Minister & Deputy Minister on Trade Policy and Trade Agreements

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Trade and Industry

09 September 2014
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Committee was briefed by the Department of Trade and Industry (DTI) on South Africa’s trade policy and trade agreements. The Minister delivered a comprehensive presentation, taking Members through SA’s policy context background, trade policy setting and SA’s trade reform experience.

The presentation showed how the profile of South Africa’s trading partners had changed in the past 20 years.  In 1994, the top five countries SA traded with were Germany, the UK, USA, Japan and Switzerland.  Within Africa, at that time, Zimbabwe was SA’s biggest trading partner, and in the East, it was Hong Kong (China).  In 2013, the top five trading partners were China, Germany, the USA, Japan and India.  This was a very dramatic change.  European trading partners were relatively low down on the list, while the important African trading partners were now Botswana, Namibia, Mozambique and Nigeria.  

Extensive tariff liberalisation since 1994 had been partly driven by World Trade Organisation (WTO) commitments, in a bid to raise competitiveness.  SA exports continued to be dominated by primary products, except to Africa, while labour-intensive production, in value added goods, had contracted due to import tariffs in the 1990s. For this reason, SA’s trade policies had changed their stance to be developmental in nature, and to encourage value-added labour intensive industrial production with tariffs informed by industrial development.  The other focus was on strengthening productive capacity, exporter development, export promotion, marketing -- and not changing the trade regime.

The briefing also covered commodity and non-commodity based exports, key policy parameters and regional integration. Various trade agreements were discussed, including those SA had regionally, across the African continent and internationally. The Minister spoke to the topical issue of citrus black spot, BRICS and the BRICS Development Bank and the WTO.

Members asked whether SA had liberalised too quickly, following the democratic negotiations, and whether certain agreements could be reversed, especially those hindering local industrialisation and development.  Other questions were focussed on the Promotion and Protection of Investment Bill, with concerns being raised around the discouragement of foreign direct investment, trade deficits and advantages of the BRICS Development Bank. The Committee also discussed the shift in trading partners between commodity and non-commodity based exports, International Monetary Fund (IMF) prescriptions and lowered tariffs.

Meeting report

Opening Remarks

The Chairperson made it clear to Members that the items on the agenda, and trade issues in general, were very important and serious. Because of this, it was more productive for Members to engage the issues, and not the positions of other Members.

 

She welcomed the Minister and Deputy Minister of Trade and Industry, Dr Rob Davies and Mr Mzwandile Masina.

 

SA’s Trade Policy and Trade Agreements: Minister of Trade and Industry

The Minister of Trade and Industry, Dr Rob Davies, took the Committee through the briefing, beginning with SA’s policy context, stating that the overall emphasis of SA’s policy context was that trade policy was informed by industrial policy.  Specifically, SA had a Trade Policy and Strategy Framework (TPSF) which had been adopted in 2010.

 

Looking at SA’s trade policy setting, SA had been a relatively open economy for decades, protected only “moderately” by tariffs. The country was considered a simple average Most Favoured Nation (MFN), with applied tariffs at 7.7% (down from 23% in the 1990s) and 56% of duties set at 0%. The reasons for this were because of the apartheid government opting to define SA as a developed country. Compared to SA’s partners, the tariff regime was transparent and not too complex and many services sectors were actually more open than some Organisation of Economic Development (OECD) countries. SA was also among the most open jurisdictions for foreign direct investment (FDI) in the world and provided a high level protection to investors, in line with high international standards. This would be further strengthened by the anticipated Promotion and Protection of Investment Bill. 

 

With SA’s trade reform experience, extensive tariff liberalisation since 1994 had been partly driven by WTO commitments, in a bid to raise competitiveness.  SA exports continued to be dominated by primary products, except to Africa, while labour-intensive production, in value added goods, had contracted due to import tariffs in the 1990s. For this reason, SA’s trade policies had changed their stance to be developmental in nature, and to encourage value-added labour intensive industrial production with tariffs informed by industrial development.  The other focus was on strengthening productive capacity, exporter development, export promotion, marketing -- and not changing the trade regime.

 

Minister Davies looked at SA’s top 15 trading partners in 1994 and 2013.  In 1994, the top five countries SA traded with were Germany, the UK, USA, Japan and Switzerland – mainly OECD countries. Within Africa, at that time, Zimbabwe was SA’s biggest trading partner, and in the East, it was Hong Kong (China).  In 2013, the top five trading partners were China, Germany, the USA, Japan and India.  This was a very dramatic change.  European trading partners were relatively low down on the list, while the important African trading partners were now Botswana, Namibia, Mozambique and Nigeria.

   

After briefly highlighting SA’s commodity-based manufacturing exports and non-commodity based manufacturing exports, major exports to the rest of Africa were explored. The point was that Africa was tremendously important in terms of trade within a variety of sectors, including machinery and equipment, motor vehicles, parts and accessories, food, basic chemicals, basic iron, steel and other chemicals.

Minister Davies said that the key policy parameters for trade negotiations were informed by, and supported, national industrial development objectives, which were to increase exports of value-added products and decrease demands which unduly limited the development policy space.  Regional integration was supported, as it was critical to create the size of market to support industrial development in all of Africa, and not just SA, within a developmental infrastructure framework. When trade negotiations were entered into, national consultation was held at an intra-governmental level between the Department of Agriculture, Forestry and Fisheries (DAFF), the South African Revenue Service (SARS), the Industry Trade Administration Commission (ITAC), business and labour in the National Economic Development and Labour Council (NEDLAC).  Consultations were also held with the Southern African Customs Union (SACU) to protect common external tariffs, with the focus areas centered on the exchange of tariff concessions, rules of origin and related legal issues.

In regard to regional integration, Africa’s growth prospects were much improved, but the current growth path -- based on consumption and mineral exports -- was not sustainable. Africa required structural transformation for value addition, diversification and inclusive growth in comparison to the European model of institutional integration.  Development integration in Africa was a priority of SA and was a model supported by SA. This model focused on market integration, cross-border infrastructure development, industrial development and economic diversification.  It would be pursued through SACU, the Southern African Development Community (SADC), the Tripartite Free Trade Alliance (T-FTA) and the Continental Free Trade Alliance (C-FTA).

With trade agreements, the SACU Agreement was focused on revenue sharing, industrial and infrastructure development, and common positions in trade negotiations. It was noted SACU was the oldest customs union in the world, pre-dating even the European Union (EU) by 50 years. The SADC FTA, together with the SADC Protocol on Trade in Services, had been adopted in 2008. These policies were intended for an integrated industrial upgrading master plan for the SADC, as it had to be given priority attention over formal trade, as discussed at the recent SADC summit. The Tripartite FTA negotiations were under way and ongoing.

Minister Davies explained trade agreements with the rest of the world, noting the SA-EU Trade, Development and Cooperation Agreement (TDCA), which came into force in 2000. When SA came out of apartheid, it was trading with the EU on the worst possible terms as a Most Favoured Nation (MFN) country, with no preferences. The government then sought non-reciprocal terms, as were enjoyed by other African countries, but the EU said SA was different from other African countries and would be required to negotiate a FTA with the EU.  Implementation of this FTA had concluded in 2012. This would be replaced by the Economic Partnership Agreement (EPA) which had just recently been initialled. The SACU-European Free Trade Association (EFTA) FTA was there for countries which were not members of the EU, like Switzerland and Norway. The SACU-India Preferential Trade Agreement (PTA) was under negotiation.

With the Tripartite SADC East African Community (EAC) Common Market for Eastern and Southern Africa (COMESA) FTA, the T-FTA negotiations were behind the schedule of the 2014 deadline. The principle was for negotiations among members who did not have any preferential arrangement in place. SACU had negotiated with the non-SADC members of the T-FTA, of which Egypt and the East African Community (EAC) were the biggest. It was agreed that modality offers would be for 60% of tariff lines duty-free entry, 25% to be negotiated, with five to eight years of implementation. Key challenges were around rules of origin. SA had developed offers, requests and texts, through NEDLAC, as a basis for the SACU position. Apart from this, work was underway on the North South (N-S) Corridor industrial development.

 

Turning to the SADC-EU Economic Partnership Agreement (EPA) negotiations, he said this EPA improved the TDCA’s access for SA agricultural exports, particularly wine, ethanol and sugar.  New Rules of Origin had been developed, to assist with clothing exports and for regional cumulation. There were agreements on recognising South African Geographical Indicators (GIs), including a number of wine products, “rooibos”, “honeybush” and “Karoo Lamb,” while there was non-binding cooperation on new generation trade issues. The EPA was initialled in July 2014, ahead of the 1 October 2014 deadline, after which there would be some “legal scrubbing” before it would be sent to Cabinet for signature and then to Parliament for ratification.

Minister Davies said international trade was increasingly not a matter of give and take because of technical barriers to trade, or non-tariff barriers.  The topical issue now was citrus black spot. The citrus sector employed about 80 000 people and SA was the largest exporter of citrus products to the EU. The citrus black spot was a little fungus on the peel of fruit which was considered a threat to citrus orchids in Southern Europe. It was said that if citrus black spot was detected, SA imports would be stopped. There was no agreed science on how the black spot was passed to another orchard and there was no threat to human health with the fruit. A few years ago, the EU had said if five interceptions of black spot were detected, consignments would be stopped. Contrary to what Europe was supposed to be doing, higher levels of chemicals were being used to combat the black spot.  So far, as reported in the press, there had been four interceptions and there may be a 10-15% loss of exports into the EU. THE Minister felt the issue needed to be driven by science and not protectionism, because the science was disputed. SA had proposed to the EU a quarantine zone, but this had not been agreed to. Government could not ideally wait for exports and potential jobs to be lost, so arbitration was being pursued under the International Plant Protection Convention on the science of this matter, under the UN Food and Agricultural Organisation.  The DTI remained ready for when industry and the DAFF gave the call to initiate action in the WTO against the EU measures as protectionist devices, rather than plant-health measures. This particular issue showed that trade measures these days were more about such issues than the give and take of negotiated tariffs.

Looking at the SACU-India PTA, there were a number of concerns from SA constituencies around Indian measures in place, like state taxes, which affected SA exports to India. This meant negotiations were going very slowly through NEDLAC, but there was consensus a preferential trade agreement, however modest, was needed with India, which was SA’s fifth largest trading partner.

The African Growth and Opportunity Act (AGOA) had assisted in growing trade between Sub-Saharan Africa (SSA) and the US, and had generated goodwill through a series of non-reciprocal benefits offered to AGOA countries. These countries had been chosen by the US, so they did not include every member of the AU or SADC.   SSA was calling for a 15-year extension of AGOA beyond expiry in September 2015, and bipartisan and administration support in the US was expected to extend. There were, however, some questions about SA and the idea of graduating out of AGOA. SA advocated building on an existing arrangement and avoiding any adjustment that would undermine the relationship. AGOA should be strengthened to support Africa’s regional integration agenda more directly, as the priority was to build a virtuous cycle of trade and investment.

SA had been a member of the Brazil Russia India China and SA (BRICS) forum since 2011, and it had become a vital element of SA’s global economic strategy.  BRICS nations accounted for about 20% of SA’s total trade. The main priority was to shift the structure of trade to be more balanced and promote more value-added exports from SA to support the Industrial Policy Action Plan (IPAP).   As chair of the forum, SA coordinated the Joint Trade Study to this effect.  SA and China had also agreed to promote ten value-added products and ten investment projects. Other areas of cooperation focused on trade and investment promotion, e-commerce, small and medium enterprises (SMEs), and technology.

Within BRICS, the business forum and business council played a key role, but BRICS support to advance Africa’s structural economic transformation and infrastructure development needed to be harnessed. With the BRICS Development Bank, there were countries with surplus capital looking for opportunities in emerging economies. The Bank could play an important role in funding the huge infrastructure gap on the African continent -- the Minister had heard this gap was costing the continent the equivalent of 2% growth. The first regional headquarters of this Bank would be located in SA, to serve the African continent.    

Minister Davies moved on to the World Trade Organisation (WTO), outlining SA’s support for multilateralism to manage interdependence. The WTO set rules for world trade, with dispute settlement procedures.  Existing rules were often unbalanced and prejudiced developing country interests, but the Doha Round aimed to rebalance the rules in favour of developing countries. However, this mandate was being steadily eroded, with the reform of agriculture moderating, but pressure to open emerging country markets for industry and services increasing.  For SA, there was no new market access, but significant market opening. Overall there had been effective resistance to an unfair deal by BRICS, the Africa Group, G20 and G90, which had contributed to an impasse since 2008. The WTO Ninth Ministerial Conference (MC9) in Bali had delivered the first outcome of the Doha Round following prolonged impasse. MC9, however, was imbalanced with a demand, while a Trade Facilitation Agreement by industrial economies had been met, as issues of concern to developing countries were postponed indefinitely. This imbalance in process led to deadlock on 31 July 2014, when members were due to incorporate the TFA into the WTO Agreement.  SA would continue to build alliances with BRICS, Africa Group, G20, G90 to champion balanced outcomes on the issues and implement the TFA, while supporting the African countries’ requirements for technical/financial support as a prerequisite to accepting obligations. 

Discussion

Mr F Shivambu (EFF) said SA was still bound to the International Monetary Fund’s (IMF) instructions on trade, and this was why subsidies had to be resorted to for local industries. It needed to be appreciated that no country could industrialise without protectionism, and it appeared that SA was simply complying with such prescriptions. SA had a very loose trade policy and more decisive action was needed.  

 

Mr B Mkongi (ANC) asked if the process of liberalisation had been too much or too rushed when SA made the democratic transition. This could explain why SA was in a trap, with agreements which did not favour industrialisation. Was there any way that trade agreements made around or pre-1994, which now hindered local industrialisation and development, could be reversed?  What criteria were used by the US to select the countries involved in the AGOA?  What was the motive behind this Act -- particularly inherent advantages for rest of Africa, and not just SA?  Was the US willing to cooperate with SA in building infrastructure development in Africa, from Cape to Cairo?  Were the dispute resolutions negotiated at an international level, in favour of Africa’s industrial development?

Minister Davies said SA had over-liberalised in the 90s owing to various reasons, like the Marrakesh Agreement, which officially established the WTO.  The WTO imposed a ceiling or legal maximum for tariffs and there was a lot of pressure on SA, given the narrative at the time, that trade liberalisation was best. The reality was that countries preached this, but did not practice it, depending on where their competitiveness was. SA now needed to navigate among a complex number of forces within a rules-based system. A flood of legal and illegal exports and substandard products was being experienced. SA needed to up its game in this area, especially with under-invoicing with customs duties.  The Department had introduced a reference price mechanism in this regard, which was at least something. Every container could not be opened and the industry needed to inform the Department for raids to be conducted and intelligence to be increased.  Some of the worst sub-standard products were paraffin stoves, and they were constantly being intercepted. With the reversal of agreements, some policy space could be clawed back as had been done in the EPA and the renouncement of export taxes. This was an important tool for beneficiation. Some agreements could be improved with “wiggle room,” a balance of forces, and using the legal rules where they could be, like with the citrus black spot issue.

AGOA was an Act of the US Congress, so it was entirely up to the US what criteria were used.  There were no legal ties, and extension was up to them. Some of the criteria were based on governance and democracy. The important point about AGOA was that its trade component was valuable to Africa, as building capacity was the primary priority instead of the design of trade arrangements. This was the general consensus at the US-Africa Summit.

Mr D Macpherson (DA) asked if there was a possibility SA could get left behind in SACU while other regional players went soaring ahead. What measures were in place to prevent the Southern African Development Community (SADC) and SACU from being abused by other African partners?  An example was undeclared goods in the textile industry coming in from Lesotho.  He questioned if the SADC Trade in Service Protocol had been signed by President Zuma before being ratified by Parliament in 2013 – if not, why had this not taken place?  How would the BRICS Bank be used to SA’s advantage in terms of envisaged projects?  How would the Promotion and Protection of Investment Bill affect SA’s agreements, specifically in the EU.  Did the Department feel the Bill would discourage fixed direct investment (FDI) from the EU? What was being done to calm concerns from the EU over this specific Bill?  With all of SA’s trade agreements in place and preferential treatment received, how could it be that SA still had a R55 billion trade deficit and was importing more than it was exporting? He found this concerning.

Minister Davies responded by saying the current issue in Africa was industrialisation. SA had to work to reposition itself in trade with Africa to move up the value chain.  Nigeria, for example, had been learning from SA on a quid-pro-quo basis. Without SA repositioning itself, there would be trade friction. President Zuma had not signed the Trade in Service Protocol because he had had to return from negotiations because the Marikana strikes had just happened. This was a mere technical oversight and was not a policy issue, as the Protocol had been ratified and was in force. SAs offer to SADC in terms of the Protocol had already been approved.

The biggest advantage from the BRICS Development Bank would be in funding the infrastructure gap which, as he had already mentioned, was costing the African continent the equivalent of 2% in economic growth a year. President Zuma had made it clear to African leaders that the development agenda needed to be defined for infrastructure financing throughout the African continent. With the Promotion and Protection of Investment Bill, research had shown there was no correlation whatsoever between having bilateral agreements and investments.  SA did not have bilateral agreements with many countries, yet there was still investment.  On the other hand, SA had bilateral agreements with other countries, but no investment.  He felt the EU and EU Commissioner were out of order to make public accusations against SA because of the Bill, instead of raising concerns privately. The Bill, which was still in NEDLAC, would provide a common platform for all investors for rights based on the Constitution. It was believed this would offer confidence to international investors.

On the issue of deficit, he said there were a number of reasons for this. Europe was one of SA’s biggest trading partners but the economic crisis there meant SA exports had dropped. In 2008, SA exported 222 billion Euros worth of products, while in 2013, this had fallen to 20 billion Euros. European demand had fallen and this had caused the change.  With the economic crisis, it was also harder to promote the SA currency and this had also led to a deficit. The issue and challenge with trade was to support value-added products, and regional integration was the priority.   

Mr B Radebe (ANC) congratulated the Department on a job well done, especially when looking at the history of SA’s trading partners. He asked if the need for passports to enter certain African countries, like Kenya, were undermining trade achievements. He felt the attitude of the Department on the citrus black spot issue was right – action could not just be taken by DAFF, and the DTI needed to take the matter to the WTO, as the EU was protectionist in nature.  He congratulated the Department on the work done on the AGOA at the US-Africa Summit.  It was important for SA to remain in the AGOA framework, given the tremendously increased growth in trade between the USA and SA. If necessary, the Committee should lobby Congress to extend AGOA.      

Minister Davies agreed that AGOA was not just for benefiting SA. The Department’s view was to keep AGOA going as it was, as its basic architecture was fine for a period of at least 15 years.  With the T-FTA and movement of people, there was supposed to be promotion of the free movement of business people, but negotiations on this had not moved much. He understood that Home Affairs was working on a number of expedited visas, but it was known that people were coming into SA from all over the place with no real legal entry, and this needed to be considered.

With the citrus black spot, the point was that SA could not sit idly by.  DAFF would have to make the call and the DTI was ready to fight the WTO on this.  His experience with this was that only when one threatened to retaliate was progress made. 

The Chairperson questioned the shift in trading partners between SA’s commodity-based manufacturing exports and its non-commodity-based manufacturing exports.  

Minister Davies pointed out that the presentation graphs may be labelled incorrectly and should be commodity/non-commodity exports and not manufacturing exports. These graphs showed SA was exporting primary products to its biggest partners, while manufactured or finished goods were largely exported to the African continent, with the exception of some value-added products exported to Europe. The challenge was how to increase trade in value-added products with SA’s newest and biggest partners like China and India. SA had always declined to quantify targets, but to simply increase the trade in value-added goods.    

Deputy Minister Masina felt there should be recognition that SA had moved away from transitional agreements. The emphasis was on providing a stable policy environment, value-added trade, regional integration and inter-African trade, to create new opportunities.

Mr Faizel Ismail, SA Ambassador to the WTO, said from his own experience at the organisation that SA had perhaps been a bit too idealistic in the beginning years, believing that other members would agree to promises when the Doha Round was launched. The impasse in the Round suggested there were protectionist tendencies in the developed world.  SA had been a voice for developing countries in the WTO, and had been leading collations of developing countries over the last few years and had pushed for a more balanced regime in the Bali negotiations.  He was proud to be associated with this work. As Ambassador, he had met with industry in Geneva on the citrus black spot issue, and had done homework by consulting with a number of other potential supporters in Latin America who had similar experiences with the EU on these so-called health issues in agriculture. There was capacity to support the industry, should it make the call.

Mr Shivambu said the prescriptions of the IMF still remained, and the whole idea of lowering tariffs was still a reality. He questioned the existence of a trade office in Shanghai, China.

Minister Davies said he had not seen the IMF document to which the Member referred, but this particular IMF agreement had no impact whatsoever on any trade policy decisions SA took currently. The only case in which tariffs had been taken down was with Arcelormittal.   

Mr Radebe thought the framework on trade tariffs was working. He appealed that Parliament should support the Department with the work it was doing.  Other parliaments spoke with one voice to support trade and the Committee should do the same, as it would only benefit the country. Deputy President Kgalema Motlanthe had said that inter-regional companies were needed to assist with inter-African trade and creating value chains.  He thanked the Ambassador Ismail, who had done exceptional work at the WTO – SA was forever indebted to him, and he was glad to see his skills were still being retained in the Department.

The Chairperson noted Mr Radebe was the whip of an important sister Committee on International Relations, and she hoped inter-Committee work would be strengthened.

Minister Davies said there were a number of dynamics to inter-regional companies, but there needed to be a code of conduct of sorts for SA traders to conform to, with some basic practices as they carried the South African brand. Only ethical trade could be supported. Value chains were vital. He echoed the need for Parliament to play an active role and have a voice in trade policy issues, as they had huge consequences, especially in the way trade related to industrial development. 

Mr Mkongi was interested in the key policy parameters, and questioned how far DTI was in negotiations with China in terms of structural imbalances.  Perhaps a separate briefing on the progress of this matter was needed.

Adoption of Committee Minutes

Committee Minutes of 29 July 2014

The Chairperson said there was information in the minutes for Members to use as notes when engaging with the Budgetary Review and Recommendations Report (BRRR) process.  The minutes were adopted without amendments.

Committee Minutes Dated 31 July 2014

The Chairperson said the minutes contained information on the entities, for Members to use as notes.

The minutes were adopted without amendments.

Committee Minutes Dated 1, 20, 22, 26, 27 August and September 2, 2014

The minutes were adopted without amendments.

The meeting was adjourned.

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