Minister on implementation of African Continental Free Trade Agreement; Committee Report on DTI performance

Meeting report

Opening remarks
Chairperson Nkosi opened the meeting and welcomed Members.

The Secretaries of the Trade and Industry Portfolio Committee and the International Relations Portfolio Committee confirmed attendance of Members of the Committee.

The Chairperson of the Portfolio Committee on International Relations, explained that, owing to her current condition, the whip of the Committee would facilitate the meeting on her behalf, where necessary.

Chairperson Nkosi welcomed the Members and everyone on the platform, with a special welcome to the Minister of Trade, Industry and Competition.

Briefing by the Minister of Trade, Industry and Competition
Minister Ebrahim Patel thanked the Members for the opportunity to present to the Portfolio Committees on Trade and Industry as well as International Relations. He noted that he was accompanied by a team from the Department of Trade, Industry and Competition. He made special reference to the two Deputy Directors-General, Xavier Carrim, DDG Trade Policy, Negotiations and Cooperation and Lerato Mataboge, DDG Export Development, Promotion and Outward Investments.

Minister Patel noted that he had a PowerPoint presentation to which he would be speaking. The Minister began with a series of statistics on Africa’s place in the world.
• Africa has 17% of the world’s population
• 3% of the world’s GDP.
• 3% of the world’s trade.
• 2% of the world’s manufacturing output.
• And only 1% of the world’s steel production.

It was his belief that policy had to change that reality. The low level of intra-African trade was a result of colonialism issues that had not been resolved. Intra-African trade was small but he was pleased to note that the trade was in value-added products which created jobs.

Over three-quarters of intra-African trade took place within regional trading blocs. In 2019, around 26% of SA’s global exports were destined for the rest of Africa.  80% of those exports were to the Southern African Development Community (SADC) countries, so the Minister believed that the AfCFTA would create opportunities to expand SA’s African trade beyond SADC to East, Central, West and North Africa and a massive market of 1.2 billion Africans.

54 African countries had signed the agreement and 36 African countries had ratified it through their domestic processes, including South Africa. Eritrea was the only African state that was not part of the AfCFTA treaty. Based on progress made, the African Union Summit in December 2020, chaired by President Ramaphosa, had provided the legal basis for the operationalisation and the commencement of preferential trading under the AfCFTA on 1 January 2021.
Risks in trading meant that industry partnerships had to address competitiveness challenges and the Master Plan framework would be used for that purpose. Trans-shipment, where one African country passes imported goods off as produced locally, in order to get the trade benefit from another African country, was a real risk as it could destroy jobs in the process. That was the reason for requiring effective capacity to monitor and enforce Rules of Origin at ports of entry.

Provincial and District-municipality level plans were to be put into place, assisted by a template, to identify both the opportunities for firms in their area and the local/provincial government contributions to “District
Export Plans”.

The Minister stated that the work programme for 2021/22 involved:
• Monitoring the state-of-readiness of trading blocs based on their offers and finalising bilateral trade offers in respect of agreed rules of origin.
• Negotiations on remaining rules of origin would be completed.
• Offers for priority sector trade in services would be finalised.
• Offers for sector trade in services would be pursued.
• Timeframes for implementation of protocols on investment, competition and intellectual property matters, would be finalised with the Council of Ministers.
• Implementation of existing agreements on customs administration would be rolled out over the course of 2021 on a country by country basis. SARS had completed its work in that regard.
Discussion  
Acting Chairperson Mpanza was requested to facilitate the discussion.

Acting Chairperson Mpanza thanked the Minister for the very informative presentation that gave an indication of hope that Africa as a continent was, at long last, going to be a significant role player in world trade. It was good news for Africans to be able to trade with one another and to contribute to a better world. It was a flagship project for the African Union and a very exciting opportunity for the country. He requested Members to be aware of time constraints in engaging in the discussion. It was not the end; it was going to be work-in-progress for both Committees.

Ms J Hermans (ANC) thanked the Minister for the thorough briefing. It excited her to see the progress. Massive infrastructure would be needed to move goods across the continent from one country to another. Previous presentations on internal treaties had shown how there was massive congestion of trucks at most border posts. There was a need for an infrastructure programme at inter-continental level. Was there something like that in place? If not, what plans should be made? There was a need for rail, border development and roads to move goods across the continent.

Mr M Cuthbert (DA) stated that it was a useful presentation. He complimented the AfCFTA secretariat on the considerable work done. It bodes well for SA. The country should take every opportunity to liberalise trade and that was a great step forward in terms of liberalising trade.

Mr Cuthbert asked what SA’s overall trade strategy was and what underpinned the strategy. In many respects SA promoted protectionism and disallowed creative disruption and lacked liberalisation. However, the country had now signed up and ratified the AfCFTA, but SA was not willing to pursue bilateral trade agreements with BRICS partners. What were the Minister’s thoughts on that and could he inform Members as to what his strategy was in dealing with that? During a presentation by the Director-General of dtic, he had suggested a bilateral trade agreement with BRICS partners, especially China, particularly in respect of agriculture. It had been dismissed off-hand by the DG who had told him that Mr Carim would explain what the hesitations were. What could be expected in terms of BRICS relations going forward and what was the strategy that was underpinning trade relations? As far as he understood, the last time that the country’s trade policy was updated was in 2012 and prior to that the document was introduced in 2008, although he stood to be corrected on that point.
 
Lastly, he stated that it was important to have a guiding light and to know what the objectives were that the country wanted to achieve. The Minister had a well-established industrial strategy and he would like to know what the trade strategy was as it seemed rather vague. He did not believe that the purview of this meeting would allow for such a discussion but he asked if a separate meeting could be set up to discuss the trade strategy in more broad terms. He wanted to know what dtic was doing to update the trade policy to make sure that it had an impact on job creation and boosting trade.

Mr S Mbuyane (ANC) stated that the presentation had been an eye-opener. SA consumed what it did not produce. He believed that SA needed a business strategy because SA exported a lot of raw material. What was in place to deal with that?

He asked about the AMOT (African Ministers of Trade) structure at AfCFTA. What was the intention of the structure and what about the new Council of Ministers? Were the structures going to be integrated into one? There were currently a whole lot of structures and that was confusing. He heard that the Secretary-General of AfCFTA was from SA which made it important to ensure that the structures worked.

Mr Mbuyane asked whether the 31% of Clothing, Textiles, Footwear and Leather was produced in SA or whether it was repackaged goods that had originally come from China.

He asked for clarity on risks and mitigation in the vulnerable sectors such as sugar. Was the infrastructure required in the continent part of SA’s national Recovery Plan? He proposed that the Portfolio Committee have further engagement on the matter.

Ms T Msane (ANC) noted that she had heard a lot on trade and goods but nothing had been said about the free movement of the African people. For goods to move, there had to be free movement of the African people across the continent. The African Union had a Free Movement Protocol but SADC had requested time to look at a few items before joining such a treaty, such as the border post issue. How far had that progressed? SADC drafted a document in 2018 on what it had to address to allow people to move freely. How far was SA and SADC in that process? The movement of people and goods went hand-in-hand. It did not help to have people stuck at border posts while the country was pushing for trade.

She asked about the Infrastructure Development in the African Continent Programme. A meeting had been held earlier in the year which had highlighted a number of issues, such as transportation, electricity, water, services and the lack of synchronisation of rail systems across the continent. How was the continent planning on getting the programme in place in order to quickly and speedily facilitate transportation and electricity systems to assist industry in different countries? SA was experiencing load shedding which was impacting greatly on industrial production in the country. How would the Minister ensure that the AfCFTA would translate into manufacturing and industrial development in the country? Was there a set plan for massive industrialisation in the country? The Minister had spoken of importing and exporting clothing. SA needed to increase its industries.

Ms Msane stated that the Minister might be aware that Africa was experiencing illicit financial flows amounting to $88.6 billion. How was the AfCFTA going to address that and assist in reducing the illicit financial flows on the continent? She had not heard from the Minister how the AfCFTA would address finances. What currency would be used in the AfCFTA?

Raising the issue of the Rules of Origin, she noted that the Minister had mentioned a disturbing set of negotiations in which each country set its own levels of local content. Should there not be a benchmark of a minimum of 50% local content in every country? What if one country wanted to set its local content at 10%? That would take the whole process back.

Ms Msane noted that the AU was currently suffering from capacity deficit. It was not doing a good job in many spheres. It was failing in peace and security, dismally. Lots of structures were failing so how would the AU be successful in ensuring that the AfCFTA considering how many aspects were failing? How were the regional economic communities going to be incorporated so that they conformed to the requirements of AfCFTA.

Rev K Meshoe (ANC) appreciated the informative presentation. He was disappointed to hear that Africa had 17% of the world’s population but only 3% of the world’s GDP. What was being done to correct that? Was there any plan or goal to correct that? It did not bode well for the continent if Africa continued to produce only 3% of the world’s GDP. People did not respect Africa because it seemed that Africans only ate and consumed. Was there a plan or a strategy to contribute more to the world’s GDP ?Trade between African countries covered only 16%/17%. How did the legacy of colonialism impact on intra-African trade? The Minister had mentioned that colonialism was one of the causes.

Rev Meshoe asked what the causes were for the fact that foreign direct investment had plateaued.  Had those funds been redirected to some other country? Were there plans to correct that situation?

He noted that the Minister had tried to explain why SA bought gold and diamonds from other countries. Why was that so? He asked the Minister to elaborate on his brief comment because he could not understand why SA needed to import gold and diamonds. Lastly, SA was selling electricity worth R11 billion to other countries. Were those countries affected by loadshedding? If not, why not? If one knew why they were not affected by load shedding, perhaps that could provide the solution to SA’s load shedding problems.

Mr B Nkosi (ANC) observed that the Agreement was trade intensive. In line with the issue of colonisation: what would the impact of bilateral trade between three African countries be on US, Europe and UK? The involvement of those countries had always been skewed to such an extent that some countries were unable to untangle themselves from such relationships, whether they were beneficial or not.

He asked if the extension and penetration of trade in the continent justified the country extending, or even maintaining, diplomatic relations in the continent? He noted that SA’s presence would be important in ensuring the implementation of the trade agreement.

He asked how the modalities between dtic and DIRCO would work in reporting on the issue. DIRCO was responsible for the political governance of the treaty but the detail, as announced by the Minister, belonged to dtic. How was Parliament going to prevent double reporting in the Annual Reports? He suggested a six-monthly briefing on the AfCFTA as that would prevent duplication and ensure.

Acting Chairperson Mpanza asked about oversight of the AfCFTA. How were the two Departments going to manage reporting? Would there not be double reporting? How were the two Committees going to manage oversight, even if it were an informal structure? The two Committees should consider co-oversight of the AfCFTA.

The Minister thanked Members for their interest and the questions put to him.

He was pleased to inform Ms Hermans that there was a plan in place in respect of infrastructure. He referred her to the Presidential Infrastructure Champions Initiative (PICI), initiated by SA, which brought together Ministers to attract investors to assist in infrastructure. Line Ministers worked with their counterparts across the continent to bring in investments. SA had cross-border projects. For example, the Lesotho Highlands water project. The border post crisis had become urgent as a result of the AfCFTA. The upgrading of the border posts would be the topic of budget discussions, which always meant some give and take, but the importance of improving the border posts had been given some oxygen by the AfCFTA.

The Minister told Mr Cuthbert that the enormous amount of work done in AfCFTA had been done by officials across the continent and the SA officials had played an active role, especially in chairing the work. It had meant a great deal of additional work for the dtic. The new head of the AfCFTA Secretariat was an ex-official of the dtic. The person who had chaired the Negotiating Forum was from the dtic. He himself had chaired the meetings of the Council of Ministers. That meant that a lot more energy and fiscal resources had been put into that area of work despite the financial constraint of the times. It meant that there had been a lot of shifting of person power and resources and he complimented the staff of the dtic on the enormous amount of important work done.

His position was that the trade policy was relatively clear. He was somewhat puzzled by the dissent that it was not clear. Simply put, it was about building local industrial capacity for the SA market and for international trade. There were two views of trade across the world. One was the naïve view which no one held anymore, and that was simply to lower all of a country’s tariffs and open the markets in the hope that industry would grow. The United States, China, all countries had a trade policy that protected certain critical local industries, dependent on the requirements of the country. No country had completely open trade policies.

South Africa’s trade policy was that it was a means of nurturing and supporting industrial development. The key point was to build strong, dynamic firms that were able to build good quality at reasonable prices and with product innovation. How then did the country engage with rest of world? The first point was that trade had to provide mutual benefits and that occurred where there was preferential access to another market. SA had a preferential arrangement with the European Union, a recently-negotiated one with the United Kingdom in the context of Brexit, and one with the United States. SA had Preferential Agreements with developing nations, such as Brazil. Thirdly, there was the Most Favoured Nation (MFN) agreements at World Trade Organisation (WTO) level, e.g. with China and India. MFN agreements meant that SA provided them with access to markets in terms of commitments put to the WTO. For SA, the big focus was on the African continent.  That was where the focus was for SA which had to find value-added exports. One of the best exports was cars. 

The Minister explained how SA had to change its relationship with markets. For example, much was traded with China, and SA had to determine what it wanted in return for the raw materials, etc. that China received from SA. SA had to expand value-added exports. One of the successes was in export of vehicles. On the back of that, the country should do more in other products. He cautioned that a country should not lower tariffs to another country if the other country had larger industries. SA had done that in late 1990s. It had rapidly opened up the market and had consequently lost thousands and thousands of jobs, especially in the clothing sector. SA needed a measured, thoughtful strategy. There had to be careful analysis of which areas would be opened. Entering into a free trade agreement with a country that had massive industrial capability, such as China, would see SA flooded with imported goods and massive job losses and deeper and deeper de-industrialisation.

He had recently been asked: Should SA not just focus on mining and agriculture? That was the route taken by many African countries. Countries following that route had low GDPs. It was the curse of colonialism. Fundamentally, the trade strategy was clear: it was about implementation and maximising opportunities. It required deep engagement with China to ensure that SA would benefit to the maximum.

The Minister informed Mr Mbuyane that the saying “Africa consumes what it didn’t produce and produced what it didn’t consume” applied to the continent as a whole. However, SA, Morocco, Egypt and a few other countries were beyond that point. They had more developed industrial structures. SA was able to consume some of what it produced and produce some of what it needed to consume, but it had a long way to go to ensure deeper beneficiation because that was taking a raw material through the stages of transformation in which jobs were created, profits were created and economic and industrial development was fostered. Countries with sophisticated economies were those that had been able to master significant industrialisation. That was why localisation was a fundamental pillar in building SA’s economy.

He confirmed that the Secretary-General of the AfCFTA was an ex-official of the dtic and had cut his teeth working there. His function was the implementation of the agreement. The Minister wished him well.

Regarding Clothing, Textile Foot and Leather exports, SA retailers were in engaged many other countries. Large SA retailers, such as Mr Price, would buy goods locally, and also from Africa and China, and then the company brought its goods for sale together in local warehouses and thereafter exported to other countries in Africa where the company had its stores. That was not transhipment but considered to have originated in SA. The Minister spoke of his pride in finding SA-made clothes and food in stores in Morocco. On the presentation slide on Clothing, Textile Foot and Leather, he had put an asterisk to explain that, concerning those exports, some goods were re-exports, especially by retail stores as explained, while other goods were fully made in SA.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              The Minister noted that Mr Mbuyane had put his finger on the risk factor in all negotiations. It was about give and take in trade but it was also about keeping one’s eye on the ball and not doing a bad trade. One had to be alert not to trade something small for something quite fundamental.

He noted that sugar was an important export product in order for the industry to survive. SA used most of its sugar and traded some. SA had to increase exports and that was being done in the Sugar Master Plan. Ultimately, the Master Plans were all part of the same economic drive. The single biggest innovation in the dtic Annual Performance Plan for 2021/22 was the integration of processes. That was why he was joined on the platform by not only the DDG for Trade Policy, Negotiations and Cooperation, Xavier Carim but also by
Lerato Mataboge, DDG for Export Development, Promotion and Outward Investments.

The Minister explained to Ms Msane that the “Free Movement of People” fell outside of trade negotiations in the African Union. In SA, the “Free Movement” fell under the Department of Home Affairs and the Department for International Relations (DIRCO). He noted that there was a complex relationship between trade and people. The European Union (EU) had the most advanced form of economic integration. It did not only have a Free Trade Area, but also a single internal market. That had caused some challenges. One of the reasons the United Kingdom had left the EU was the free movement of people. Politicians in the UK contended that jobs were being lost because of the free movement of people. America had a free trade agreement that did not include the free movement of people. He added that there were different streams of discussion in the AU and the “Free Movement of People” had not come under discussion in the trade stream discussions.

He thanked Ms Msane’s for her reference to PIDA Week under the Programme for Infrastructure Development in Africa (PIDA). The AfCFTA changed the infrastructure needs in Africa. Previously infrastructure development on the continent was based on the idea that a country invested in infrastructure and it hoped that investors would come and utilise the infrastructure. Some investors had come, but not enough to make it a commercially viable proposition. That strategy had not been very effective. Now the AfCFTA was developing a much stronger commercial case behind the development case for infrastructure.

It was a legacy of the past that rail tracks related back to the colonisation by different countries and hence different rail systems across the continent. The Minister said he had once drawn a diagram of railway lines across the African continent and it had been like the legs of a spider - the lines came from a mining town and connected to the sea ports. It was not about connecting Africans to one another; railway lines had been built to transport materials offshore. It was necessary to reverse that as that was a classic example of how colonisation had led to the underdevelopment of Africa. SA was working on a Cape to Cairo infrastructure system which would not only connect SA to Egypt but would connect countries all along the route.

Another example of the impact of colonisation was the development of mining economies. Mr W Thring (ACDP) consistently raised the issue of beneficiation which would break the role defined for Africa as a producer of raw goods and which had trapped the economy in the resources economic cycle which had a very negative impact when resources prices dropped. Beneficiation also benefitted industries downstream. The difference between the producer of cocoa and the producer of chocolate was enormous. Ghana now wanted to make chocolate and not export cocoa. He had received samples of delicious chocolates that had been manufactured in Africa. If one country produced platinum and another produced copper, there would be no trade as neither was a consumer product. Economics was about trade-offs. Africa had to produce goods for consumption. If Africa was to break the development challenge, it had to break with tradition.

The Minister agreed that illicit financial flows created a huge problem that the Minister of Finance was dealing with. It was extremely difficult to deal with the problem. One had to fight the export of illicit financial flows but also work on those who accepted illicit capital. The OECD (Organization for Economic Cooperation and Development) and the G20 (Group of Twenty) had begun to look at illicit financial flows. That was how the capital of Africa was shifted, damaging Africa’s development. Ultimately everything came back to money.

He added that SA had a very ambitious export plan that would be carried out at sector level but the idea was ultimately to get districts to develop export plans. He noted that Committee Members would have to give the dtic some leeway as it was not going to be easy and would take some time to get it right.

The Minister informed Mr Mbuyane that countries did not set their own rules on Rules of Origin. Those rules were negotiated and agreements had to be found. The percentage of local content differed according to the goods. Critical to the success of the system were the customs controls that had to be strengthened and beefed up. It was important to ensure that SA had the capacity to check that goods were manufactured in the country where they were said to be manufactured. That was an important part of the future work in the AU and of the AfCFTA Secretary-General (SG). SA had informed the SG that it supported a younger group of technical experts in the AfCFTA so that the AfCFTA was benchmarked with the very best to build strong institutions.

He did not envisage a change in trade with SADC but SA was looking to increase exports to other African countries, which would offer wider opportunities for trade.

How to change the low economic figures for Africa? The Minister explained that industrial development and beneficiation was the way forward and that would develop South African Customs Union (SACU) value chains. Why did SA buy gold? Neighbouring countries mined the gold but the gold had to be refined into gold bars for export to countries that used the gold to make jewellery, etc. That was a form of beneficiation as SA added value to raw gold mined in neighbouring countries.  In fact, SA companies mining gold and diamonds in other African countries would export to their own companies in SA to refine the gold.

Foreign direct investment had fallen a year or so back and that had been as a result of a fear of a drop in commodity prices. That was pre-Covid. The President was working hard to obtain capital investments. The Minister added that SA was the biggest exporter of capital to African countries where the capital was used for infrastructure, mining etc. That capital drew on SA’s quite deep financial markets.

Regarding the sale of electricity, he explained that it could not be stored. If a country produced more electricity than it needed in a 24-hour period, the country could either sell it or it would lose it, so SA bought electricity from Cahora Bassa Hydro-generating Power Station in Mozambique when there was excess there and SA sold when SA had excess.

The Minister responded to Mr Nkosi’s comments on the agreements with Europe and the America. The agreements remained in place and did not change in any way as a result of the entry of the AfCFTA into force, but in future the intention was for the AfCFTA to negotiate new trade agreements, in some instances. The scale of a market defined one’s power in any trade negotiation. With 60 million people, SA’s trading power was limited. There would be much more power if SA was negotiating for AfCFTA agreements with its 1.2 billion market, but that would require a lot of work in bedding down the AfCFTA. He said that it was really hard to develop the trade agreements, but even harder to implement. For example, it did not help to lower tariffs when trucks were stuck at border posts. Bottle necks had to be addressed by both countries adjoining a border post and for that, one needed the budget for resources. The road leading to the border post, the buildings and the electronics had to be upgraded, on both sides of the border.

SA had to maintain strong technical skills in Trade Missions in Africa to bed down the agreements. The relationship between the dtic and DIRCO was strong. Because the trade agreement was so significant, the President had led the negotiations for the past 12 months.  The trade aspect was handled by dtic and the diplomatic work that underpinned and supported the trade negotiations was done by DIRCO. He and Minister Pandor were working very closely together. He would speak to her about the concerns about reporting for oversight purposes in Parliament. He informed Mr Mpanza that he would give some thought to reporting mechanism.

Some detailed answers to questions would be found in the Minister’s presentation but he hoped that the integrated parts of government could be seen via his remarks.

Acting Chairperson Mpanza agreed on the need to have further engagement between the Committees. The two Committees would also look at it. It was becoming clear that there was an urgent need for the Border Management Administration to be put in place, especially at the Beit Bridge border with Zimbabwe. 

Acting Chairperson thanked the Chairperson of the Portfolio Committee on Trade and Industry for the warm welcome extended to the Portfolio Committee on International Relations. He thanked the Minister for the very good interaction in the meeting. He stated that his Committee would excuse itself from the meeting.

Chairperson Nkosi thanked all and wished the Chairperson of the Portfolio Committee on International Relations well. He reminded the Minister that the Committee still had to consider the impact of Covid on the critical and important issues relating to trade.

Mr W Thring (ACDP) said he had a question that he would hold for the next meeting.

The Minister requested permission to be excused as he had another meeting. He wished the Committee well.

The Portfolio Committee on International Relations left the platform as the remainder of the meeting related to Portfolio Committee on Trade and Industry internal matters.

Quarterly Report on Portfolio Committee on Trade and Industry Second and Third Quarter Financial and Non-Financial Report
Chairperson Nkosi requested the Committee Secretary to present the draft report which had been sent to Members.

The Committee Secretary reminded Members that the Financial Report had previously been presented to the Committee. He had requested political parties to submit conclusions to the current report but input had been received from the ANC only.

The ANC conclusions were flighted for consideration by the Committee Members. There were no comments on the proposed conclusions.

The Secretary reiterated that no other recommendations had been received but as the report would be finalised and presented the following day, recommendations could still be added.

Consideration of Minutes
The Minutes of 2 December 2020, 16 February 2021, 17 February 2021, 23 February 2021, 24 February 2021 and 26 February 2021 were adopted by the Committee with no amendments and no objections.

The Minutes of 3 December 2020 were adopted as amended with technical amendments and no objections.

Closing remarks
The Chairperson noted that, the following day, the meeting would start at 09:00 and would be a consideration of the update on the SEZ implementation, a status report from the SABS on progress regarding the implementation of its turnaround strategy; formal consideration of the report on the DTIC’s second and third quarter financial and non-financial performance, and the draft Committee Programme for the Second Quarter 2021.

The meeting was adjourned.