Southern African Customs Union (SACU) & revenue sharing formula: status report

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Trade and Industry

29 July 2015
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department on Trade and Industry (DTI) said the Southern African Customs Union (SACU) was established in 1910 to serve British colonial interests and, after 1948, the interests of the apartheid regime. In 1994, South Africa initiated re-negotiations and the new SACU Agreement entered into force in 2004. The new Agreement democratised relations between South Africa and Botswana, Lesotho, Namibia and Swaziland (BLNS). It retained the common external tariff (CET) for imported goods and the revenue sharing formula (RSF) that allocated revenue in favour of BLNS from a common pool made up of customs and excise duties. While SA contributed around 98% to the pool, BLNS received around 55% of the proceeds. Despite good intentions embedded in the Agreement, several challenges have emerged. In 2011, President Zuma convened a Summit to address serious divergences among member states and volatility in customs revenue, on which BLNS was highly dependent. The agreed to five point plan was:

-Review the Revenue Sharing Arrangement (RSA);

-Prioritise work on regional cross-border industrial development;

-Work to promote trade facilitation border measures;

-Develop SACU institutions; and

-Strengthen unified engagement in trade negotiations.

The next steps for SACU included a re-assessment on how best to advance development and integration in SACU.

The Trade Law Centre said the common external tariff CET was informed by South Africa’s industrial policy, whereas the generation of revenue was the main objective for the smaller countries. SACU had a single customs territory where goods moved freely among member states with no duties payable and border procedures dealt with, for example animal and plant health issues. This was very important from a trade facilitation and customs management perspective specifically because smaller member states have given up trade policy space and therefore negotiated trade agreements with third parties collectively where they have to decide on the common trade/tariff policy, how to share customs revenue and manage their collective affairs.

SACU was also an excise union where excise taxes were paid into the common revenue pool to be shared according to the RSF in the 2002 Agreement. Recently, some member states have introduced domestic levies on alcohol and tobacco products and it raised questions whether it was in line with the WTO Agreement. All countries, except Botswana belonged to the Common Monetary Area (CMA). There were bilateral agreements between South Africa and each of Lesotho, Swaziland and Namibia to govern the CMA. It was a multi-currency arrangement where the Rand was the anchor currency. There was no formal arrangement for common interest rates, but the central banks of the smaller countries synchronised with changes in South Africa’s repurchase rate and countries effectively implemented South Africa’s monetary policy. Botswana was not part of CMA, but its currency (Pula) exchange rate determination followed a crawling peg arrangement which meant it was being adjusted according to changes in a basket of currencies, with the Rand being weighted heavily in the basket. The member states in SACU were possibly the most integrated sub-region in Africa and Botswana and Namibia were among South Africa’s top ten export destinations. She asked members to consider the following issues should SACU be disbanded:

  • All SACU member states belonged to SADC and they could trade under the SADC Free Trade Area, but what would happen to the SACU tariff regime in SADC? 
  • What would happen to other bilateral agreements SACU member states had?
  • WTO matters
  • In light of the revenue needs of BLNS, they might diversify their import sources significantly.
  • What are the true costs and benefits of SACU?

DTI said the objectives of the WTO TFA Mandate were to expedite movement, release and clearance of goods, improve cooperation between customs/other authorities and to enhance technical assistance to build capacity. The three categories were:

Category A: commitments that a Developing Country member or Least Developed Country (LDC) member designated for implementation upon entry into force of the TFA, or in the case of a LDC within a year after entry into force of the TFA

Category B: commitments that a Developing Country member or LDC member designated for implementation on a date after transitional period of time after the entry into force of the TFA

Category C: commitments that a Developing Country member or LDC member designated for implementation on a date after a transitional period of time following the entry into force of the TFA and requiring the acquisition of implementation capacity through the provision of assistance and support for capacity building

The General Council adopted the TFA Protocol in November 2014 and opened it for acceptance. The TFA would be enforced once two thirds of all WTO members have ratified the Agreement. The countries that have notified acceptance of the Trade Facilitation Protocol to date were Hong Kong, Singapore, the United States of America, Mauritius, Malaysia, Japan, Australia and Botswana. South Africa emphasised that consideration should be given to the impact of the TFA on the regional integration processes in Africa and was working on this in the African Union (AU). An inter-departmental working group had been established to consider implementation of the TFA and this working group had finalised South Africa’s Category A commitments, as well as the terms of reference for the establishment of the National Trade Facilitation Committee. The Department was awaiting legal advice from the Department of Justice and Constitutional Development on the classification of the Protocol of Amendment to incorporate the TFA into the WTO Agreement. A Cabinet memo was being prepared to establish the National Committee and to obtain approval for South Africa’s Category A commitments.

The Committee said the costs and benefits of SACU needed to be assessed, because there had been no fruitful outcomes from the years of negotiating. The revenue sharing formula (RSF) has always been a problem and countries had been made aware that revenue should not be used for other costs, but should be used for industrialisation and industrial development and that did not happen. Members questioned whether South Africa, in light of the country’s investment, “was getting value for money”. It was also questioned how South Africa was being regarded by other African states since SACU was founded on the principles of colonialism and whether SACU should be disbanded in favour of the Southern African Development Community (SADC). 

A Committee Member referred to Swaziland and asked whether the human rights issue was considered when deciding which countries to trade with. In terms of regional stability, Swaziland could become a problem because there was resistance against the monarchy. Another member suggested that there should be certain conditionalities on how the revenue should be utilised, and also proposed a common minimum wage so that there was not such an incentive for South African businesses to locate to other countries and then trade tariff free with South Africa. 

Meeting report

The Chairperson welcomed everyone and the agenda of the meeting was adopted.

South Africa and the Southern African Customs Union

Ms Xolelwa Mlumbi-Peter, Acting Director-General: International Trade and Economic Development Division, DTI, said the Southern African Customs Union (SACU) was the world’s oldest customs union. It was established in 1910 to serve British colonial interests and, after 1948, the interests of the apartheid regime. In 1994, South Africa initiated re-negotiations. The negotiations concluded in 2002 and the new SACU Agreement entered into force in 2004. The new Agreement democratised relations between South Africa and Botswana, Lesotho, Namibia and Swaziland (BLNS). It established a Council of Ministers as the highest decision-making body where decisions were taken by consensus. It retained the common external tariff (CET) for goods imported into the common SACU market. The revenue sharing formula (RSF) that allocated revenue in favour of BLNS from a common pool made up of customs and excise duties was also retained. While SA contributed around 98% to the pool, BLNS received around 55% of the proceeds. For 2015/16, for example, total disbursement would be approximately R84 billion, of which BLNS would receive R46 billion. This was seen as ‘compensation’ for BLNS’ lack of policy discretion to determine tariffs and for the price raising effects of being subjected to tariffs that primarily protected the South African industry.

South Africa remained by far the most industrialised economy in SACU. The Agreement also had enabling provisions for development of common policies and institutions. Key areas for common policies included industrial and competition policy, along with cooperation in agriculture. Enabling provisions also provided for the establishment of National Bodies and a SACU Tariff Board. The SACU Tariff Board made recommendations to the Council on tariffs; trade remedies (anti-dumping, countervailing and safeguard duties) and rebates. Until these institutions would be established, functions were delegated to the International Trade Administration Commission (ITAC) in South Africa.

Ms Mlumbi-Peter said that despite good intentions embedded in the Agreement, several challenges have emerged. In 2011, President Zuma convened a Summit to address two challenges that threatened the Union:

  • Serious divergences among Members during the Economic Partnership Agreement (EPA) negotiations with the European Union; and
  • Volatility in customs revenue, on which BLNS are highly dependent – fluctuations in revenue shares with serious implications during the global economic downturn.

The Summit laid a basis for a process to move SACU beyond an arrangement held together only by the CET and the revenue sharing arrangement (RSA), and more firmly towards a deeper development and integration project.

She gave an overview of the principles that informed the work programme and also highlighted the agreed to five point plan of SACU that read:

  • Review the Revenue Sharing Arrangement (RSA);
  • Prioritise work on regional cross-border industrial development;
  • Work to promote trade facilitation border measures;
  • Develop SACU institutions; and
  • Strengthen unified engagement in trade negotiations.

For South Africa, the key issue was the development of programmes and projects that promoted real economic integration with key focus on industrial development, trade facilitation and infrastructure development. Progress on the five point plan was uneven, because there was progress on trade facilitation, there was greater unity of purpose in negotiations with third parties, but there was little meaningful progress on the review of the RSA. Without changes to the RSA, work on cross-border industrial and infrastructure development lacked adequate financial support. South Africa viewed tariffs as instruments of industrial policy while tariffs were a major source of government revenue for others. Differences arose when one member state proposed lower tariffs to import goods from cheapest sources globally, and this undermined the industry of another member. Without coordinated approach to industrial and trade policy, establishment of the SACU Tariff Board to co-determine tariffs posed risks to effective decision-making for industrialisation across SACU and consensus decision-making could become a recipe for gridlock. 

Two core challenges remained unresolved in SACU:

  • The development of common policies and priorities among countries that exhibit disparities in economic size, population and levels of economic, legislative and institutional development
  • An effective decision-making procedure that takes proper account of differences in economic impacts and populations across SACU

Ms Mlumbi-Peter gave an overview of the role of the Council, the role of the SACU Summit and issues that had been elevated to the heads of states. The next steps for SACU included a re-assessment on how best to advance development and integration in SACU. An open discussion was required among SACU members and the development of a common approach to trade and industrial policy was most urgent and was the prerequisite for establishing effective SACU institutions in future. A discussion on appropriate decision-making procedures on sensitive trade and industry matters that took into account SACU-wide impacts was required. Progress across all pillars of the five point plan remained an important option to advance development integration in SACU.   

 (See attached presentation)

SACU: Key Issues and Impact on Regional Integration

Ms Trudi Hartzenberg, Executive Director, Trade Law Centre, said the presentation different perspectives from different stakeholders. The common external tariff CET was informed by South Africa’s industrial policy, whereas the generation of revenue was the main objective for the smaller countries. SACU had a single customs territory where goods moved freely among member states with no duties payable and border procedures dealt with, for example animal and plant health issues. This was very important from a trade facilitation and customs management perspective specifically because smaller member states have given up trade policy space and therefore negotiated trade agreements with third parties collectively where they have to decide on the common trade/tariff policy, how to share customs revenue and manage their collective affairs.

SACU was also an excise union where excise taxes were paid into the common revenue pool to be shared according to the RSF in the 2002 Agreement. Recently, some member states have introduced domestic levies on alcohol and tobacco products and it raised questions whether it was in line with the WTO Agreement. All countries, except Botswana belonged to the Common Monetary Area (CMA) and this had monetary policy and exchange rate implications. There were bilateral agreements between South Africa and each of Lesotho, Swaziland and Namibia to govern the CMA. It was a multi-currency arrangement where the Rand was the anchor currency. There was no formal arrangement for common interest rates, but the central banks of the smaller countries synchronised with changes in South Africa’s repurchase rate and countries effectively implemented South Africa’s monetary policy. Botswana was not part of CMA, but its currency (Pula) exchange rate determination followed a crawling peg arrangement which meant it was being adjusted according to changes in a basket of currencies, with the Rand being weighted heavily in the basket. The member states in SACU were possibly the most integrated sub-region in Africa and Botswana and Namibia were among South Africa’s top ten export destinations. Linkages had been made between trade in goods and trade in services.

Ms Hartzenberg highlighted the intra-governmental perspectives on SACU and said South Africa was committed to the implementation of the five point plan and the establishment of the institutional architecture of SACU. Various issues needed to be considered such as what would happen when National Bodies (equivalent of ITAC) were established by Botswana, Namibia, Lesotho and Swaziland, the role of ITAC and renegotiating the RSF. She asked members to consider the following issues should SACU be disbanded:

  • All SACU member states belonged to SADC and they could trade under the SADC Free Trade Area, but what would happen to the SACU tariff regime in SADC? 
  • What would happen to other bilateral agreements SACU member states had?
  • WTO matters
  • In light of the revenue needs of BLNS, they might diversify their import sources significantly.
  • What are the true costs and benefits of SACU?

Discussion

Mr B Mkongi (ANC) said the costs and benefits of SACU needed to be assessed, because there had been no fruitful outcomes from the years of negotiating. The revenue sharing formula had always been a problem and countries had been made aware that revenue should not be used for other costs, but should be used for industrialisation and industrial development and that did not happen. South Africa should not be a ‘God’ to these countries in the same way the apartheid regime related to them, because it would mean the dependency syndrome these counties had on South Africa would be perpetuated and there would be no reciprocal benefits. Assessment of the costs of benefits of SACU to South Africa would give a concrete platform to decide whether to disband SACU and move under SADC. If independent agreements could be made with the WTO on tariffs it meant the same could be done in the free trade area of SADC.

Ms Mlumbi-Peter replied that the revenue sharing formula had been part of the discussions in SACUs five point plan and it centred on how SACU as a resource could be used to implement the regional integration agenda in terms of the work programme that had been agreed to by all member states. It was complex discussions given the dependency some of the member states had on the revenue generated by SACU. Negotiations needed to be sensitive to the needs of the various countries, but should also balance the needs of South Africa. Discussions had also been elevated to heads of states to find a working formula for SACU that would contribute to the interests of all the member states. SACU was a deeper level of integration in terms of the relationship between the customs union, common external tariff and common market. This relationship had its complexities because the asymmetry of the member states had to be taken into account. There were provisions in the Agreement that were developmental in nature and to the benefit of BLNS in terms of industry protection to give them space to be able to develop their industries.

Ms Hartzenberg said the asymmetry and South Africa’s role were a complex issue, because the South African economy dwarfed the smaller countries completely, but the South African economy had features of a “least developed economy” within the overall economic structure. The country faced its own specific industrial development, reindustrialisation, job creation and broader development challenges. The overall assessment of the true costs and benefits to the country was a complex matter to get to grips with, because it should also be considered to what extent engagement with SACU in terms of trade investment relationships translated into employment benefits for South Africa.

Mr A Williams (ANC) referred to Swaziland which was the only absolute monarchy in the world and ‘where democracy was just a myth’ and asked whether the human rights issue was considered when deciding which countries to trade with. In terms of regional stability, Swaziland could become a problem because there was resistance against the monarchy.

Ms Mlumbi-Peter replied that the SACU agreement was a trading goods agreement and there were other avenues to deal with bilateral issues with member states. There were bilateral engagements and structures where matters of concern or matters beyond trade were discussed and resolved and this was done through the Department of International Relations and Cooperation.

Mr N Koornhof (ANC) said SACU was a complex problem because it was in South Africa’s interest not to destabilise the neighbouring countries. He asked if there had never been any assessment done on the costs and benefits of SACU.

Prof C Msimang (IFP) asked, in light of the country’s investment in SACU, whether South Africa was getting value for money. Since all member states of SACU were also member states of SADC, he asked if it would not be better to have one body (SADC) than having two bodies running side by side. He asked how South Africa was being regarded by other African states since SACU was founded on the principles of colonialism.

Ms Mlumbi-Peter replied that it was a complex relationship problem because there was one major industrialising and developing country (South Africa), a less developed country in Lesotho and small and vulnerable economies in terms of Namibia and Swaziland. It was beneficial to South Africa because over 95% of financial flows in SACU involved South Africa either as a source or destination. Approximately 90% of imports for Swaziland and Lesotho came from South Africa and there were very close commercial ties with BLNS that benefited South Africa. SACU contributed to South Africa’s developmental and industrial objectives. There was realisation in the region that South Africa was the more developed country in the arrangement and there was a strategic role the country needed to play in support and in partnership with the countries concerned. In some cases South Africa would be expected to do more, but most of the asymmetries were accommodated for in the Agreement. The revenue sharing formula had a development component and some of the provisions recognised that there would have to be some measures BLNS was able to implement in order to boost their own industrial development. There was a process that tried to shape industrial development and it focused on identifying complementarities rather than looking at areas competition so that there were mutual benefits for all countries involved.

Ms Hartzenberg said it had also been reported in the media that South Africa did not push strongly enough to give effect to the SACU Agreement. It should be kept in mind that if the decision making of the SACU Tariff Board was considered, there was a risk that consensus decision making might lead to the four smaller countries voting against South Africa’s position on industrial development due to the differences in objectives. The ITAC arrangement was particularly important for South Arica, because the country was able to articulate particular industrial development priorities very clearly.

The Chairperson said a follow-up engagement would need to happen either in two months time or early next year.

Mr G Hill-Lewis (DA) the revenue need of the smaller countries did not diminish South Africa’s need for revenue. It was good to be a generous country, but when an absolute monarch indulged in every luxury and bought the most expensive vehicles on an almost monthly basis, it was irksome and there should be conditionalities. A common minimum wage across the countries should be a condition of trade, because manufacturing jobs had been moving to these smaller countries in recent years. It did not seem right that South Africa significantly subsidised the national budgets of those countries as well as exporting jobs to those countries. One of the deeper integrations needed in SACU was the common minimum wage so that there was not such an incentive for South African businesses to locate to those counties and then trade tariff free with South Africa.

The Chairperson said it was a broad statement that should be tackled at the follow-up engagements where National Treasury and the South African revenue Services would also give input.

(See attached presentation)

World Trade Organisation (WTO) Trade Facilitation Agreement (TFA)

Ms Niki Kruger, Chief Director: Trade Relations, International Trade and Economic Development Division, DTI, said the objectives of the WTO Trade Facilitation Mandate were to expedite movement, release and clearance of goods, improve cooperation between customs/other authorities and to enhance technical assistance to build capacity. She gave an overview of the provisions in the TFA (slide 5) and the three categories that were:

Category A: commitments that a Developing Country member or Least Developed Country (LDC) member designated for implementation upon entry into force of the TFA, or in the case of a LDC within a year after entry into force of the TFA

Category B: commitments that a Developing Country member or LDC member designated for implementation on a date after transitional period of time after the entry into force of the TFA

Category C: commitments that a Developing Country member or LDC member designated for implementation on a date after a transitional period of time following the entry into force of the TFA and requiring the acquisition of implementation capacity through the provision of assistance and support for capacity building

If a Developing Country or LDC considered itself to experience difficulties to implement its commitments by the definitive dates, it should notify the Trade Facilitation Committee. Developing Countries and LDC members could shift commitments between categories B and C with an obligation to provide information on assistance required to build capacity.

Ms Kruger said the TFA concluded in Bali in December 2013 and preparatory work started in January 2014. The General Council adopted the Protocol in November 2014 and opened it for acceptance. The TFA would be enforced once two thirds of all WTO members have ratified the Agreement. The countries that have notified acceptance of the Trade Facilitation Protocol to date were Hong Kong, Singapore, the United States of America, Mauritius, Malaysia, Japan, Australia and Botswana.

South Africa emphasised that consideration should be given to the impact of the TFA on the regional integration processes in Africa and was working on this in the African Union (AU). The country also worked closely with other SACU member states in terms of co-ordinating respective commitments. An inter-departmental working group had been established to consider implementation of the TFA and this working group had finalised South Africa’s Category A commitments, as well as the terms of reference for the establishment of the National Trade Facilitation Committee. The Department was awaiting legal advice from the Department of Justice and Constitutional Development on the classification of the Protocol of Amendment to incorporate the TFA into the WTO Agreement. A Cabinet memo was being prepared to establish the National Committee and to obtain approval for South Africa’s Category A commitments.

(See attached presentation)

Discussion

Mr Hill-Lewis asked when South Africa would sign the Trade Facilitation Agreement protocol.

Ms Kruger replied that the Category A Commitments had been finalised and the Department was in the process of getting a legal opinion from the Department of Justice on whether a ratification process was needed. As soon as that opinion had been received, the Category A Commitments Proposal as well as a proposal for the establishment of the National Committee would be submitted to Cabinet. Cabinet would be approached in August or September 2015 and after that there would be more clarity on the process.

The Chairperson noted that the Committee Researcher also collated some of the information that had come from the Department and it had been distributed to Members. South Africa was working hard to ensure that the Ministerial meeting in Kenya would lead to substantive advancements in the negotiations and did not compromise the country’s priorities.

 The Chairperson thanked everyone and the meeting was adjourned.

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