SADC Amendment Protocol

11 October 2000
SADC AMENDMENT PROTOCOL

SUMMARY
The context and contents of the Southern African Development Community Amendment Protocol were outlined It deals with rules of origin on products to ensure that only genuine SADC products benefit from the Agreement, customs assistance and cooperation to ensure due diligence is applied, dispute settlement mechanisms in the form of a WTO-style panel mechanism, as well as the special needs of the severely distorted sugar sector. There was discussion of some specific points and of general issues of attracting investment, and of industrial strategy. Thereafter, the three National Assembly Portfolio committees recommended approval of the Protocol, with the Democratic Party in the Trade and Industry Committee recording its objection.

MINUTES
Small and Medium Enterprise Development Programme (SMEDP)
Prof Kaplan apologised that he had made a mistake in his presentation the previous week. He had incorrectly stated that the SMEDP programme did not provide support for small investors below five million Rand. In reality, an investment grant of up to 10% per year is available on investments of up to five million Rand.

A member asked about what happens to an investor who cannot put together a million Rand. Prof Kaplan tried to clarify that there is no minimum and that an investor qualifies for the subsidy at any level of investment. The Chair explained that Prof Kaplan is saying that the incentive does include all investments.

Mr Ramgobin (ANC) asked what the set of criteria are for this subsidy, whether they are published and known, and in how many languages they are distributed. Prof Kaplan stated that all investments in the areas sketched out qualify for this incentive so long as they are in qualifying assets such as land and buildings, research and development, and many other things, although not including goodwill. There will soon be A formal publication on the scheme that will widely publicise it.

Southern African Development Community (SADC) Amendment Protocol
Mr Mfundo Nkuhlu, Chief SADC Negotiator for South Africa and Manager of the Africa Programme at the Department of Trade and Industry, set out the context of the SADC Agreement. The Agreement had been signed in Maseru in August 1996. South Africa's Parliament ratified it in November 1999. It came into effect on 25 January 2000, as two-thirds of SADC countries had ratified it by this date. Angola, the DRC and Seychelles have still not signed the Agreement, but they may accede to the existing Agreement at some later date should they be ready to join.

The surface objective of the Agreement is to liberalise intra-regional trade. However, accompanying this objective are the higher-order goals of improving the efficiency of production, attracting direct domestic, cross-border and foreign investment, and promoting diversification and industrialisation.

Mr Nkuhlu stated that the basic economic rationale for the Agreement from South Africa's perspective is a crisis of a rise in exports against flat imports:
- SA exports to SADC countries went from R8 000 million to R17 170 million
- SA imports from SADC countries went from R1 833 million to R 2 523 million.
The problem is that this curve is not sustainable over time because of the resulting balance of payments problem. On the data up to 1998, the latest which the central bank has released, the investment outflow from South Africa is not enough to make up for the structural imbalance. Trade with Zimbabwe, one of South Africa's top ten trading partners, is already on the way down because of problems in Zimbabwe.

Mr Nkuhlu explained that the Amendment Protocol was agreed to at Windhoek on August 7, 2000. It seeks to deal with four issues on which the parties to the SADC Agreement wanted better elaboration. First, it revises the rules of origin in the context of continuing concerns about goods from elsewhere trying to take advantage of the SADC Agreement. Second, it tries to respond to a need for more mutual assistance and cooperation in customs matters. Third, it strengthens the dispute settlement mechanisms, an important step given that a corollary of increased trade is increased disputes. Fourth, it amends market access in the sugar industry.

1 On the rules of origin aspect, Mr Nkuhlu explained that these are developed to some extent on a product-by-product basis. The intent is to ensure that sufficient value is added in manufacturing or processing. Lax rules of origin would encourage the re-export of goods imported from elsewhere and defeat the higher-order goals of the SADC Agreement. Some saw South Africa's insistence on this early in the negotiation process as protectionist. However South Africa was resolved that it was an important issue that SADC be dealing in outputs from SADC economies.

The rules of origin for agriculture are that the product be entirely produced in the SADC country. For manufactured goods, the rules are essentially that there be substantial value added or a substantial transformation of the product. Textiles and clothing were a specific area of contention because of the effects on employment and manufacturing. Originally, the idea was to have a rule requiring two transformation stages (a transformation stage being, for example, crop to fibre or fibre to cloth or cloth to garment). However, countries like Zimbabwe and Mozambique that are not at the edge of world development said that this was expecting a lot from them. In their situation, they would need a lot of capitalisation to be able to do two stages of transformation. They made a case for one-stage rules. The Protocol makes this concession for four countries in the SADC region. LDCs within SADC may not be able to comply with a two-stage requirement now. There has, however, been agreement on a five-year time frame during which there will be attempts to attract investment to enable compliance, and at that point there will be a review.

2 Mr Nkuhlu explained the area of customs assistance and cooperation as being oriented around the realisation that a regulation must be adopted to prevent customs fraud. The main thrusts in this area of the Protocol are:
- to create an institutional framework for coordination that will help ensure the application of due diligence in all countries
- to implement operational cooperation in order to verify the credibility of data from the other countries
- to automate systems (briefings are to come from Revenue Services on their automation efforts)

3 The existing provisions on dispute settlement will be replaced with a new Annex that reflects a simplified version of the World Trade Organisation's (WTO's) DSU (Dispute Settlement Unit). Essentially, panels of adjudicators will be empowered to deal with particular disputes and their decisions given final effect when the Ministers act on their decision. The three phases of consultation, the panel process, and the adoption of the panel report will all be time-bound to recognise commercial reality.

4 Mr Nkuhlu explained that the sugar industry is in need of special rules because it is an area of potential for some SADC countries but it is also an area where the world's largest supplier, the EU (European Union), is the least competitive. The EU has both production support and export support, making for a severely distorted world market. There need to be structural changes in the world economy before SADC can move toward full liberalisation in the sugar sector. A technical committee will determine quotas for this sector so SADC countries can trade in sugar amongst themselves.

5 The Protocol also provides for a schedule for the implementation of tariffs. Mr Nkuhlu explained that this is complicated because the countries are at different levels of economic development. This necessitates an asymmetrical implementation. While South Africa and the Southern African Customs Union countries will implement their reductions over five years, the rest will do so over eight years. There are also differences in degree. The general offers are as follows:
Malawi 41,88% 39,98% 18,14%
Mauritius 51,79 33,38 14,83
Mozambique 16,92 51,22 31,85
SACU 76,54 21,04 2,40
Tanzania 9,80 78,01 12,19
Zambia 23,22 62,90 13,88
Zimbabwe 30,53 41,04 28,43
[1st figure represents the immediate reduction (as a percentage of South Africa's trade with the country), 2nd figure represents the reduction over the five or eight-year period (as applies to the country), 3^rd figure reflects sensitive areas where there has not yet been agreement on a reduction.]

Mr Nkuhlu noted that another complicating factor is the need with certain types of concessions to extend them to other WTO members because of the provisions of the WTO Agreement. Thus, it is necessary to proceed with SACU in a manner that still offers some protection.

Mr Nkuhlu stated that the Protocol had been approved by the heads of state on August 7, 2000, and became implementable as of September 1. States are to deposit their implementation agreements within six months and indicate an implementation date within twelve months.

As with any trade agreement, residual issues remain. Mr Nkuhlu explained that these include:
- ongoing issues on the rules of origin
- the removal of non-tariff barriers in such forms as customs procedures, arbitrary governmental interventions in the market, uncertainties about export licences, and even such matters as the non-existence of infrastructure like roads
- possible improvements on the tariff reduction offers
- cooperation on technical standards
- as a matter of urgency, establishing an implementation unit in the SADC Secretariat (South Africa, Lesotho, Mozambique, and Zimbabwe have already seconded officials)

Mr Nkuhlu stated that the Protocol amendments will be published in the Government Gazette.

Discussion
A member expressed concerns about the sugar agreement in the context of the EU's behaviour, stating that our supermarkets are laden with foreign sweets and dairy products. She asked what we can do in terms of the SADC Protocol to find a solution to the problem. Another member asked about the impact of the sugar agreement in relation to our obligations to the EU.

Mr Nkuhlu stated that sugar within the SADC will be a closed market, meaning that EU sugar products will not enter. SADC is not conceding anything. The implementation of SADC will not be subject to restraints from obligations to the EU. The question is how to rid the world economy of a structural constraint. This issue belongs in the WTO as a transgression of very fundamental rules of free trade. Mr Nkuhlu stated that the Seattle Summit had been scuttled in part because the major powers had not been ready for the next cohort of structural changes, which must come from their economies. There must be a reform of the sugar sector on a global scale. Unfortunately, this touches the raw nerve of agriculture policy, which helps hold the EU together. It goes to the heart of political governance of the world economy.

Ms Mahomed (ANC) asked for an explanation of the repercussions of a harmonised coding system. She asked whether the infrastructure for due diligence will exist in countries like the DRC or Zimbabwe that are experiencing instability.

Mr Nkuhlu explained that there are still some residual issues on rules of origin. As for the technical capabilities, South Africa itself will need an infusion of technology, as it still has customs ports that operate manually. A tenet of the SADC, however, is that there is a need for harmonisation and investment in this direction. Each country within SADC is effectively extending its own frontiers, so it has to be confident about the conditions on the other side.

Ms Mahomed (ANC) also asked where the seat of adjudication for the dispute settlement mechanism will be and whether the necessary expertise is present.

Mr Nkuhlu explained that there is no seat of adjudication because the dispute settlement functions through panels. These tend to consist of trade experts, legal experts and others, chosen on an ad hoc basis and often drawn from universities. This avoids the costs of having a whole court when South Africa's own court system is under considerable pressure.

The Chair asked about the presenter's suggestion that increased investment in other countries would be good for South Africa. He asked if the presenter understood that South Africa itself has a problem with investment. Mr Nkuhlu responded that South Africa has fallen far short of its own expectations on investment and that this is imposing a ceiling on growth levels. Mobilisation of domestic investment is a key strategy. The ability to attract foreign investment may well depend on this mobilisation of domestic investment, as domestic investment reflects the state of confidence in our own future. Mr Nkuhlu explained that there are four areas where we need investment in order to achieve sustainable growth:
- the ICT (information and communication technologies) sector, since this affects the ability to increase value-added activity in more traditional sectors and since the Internet can overcome geographic distance
- physical infrastructure and logistical networks, since these affect goods getting in and out
- natural resources, since these are an area of natural strength
- manufacturing, since this is an area in which competitiveness can increase

The call for investment in neighbouring countries is not based on morality but on the idea that the home base needs nearby expansion in order to grow. The situation between South African and Zimbabwe affects the South African economy and its ability to attract foreign investors. Foreign investors often look at South Africa as a platform into the region.

The Chair asked for the presenter's comments on strategies around AGOA (African Growth and Opportunities Act), the new American initiative allowing African products readier access to the American market.

Mr Nkuhlu responded that there are clear benefits of greater access to the American market. The legislation provides considerable relief concentrated in areas like clothing and textiles. However, one needs to remember that real concessions must be achieved through negotiation. What is given "a la aid" always comes with constraints and is subject to revocation. Stringent customs rules do indeed seem to come with what was originally a generous offer. Concessions from the EU are more certain because they have been achieved through negotiation. The American offer is analogous to the old GSP (General System of Preferences) offered unilaterally. Because there is no negotiation on the terms, we must follow their rules.

Mr Zita (ANC), Acting Trade and Industry Portfolio Committee Chair, asked about the differing economic structures of the different countries in the region and whether there are any ideas about harmonising their structures. He asked for more comments on the tariff reduction issue.

Mr Nkuhlu replied that there are controversial issues here. The reality is that since 1994, South Africa has been emerging from a period of protectionism during which it fell behind. The question today is how to mobilise resources and make the economy competitive for growth and social needs like employment and poverty eradication. Due to integration in the world economy, competition is now at the global level. South Africa does not have favourable circumstances for its restructuring. There is not a simple answer.

Mr Zita (ANC) also asked about any thoughts on using natural strengths to facilitate development, citing as an example the recent discovery of oil in Tanzania. There was no specific reply to this question.

A member asked a question about whether the two-tier system is open to abuse. There was no specific reply to this question.

Mr D Lockey (ANC) stated that human resources are one of the constraints on long-term high levels of growth. He asked whether it would not be wise to find niches in the world market where South Africa can develop and nurture industries that can penetrate these. Thus, South Africa would develop a vision on which industries to support to make inroads into the world market. He cited as an example the platinum industry. Forty percent of platinum in the world is used for jewelry. But South Africa produces eighty percent of the raw commodity and could control the supply. He suggested using industrial policy to support such areas where South Africa will get a clear competitive advantage.

Mr Nkuhlu replied that industrial strategy is not about picking winners and losers or we risk writing off pockets of the economy. The natural resource sector is one area where South Africa adds value. The auto industry is one where South Africa has developed specific programmes. And it is true that we need to do so in other niches where we can obtain global competitiveness.

Ms Mahomed (ANC) asked for specific strategic plans concerning South Africa and the region. Mr Nkuhlu replied that specific plans for the region often flow from strategic plans. He stated that the initial policy of regional institutions developed at Harare was one example.

Ratification of the Protocol
Mr Ebrahim, Chair of the Portfolio Committee on Foreign Affairs, read a report stating that the Committee had considered the Protocol and recommended approval of the Protocol. He asked if there were any objections. There were not.

Adv Holomisa, Chair of the Portfolio Committee on Agriculture and Land Affairs, read a report stating that the Committee had considered the Protocol and recommended approval of the Protocol. He asked if there were any objections. There were not.

Mr Zita, Acting Chair of the Portfolio Committee on Trade and Industry, read a report stating that the Committee had considered the Protocol and recommended approval of the Protocol. He asked if there were any objections. Mr Bruce (DP) indicated that he had an objection. It was recorded that the DP in the Portfolio Committee on Trade and Industry had objected, but not in the other committees.

In conclusion, the Chair stated that the NCOP would meet to consider the Protocol in the near future.