectionism. When SA announced the IPAP, making manufacturing a key pillar of its industrial policy, there was criticism from the EU.

The EU knew very well job creation was critical in the country. They opted for the raw materials route, which had become a sticky point with the EU. It was made clear by the EU that although they understood SA’s objectives, they also had their own needs. The assumption, that if the country succumbed to all the dictates including the Washington Consensus everything would be perfect, was a bit flawed. Without policy one would have given away power to foreign powers.

Mr Magama commented there were conflicting views around manufacturing and services as nodal points for job creation. Government policy assumption was that industrialisation was key to creating jobs. Today it had been said that services made up 60% of the country’s GDP, and would thus be a nodal point for job creation. This was an interesting observation, but could it be elucidated as to what informed that. All government policies should serve SA’s own national interest, as not only pertaining to SA but the broader Southern African Development Community (SADC) region.

The Chairperson commented that the presentations did not acknowledge that the country was trying to develop a regional economy. That it did not exist, was a huge deficit that had to be overcome, and it was a legacy of colonialism.

The Chairperson said with respect to tariffs, she would never have been aware of the enormous subsidies paid to prop up a group of inefficient industries, and that they paid R200 billion to farmers. This workforce was not even 2%. The challenge was the way WTO continued to be dominated by capitalist countries, which made it extremely difficult for the developing world to get changes there. There was a need to take another look at services but in relation to the value chain for manufacturing.

SAIIA response
Mr Draper replied South Africa was comparatively an open economy. The IPAP was focused on sensitive sectors and therefore could be characterised as social policy and not industrial policy. He got the impression that dti was focused on protecting existing jobs in the threatened sectors. He agreed with the view that no country in the world had ever developed without industrialising, but his point sought to illustrate that South Africa had gone through the industrialisation phase back in the 60s. The country had a different kind of economy now, and could therefore not turn back the clock to manufacturing. If it wanted to promote manufacturing that ought to be done in line with looking at the services sector. He agreed that most of the challenges lay outside of the dti mandate, but services needed to be part of its agenda.

He chose not to respond on the Washington Consensus comment on whether it was ideological or not. He agreed with the point on the Doha Round. It would be ideal if it could be concluded but that would not happen. There was a different reality out there.

He commented that there was no way around the multi-laterals agenda. It could work in South Africa’s interest but the country ought to tread carefully. With regards to standards, the reality was that the big guys came together and drew up the standards; MNCs came together at a forum and agreed on the standards. Developing countries were spectators in that process; they do not have the kind of MNCs that could drive that agenda. Developing nations were standard takers, whether they liked it or not. It was different when it came to rules, but on standards there was no leverage.

On whether the country should move away from protecting industries, it depended on whether the country viewed industrial policy as social policy, as seemed to be the case with the dti. In that case the answer would be "no".

The Department made the claim that unilateral liberalisation had failed everywhere. If one looked at Australia and New Zealand who both pursued massive unilateral liberalisation in the 80s, and their economies were very much competitive now. Both countries had different social conditions to South Africa. That much more could also be said about China, India, Brazil - all of whom pursued a very aggressive unilateral liberalisation.

He said South Africa could offer the multinationals two things: firstly, the gateway idea – linking them to the region; secondly, import the intermediate, duty free. This was what Walmart was all about. The company would definitely import as all companies do, but also it wanted to export from South Africa into the region.

TRALAC response
Ms Hatzenberg replied that a fundamental issue when one looked at industrial competitiveness was what constituted the real problem, and deciding on which policy instruments were appropriate to address the problem. If a private sector delegation came to the dti and requested protection against imports from such countries as China or Brazil, it would be appropriate to understand why the country was not able to compete.

It was important to understand the reasons for inability to compete rather than protecting companies using higher tariffs. The tariff was politically a very appealing policy instrument. The problem with tariff increase was that it might not assist the companies to address the challenges they faced. This was where the discussion on services and policy coordination with other line departments became critical so the country could come up with a coherent industrial development strategy.

Other departments were crucial if the country was to holistically address the industrial policy question. She cited the Department of Energy (DoE) as one case in point. Energy was a major constraint and added to the cost of doing business. It was not the import duty that would save the companies but a reliable energy supply.

She said South Africa’s position in the context of SACU was important. If SA had technically given up trade policy space on the import tariff, it could not as a member of SACU simply unilaterally increase import duties on any product. The country had to engage other members of the custom union, as there was a common external tariff. To this day, SACU did not have a tariff board that could manage the common external tariff, and make decisions on tariff applications.

She had raised the matter of financial services in the context of EU-US negotiations. The US financial services sector wants it on the agenda. There were interesting developments there. South Africa was committed to growing the regional economy and integrate it to Africa, but strategy was not clearly articulated.

TIPS response
Mr Saul Levin, TIPS Head of Research and Policy Strategy, said growth and trade with Africa was growing. TIPS recently did a survey of 500 exporters, and they identified emerging markets, particularly African countries, was where they wanted to go to. The business community was moving in that direction. The question ought to be how the dti followed that. Some of the key issues would be what happened around trade facilitation, through looking at strengthening the border posts. This was the issue that the South African Revenue Service (SARS) was currently looking at. The country needed to think around concentrating some of its efforts to allowing greater exports to and imports from African countries. Another consideration was to look at what products the country imported from other African countries, of course in relation to what it exported to them, in order to maintain a trade balance.

There were areas that the country could be successful on through growing the economy through the manufacturing sector. There were certain benefits and stimulus for the country, to get into that. On the look of global value chains, the issue was more around the regional value chains. There were multinationals in the country, but more should be engaged with a view to trading with the region more.

AgriSA presentation
Ms Elaine Alexander, AgriSA CEO, said current trade agreements impacted on the agriculture value chain. There also were the concerns at this stage with such issues as putting people back-on- the-land programme, and food security. Agriculture could do a lot of producing intermediary products as had been suggested but would require more fixed stock. If stock declined the number of suppliers declined as well, and that made it difficult for the suppliers to increase intermediary processing as well as manufacturing on top of other competing interests such as feeding the people.

Agriculture in SA had been too liberalised. Farming units were decreasing and a lot of it had to do with consolidation. The sector competed with other developing countries like Chile, Brazil and Peru who received a lot of support from their governments. South Africa did not give the kind of budgets availed to agriculture in those countries. These were South Africa’s most important competitors. The EU would always argue that it wanted returns from the sectors it subsidised.

Until recently, the country had a trade balance but now it was importing more agricultural products. Europe was a major trading partner for South Africa in agriculture. There was a view to move away from Europe in order to diversify the market. US was becoming a difficult market for the sector with all its bio tariffs and security measures.

South Africa had a lot of veterinary issues to ponder. Its product base could be expanded if working relationships were dealt with in the Department of Agriculture, dti and through the NDP. Opportunities that could stimulate the economy were there in agriculture, and this ought to be borne in mind when negotiating trade agreements. As the country was resisting financial services, it did not have an area to trade off. This limited the scope, and the country, as a result, ended up looking at agriculture.

The proposal with SA-India was to put a tariff on packaging that was 30% of agricultural costs on exports. This made the country uncompetitive; one needed to realise that when protecting those industries often there was an impact on other industries that could be more competitive. Again, there was the issue of whether government departments worked together when considering trade agreements. The fishing sector was not protected as it should be.

There were also a lot of non-tariff barriers, and the EU was growing in terms of how they protected their markets especially for domestic production. The country should understand agriculture a lot more, and the relationship between dti and Department of Agriculture Fisheries and Forestry (DAFF) should be looked at. Agriculture was a fundamental sector of the economy, and government ought to understand agriculture and how it could help. The sector should not be treated as though it was not important.

Trade factors included tariffs and non-tariffs measures, infrastructure, finance, exchange rates, and power factors of chain stakeholders. Retailers were the most powerful people in the agricultural chain, and they put in extra standards. Standards were fine if they were determined scientifically correct, but if they were used as a differentiating mechanism and barrier to trade then government should consider dealing with them. It was raised at the WTO 2011 ministerial meeting that private standards had to be considered at WTO as non-trade barriers. Most governments came up with complex rules in this sector. This was just another form of protectionism.

She said a preferential trade agreement as opposed to a free trade agreement, was preferable. Capacity was needed on these kinds of engagements because other governments were very adept in negotiating around scientific issues. In 2008, South Africa lost a market in Thailand to Cyprus and that cost R1.6 billion for the first three years. That could be quantified to about 300 job opportunities. But dti did not negotiate on these aspects, but more DAFF; the Department needed support to do that.

Fruit was South Africa’s biggest export, and the country ought to be thinking about the EU in terms of agriculture otherwise production would be lost. EU’s agricultural production had gone down because they had started implementing some of the rules on their farmers. In SACU the region tried to improve its capacity. SACU partners unilaterally put barriers on the borders; this happened with grain and meat. This was not saying this was not allowed, but it was important that South Africa was consulted, as such action destabilised agriculture. This was the kind of information the country would require at the next engagement with the partners.

There was a need to invest in non-tariff measures on trade. The University of the Western Cape had done a symposium on this aspect where students competed on trade laws. They presented on the Thailand issues and what was going on, but not enough of this was being done. If Africa wanted to be a major trading bloc these were things that it had to consider. The country had enormous policy space to support agriculture. The sector was a platform for intermediary production. The market was not big enough to absorb the production that was there. The country should build partnerships. Government should put more money into agriculture.

Business Unity South Africa (BUSA) presentation
Ms Nomaxabiso Majokweni, BUSA CEO, said the engagement addressed fundamental issues of markets and where they were located. The free trade agreement (FTA) route was not the only thing that could address the trade related challenges the country faced. There was a need for preferential trade agreements (PTAs) as opposed to FTAs. The country had been absorbed with the EU, and needed to consider Asia, but such needed to be thought through.

BUSA supported the strategic way in which the trade policy had been addressed. BUSA welcomed the approach of putting emphasis on regional integration. There was a need to look at how trade operated. Opportunities were there in the regional approach.

Tariffs were a tool but not the only means to solve the trade related challenges. This was a problem and often led to protectionism. Trade could be a driver for both growth and investment. Some TNCs set up shops in the country and then exported to nations that SA had trade agreements with. The EU had shown discomfort with SA unilaterally cancelling the bilateral investment treaties (BITs) with Spain and Luxembourg. Usually the engagements ought to be at government level but the EU from time to time would engage business on issues. This necessitated a closer working relationship with government.

A lot had been said about SACU but there was opportunism by other regional blocs like the US and the EU when dealing with individual partners of SACU. The US had often discussed with members of SACU differently, and if there were no common agreement on issues, the US’s approach had been to split SACU to their benefit. There was a stronger cooperation and agreement within SACU.

There was a need for capacity and mechanism to be able to deal with the non-tariff barriers (NTBs). It was not simply about tariff barriers but from time to time non-tariff issues. There should be a reporting mechanism, and the rule of law ought to be strengthened in respect to those. Business was quite involved in working in trade facilitation matters, not only in Africa but also those existing agreements that the country had. SA should be proactive and strategic. Sometimes SA tended to fall back into a defensive approach. She cited how in a session with India, it became so easy to agree on a defensive list, whilst it took ages to finalise proactive offensive list of products.

The US would have AGOA with SA, but would also have other protective agreements with other partners. It became important to keep up with what partners were doing with other regional blocs in the world so as to understand how such would impact on the partnerships. Capacity was needed to deal with modern challenges with regard to trade challenges and trade relations.

The country needed to be flexible and adapt to the dynamic nature of challenges it confronted. There were measures in place, but there also were issues of enforcement. Business was not keen in SA being graduated out of AGOA. BUSA was currently doing a study on the economic impact of such a step, and on what products the country should be looking at.

dti comments
Dr Vickers said dti supported the focus on trade facilitation; the country had been very active in organisations like SACU and SADC. At WTO there were still a lot of issues around trade facilitation. These were not only differences among North and South, but even among developing countries themselves. There was still some distance to cover in that area. dti would welcome research from the private sector to help government understand what it traded; such a study would be very useful.

dti supported AgriSA’s view on the preferential trade agreement (PTA) rather than full free trade agreement. SA was relatively open in terms of its tariff regime. In order to have a broad based trade agreement one would have to undertake considerable across-the-board liberalisation. PTAs allowed one to negotiate a far more limited agreement and in that way one could sequence tariffs and the cooperation a country had.

There were very strong trade agreements with the EU, US and Japan. The reason the country did not take on free trade agreement negotiations with Japan was because that country’s import tariffs were already low, and SA would have to take a massive cut. Their market was relatively open; there was strong cooperation with Japan on the automotive sector, agro-processing, and beneficiation.

Within BRICS, countries were starting to cooperate based very strongly on trade facilitation. Expectation was too high, yet the country had been within the bloc for a mere two years. The contradictions in the BRICS were just as much as those in the US and the EU. It would be incorrect to suggest that contradictions were much more. The BRICS were currently undertaking a joint study to understand much more those areas in which members complemented each other.

From the dti perspective, manufacturing still had a crucial role to play in SA economy. The services sector only produced menial jobs in fields such as retail and security. Was this the kind of economy the country wanted, or an economy that produced decent jobs?

Discussion
Dr W James (DA) sought clarity and further information about lack of access to Thailand markets for SA fruit. He requested that the billion figures quoted as estimated loss be confirmed. What would be the implication for jobs locally? How could this matter be fixed?

Mr Hill-Lewis commented that he was interested in the soft infrastructure, especially as some of the policies would take a while to get right. He described soft infrastructure as the low hanging fruit.

Mr Hill-Lewis commented that a number of the presenters had made a point about dti’s patchy relationships with other departments. So many challenges that most SA companies faced were not due to a failure by the dti, but due to other departments. It did seem to be the lack of the dti taking the lead in sorting out those issues. He cited the SPS issues with DAFF. dti should take a lead in sorting out these matters, in order to facilitate trade.

Rev Thring asked if there was information on the state owned arable land that was available as opposed to private arable land. He wanted to know how united was BUSA. Unity was prime when one spoke of investments. Also what interventions was BUSA putting in place to reduce the effects of the wage increase?

Mr Gcwabaza sought clarity on the bulk wine import by Britain. What impact had that had on the agricultural sector in the country, on such areas as production and employment?

The Chairperson asked what measures were put in place to “stem that hemorrhage” of importing food since 2012. It would appear from the chart in the presentation that there had been a downward trend in food production since the 60s.

Responses
Ms Alexander, referring to Thailand, said it would be ideal if she presented the Committee with the actual report that was done on the matter. In there, all the figures and the projections would be indicated to date, and for the following four years.

Mr Dawie Maree, AgriSA Senior Economist, replied there was always a time lag due to disaster management activities moving from a local level up to provincial and national levels. Normally, organised agriculture experienced droughts and then it had to go through the government structures.

Mr Maree said the Chief General Surveyor had made a state land audit. Figures from the audit should be available and that was where the extent of arable land could be understood, but unfortunately the information was not currently available.

Dr Vickers replied the GSP in the US expired at the end of July and the US Congress was currently considering legislation to renew it. But that did not impact on any other African country under AGOA. SA was not affected either.

Ms Majokweni said BUSA was united as it could be under the circumstances.

The Chairperson interjected and asked what circumstances were those.

Ms Majokweni replied these concerned the matter with the organisation representing black businesses, which had walked out of BUSA. The result of that action was the birth of black industrialists and it would appear this would be the mandate black business would continue to drive for some time. Currently there were macro-business issues that BUSA worked on and they cut across all business sectors. But BUSA should be able to deal with those. The organization was at an advanced stage of deciding how it could cooperate at a macro-business level. Engagement also happened with Black Management Forum (BMF) and the National African Federated Chamber of Commerce and Industry (NAFCOC), both of whom were for members of black business.

Business would meet Cabinet next week to look at the key five areas that would take the economy on the trajectory envisaged in the National Development Plan (NDP). Business would not wait for what Government could do, and had as a result championed an education trust, under the guidance of Mr Sizwe Nxasana (CEO of RMB). This was the kind of agenda business would be driving, and this was the aim that business would want out of education.

On concerns about the increasing wage bill, Ms Majokweni said BUSA’s view was that there need not be companies closing down as a result of this trend. Also this trend should not result in companies having to retrench workers.

Closing remarks
Ms Hartzenberg said the importance of the discussion was the input from the private sector. This ultimately would determine whether or not SA negotiated international agreements which facilitated good economic decisions. The evidence coming out of the private sector perceived at a broader global level – was the increasing importance of the non-tariffs agenda. This had implications for national trade policy strategy. The country had to engage that agenda actively and also build capacity. Other areas that needed focus was dispute resolutions and trade remedies. A team of experts with technical knowledge of negotiating was required in this field. ITAC was extremely important, but the question was whether it was adequately resourced.

Mr Draper said he agreed with the points raised and thus would be interested to know if ITAC worked administratively. ITAC appeared to have a policy master that was dti, but administratively it had another master that was the Department of Economic Development; this appeared very problematic. A lot of people dealt with ITAC. He was keen to understand ITAC’s methodologies.

He rejected the dti representative's view on jobs in the services sector. The job creation had been on the retail side and a lot of it had been built around imports. If one left this out over the value chain, it would compromise the economy. If one lowered the tariff on imports, the retail sector would grow and more jobs would be created. Probably clothing prices would be reduced and that would be very good for poor people. To save the few jobs in the clothing sector, the country put too high a tariff on the retail. It was therefore inhibiting the services sector in order to protect the few manufacturing jobs. This was problematic and needed careful interrogation into the future.

Mr Levin said TIPS saw potential in growing the services sector. The export sector offered opportunities in supporting growth and resources needed to be geared to that purpose. Aligning with IPAP sectors was critical, but also it was important to maintain traditional markets but grow new markets as well. Grow into the region was also crucial, and an aggressive push of the tripartite free trade agreement became an essential part of that strategy. TIPS agreed with the comment made on supporting efforts to address non-tariff barriers as well as inter-departmental cooperation.

Dr Vickers said the exchange of views had been useful. dti’s view remained that trade strategy and policy needed to support jobs, value addition and economic diversification rather than importing everything. The country needed a clearer agenda around services and try to get a clearer sense of what SA exported in terms of services and that which it imported.

The Chairperson said it was a good idea that people brought differing views and perspectives to the table. It would not help to agree on everything if there were serious challenges that the country was confronted with. It was unfortunate that SA’s industrialization had somewhat stopped, because if developed countries had the same experience they would not be where they were today. The country needed to re-industrialise. She said not enough was done when it came to agriculture. The food issue was serious; one should see how Europe and US look at the matter of food.

The Committee would get the information analysed and prepare a report in three weeks' time. The understanding was that dti was not saying no to services, rather it was saying it was prioritising something else. SA wanted to be able to manufacture its own components alongside the overseas producers. The country could not forever be consumers of Western products.

There was no regional market, and that had to be developed. The SA population was too small for where the country wanted to go, and had to opt for the regional market. With respect to the financial services sector, it should remain the best; the sector would be needed wherever the country was going. But for now industrialisation, underpinned by a strong manufacturing sector, was what needed to be prioritized.

The meeting was adjourned.

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