Southern African Customs Union (SACU); with Minister of Finance & Deputy and Minister of Trade and Industry

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Trade and Industry

11 September 2018
Chairperson: Ms J Fubbs; Ms T Tobias (ANC)
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Meeting Summary

The Standing Committee on Finance and the Portfolio Committee on Trade and Industry met jointly for a briefing by the Ministers of Finance and Trade & Industry, as well as the Deputy Minister of Finance, on the Southern African Customs Union (SACU).

The Minister of Trade and Industry, highlighted that the Southern African Customs Union, established in 1910, is the oldest customs union which initially served British colonial interests and, after 1948, the interests of the apartheid regime. South Africa initiated re-negotiations in 1994, which were concluded in 2002 and thereby ushering in a new SACU Agreement which entered into force in 2004. The new 2002 Agreement democratised relations between SA and Botswana, Eswatini, Lesotho and Namibia (BELN), and established a Council of Ministers as highest decision-making body where decisions are taken by consensus. In 2011, a SACU Summit was established to provide strategic guidance. It retains the common external tariff (CET) for goods imported into the common SACU market. The key elements of the 2002 Agreement include: consensus based decision making; establishment of SACU Institutions (Council of Ministers, Commission, SACU Summit (in 2011), Tariff Board, SACU Tribunal, SACU Secretariat); a revenue sharing formula (RSF) that compensates for the adverse effects of belonging to a customs union (Industrial polarisation, price raising effects and trade diversion); as well as the creation of a development component. The Agreement also established a common negotiating mechanism.

The Minister of Finance spoke about finance matters in relation to SACU. He highlighted the SACU revenue sharing formula. The formula consists of: a customs component which is distributed based on member states’ share of intra-SACU imports; an excise component which is based on shares of SACU GDP ratios; and the development component, evenly distributed amongst member states with a small adjustment for per capita GDP. SACU revenue distributions towards BELN have risen significantly across the evolution of the SACU Agreement. Since the inclusion of Namibia into the Customs Union in 1990, the average revenue shares of the BELN has risen from 38 percent during the period 1991/92 to 2004/05 (1969 Agreement) to 54 percent for the 2005/06 to 2018/19 period (2002 Agreement). On revenue performance, compared with 2017 budget estimates, SA’s projected payments have been revised down by R14.1 billion in 2018/2019 and R19.8 billion in 2019/2020. The main drivers of lowered budget estimates were shrinking common revenue pools due to poor economic climate that impacts trade and results in lower revenue collections.

Differences in policy perspectives were evident in approaches to tariff setting. SA views tariffs as instruments of industrial policy while tariffs are a major source of government revenue for others. While rebates may be employed effectively to promote industrialization, they also result in revenue foregone for which additional compensation is sought. Differences arise when one member proposes lower tariffs to import goods from cheapest sources globally, and this undermines the industry of another member. In light of these policy differences, the process to establish SACU institutions is constrained. Two core challenges remain unresolved in SACU, these being: the development of common policies and priorities among countries that exhibit disparities in economic size, population, levels of economic, legislative and institutional development and; an effective decision-making procedure that takes proper account of differences in economic impacts and population across SACU. The 2002 SACU Agreement has not placed SACU on a developmental trajectory. Although the 2002 SACU Agreement established a development component as one of the components of the revenue sharing formula, this agreement has not yielded the anticipated developmental results. The development component is not earmarked for developmental purposes, but has instead been integrated into the recipient countries’ revenues. In light of the aforesaid, SA advocates for a developmental approach to regional integration in all economic integration initiatives in Africa. The 2002 Agreement does not contain enabling provisions to facilitate implementation of the development programme and thus necessitates a review.

Members noted that one of SACU’s objectives was to improve the movement of goods from SA to neighbouring countries. In light of this, what was being done to address time and cost-related trade inefficiencies? Also, SA’s declining revenue share was not a new issue. Why had it taken so long to get to the point of having a review, given that SA was contributing the most and benefiting the least from the arrangement? They urged the Committees to support the two ministries in their effort to transforming the SACU. National interest should take precedence. They pointed out that the difference between what SA puts in and what it takes out of the SACU arrangement was quite significant. Was it possible that other member states could spruce up their revenue raising efforts to equal the contribution of SA? Tariffs must be used as a tool for industrialisation. SACU must be reviewed and the Ministers’ efforts should be fully supported.

Report on the review of the 2002 SACU Agreement

The Committees, having considered the subject of the review of the 2002 SACU agreement, and briefed by the Ministers of Trade & Industry and of Finance, noted that the said Agreement was currently undergoing a review and needed to be transformed to implement a developmental integration approach that seeks to promote industrialisation and economic diversification of SACU economies. The Committees therefore resolved that the Ministers should undertake identified aspects during their engagements with SACU.

The Report on the review of the 2002 SACU Agreement was adopted by the two Committees separately.

The Committees recommended that the National Assembly adopt the said resolution. 
 

Meeting report

Ms Fubbs welcomed everyone and stated that the briefing’s subject matter was an area of mutual interest and involvement for the two Committees.

Briefing by the Ministers of Trade & Industry and Finance
Dr Rob Davies, Minister of Trade and Industry, highlighted that the Southern African Customs Union (SACU), established in 1910, is the oldest customs union which initially served British colonial interests and, after 1948, the interests of the apartheid regime. South Africa initiated re-negotiations in 1994, which were concluded in 2002 and thereby ushering in a new SACU Agreement which entered into force in 2004. The new 2002 Agreement democratised relations between SA and Botswana, Eswatini, Lesotho and Namibia (BELN), and established a Council of Ministers as the highest decision-making body where decisions are taken by consensus. In 2011, a SACU Summit was established to provide strategic guidance. It retains the common external tariff (CET) for goods imported into the common SACU market. The key elements of the 2002 Agreement include: consensus based decision making; establishment of SACU Institutions (Council of Ministers, Commission, SACU Summit (in 2011), Tariff Board, SACU Tribunal, SACU Secretariat); a revenue sharing formula (RSF) that compensates for the adverse effects of belonging to a customs union (Industrial polarisation, price raising effects and trade diversion); as well as the creation of a development component. The Agreement also established a common negotiating mechanism.

Timeline of events since implementation of 2002 Agreement
Since implementation of the Agreement, 2007/08 was the period in which divisions began to surface over economic partnership agreement (EPA) negotiations and declines in SACU revenues as a consequence of the global financial crisis. The SACU Summit, in 2011, introduced a five point work programme to: promote cross-border value chains and regional industrial development; review RSF; advance trade facilitation; establish SACU institutions and establish unified engagement in trade negotiations. The 2013 SACU Summit added Trade in services to the work programme resulting in a six point work programme, but member states reached a political impasse over differences in the interpretation and implementation of some provisions of the 6-Point Plan. 2013 to 2017 was an impasse, following which a consensus to review some aspects of the Agreement was reached during the 2017 SACU Summit.
 
Mr Nhlanhla Nene, Minister of Finance, spoke about finance matters in relation to SACU. He highlighted the SACU revenue sharing formula. The formula consists of: a customs component which is distributed based on member states’ share of intra-SACU imports; an excise component which is based on shares of SACU GDP ratios; and the development component, evenly distributed amongst member states with a small adjustment for per capita GDP. SACU revenue distributions towards BELN have risen significantly across the evolution of the SACU Agreement. Since the inclusion of Namibia into the Customs Union in 1990, the average revenue shares of the BELN has risen from 38 percent during the period 1991/92 to 2004/05 (1969 Agreement) to 54 % for the 2005/06 to 2018/19 period (2002 Agreement). On revenue performance, compared with 2017 budget estimates, SA’s projected payments have been revised down by R14.1 billion in 2018/2019 and R19.8 billion in 2019/2020. The main drivers of lowered budget estimates were shrinking common revenue pools due to poor economic climate that impacts trade and results in lower revenue collections.

The current arrangement had the Minister of Finance of SA continuing to set excise duties on behalf of SACU. SA maintains its status as the manager of the SACU Common Revenue Pool – customs and excise revenue collected in the customs union.

Dr Davies highlighted the customs union’s architecture on tariff setting. The 2002 SACU Agreement provides for establishment of a Tariff Board and five National Bodies that make recommendations to the Tariff Board. Decision-making on tariffs is on the basis of consensus by Council that meets quarterly. The International Trade and Administration Commission (ITAC) is the interim Tariff Board for SACU. A study undertaken by SACU had found that the architecture for tariff setting is not suitable as it may disable tariffs as an industrial policy tool; an may result in inefficient decision-making due to the number of institutions involved in tariff setting. This called for the need to revise the current architecture entailed in the 2002 Agreement and find a suitable architecture that will preserve tariffs as instruments for industrial development. This was critical in the context of current developments in global trade.

Decision-making is currently an issue of discussion in SACU. Currently, ITAC is the Interim SACU Tariff Board and makes recommendations to the SA Minister of Trade and Industry. The current process, which could be further streamlined, provides for BELN participation in the investigations and their submissions taken into account in making recommendations. SACU will need to find a suitable decision-making mechanism that does not disable the effective use of tariffs as an industrial policy tool. The level of ambition on tariff setting will depend on the discussion on the review of the revenue sharing arrangement.

Industrial Development
The 2002 SACU Agreement has enabling provisions for development of common policies and institutions.
Key areas for common policy include industrial and competition policy, along with cooperation in agriculture. The
Agreement also provides for the development of similar legislation on customs and excise duties. While SACU is discussing an approach to industrial development, the Southern Africa Development Community (SADC) adopted the SADC Industrialisations Strategy that adopts a pragmatic approach centred on cooperation. SACU reached consensus to focus on cooperation with a view to promote the development of regional value-chains using the SADC Industrialisation Strategy as a basis. Work in the area of regional industrialisation continues to identify the public policy interventions and tools required to promote industrial development and regional value-chains across the region. SACU has prioritised the following sectors for the development of regional value chains and cross-border collaboration: agro-processing; fisheries; forestry; textiles and garments; leather and leather products; mineral beneficiation); pharmaceuticals and chemicals; meat; and automotive.

Emerging Policy Debates in SACU
Differences in policy perspectives were evident in approaches to tariff setting. SA views tariffs as instruments of industrial policy while tariffs are a major source of government revenue for others. While rebates may be employed effectively to promote industrialisation, they also result in revenue foregone for which additional compensation is sought. Differences arise when one member proposes lower tariffs to import goods from cheapest sources globally, and this undermines the industry of another member. In light of these policy differences, the process to establish SACU institutions is constrained. Two core challenges remain unresolved in SACU, these being: the development of common policies and priorities among countries that exhibit disparities in economic size, population, levels of economic, legislative and institutional development and; an effective decision-making procedure that takes proper account of differences in economic impacts and population across SACU. The 2002 SACU Agreement has not placed SACU on a developmental trajectory. Although the 2002 SACU Agreement established a development component as one of the components of the revenue sharing formula, this agreement has not yielded the anticipated developmental results. The development component is not earmarked for developmental purposes, but has instead been integrated into the recipient countries’ revenues. In light of the aforesaid, SA advocates for a developmental approach to regional integration in all economic integration initiatives in Africa. The 2002 Agreement does not contain enabling provisions to facilitate implementation of the development programme and thus necessitates a review.

Discussion
Ms Tobias appreciated the presentation and invited clarity seeking questions. Members had to be brief as the Committees were pressed for time owing to a plenary session afterwards.

Mr D Macpherson (DA) noted that one of SACU’s objectives was to improve the movement of goods from SA to neighbouring countries. In light of this, what was being done to address time and cost-related trade inefficiencies? Also, SA’s declining revenue share was not a new issue. Why had it taken so long to get to the point of having a review, given that SA was contributing the most and benefiting the least from the arrangement?

Mr D Mahlobo (ANC) urged the Committees to support the two ministries in their effort to transforming the SACU. National interest should take precedence.

Mr A Lees (DA) said the difference between what SA puts in and what it takes out of the SACU arrangement was quite significant. Was it possible that other member states could spruce up their revenue raising efforts to equal the contribution of SA?

Mr B Radebe (ANC) said tariffs must be used as a tool for industrialisation. SACU must be reviewed and the Ministers’ efforts should be fully supported.

Ms Tobias asked if the 2016 overpayments had been refunded to the fiscus. She strongly recommended that there be a tribunal to break impasses as they arise during SACU negotiations.

Minister Nene said very little progress had been made despite efforts and ongoing negotiations to review SACU’s revenue sharing formula. The establishment of a development fund would be the solution to spruce up revenue raising capacity of other member states. The executive would indeed appreciate a considered mandate from Parliament.

Minister Davies noted that Members were in agreement that SACU’s revenue sharing mechanism ought to be reviewed. There currently was a deadlock in negotiations and thus the need for a meeting of minds to deliver on what was possible, with the support of Parliament. All member states could benefit from greater efficiency within SACU.

Report of the Portfolio Committee on Trade and Industry on the review of the 2002 SACU Agreement
Ms Fubbs noted that Members were in agreement that the 2002 SACU Agreement architecture needed to be reviewed. Therefore, having considered the subject of the review of the 2002 SACU agreement, and briefed by the Ministers of Trade & Industry and of Finance, the Committee notes that the said Agreement was currently undergoing a review and needed to be transformed to implement a developmental integration approach that seeks to promote industrialisation and economic diversification of SACU economies. The Committee therefore resolves that the Ministers should undertake identified aspects during their engagements with SACU. The Committee recommended that the National Assembly adopt the said resolution. 

Mr Fubbs put the Report up for adoption by the Portfolio Committee on Trade and Industry Members.

The Report of the Portfolio Committee on Trade and Industry on the review of the 2002 SACU Agreement was adopted.
 
Report of the Standing Committee on Finance on the review of the 2002 SACU Agreement
Ms Tobias put the Report up for adoption by the Standing Committee on Finance Members.

The Report was adopted.

Ms Tobias appreciated the engagements and thanked everyone for their inputs.

The meeting was adjourned.


 

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