SA-EU Trade Agreement; SADC Trade Protocol

Meeting report

 

ECONOMIC AFFAIRS SELECT COMMITTEE
10 November 1999
BRIEFING ON SA-EU TRADE, DEVELOPMENT AND CO-OPERATION AGREEMENT AND SADC TRADE PROTOCOL

Documents handed out
Trade, Development and Co-operation Agreement - Briefing Document By the Department of Trade and Industry (Appendix 1)
Slide Presentation on SA/ EU Agreement (Appendix 2)
SADC Trade Protocol - Briefing document (Appendix 3)
Slide Presentation on SADC Trade Protocol.

News article in Business Day: SADC renews bid at duty-free trade

SUMMARY
The SA-EU Agreement was signed on 11 October 1999 after nearly four years of negotiation. The essence of the agreement is as follows: The EU will liberalise 95% of imports from South Africa within 10 years. South Africa will liberalise 86% of imports from the EU within 12 years. A Free Trade Area (FTA) will be set up to cover around 90% of current trade between South Africa and the EU. South Africa's sensitive sectors will be protected (automobiles, textiles, red meat, sugar, winter grains and dairy). Partial liberalisation of the Agricultural sector will occur.

The main objective of the SADC Trade Protocol is to create a duty-free trade area over a period of eight years. It wanted to develop integrated industrial and agricultural strategies for international competitiveness. It wanted to promote efficient production within the SADC region reflecting current and dynamic economic growth levels. It aimed to enhance the economic development, diversification and industrialisation of the region.

The main provisions of the Trade Protocol deal with the elimination of tariff and non-tariff trade barriers within eight years. The non-tariff issues were rules of origin, cooperation in customs administration, trade facilitation and SPS; anti-dumping and countervailing measures, promotion of cross-border investment, trade in services, intellectual property rights and competition policy, trade relations with third parties, institutional arrangements, dispute settlement and ratification.

MINUTES
Mr Johan Van Der Merwe, the Director of Agro Processing at the Department of Trade and Industry (DTI) assisted by Gunter Muller also from DTI gave a briefing on the SA-EU Agreement that was reached at the end of March after nearly four years of negotiation. The Agreement was signed on 11 October 1999. (See Appendix 1 for briefing document).

Mr Mfundo Nkuhlo, the Chief Director of Africa Trade Relations at DTI presented the briefing on SADC Trade Protocol. The main objective of the SADC Trade Protocol is to create a duty-free trade area within eight years. It wanted to develop integrated industrial and agricultural strategies for international competitiveness. It wanted to promote efficient production within the SADC region reflecting current and dynamic economic growth levels. It aimed to enhance the economic development, diversification and industrialisation of the region.

The main provisions of the Trade Protocol deal with the elimination of tariff and non-tariff trade barriers within eight years. The non-tariff issues were rules of origin, cooperation in customs administration, trade facilitation and SPS; anti-dumping and countervailing measures, promotion of cross-border investment, trade in services, intellectual property rights and competition policy, trade relations with third parties, institutional arrangements, dispute settlement and ratification.

Questions and Comments
A question was raised whether the whole issue around the use of the words Port and Sherry were not in fact negotiating tools to gain access to South Africa’s fishing waters?

Mr Muller said that he did not think so since countries like Portugal and Spain had a genuine concern about their wine names. In any case he said that access to South Africa’s waters was no longer an issue since they would simply not allow it.

With regard to health and sanitary requirements did the EU have to conform to the same standards as SA?

Mr Muller said that the EU had its own set of health standards and because there were different diseases in the various countries, the EU had to prove that products entering SA were free of diseases that SA did not encounter. The standards applied were either SABS or standards administered by the Department of Agriculture. These standards had to comply with the SPS agreement, which was a WTO agreement . This agreement basically said that all standards had to be scientifically based. He said that one could not insert a level of protection not scientifically based just to keep certain products out of a market.

There was a further concern about certain EU countries’ interest in SA’s fishing waters. The DTI was asked for a firm commitment that it would not come back at a later stage and say that because of some reasoning it was considering allowing certain countries access to our fishing waters.

Mr Nkuhlu said that with particular reference to the Spanish request for access to SA fishing waters, it was not a question of their suddenly losing interest in access, but rather an acceptance that they would not be granted the rights to do so. He said that in terms of negotiations it was quite clear that this was an area where South Africa would simply not compromise.

The chairperson, Mr M Moosa (ANC Gauteng), said that at the last minute before the signing of the Agreement, there was suddenly a whole range of issues raised about traditional expressions – other than Port and Sherry – such as Feta cheese. He wanted to know how these issues would be resolved and what process would be followed to deal with these issues. He asked if SA was still expected to give a commitment in respect of the use of the terms Feta cheese and various other names. He thus wanted to know what the approach of the government was to this if SA was required to give these commitments.

Mr Nkuhlu said that with respect to where SA was in relation to traditional expressions he said that a critical meeting was taking place in Brussels that same day. This meeting had to establish a view on whether they found the EU agreement’s formulation of the provisions on wine and spirits agreeable to themselves. He said that ideally SA would want to deal with the issues of traditional expression within the ambit of the WTO on the grounds that there is no established international norm on these issues of geographical indications and traditional indications. He said that the reason this matter was still on the table on the EU side was that some member states were still not satisfied with the agreement as it stands. For this reason on the EU side implementation of this agreement was linked to the successful conclusion of a separate wines and spirits agreement. At the eleventh hour before the signing of the agreement it was decided to de-link these processes and to set a time frame for the conclusion of a separate wine and spirits agreement. He said that there were unconfirmed reports that some EU members were still insisting on a linkage of the two agreements which he felt would cause a political problem which could result in the agreement not being implemented on due date. He said however that if COREPER - the body which was meeting in Brussels today - was satisfied with the outcome of the agreement, then they would advise member states accordingly and the wine and spirits agreement could be signed as a separate agreement, meaning that implementation of the EU/SA trade agreement would take place as scheduled.

Mr Moosa felt that SA’s position on giving into the request on the Port and Sherry issue was in fact a mistake since it created a precedent for other countries to come with their traditional expressions and insist that they be respected as well. He felt that the terms of Port and Sherry were far too general to be deserving of copyrighted or trademarked status and felt that this should have been the basis of how this issue should have been dealt with initially.

Mr Nkulu said that the reality existed that SA had already, a while ago, in its own legislation, agreed to the dropping of the term Champagne. Secondly he said that research has found that SA is not a major exporter of Port and Sherry to European markets. He said that it was therefore immaterial what the outcome of the negotiations were on these issues.

A member of the ANC was concerned about the EU’s Common Agricultural Policy (CAP) and their export subsidies. He felt that because South Africa has opened its agricultural markets to the EU, SA would be encountering some problems since he did not think that SA would be able to compete "toe to toe" with the EU simply because the EU countries were subsidising their products whilst we were not doing so. He said that the WTO itself was worried about this. In the Uruguay Rounds the EU insisted on CAP and the processes were unfair. He said that whilst he knew that a meeting was set aside for next year to resolve this problem, he said that the EU, being as strong as it is, does not easily compromise. He felt that they may have looked at South Africa sympathetically, since it was a weaker country than most EU members, but he realised that he was wrong. In fact he thought that the EU would benefit more than SA from the agreement.

Mr Moosa felt that the issue of traditional expression was becoming a form of protectionism. He said that whilst there was deregulation on the one hand, giving rise to the idea of the globalisation of trade, this enforcement of protecting traditional expressions was just another clever way of securing and protecting markets and products. He said that this issue needed a bigger discussion. He said that this issue had been raised in the joint report by the relevant parliamentary committees, including the Select Committee on Economic Affairs, which underpinned their ratification of the agreement on this issue.

Mr Nkuhlu said that with regard to CAP, it was not a matter, which SA would be able to resolve by itself. He said that it would be the major negotiating point of the next round of the WTO in Seattle at the end of November. He said that everyone was unimpressed with certain proposed agricultural reforms by the EU since it did not go far enough to establish fair and level playing fields. He said that if the EU was reluctant to give concessions to South Africa it would be even more reluctant to give concessions to the rest of the world.

Due to time constraints, there were no questions on the SADC trade protocol presentation.

 

Appendix 1:
Briefing Document on the RSA - EU Trade, Development and Co-operation Agreement

1. Background
The last week of March 1999 marked the end of almost four years of negotiations with the European Union towards a Trade, Development and Co-operation Agreement. Minister Erwin and Commissioner Pinheiro finalised this historic agreement which has been endorsed by both the South African Cabinet and the European Council of Ministers. The signing of the agreement, which was of national and international importance, took place on 11 October 1999. The expected implementation date is 1 January 2000 which will allow time for government structures as well as private sector operators to prepare for the procedural implications of a free trade area with our most important trading partner in the world.
 
1.1The origins of the Agreement
The call for negotiations with SA was expressed as part of the EU’s desire to support SA’s new democracy and address the legacy of the past. The EU argued that a free trade area was the best and only way it could provide SA with better market access. The EU’s mandate tempered SA’s high expectations. South Africa, however, chose to engage and develop a strategic partnership with the EU, which is SA’s major trade and investment partner.
 
As part of economic transformation, the government has adopted policies which seek to reposition and re-integrate the South African economy within a rapidly changing global economy. This necessitates the establishment of globally competitive economic enterprises. The move toward global competitiveness has to be accompanied by regional economic cooperation that advances a broad and integrated process of industrialisation and modernisation in the economies of Southern Africa.
 
A growing South African economy that facilitates intra-regional economic trade and investment flows is a major opportunity for development in Africa and more particularly Southern Africa in the medium term. Not only will it source a wider range of products from its neighbours but it will also be able to invest in activities that will increase the region’s exports. This can only happen if South Africa is able to expand its production base by strengthening and enhancing its competitive advantage in the beneficiation of its natural resources. This in turn requires that there is an increase in value added production and a larger manufacturing sector.
 
The bold move toward a free trade agreement with the EU is intended to contribute towards restructuring of the economy. It is also aimed at consolidating the strategic links with the economies of the member states of the EU, securing preferential market access for South African products and providing certainty and added leverage for foreign investment into the South African economy.

2. ELEMENTS OF THE AGREEMENT
The Trade, Development and Co-operation Agreement with the EU covers a wide range of issues in a comprehensive field of co-operation. It includes, inter alia;
Political dialogue
Provisions for a Free Trade Area
Trade related issues
Economic co-operation
Financial assistance and development co-operation
Social and cultural co-operation
As part of establishing a comprehensive relationship with the EU, two other agreements have been concluded:
Science and Technology Agreement (signed in December 1996)
Partial Membership of the Lomé Convention (agreed in April 1997)
 
At the request of the EU, SA accepted to negotiate a Wines and Spirits Agreement and a Fisheries Agreement. SA insisted, however, that such agreements should be mutually beneficial and that there should be no conditional linkage with the main agreement. The main agreement contains a so-called hook-clause providing for future negotiations for a co-operation agreement on fisheries and there is also a side letter covering the political agreement on port and sherry.
 
3.KEY FEATURES OF THE AGREEMENT
3.1 Essential Element and Non-execution provisions
Respect for democratic principles, fundamental human rights and the rule of law is established as key elements of the agreement. Good governance is established as another important principle. Any violation of these principles by one party would lead to the other party taking appropriate measures, including withdrawing some concessions. SA insisted on the formulation of these provisions such that there is objectivity in the test for breach of the essential element of the agreement without the risk of unilateral action nor the balance of economic or political interests becoming the determining factor. The agreed text has a better definition of good governance and circumstances under which the non-execution provision can be invoked.
 
3.2 Free Trade Area (FTA) Provisions
3.2.1 General Features
When SA presented its trade offer to the EU in June 1997, it called for free trade with asymmetrical coverage of all trade and sectors and special protocols to cover sensitive products. It also called for development and financial measures to support further regional integration and to facilitate the adjustment process in Southern Africa. The outcome of the negotiations meets the WTO requirements of Art. XXIV GATT 1994. The coverage of the FTA will be around 90% of current trade between the Parties with the following elements:
Community: full liberalisation of 95% of imports from SA at the end of the transitional period of 10 years.
South Africa: full liberalisation of 86% of imports from EU at the end of the transitional period of 12 years.
Includes both traded and non-traded products.

Provides for the protection of SA’s sensitive sectors (automobiles and components, textiles and clothing, red meat, sugar, winter grains, and dairy).
Includes the agricultural sector, alongside all other sectors with partial liberalisation and provision for regular reviews on products on the reserve lists.

Commits the EU to provision of support for SACU for adjustment efforts resulting from the establishment of the FTA.
Contains several elements that assure a positive regional impact on the other countries of SADC.
 
3.2.2 Industrial Sector
Approximately 86% of SA’s total exports to the EU consists of industrial products. While the EU’s average tariff levels for industrial products is low, the removal of tariffs will nevertheless give SA’s exporters a relative advantage against some of their competitors in the EU market. The EU will eliminate its industrial tariffs either immediately or within three years after the entry into force of the agreement. This includes most of the sensitive products of textiles and clothing (only about 20% of SA’s textile exports to the EU will be phased out over a longer period. i.e. 6 years from the entry into force of the agreement). At entry into force of the agreement tariffs on auto-components will be reduced to 50% of the MFN rates applied by the EU. Other products like ferro-chromium with tariff elimination starting in the 4^th year will continue to have a global duty free quota. Only six lines of aluminium will remain on the reserve list. The products on the reserve list will nevertheless be subject to reviews.
 
As indicated the transitional period for the phasing out of tariffs by SA is twelve years to allow for adjustment by firms. Sensitive products like automobiles and parts will remain on the reserve list without any tariff elimination or reduction schedules at this point. This will be reviewed in the light of the outcome of the mid-term review of the Motor Industry Development Programme. With regard to other sensitive products, South Africa persuaded the EU to moderate its initial expectations. This will enable SA to have a slower phase-down. In the case of clothing and textile there is a commitment to reduce the tariffs applicable to imports from the EU. Depending on the segment of the market, by the end of the 8^th year the tariffs will vary between 5% and 20%. Between the 8th year and the end of the transition period, EU products will enjoy a preference over the MFN rate of around 40%. The agreement therefore takes into account the changes in these industries at a pace far beyond what was conceivable a few years ago.
 
3.2.3Agricultural sector
The agricultural sector is traditionally the most protected sector in the EU and has generally been excluded by the EU in other free trade agreements. In its mandate the EU a priori excluded about 46% of agriculture from the FTA with SA.

Agricultural safeguard clause
While the EU’s Common Agricultural Policy (CAP) is still a matter of concern, the agreement provides (with regard to agricultural policies) for consultation and compensatory adjustments for any changes which may affect the balance of concessions. The Agricultural policies provision is supplemented by an Agricultural safeguard clause which gives SA the right to challenge the EU should there be proof that increased imports of agricultural products are causing harm or threatening to cause harm to the domestic industry. The onus is on South Africa, especially the industry, to put in place an effective monitoring system that will serve as an early warning signal in this regard.

EU export subsidies
Although SA did not succeed in eliminating EU export subsidies completely, there are some important breakthroughs. Firstly, the EU has committed itself not to pay export refunds on cheese exported to South Africa under the tariff quota of 5000 ton. Secondly, the EU is willing to eliminate export refunds on products South Africa might want to offer for front-loading during the implementation period. Refunds will be eliminated in full once tariff liberalization starts. This is an important aspect of the agreement, as most of the EU agricultural products will not be competitive on the domestic market without refunds. South Africa will take up this challenge. Should the EU be unwilling or unable to eliminate export refunds, South Africa can simply retract its offer of front-loading.

Tariff quotas
The introduction of tariff quotas is important in that it makes inroads into the EU reserve list. Especially the tariff quotas for canned fruit (60 000 ton), fruit juices (5 000 ton) and cut-flowers, in particular proteas (900 ton) are of interest to the industry in SA. The quotas for wines and sparkling wines, as well as for cheese are also significant.

Reserve list
The EU list of exclusions has been reduced, i.e. from 46% to 38% (based on 1997 trade statistics). If one takes into account tariff quotas, it has been reduced even further to 26%. This is an important development. In addition, it is now called a reserve list subject to regular reviews with a view to further opening of the market. South Africa will therefore be continuously pressing for a review of this list in the light of changing circumstances on EU and/or world markets.

3.3Trade-related issues
While the SA law on the regulation of economic activities is consistent with international practices, SA took a view that provisions on trade-related issues in the bilateral agreement with the EU should not go beyond the current multilateral conventions and disciplines agreed in bodies like the WTO, WIPO etc. This is particularly important given SA’s commitment on playing an active role in advancing the interests of the developing countries in the multilateral fora. A number of the trade-related issues put on the table by the EU are still subject to intense debates and examination in the multilateral fora. On issues like government procurement and intellectual property rights the agreement provides for mechanisms for further dialogue with the EU. Generally speaking, commitments that were made were regarded as necessary for the proper functioning of the free trade area. These include:

Customs Unions and FTAs
The agreement provides for consultations to take into account the mutual interests in the event that the maintenance or establishment of CUs or FTAs affect each other’s interests. For SA, this provision was regarded as essential for the protection of domestic interests against the change in the balance of rights which may arise from the future enlargement of the EU.

Anti-dumping and Countervailing Measures
The agreement provides for parties to consider alternatives (constructive remedies) before imposing definitive anti-dumping duties and counter-vailing duties. This creates an opportunity for the relevant firms to put options for undertaking on price, volume and/or combination of that rather than to face prohibitive duties.

Safeguards
There is a comprehensive provision covering regular, regional and transitional safeguard measures. The regular safeguard provides for measures to be taken in the case of import surges which threaten or cause injury to domestic producers. This is supplemented by the non-reciprocal provision in terms of which SA will be able to take exceptional measures to protect infant industries or sectors facing serious difficulties caused by increased imports during the transitional period. There is also provision for measures to be taken to safeguard any of the other SACU members against increased imports which threaten or cause serious deterioration in that member’s economic situation. The comprehensive safeguard provision is important to ensure that SA and other SACU members can temporarily protect themselves or slow down the pace of liberalisation if the impact proves to be more than what SA or the respective SACU member can handle.

Used goods
The exceptions clause provides for the protection of domestic producers against the importation of used goods.

Competition Policy
SA sought to ensure that the provisions do not go beyond those of the new competition policy and law. It provides for consultative mechanisms to attempt to accommodate the interests of each Party with the application of domestic law. It does not regulate the provision of state aid, nor deals with services and government procurement as was proposed by the EU.

Public Aid
The agreed text recognises that it is in both parties’ interest to ensure that public aid is granted in a fair and transparent manner. It also takes into account the facilitating role that can be played by state support and involvement in the restructuring of the SA industry and economy. It thus provides for consultation between the parties to find a satisfactory solution to situations where public aid distorts fair competition.

Dispute Settlement
To ensure that there are no unnecessary delays in the resolution of disputes, the agreement sets out clear disciplines for the trade chapter. Other disputes on the general provisions of the agreement or for those arising in areas such as Develop-ment Cooperation and Economic Cooperation will be governed by a less tight procedure.
 
4.ECONOMIC COOPERATION
The agreement provides for co-operation in a variety of fields including industrial restructuring and modernisation, investment promotion and protection, trade development, development of SMMEs, information and communication technology, energy, mining and minerals, transport, tourism, services and consumer protection.

PROTOCOL ON RULES OF ORIGIN
Rules of origin form the backbone of a preferential trade agreement like the one SA is about to sign with the EU. These rules prohibit the deflection of trade and thereby protect the integrity of the agreement. The protocol will therefore determine the administrative framework of the agreement between SA and the EU. It prescribes what would count as local content and has the same function as a passport for a human being. The rules determine the ability of economic operators in the contracting parties to reap the rewards of duty-free access to one another's markets. Important features of the protocol include:

Cumulation
Cumulation of the rules of origin is an instrument enabling the parties to a free trade area to use material originating in certain other countries, i.e. without violating the rules of origin. The protocol provides for diagonal (or partial) cumulation between SA and the EU as well as with materials originating in non-SACU ACP countries. As far as SACU is concerned it allows for full cumulation with materials originating in BLNS..
As far as cumulation within the context of the Lomé Convention is concerned - i.e. trade in the direction SA to all ACP countries to the EU - the EU has undertaken to remove the current ad hoc provision with regard to SA and to replace it with diagonal cumulation with SA. This means that ACP countries including BLNS will be able to cumulate with materials which have acquired originating status in SA.

List rules
These are specific rules for specific products, based on the tariff nomenclature. This list which is contained in Annex II of the protocol describes the working or processing to be carried out on non-originating materials in order that the final product can obtain originating status. SA’s view was that some of these rules did not reflect the level of productive capacity in South Africa. These are 04.03 (cream yoghurt); 09.02 9 (tea); 20.08 (peanut butter); 20.09 (fruit juices); 22.02 (beverages); and 25.25 (mica). This matter is still under consideration by the EU.

General value tolerance rule
Art. 5 allows a certain percentage of the value of the final product to be imported from other countries, notwithstanding the conditions set out in the list rule. The protocol makes provision for a general tolerance of 15%, with the exception of textiles (which will be covered by explanatory notes 5.1 and 6.1), fish, tobacco and alcohol.

Prohibition of drawback of, or exemption from, customs duties
The Commission’s proposal contained in Art.14 of their draft protocol specified that non-originating materials used in the manufacture of products destined for the EU or SA market shall not be subject to drawback of or exemption from customs duties. However, it did not preclude the application of the export refund system for agricultural products applicable in the EU.
This proposal was not acceptable to SA and the prohibition on draw-back has therefore been deleted from the protocol.

Definition of fishing vessels
As far as the definition of fishing vessels is concerned, a paragraph has been added at the end of article 4.2 to reflect SA’s position on the requirement for officers and masters, subject to the entry into force of tariff concessions on fishery products (which in reality will only be granted if SA is willing to grant the EU access to its fishing waters).

Sectoral Agreements
6.1 Fisheries Co-operation
The EU put SA under lot of pressure for a Fisheries Agreement with provision for access to SA’s fishing resources. It thus made a linkage between the Fisheries agreement and the market access concessions as well as the overall agreement.
From the outset SA explained its new fisheries policy and its efforts towards the restructuring of the industry and conservation of fisheries. It emphasised that access to fishing resources would not be possible. An agreement regarding the future fisheries co-operation was reached in December 1998. This includes:
Both sides declared that they will make their best endeavours to negotiate and conclude a co-operation agreement no later than the end of the year 2000.
The EU wants to hold back the implementation of tariff concessions to SA on fisheries products. The most sensitive of these concessions are only envisaged in the light of the content and continuity of the future fisheries agreement.
SA will abolish its tariffs on fisheries products in parallel to the elimination of duties of the corresponding tariff positions by the Community.

6.2 Wines & Spirits
The political compromise on port and sherry which was reached in Davos on 29 January by Minister Erwin and Professor Pinheiro contains the following main elements:
Phase out clause for SA use of names port and sherry in exports to third countries.
Definition of SA domestic market to include all of SACU.
SA to continue the use of names port and sherry on its domestic market throughout the transitional period of 12 years.
Review of the use of names within the transition to decide on the names to use beyond the 12 years.
SA wine sector to enjoy a duty free quota and financial assistance for restructuring of the industry.

ANNEX 1
AGREED ELEMENTS OF A COMPROMISE PACKAGE ON WINES AND SPIRITS
1.South Africa reconfirms that the names "port" and "sherry" are not and will not be used for its exports to the EU
2.South Africa will phase out the use of the "port" and " sherry" names on all export markets within 5 years, except in the case of non-SACU SADC countries, where an 8 years phase out period would apply.
3.For the purpose of the Wines and Spirits Agreement, the South African domestic market is defined to cover SACU (Botswana, Lesotho, Namibia, South Africa and Swaziland).
4.South African products may be marketed as "port" and "sherry" on the South African domestic market during a 12 years transitional period. Beyond that period the new denominations of these products which shall be used on the South African domestic market will be jointly agreed between South Africa and the EU.
5.From entry into force of the agreement, the EU will provide a duty free quota for wines covering the current level of trade of 32 million litres of South African exports to the EU, with allowance for the future growth of this quota.
6.As an additional effort to the main objectives agreed for the Development programme for South Africa to be funded by the EU, the EU will provide assistance of 15 million euro for the restructuring of the SA wines and spirits sector and for the marketing and distribution of SA wines and spirits products.

7.CONCLUSION
The agreement with the EU will, among other things, establish for the next 12 to 15 years SA’s trade relationship with its major trading partner and important trading block. The agreement establishes as good concessions as each party can get at this point. There is room for improvement within the reviews as set in the agreement. The agreement reached between Minister Erwin and Commissioner Pinheiro is the basis for both Parties to move forward after almost four years of protracted negotiations. It has been formally signed and will be submitted for ratification by Parliament.

Appendix 2:

OVERALL RESULTS
· Political dialogue
· Provisions for a Free Trade Area
· Trade related issues
· Economic Co-operation
· Financial Assistance and Development Co-operation
· Social and cultural co-operation

As part of establishing a comprehensive relationship with the EU, two other agreements were concluded:
· Science and Technology Agreement (signed in December 1996)
· Partial Membership of the Lomé Convention (agreed in April 1997)

KEY FEATURES OF THE AGREEMENT
· Essential Element and Non-execution provisions
· Democratic principles, fundamental human rights and the rule of law
· Free Trade Area (FTA) Provisions

FREE TRADE AREA (FTA) PROVISIONS
General principles -
· asymmetrical coverage
· special treatment for sensitive products
· support further regional integration
· facilitate the adjustment process in Southern Africa.

Established modalities
· coverage of around 90% of total trade -
- EU: full liberalisation of 95% of imports
- SA: full liberalisation of 86% of imports
· Includes traded and non-traded products
· Adjustment support for SACU partners

· INDUSTRIAL SECTOR TARIFF LIBERALISATION

· EU eliminates tariffs on substantially all imports from SA (99%) either immediately or within three years
· SA eliminates tariffs on 86% of imports from the EU over a transitional period of up to twelve years
· Establish relative advantage

Reserve list products:
· SA (annex III list 6)
Energy sector, some chemicals, textiles and clothing, used goods, motors (passenger vehicles) and components
· EU (annex II list 5)
Aluminium - to be reviewed in year 5 with a view to tariff elimination

AGRICULTURAL SECTOR
· Agricultural safeguard clause
· Export subsidies
· Tariff quotas
· Reserve list

TRADE-RELATED ISSUES
· Customs Unions and FTAs
· Anti-dumping and Countervailing Measures
· Safeguards
· Used goods

PROTOCOL ON RULES OF ORIGIN
Important features -
· List rules
· Cumulation
- partial - SA/EU and SA/Non-SACU ACP
- full - SA/BLNS
· General value tolerance rule

SECTORAL AGREEMENTS
· Fisheries Co-operation
· Wine and Spirits

WINES & SPIRITS
Phase out clause for SA use of names port and sherry in exports to third countries.
Definition of SA domestic market to include all of SACU.
For SA to continue the use of names port and sherry on its domestic market throughout the transitional period of 12 years.
Review of the use of names within the transition to decide on the names to use beyond the 12 years.
SA wine sector to enjoy (a) duty free quota and (b) a financial assistance for restructuring of the industry.

MOTORS AND COMPONENTS

 

	Extent of liberalization	Period of liberalization
Components Three categories of liberalization according to sensitivity: Category 1 and Category 2 and	30% to 10% 20% to 10% 15% to 11% 10% to 6%	Year 0 to 11 Year 0 to 11 Year 0 to 4 Year 0 to 4
Category 3	Preference of 5% established either at e.i.f. or on the 3rd year
Tyres Trucks Tractors Tubes Passenger vehicles	25% to 15% 15% to 10% 20% to 10% 30% to 15%	Year 0 to 5 Year 0 to 5 Year 0 to 5 Year 0 to 5

 

TEXTILES, CLOTHING, LEATHER AND FOOTWEAR

 

	Extent of liberalization	Period of liberalization
Footwear Synthetic upper Leather upper Textiles and Clothing Clothing Fabrics House hold Yarns	20% to 10% 30% to 20% 40% to 20% 22% to 10% 35% to 15% 17% to 5%	Year 0 to 6 Year 0 to 8 Year 0 to 7 Year 0 to 7 Year 0 to 7 Year 0 to 7

 

Appendix 3:
EXPLANATORY NOTE ON THE RATIFICATION OF THE SADC TRADE PROTOCOL
1. Introduction
The purpose of this explanatory note is to guide both the Portfolio Committee in the National Assembly and the Select Committee in the NCOP through the documentation submitted in support of the ratification of the SADC Protocol on Trade. The full text of the trade protocol, the rules of origin contained in the offer of the Southern African Customs Unions, the tariff liberalisation schedule and the Memorandum of Understanding on Standards, Quality Assurance, Accreditation and Metrology are attached hereto.

The objectives of the SADC Protocol on Trade are to:
· create of a duty free trade area over a period of eight years;
· develop integrated industrial and agricultural strategies for international competitiveness;
· promote efficient production within the SADC region reflecting the current and dynamic economic growth levels; and
enhance the economic development, diversification and industrialisation of the SADC region.

2. Background
The SADC Protocol on Trade was signed by the Heads of State or Government during the Summit in Maseru in August 1996. It was signed as a framework document providing basis for economic integration through the creation of a Free Trade Area

For the Protocol to enter into force, it has to be ratified by at least two thirds of the
Member States. It has currently been ratified by five Member States, namely, Botswana, Mauritius us, Namibia, Tanzania and Zimbabwe. It is now being processed for ratification by the following countries: Lesotho, Malawi, Mozambique, South Africa, Swaziland and Zambia.

In order to be ready for implementation, the Protocol needs to be supplemented by a schedule for tariff elimination and an appropriate set of rules of origin. The comprehensive tariff offer and supplementary rules of origin offered by South Africa, together with her SACU partners, are attached hereto for consideration.

After thirteen rounds, the trade negotiations have now progressed sufficiently for us to be confident that the final outcome will largely mirror the offer that SACU has tabled. It is, however, expected that the offers of the other countries, particularly Mauritius Tanzania, Zambia and Zimbabwe will be improved further in the next rounds in order to enhance the total trade coverage ahead of the next Ministerial meeting scheduled for October 1999.

Regarding the rules of origin, the SADC Ministers on Trade agreed in Gaborone, Botswana on 15 July 1999 on well-defined rules of origin that would help stimulate economic activity in the SADC region, enhance value-added processing and circumvent the trade of illicit or counterfeit goods and the fraudulent supply of third party goods. These views are in line with the SACU proposals on rules of origin.

It is now agreed that all primary products, including agriculture products, should be wholly obtained from each Member State. It is further agreed that processed industrial products can acquire originating status provided that the imported materials have undergone sufficient transformation such that:

(i) the c.i.f value of those materials does not exceed 60% of the total cost of the materials used in the production of the goods; or
(ii) the value-added resulting from the process of production accounts for at least 35% of the ex-factory cost of the goods.

The following sectors: processed agricultural products, textiles, clothing, leather, footwear and auto industry will require specific list rules detailing sufficient processing and substantial transformation to confer an originating status as proposed in the rules of origin attached in the accompanying documents.

The Protocol also provides for safeguard measures against unfair practices. In such instances Member States would have recourse to take anti-dumping action and apply counter-vailing measures to import trade that distorts fair competition. It also prohibits the granting of production and export subsidies that may distort or threaten fair competition.

It is proposed that products benefitting from direct and actionable subsidies that may distort fair competition, including export subsidies such as export processing zones should not be granted preferential treatment under the Trade Protocol.

Similarly, Member States are required to notify the non-tariff measures that they apply in their trade policies and to make firm undertakings on the removal of those that distort or prohibit trade. In this regard, the removal of trade-distorting measures in agricultural trade such as quantitative import and export control, single channel marketing and price controls is an urgent matter that still has to be finalised in the negotiations.

Agreement has also been reached on a Memorandum for Standards, Quality Assurance, Accreditation and Metrology (SQAM) and the creation of sub-committees to foster cooperation in customs administration and trade facilitation, including such areas as the harmonisation of technical and regulatory standards, sanitary and phyto-sanitary measures, simplification of documents and procedures, inspections and joint investigations. The attached memorandum will be submitted for signature to the Council of Ministers when it next meets in January 2000.

The implementation of the SADC Protocol on Trade requires effective coordination and improved efficiency of SADC institutions and an increasingly leading role by Member States in driving the process forward, in monitoring and in maintaining a close liaison with one another. This raises, in a broader context, the urgency of institutional reform and rationalisation of SADC with Member States providing political leadership and the requisite technical support.

In light of the above, Cabinet has approved the tabling of this Protocol on Trade for ratification by both Houses of Parliament in term of section 213(2) of the Constitution of the Republic of South Africa, 1996 (ACT 106 of 1996) (the Constitution)1 during the First Session of the Second Parliament of the Republic of South Africa.

3. Summary of the Most Important Provisions of the Protocol on Trade
Part One, covering Articles 1 and 2, deals with definitions and objectives.

Part Two, from Article 3 to 11, provides for the elimination of tariff and non-tariff barriers to intra-SADC trade, and allows for general exceptions on grounds of public morals, public order, health, safety and security considerations.

Parts Three and Four, comprising Articles 12 to 21, provide for rules of origin; cooperation in customs administration; trade facilitation; cooperation on technical standards, sanitary and phyto-sanitary regulations; as well as trade remedies such as anti-dumping and counter-vailing measures.

Parts Five, Six and Seven, covering Articles 22 to 26, deal with trade-related issues such as the promotion of cross-border investment; trade in services; intellectual property rights; competition policy and trade development.

Part Eight, Articles 27 to 30, regulates trade relations, including preferential trade agreements, coordination of trade policies and cooperation with third parties.

Part Nine, Articles 31 to 39, provides for institutional arrangements and dispute settlement procedures, the ratification process and the depository of the instruments of ratification.

4. Implications for the South African Economy
There are three implications of the implementation of the SADC FTA for the South African economy:

An increase in trade flows between South Africa and SADC countries as well as dynamic impacts from higher investment flows to the region;
· A reduction in tariff revenue derived from imports from SADC countries; and
· Institutional restructuring of the South African Revenue Services to develop capacity to administer the SADC FTA

As regards increased trade flows, current trends suggest that in the short to medium term, there is unlikely to be a substantial change in such flows. Trade with SADC countries has increased dramatically during the period 1990-1998. Imports from SADC increased from R61 I million (less than 1% of total imports) to R2.2 billion (in excess of 2% of total imports) during that period. The increase of South Africa's exports to the region was even more dramatic - from R3.5 billion in 1990 (5% of total exports) to RI 5.6 billion in 1998 (11% of total exports).

At present, the ratio of South Africa's exports to imports stands at 7:1. Our exports to the region are concentrated in the high value-added sectors such as minerals and base metals, chemicals, machinery, transport equipment and food and beverages. These sectors generate overall growth and high-wage formal employment in the domestic economy and their exports to SADC have grown dramatically - tripling between 1992 and 1998.

In aggregate, SADC imports account for a mere 2.% of South Africa's total imports. The low levels of current SADC exports to South' Africa coupled with structural constraints to the expansion of production suggests that in the short- to medium-term tariff liberalisation to SADC is unlikely to have a marked negative impact on the South African economy.

An analysis of SADC imports as a proportion of South Africa's effective market (defined as domestic production less exports plus imports) demonstrates even more starkly the limited impact the trade offer will have on South Africa's economy: in aggregate, in 1998 SADC imports accounted for a mere 0.25% of South Africa's domestic market.

In the realm of investment, the implementation of the SADC FTA is likely to attract investment to the region as larger markets will increase the attractiveness of individual Member States for investors, who will be able to supply the entire region from any individual SADC country.

In addition, South Africa has been engaged in bilateral discussions with individual SADC Member States to promote investment in those economies through spatial development initiatives (SDI's). The promotion of investment in these economies is considered vital, as the absence of inward investment will substantially diminish the benefits of trade integration and may result in an allocation of benefits that is disproportionately in favour of the stronger economies.

The rationale underpinning the SDI concept is that the SADC region's economic potential lies in the extraction and beneficiation of minerals, the expansion of agricultural production and beneficiation through agro-processing and the development of the tourism sector. Due to civil war and neglect, however, much of the infrastructure necessary to render this potential viable is either absent or in a state of disrepair. Hence the SDI methodology endeavours to package and sequence infrastructural and industrial investments projects in a way that makes both commercially viable and attractive to investors.

As regards revenue derived from customs duties on SADC imports1 the reduction of tariff duties will result over time in the Government forfeiting revenues collected from import trade. Since the imports from SADC as a share of total imports is low, the revenue losses are likely to be out-weighed by the creation of new trade. Further, the Government does not rely on trade taxes as a major source of income. Instead, tariff
policy adjustments are considered primarily in the context of trade policy and industrial strategy developments.

In the area of customs control a direct implication for South Africa is the need to strengthen institutional capacity to implement and monitor the agreement in South Africa and the SADC region.

The South African1 Revenue Service (SARS) has already initiated a programme of institutional restructuring and staff training in anticipation of the implementation requirements for both the SADC Protocol on Trade and the SA-EU Trade and Development Agreement.

In line with the restructuring of the SADC Secretariat, the SADC Committee of Ministers of Trade took a decision in September this year to second staff to that institution for the purpose of implementing and monitoring the trade agreement.

In terms of customs cooperation with other SADC countries, three sub-committees -dealing with customs cooperation, trade facilitation and sanitary and phytosanitary standards - have been established to strengthen customs control in the region.

5. Consultations
The following government departments have been consulted on various aspects of the SADC Protocol on Trade over an extended period: Agriculture; Finance; Foreign Affairs; Justice and Constitutional Development; Minerals and Energy; Transport; the South African Revenue Service and Provincial Governments through the MINMEC.

Various other stakeholder bodies and the public at large have been consulted by way of workshops, seminars and presentations. These include, among others, the following: the Portfolio Committee on Trade and Industry in the National Assembly; the Select Committee on Trade and Industry in the National Council of Provinces; NEDLAC; Chambers of Commerce and Industry; Trade Unions; private and public corporations and academia.

There has also been consultation with the private sector with a view to strengthening systems for combating customs, VAT and trade fraud, both in South Africa and the SADC region as a whole.

6. Conclusion
On 18 August 1999 Cabinet re-affirmed South Africa's negotiations mandate for a free trade area in the Southern African Development Community based on:

(i) a comprehensive offer of coverage for tariff reductions for both traded and non-traded goods as contained in the tariff schedule;

(ii) an accelerated asymmetric reduction of tariffs by the Southern African Customs Union countries within a five year period for the vast majority of tariff lines;

(iii) An adequate and appropriate set of rules of origin for traded products that allows maximum economic activity and value-added processing in the SADC countries and circumvents the trade of illicit and counterfeit goods and fraudulent third party goods as contained in the rules of origin;

(iv) safeguard measures, customs administration, trade facilitation and simplification of documentation and procedures; and

(v) harmonisation of technical standards and other regulations.

Cabinet approved that South Africa, acting in unison with partners in the SAC U, create a momentum for forward movement in tariff reductions and the credibility of the SADC Free Trade Agreement by implementing the agreement to eliminate tariffs and other non-tariff barriers by I January 2000 even if it means that SACU implements unilaterally ahead of other SADC countries.

Cabinet further approved that, based on the expected final outcome of the negotiations that would be consistent with the requirements and recommendations outlined above the tabling of the SADC Protocol on Trade for ratification by both Houses of Parliament during the First Session of the Second Parliament in terms of section 231(2) of the Constitution of the Republic of South Africa (ACT 106 of 1996) (the Constitution) in preparation for implementation by January 2000.