A summary of this committee meeting is not yet available.
PORTFOLIO COMMITEES OF AGRICULTURE AND LAND AFFAIRS, FOREIGN AFFAIRS AND TRADE AND INDUSTRY & SELECT COMMITTEE ON ECONOMIC AFFAIRS: JOINT MEETING
26 October 1999
EU/SA TRADE DEVELOPMENT AND COOPERATION AGREEMENT: HEARINGS
Documents handed out
South African Chamber of Business (SACOB)
The SA Clothing Industry and the EU Free Trade Agreement
Textile Federation's submissions on the SADC and SA/EU Free Trade Agreements
AGRI-South Africa Submission
The Alternative Information & Development Centre
South African Chamber of Business (SACOB) presented their submission on South Africa's Ratification of the EU/SA Free Trade Agreement.:
Questions and comments
Mr C Eglin (DP) asked about the effect of the Agreement on the SADC region as a whole. He said that the rest of Africa already had the Lome Convention. He therefore wanted to know how this would affect them.
Mr Warren said that South Africa was the principal economic force in SADC. He said that if South Africa should therefore prosper, the other SADC countries would get a "spin off" from this.
A member asked whether the South African business community was in fact ready to reap the benefits of the Agreement.
Mr Warren replied that whilst he could not speak for all sectors of business, the progress of the EU negotiations had been a focus of the business community for a long time. The business community had been confident that agreement would be reached. He said that one should not underestimate the resourcefulness of the business community and reminded them how it could cope fairly well, during the Apartheid era, with sanctions.
Another member wanted to know to whether, and to what extent, SACOB could assist business.
Mr Warren said that there was a concerted effort in SACOB to empower big and small businesses to take advantage of the Free Trade Agreement.
It was noted by a member that Mr Warren, during his submission, said that some sectors actually felt that they would be disadvantaged by the agreement. He wanted to know which sectors these were.
Mr Warren could not mention too many but said in particular the wine and spirit sectors felt that the Agreement would be to their disadvantage.
Clothing Federation of South Africa
Dr B Richards, President of the Federation, presented the The SA Clothing Industry and the EU Free Trade Agreement submission
Questions and comments
A member noted that Dr Richards had said that the clothing industry had been going through problems for some time. He wanted to know what the impact would be on South African industries in the light of the fact that the EU's imports from South Africa only constituted 0.1% of the EU's total clothing imports.
Dr Richards emphasised that the relative rates of change was not a threat to South Africa and thus the EU was not a threat simply because of the 0.1% issue.
He said the problem came about with illegal imports from East Asia and other countries.
A member wanted to know what the impact of the Agreement would be in terms of employment.
Dr Richards said that the EU Agreement would not cause job losses; rather that South Africa instead could potentially double its exports. He belives that the target market for a large section of the sector's exports would be the middle to upper income bracket of First World countries.
A member commented that the biggest imports were from the EU and most of the illegal imports came from outside of the EU.
Dr Richards said that it was indeed not the legal imports from EU but in fact the illegal importing from outside of the EU that was causing the loss of jobs and high interest rates.
Another member asked what percentage clothing which was locally produced, was done so with locally produced yarn.
Dr Richards did not have exact figures with him.
Ms Fiona Tregenna presented the COSATU submission
Questions and comments
A member was interested in an assesment of the gains and losses of the Agreement. He wanted to know why Nedlac was not taken aboard during the discussions since he felt that this would have enriched the process. He also wanted to know what rural people would gain.
In terms of the assessment of gains, Mr Coleman said that this could not be done because of a lack of impact studies. He also said that it was one thing to do studies but another to actually observe dynamic economic interaction.
Another member remarked that Cosatu was saying that South Africa was not ready for implementation of the Agreement, whilst SACOB was saying that it was. He wanted to know whether Cosatu had checked what job losses would occur as a result of the agreement, if any.
Mr Coleman had in fact to some extent answered this question already but added that South Africa's ability to gain, depended on its ability to take advantage of the agreement.
Another member was worried that the process between labour and government was not working well and wanted to know to what extent Cosatu had in fact engaged the EU.
Mr Coleman was not aware of any formal engagement between COSATU and the EU.
There was concern amongst various members around the issue of the common agricultural policy of the EU. It was common cause that in terms thereof, EU countries received subsidies which actually created an imbalance in terms of competition with non-EU countriues in the EU's favour.
Mr Coleman said that this issue had to be dealt with by government on a bi-lateral or multi-lateral basis.
This submission was presented by Mr B Brink, Executive Director: Textile Federation
Questions and comments
It was asked what arrangements had been made to cater for job losses in the sector.
Mr Brink expressed the view that he was doubtful whether there would be further job losses as a result of the agreement.
Mr Hans van der Merwe, Deputy Executive Director of AGRI-South Africa , presented the submission.
Questions and comments
A member remarked that the labour force was at a very vulnerable stage as a result of the agreement and expressed concern about this.
Mr van der Merwe said that competitors under pressure would have to scale down in industries where they were not competitive and focus and grow in industries where they were. Structures had to be put in place to address this.
THE ALTERNATIVE INFORMATION & DEVELOPMENT CENTRE
Mr Simpiwe Dada from The Alternative Information & Development Centre presented the submission. There were no questions or comments due to time constraints.
The committees decided to support the ratification of the Agreement and the meeting was adjourned.
POSITION PAPER ON THE RATIFICATION OF THE EU/SA FREE TRADE AGREEMENT
South African Chamber of Business (SACOB)
The South African Chamber of Business welcomes the signing of the EU/SA trade 'Agreement. The results of appropriate implementation of the conditions will have, amongst others, the following results:
Freer movement of goods and services between South Africa and the European Union member states.
Â· Transparent equitable and accountable management of South Africa's human, natural, economic and financial resources for the purposes of economic growth and sustainable development.
Â· Regular political dialogue between the European Union and South Africa
Â· A timetable for tariff elimination
Â· The channeling of part of the EU'S future assistance. In a targeted manner, e.g. emerging entrepreneurs in the form of risk capital or interest rates subsidies on own resources lending and loans to South African borrowers for projects in South Africa, and on a case by case basis, for projects in the SADC region.
Â· Individual bilateral agreements between South Africa and member states of the EU will not be affected.
Â· Solutions will be sought on the control of Illegal immigration between the EU and South Africa.
SACOB believes that the above factors relating to the Agreement will be of benefit to South Africa.
2 GENERAL BENEFITS FOR SOUTH AFRICA
2.1 Freer Movement of Goods and Services between EU member states and South Africa
SACOB acknowledges that there is room for improvement in the Agreement. However, it will provide South African exporters better market access to European Union countries, which will contribute to the growth of our economy. One of the benefits of economic growth is the creation of sustainable jobs.
An additional benefit will be the facilitation of. intra regional economic trade
and investment flows from Europe into Southern Africa. South Africa is in a unique position to play a leading role in the development of the region, and to exploit the potential growth in the region by increasing its regional trade. But this will only be possible if South Africa can increase its production base. The EU/SA Free Trade Agreement will provide the synergy for increasing our production base.
2.2 Transparent Equitable and Accountable Management of South Africa's Human, Natural, Economic and Financial Resources for the Purposes of Economic Growth and Sustainable Development
One of the key elements of the Agreement is respect for democratic principles, fundamental human rights and the rule of law. Any violation of these principles provides the other party to the agreement with the right of censure. The Agreement provides for objectivity in the test of breach of this clause, and obviates the risk of unilateral action being taken. Thus good governance becomes an essential element which will provide both parties with an assurance that legislation in each country will be complied with and that the rights of individuals in each, as determined in the respective constitutions will be protected.
The provision relating to transparency and equitable and accountable management at South Africa's human, natural, economic and financial resources confirms the framework within which South African business is expected to operate and provides a safeguard to labour that appropriate legislation will be applied.
All of the above conditions are supported by SACOB.
2.3 Regular Political Dialogue between the European Union and South Africa
The provisions relating to political dialogue will, amongst other matters, encourage the support for democracy, the rule of law and respect of human rights, promote justice and help create the necessary conditions to eliminate poverty and all forms of discrimination. In addition. SACOB believes that the implementation of this provision will enhance the efforts of business to bring about a just and democratic South Africa.
2.4 A Timetable for Tariff Elimination
The fact that a timetable for tariff elimination will be implemented will provide South Africa with the opportunity to plan appropriately for the time when tarrif barriers will be eliminated. While it will be a challenge for producers for the domestic market who compete with imported goods, it will provide exporters with an advantage.
SACOB refers to an address given to its Annual Convention on 12 October 1999 by Minister Alec Erwin when he referred to the need for South African business to look beyond the domestic market and to become global players. SACOB concurs with this view and regards the reduction and elimination of tariff barriers to trade as an opportunity for South African business to enter the International market
2.5 The EU's Willingness to Consider the Channelling of Part of Future Assistance to South Africa to Targeted Areas.
The fact that the EU Is willing to assist financially in developing the region and individual businesses, will facilitate the establishment of new business opportunities and growth of SMME's In South Africa. SACOB regards this sector of the economy as very important. It believes that by developing this sector the achievement of the objective of sustainable economic growth and employment creation can be enhanced.
2.6 Individual Bi-lateral Agreements between South Africa and Member States of the EU
SACOB supports the fact that existing agreements between South Africa and individual member states of the EU will continue to be applied after the Free Trade Agreement is implemented. It is however recognised that as the Free Trade Agreement is applied they may be reasons for amending or canceling bi-lateral agreements. However, this must only be considered after due cognisance has been taken of the benefits of such amendments and cancellations.
2.7 Control of Illegal Immigratlon Between the EU and South Africa
SACOB refers to the current circumstances being faced by South Africa regarding the Illegal entry of persons into South Africa and consequently supports the provision in the Agreement that illegal immigration between the EU and South Africa will be controlled.
3 PROCESS OF RATIFICATION OF THE AGREEMENT
SACOB refers to the fact that the signing of the Agreement on 11 October 1999 is only one of the steps in a lengthy process which South Africa must now embark on. SACOB recognises the obligation placed on the South African government to ratify the agreement. Thereafter. the provisions in the Agreement must be legalised and enforced.
SACOB appeals to government to operate in a transparent manner during
these processes. SACOB believes that government has an obligation to consult with all stakeholders on the matter to ensure that the implementation of the Agreement is carried out in such a manner that it benefits the economy of South Africa as a whole, and that the interests of stakeholders can be accommodated as far as practicable.
4 CONCLUDING REMARKS
SACOB has analysed the EU/SA Free Trade Agreement and has come to the conclusion that it will benefit the South African economy and promote growth and development not only within the borders of the country, but within Southern Africa as well.
SACOB believes that the Agreement will encourage providers of goods and services to the domestic market to become global players.
SACOB also beIieves that the growth of the economies in the Southern
African region, which should be encouraged by the Agreement, will be
beneficial to South African business and will contribute to the growth of
South Africa and hence to employment creation.
SACOB recognises that not all sectors of the economy will benefit to the same extent by the Agreement, and that some sectors believe that it is to their disadvantage. However, the Agreement will encourage South African business to become globally competitive, whether it is because they compete on the export market, or with imports on the domestic market. This will mean that South African businesses, whether they provide goods and services for the international or domestic market, will have to become more efficient. Consumers will be the ultimate beneficiaries of economies of scale and greater value for money derived from the need of business to be internationally competitive.
SACOB regards consultation with stakeholders as a prerequisite in the process of ratification of the Agreement, as well as in the process of introducing legislative requirements for the implementation of the Agreement. To this end, SACOB believes that as "the voice of business it should be one of the stakeholders to be consulted.
The SA Clothing Industry and the EU Free Trade Agreement
There are approximately 137 000 people currently employed in the formal sector of the clothing manufacturing sector in South Africa. Employment has declined in recent years from a peak of 152 000 in 1996. Nevertheless, the clothing industry remains the most labour intensive sector in manufacturing, accounting for 10 % of total manufacturing employment.
The ex-factory value of sales in 1998 was R9,7 million, which represents approximately 2% of South Africa's GDP. The industry has experienced one of the most difficult periods in its history but there are signs that the situation is improving.
Exports by the industry amounted to R772 million in 1998, which is 8% of total production. In the first quarter of 1999, exports grew by 60% over the same period of the previous year, reflecting an improving international market environment and that South Africa is beginning to establish itself in the global market.
The USA and UK remain the two most significant destination countries for clothing exports, accounting for 42% and 32% of total exports respectively.
Exports to the EU in 1998 were R304 million which represents 40% of total exports. Of the EU countries, the UK is the major export destination country, accounting for 81% of exports to the EU, followed by Germany (8%), France (4%), Italy and Netherlands (2% each).
Clothing imports into South Africa amounted to R930 million in 1998 with the major source countries being Malawi China and India. The EU accounted for 12% of total imports with Italy being the most significant supplier (42% of imports from the EU), followed by Germany (19%), France (16%) and the UK (14%).
EU customs duties on clothing will be phased down to zero according to two different schedules. The first will be a phase-down to zero duty over 3 years and covers products such as foundation wear, underwear, windbreakers and mens' woven shirts. The second schedule provides for a phase-down to free of duty over 6 years and covers the balance of clothing items such as woolen suits, jackets, trouser:, jerseys, knitted shirts. etc. This latter group of products is where South Africa's strength lies and tends to be the more value added items.
The general rate of dutv into the EU on clothing is 14%. although lower rates apply on specific tariff lines. In cases where the GSP applies. the dutv is ~ and in such cases this will form the base rate for the phase-down to zero.
The free trade agreement for clothing is subject to relatively stringent rules of origin. As a general rule, only South African or EU made fabric can be used. The fabric has to be made from locally produced yarn. This is the 2 stages of conversion principle which is an already well-established principle in the Lome convention. In certain categories of woven garments, exceptions are made which permit the use of imported fabric but then a high value-added requirement of 60% is imposed.
South Africa will be phasing its duties down to 20% over 8 years - this represents a 50% preferential rate over the 40% general duty that wiIl be in force at that time. On implementation of the agreement, the South African duty will be reduced to 40% from a rate of 66% at the time of the negotiations (60% at implementation date). Certain product lines which are lower than the general level 60%) will be reduced to zero immediately.
The general opinion of the agreement reached on clothing is that it actually favours the EU as South Africa has given awav more in terms of percentage points. The developmental principle to encourage growth in South Africa has certainly been lost in the negotiating process. This issue needs to be viewed in the context of the relative sizes of the industries in the two partners. Simply put, the South African clothing industry is a dwarf with its exports to the EU accounting for a mere 0,1% of total EU clothing imports. Clearly, the South African clothing industry poses no threat. It would appear that the EU was more concerned with wanting access to South African raw materials, such as raw wool, as well as access to SA markets for their products.
Overall, however, the South African clothing industry is expected to benefit in the medium to long term. Export growth will occur and after 8 years could result in a doubling of the size of the SA industry - a lot will depend on international developments, especially the phasing-out of quota restrictions for competitor countries under the Multi Fibre Arrangement (MFA) - such countries will still be faced with normal customs duties, however.
Initial indications are that even the first tranche of the phase-down process has resulted in increased interest from EU buyers, which bodes well for establishing a growing long-term relationship.
Â· The EU is a very important market for the local agricultural sector which should be recognised in any agreement;
Â· The value of GSP's likely to be granted to South African agriculture will not be much, as the EU had already expressed a preference for a free trade dispensation (the delay in granting GSP's to agriculture was seen as part of the delay tactics to get South Africa to become more accommodating to the idea of an FTA);
Â· Rules in terms of the Uruguay-round agreement and GATT rules in general should be adhered to, i.e. no waivers should be sought;
Â· A comprehensive view on local policy and strategy regarding tariff protection on agricultural products should be obtained and incorporated into the negotiations;
Â· Any negotiations should be on a line by line basis;
Â· The EU should be convinced of the developing character of the economy as well as the need for a meaningful improvement in market access;
Â· Asymmetry in favour of South Africa is necessary, especially since the country is moving out of a period of trade isolation;
Â· The impact of the CAP in the EU and especially export subsidies being granted by the EU should constitute an integral part of the negotiations; and
Â· All interested parties should be involved in the trade negotiations.
It does, judged by the content of the TDCA, appear that these principles were to a greater or lesser extent adhered to and that the operational side of the latter should now be developed, applied and monitored in order to ensure the fullest possible compliance. In the latter respect Agri SA wishes to allude to some of the related aspects currently being viewed as of primary importance.
2. INSTITUTIONAL CAPACITY OVERSEEING THE IMPLEMENTATION PROCESS
During November 1996 the Minister of Agriculture appointed an Agricultural Trade Forum (ATF) consisting of the developing farming sector, commercial farming sector, processors of agricultural products, farm worker trade unions, trade unions in the processing industry and government representatives. According to the terms of reference of the ATF it had/has to act as a forum for trade discussions and a channel of communication, whilst also having to devise negotiating strategies which must be tested with the broad agricultural community. This body fulfilled a very useful function during the EU-SA negotiations.
Despite the existence of the ATF which had to deal with the peculiar situation of agriculture (i.e. heavily distorted international markets, special obligations in terms of the WTO-organisation, CAP in the EU and certain specific agricultural proposals made by the EU with respect to the potential agreement) close liaison with NEDLAC structures (i.e. through the Trade and Industry Chamber and Teselico) was maintained.
Given the complex operational side (e.g. 13 agricultural product groups of the EU and South Africa to be monitored and administered, application and control of quotas, application of rules of origin, safeguards for agricultural products as contemplated in Article 15, accelerated tariff reductions included in Article 16 and the review clause contained in Article 17 of the TDCA), the agricultural sector deems it of utmost importance that the ATF should be kept intact in order to act as the co-ordinating body in agriculture for relevant investigations, actions pertaining to these issues and the general overseeing of the implementation process.
3. AGRICULTURAL SAFEGUARD
At the initial stages of the negotiations the agricultural sector put forward the concept of "Special Protocols" as an appropriate mechanism for dealing with the trade treatment of "sensitive" products and sectors. This would have entailed excluding the product or sector concerned from the general process of tariff elimination and instead subjecting it to special arrangements which would be established in the light of the particular problems faced. The EU preferred to exclude these sensitive products from the schedules of tariff elimination established under the agreement. The only commitments made on products such as frozen meat, maize and starches was that the treatment accorded these products would be periodically reviewed.
The EU, however, was allowed to retain in place its system of export refunds and production aids which can, despite tariff arrangements, still disrupt the local market. The Agenda 2000 proposals for CAP reform left the system of export refunds completely untouched, indicating that this will still remain an important problem area for South Africa and also the BLNS countries.
Safeguard mechanisms will be available i.t.o. Article 23 (e.g. appropriate measures under the conditions provided for in the WTO Agreement on Safeguards or the Agreement on Agriculture annexed to the Marrakesh Agreement). In terms of the agricultural safeguards under Article 15 the Co-operation council may suggest solutions or unilateral provisional measures may be taken by the affected party to "limit or redress" the disturbance. The affected party will take into account the interests of both parties. Agri SA is of the opinion that even if Article 15 is intended to provide a fast track approach towards agricultural safeguards, time-consuming compilation of complaints will still be the order of the day.
Agri SA is thus of the opinion that:
Â· A local monitoring structure (e.g. the ATF in collaboration with SARS) should be put in place and that commodity branches in agriculture should consequently not be solely responsible for this function;
Â· Further examination and possible elimination of export refunds in connection with trade with South Africa should be addressed as a matter of urgency in accordance with Article 16(1) (i.e. accelerated tariff elimination by the Republic of South Africa) of the TDCA and also within the context of WTO;
Â· A time frame with respect to considering further steps in the process of liberalisation of reciprocal trade - no later than five years after the entry into force of the TDCA - should i.t.o. Article 17 be developed as a matter of urgency; and
Â· Consideration of operational methods to apply Article 4(1) (i.e. co-operation with respect to the exchange of information and training schemes) and Article 48 (i.e. co-operation on any field covered by the agreement lending itself to statistical treatment) should be dealt with as a matter of urgency.
4. TRADE DEVELOPMENT
The EU has agreed to liberalise approximately 61% of agricultural imports from South Africa. This is a fairly substantial improvement on the 54% tabled by the EU in their initial trade offer of January 1998. In addition to the 61% of agricultural trade subject to tariff liberalisation, the EU is granting South Africa tariff quotas for certain agricultural products at preferential tariff rates (ranging from 0% to 50% of MFN). These quotas make up approximately 13% of agricultural trade with the EU, implying that in total about 74% of South African exports to the EU will be subject to some form of preferential trade access. This obviously entails a "theoretical" potential market calling for translation into an effective market.
In terms of Article 52(1) the parties undertake to "develop, diversify and increase" trade between them and to improve the competitiveness of South African production on the domestic, regional and international markets. The scope and content of measures in this respect may go a long way in enabling South Africa to really penetrate EU-markets.
COSATU welcomes the opportunity to comment on the European Union-Republic of South Africa Agreement on Trade, Development and Co-operation ("The Agreement"). The Agreement will have significant effects in shaping not only South Africa's future trade relations but also our domestic industrial structure and employment levels. There will be substantial effects on the Southern African region, in particular on the Southern African Customs Union (SACU).
In making our submission we are mindful of the fact that the Agreement has already been signed and is set for implementation for January 2000. COSATU's concerns around the process leading to the Agreement are reflected in section five of this document. Our understanding is that there is very little, if any, space for making amendments to the Agreement at this stage. We have thus not felt it necessary to engage in a detailed critique and counter-proposals on the substance of the Agreement. Beyond some general comments in this regard, we have focussed our submission on issues related to the actual implementation of the Agreement. We support many of the comments and recommendations made by the Parliamentary Committees on the Agreement. COSATU also takes note of the fact that the Agreement deals not only with trade but also with development and co-operation. Our comments have, however, focused on the trade dimension of the Agreement. It is felt that it is in the trade area that the greatest threats are posed to the South African economy, while the other aspects of the Agreement are more supportive.
- Existing tariff reduction policy should be reviewed, so that tariffs can be used more strategically as an instrument of an active industrial policy.
- Overall and sectoral impact studies should be urgently produced to assess the likely effects of the Agreement on the South African economy and particularly on employment. We call on the Committees to make such studies a condition of ratification. If in future additional European countries look like joining the EU, appropriate impact studies should be done in advance.
- Mechanisms should be put in place to overcome the EU's Non-Tariff Barriers, including DTI liasing with business to identify obstacles and accelerated research and improvement on standards, quality, metrology etc.
- Steps need to be taken to minimise negative effects on SACU countries arising from the Agreement. South Africa needs to assist in ensuring that the EU commitment of support translates into meaningful resources.
- We are tabling specific proposals to deal with the negative effects of the Agreement. These include support for industrial restructuring, support for workers affected, use of safeguard mechanisms, and particular monitoring in relation to the agricultural sector.
- DTI needs to accelerate initiatives to publicice the Agreement and empower South African firms to maximise growth opportunities. Programmes should be put in place to encourage export promotion, attract new investment to take advantage of the new trade preferences, and focus on opportunities for SMME's.
- The Joint Co-operation Commission to be established should include stakeholder representatives.
- COSATU would want to participate in discussions on outstanding areas of the Agreement and to participate more substantively in future trade negotiations. This would include greater resource and information sharing, and participation in South African negotiating delegations.
COSATU believes that South Africa's trading patterns should not be coincidental, purely a function of historical/colonial relationships, or based solely on grounds of maximum economic gains. Our trade relations need to be defined by our conscious choices as a nation: choices around which countries and regions we wish to forge stronger relationships with, and choices around the type of domestic economy we want to promote. COSATU appreciates the fact that this is a joint hearing also including the Portfolio Committee on Foreign Affairs, as trade is a key tool in taking forward South Africa's international agenda, in particular the concept and practice of an African Renaissance.
The European Union is obviously a key trading partner for South Africa. Notwithstanding its importance, it needs to be recognised that trade relations are dynamic and that the relative importance of trading partners changes over time. In the long term, COSATU feels that it is appropriate for South Africa to cultivate stronger trading relationships with other developing countries, particularly those with which we share a similar world outlook. We take note of policy initiatives within the Department of Trade and Industry (DTI) to cultivate increased trade with the developing world, and we support further accelerated progress in this regard. In our view it would have been desirable for the SADC Agreement to have been implemented in advance of the EU Agreement. Nevertheless, it is important that over time we attempt to reshape our trading relations in line with our international vision.
Focussing specifically on the trading relations between South Africa and the EU, this relationship is again a dynamic one upon which the Agreement will have a profound effect. The issue is at one level about the size of the trade flows in each direction - what will be the relative effects on our exports to and imports from the EU? A second dimension is in terms of the content of the flows - will we be exporting mainly primary products in exchange for high value added goods? There is a danger of South Africa's productive capacity being locked into a particular mode. COSATU views it as a challenge for South Africa to transform colonial trading relationships and for us to move up the value-adding chain.
An export strategy based on primary products makes the South African economy particularly vulnerable. There is a general decline in the world prices of primary commodities (or at least these prices have not increased in line with the prices of manufactured goods), which has negatively affected developing countries reliant on them. Furthermore, the booms and slump of primary commodity prices (often over an approximately seven year cycle) can be destabilising for the economy, as can the inherent vulnerability of the agriculture sector.
A pattern of exporting principally capital-intensive primary goods while importing principally labour-intensive manufactured goods also deepens our balance of payments vulnerability. Domestic economic growth increases the demand for high value-added imports , worsening our balance of payments position.
South Africa need not accept that our comparative advantages are static, based on existing factor endowments. Such an approach would tend to favour for example the export of mineral based primary products, based on our endowments of mineral supply and exceedingly cheap electricity. Forging a trade strategy based on existing price structures (allocative efficiency) tends to reinforce existing biases in our production structure. It also gives rise to a contradictory situation, where we export capital intensive goods despite our massive labour endowment, apparent in the extremely high unemployment rate.
An alternative approach of "dynamic comparative advantage" does not confine itself to the existing price and production structures, but seeks to maximise creative efficiency. For example, potential forward and backward linkages can be actualised through strategic state intervention. COSATU acknowledges the sensitivity of DTI to this debate, and the commitment of the government to move South Africa up the value-adding chain. Our concern is the extent to which the EU Agreement succeeds in advancing this objective. The comments on the Agreement by these committees see the greatest opportunities in respect of industrial products, and hopefully there will be potential for expansion in the more value-added products. Given the relative inaccessibility of the European agricultural market it could not be said that the Agreement per se locks South Africa into primary agricultural production.
In signing the Agreement South Africa has accepted certain risks - there are no guarantees as to the real outcomes for us. There is no definitive empirical evidence as to whether or not the Agreement is in South Africa's favour overall. Furthermore, given the huge imbalance between the South African and EU economies, any negative effects will be far more keenly felt by ourselves. COSATU is also concerned about the extent of South Africa's capacity, particularly in the short and medium terms, to take up the export opportunities which are opened up through the Agreement. It is thus imperative that, in the implementation of the Agreement, risks and negative effects are minimised and their consequences buffered, while growth opportunities are maximised.
Given the crisis of job losses which South Africa is currently experiencing, any current or proposed policies need to be evaluated in the context of their impact on employment. While it would be simplistic to reduce this to the only benchmark for evaluating policy, COSATU asserts that job creation and the prevention of job losses needs to be the primary criterion informing policy.
COSATU has consistently raised concerns about the approach to tariff liberalisation and export orientation as set out in the Growth, Employment and Redistribution (GEAR) macro-economic strategy. Our concerns around these policy measures include job losses arising from the eroding of domestic industry, a promotion of capital intensive rather than labour intensive industries, and a lack of focus on growing the domestic market. In previous forums, including in our submission on Industrial Policy to the Industrial Policy Group of the Trade and Industry Portfolio Committee last year, COSATU has voiced concern about the rapid pace of tariff liberalisation, faster than South Africa's WTO commitments. The Agreement under discussion today will obviously have the effect of further lowering our tariffs to our major trading partner. For this reason we would like to take this opportunity to raise broader questions about the relationships between tariff liberalisation, export orientation, and employment.
COSATU does not see any necessary correlation between tariff reduction, employment creation, and increased efficiency of industries or greater exports from South Africa. The fact that there has been a decline in employment levels at the same time as significant increases in output and export growth (briefly outlined in the previous section) is most telling. This pattern flies in the face of the prevailing logic of the GEAR strategy which is that increased competitiveness will lead to increased exports, which in turn will lead to expanded production for the expanded market, which in turn will lead to increased job creation.
A key problem with this approach is that scarce resources are mobilised into competitive, export-oriented, usually capital intensive, industries, while the resourcing of more labour-intensive forms of beneficiation and industrial activity is neglected.
Furthermore, the assumption that increased competition from cheaper imports will lead to greater efficiency in domestic production is flawed. COSATU does acknowledge that there is currently considerable inefficiency in South African industry, particularly at the level of managerial inefficiency, and that considerable restructuring is required. The catalyst for such restructuring should not, however, be opening up to unregulated competition - which may well have the effect of shutting down South African companies rather than making them more productive. Restructuring should rather be guided by pro-active industrial policy initiatives, such as those which share information about international best practice in particular production lines. Rather than simply presuming that industry will develop if it is exposed to the 'cold winds of competition', an approach is needed which nurtures domestic industry through selective use of protective measures, as well as deliberate industrial strategies aimed to build up domestic capacity. This could have a number of facets such as:
- Import substitution
- Active tariff policy
- Increased investment in research and development, co-ordinated with research institutions
- Industrial and agricultural support targeting including promotion of beneficiation and high growth clusters
Tariff policy can be a key component of an overall industrial strategy, providing tools through which government can actively guide the economy, prioritising and cultivating certain industrial sectors. Tariff liberalisation - particularly where such liberalisation is not South Africa's own initiative but is in response either to WTO rules or to a bi/multilateral negotiations process - inhibits the capacity of government to do this.
International experiences of industrialisation, whether of the developed countries at earlier stages or more recently of East Asian countries, shows a consistent pattern of protection of domestic industries during development with tariff liberalisation only coming later, if at all. Even where there has been a strong emphasis on export promotion, this has been complemented by strong barriers against imports.
Instead of focussing exclusively on export orientation, a component of industrial policy should be to encourage import-substitution in order to assist in expanding the domestic traded goods sector. Expansion through import-substitution operates through reducing the propensity to import, reducing leakages from the domestic economy. Specific strategic sectors must be targeted for a concerted programme of import substitution. The chief criterion in selecting these sectors must be their ability to generate sustainable employment.
An appropriate balance between an export thrust and import substitution has important employment effects. Import substitution provides greater potential for the adoption of labour intensive techniques and employment generation than do export oriented industries which in order to be internationally competitive tend to focus on cost cutting through the adoption of the most efficient production technique.
In COSATU's view existing tariff policy should be modified along the following lines:
- South Africa's general tariffs should not be reduced at a rate faster than that required by our obligations to the World Trade Organisation;
- Tariff reduction should be preceded and concurrently sopported by active industrial policies to promote competitiveness;
- Concrete social adjustment programmes to transfer workers into new jobs must be introduced if tariff reduction leads to retrenchments;
- Government should use tariffs strategically, reducing them to improve competitiveness, but also increasing them to protect jobs and promote industrial development;
- Review of tariff reductions which are having negative effects and not reaching the desired objectives.
Government has argued that job loss in manufacturing is as a result of SA's structural adjustment to global trends in manufacturing and is not due to poor sequencing of tariff reductions and supply-side measures. However concrete experience at sectoral level is not only that jobs have been lost and jeopardised concurrently with tariff reductions, but that tariff reductions have arguably slowed down the rate of new job creation.
COSATU appreciates that it was able to participate within the negotiation process to the extent that it did. We participated at two levels :
- via the NEDLAC Trade and Industry Chamber's Technical Sectoral Liaison Committee (TESELICO). TESELICO provided a general cross-industry/sector consultative forum for government trade negotiators to liase with business and labour over technical matters relating to the Agreement
- in ad hoc sectoral consultations (outside of NEDLAC) that took place from time to time.
These processes were inadequate for COSATU to input substantively and continuously into the negotiations process. At many stages insufficient information was available. An additional source of frustration to labour was that at some points during the negotiation government engaged in bilateral sectoral meetings with employers but did not extend this arrangement to include labour.
It would also have been desirable for the relevant parliamentary Portfolio and Select Committees to have had more consistent and meaningful opportunities for shaping the Agreement. The fact that so few stakeholders are making submissions today, despite the huge effects the Agreement will have, is an indication of the disempowerment of broader society in this process. Although the Agreement has been in the pipeline for some time, the haste to have it implemented on 1 January seems to have led to an inappropriate compression of events in these final stages.
COSATU tables the following proposals around future processes:
- Labour would wish to continue to be involved in the discussions relating to some of the outstanding elements of the Agreement. In this regard specific mention is made of those sections of the Agreement relating to public sector procurement (article 44); fisheries (article 61); services (article 29)
- Given the complexity of the issues involved in the negotiations government should make specific resources (especially research) available to the labour constituency to enable it to be properly involved in the future negotiation processes. The IDC played a significant role in assisting labour during the EU-RSA Agreement - perhaps this arrangement needs to be formalised and enhanced. Labour appreciates that government shared resources but there could have been greater sharing; government research could have been shared more quickly.
- Consideration should be given to including labour representatives as part of the SA delegation during the negotiation of any trade Agreement. Sufficient flexibility should be allowed that labour is able to articulate our own mandates positions to government, in a way that does not undermine the coherence of the South African negotiating position. This will facilitate report backs to the labour movement in general, and allow the government to be fully aware of a labour informed position in the cut-and-thrust of negotiations. Labour asked to be present during the EU negotiations but this was not acceded to.
"The first lesson relates to the basic motive for SA to consider a PTA [Preferential Trade Agreement] with the EU. Whether it is an essentially political decision or an economic one would have major implications. If it is mainly an economically motivated decision, then serious preliminary studies are need to assess the overall desirability and impact on SA ." Mustapha Nabli
Any adjustment to a nation's tariff regime can have enormous (positive and/or negative) impacts upon all aspects of the economy of that country. It was therefore somewhat surprising that the DTI entered into negotiations with the EU without sufficient prior thorough checks on what the probable effects of any potential trade deal would be on the RSA economy. That the negotiations were finalised without an overall quantitative and qualitative impact assessment having been concluded is very disturbing. Labour is especially concerned about the possible impact the Agreement may have upon jobs.
While it is recognised that government (prior to and during the course of the negotiations) did consult with business and labour to obtain their views on possible tariff adjustments these consultations should not have been seen as a substitute for a rigorous qualitative and especially quantitative analysis of its own. During the course of the negotiations a number of academic econometric impact studies were completed independently of government (see Appendix 1 for highlights of the key conclusions of these studies). None of these showed that a probable Agreement would be overwhelmingly in favour of the RSA. Indeed one study completed by UNCTAD showed that the Agreement was not in the South Africa's interest.
COSATU tables the following proposals:
- Parliament should require as a condition of ratification that the DTI (together with other affected government departments, e.g. Land Affairs and Agriculture) should urgently produce two studies, namely :
- one macro qualitative and quantitative study that would attempt to assess the likely impact of the whole of the Agreement upon the RSA (including the issue of the capacity of domestic industry to take up the export opportunities provided for);
- a series of other studies which would examine the impact of the Agreement upon specified economic sectors and geographic regions of the country.
- Both studies should have as a focus the likely employment effects of the Agreement. These studies will be much easier to conclusively finalise now that there is certainty about what the Agreement entails.
The results of these studies should then be used to deal with the negative effects of the Agreement while taking advantage of positive opportunities. Specific proposals in this regard are tabled in section seven of this submission.
Such studies could also be used to establish base lines against which regular future studies on the impact of the Agreement could be measured. COSATU proposes that bi-annual overall studies should be commissioned on the impact of the Agreement; while annual surveys should be produced on those identified sensitive sectors.
- In the event that additional European countries join (or look like joining) the EU then COSATU proposes that further impact studies should be produced on what the likely impacts of these countries' accession would be on the RSA economy. We are concerned about the entry of low wage countries to the EU (e.g. Turkey, Poland, Hungry, Czech Republic, etc) , and the negative impact this could have upon South African industry.
- Parliament should require that, as a condition of ratification for other future trade Agreements, the government should provide prior impact studies on the likely effects of such agreements upon the South African economy.
- All the research endeavors proposed above should be produced with the active participation of representatives from the labour movement; and there should be regular reporting on the results obtained to Parliament.
Although the Agreement is to a certain extent asymmetrical and differential in South Africa's favour, South Africa will still be faced with increased competition from imports and increased opportunities to export over roughly the same time period. The immediate adjustment costs will be relatively far greater for South Africa, given that the European trade regime is already far more liberalised. South African industries liberalising from a more protected starting point could feel the change more keenly than EU industries.
COSATU is concerned that the asymmetrical and differentiated nature of the Agreement will be eroded by the EU's superior capacity to take up increased production as well as to defend their own markets. While South African tariff reductions will open up the space for increased EU imports almost immediately, uptake of enhanced export opportunities may be delayed. This could potentially lead to a worsening of the trade balance, with limited foreign exchange reserves being used to pay for imports while relatively little foreign exchange reserves are being earned. This scenario could be perceived as placing "upward pressure" on interest rates, which would have further negative consequences for domestic investment and job creation.
As discussed in section 3 above, COSATU is concerned about tariff liberalisation exacerbating the jobs crisis engulfing South Africa. We are not convinced that jobs generated from increased exports to the EU will outweigh job losses from increased imports, although we do indeed hope that this will be the case. The employment effects will also be affected by the relative labour intensity of exporting and import competing industries. Contrary to what economic theory predicts, given South Africa's labour-intensive factor endowment, our exports currently tend to be relatively capital-intensive while many of our imports tend to be relatively labour-intensive. A difficult challenge for us as a country is to reconcile the imperatives of increasing exports, moving our production up the value-added chain, and promoting labour intensive production. Government policies need to assist in meeting this challenge.
Proposals for managing any negative employment effects are discussed in section 7.1 of this submission.
The subsidy system of the EU, particularly of agriculture, is an ongoing concern. The massive public sector aid (40000000 ecu per annum) provided to its farmers, agricultural processing industries and food product traders creates major competitive distortions -for exporters to the EU market, competitors with EU exports in domestic markets, and for exporters competing with EU exports in third markets. This situation obviously does not emanate from the Agreement under discussion, but more broadly from the system of international trade regulation and the condoning of such practices by developed country regions in the Marrakech round. This is a crucial factor in determining the impact of the agricultural aspect of the deal.
We echo the concern expressed in the comments on the Agreement from these committees, that the Agreement has only partially addressed problems created for South African agricultural exporters created by the protectionism and unfair trading practices associated with the EU's Common Agricultural Policy (CAP). These subsidies present a major obstacle to South African access to third markets, and the employment opportunities which could arise from this access, and pose the danger that dumping of produce by European farmers at prices lower than our local producers can match. This is in the context of the concurrent removal of subsidies to South African producers.
In terms of the South African market, even though some tariff barriers have been retained the EU system of export refunds allow EU exports to "jump" these barriers. COSATU hopes that ways will be found of dealing with the EU subsidy system, possibly on a multilateral basis. We support the call from these committees for a major breakthrough in such issues in the WTO's Millennium Round of negotiations due to begin in Seattle in December.
Labour is wary that the RSA may have scored pyrrhic gains in the negotiations with the EU. The EU may have agreed to reduce its tariffs to zero (or near zero) for a whole range of RSA products in the full knowledge that many South African products would be unable enter the EU (or find it exceedingly difficult to do so). This is because the EU has put in place a number of barriers or disincentives such as :
- bureaucratic customs and administrative entry procedures
- technical barriers to trade
- charges relating to imports
- government aid, including subsidies.
Prior to the commencement of negotiations with the EU, labour's representatives in NEDLAC argued that it was important for government to undertake research that would identify those non-tariff barriers the EU had in place. This did not occur. It was only during the course of the negotiations that some work was done on Non-Tariff Barriers. It is COSATU's view that this research should have been finalised even prior to the commencement of negotiations.
COSATU tables the following proposals:
- The DTI (together with other government departments) should be required - when they publicise the benefits of the Agreement - to encourage all business to immediately advise it of any EU originated entry "impediments". The DTI should specify a person or structure within the DTI to whom business can report its problems; this person/structure should ensure that a speedy investigation is launched into the merits of the complaint; and that proposals are made to address the issue.
- The DTI should report to parliament on an annual basis on all those non-tariff barriers that the EU has used in order to block South African products, and what measures it took to counteract these.
- South Africa should speed up its own research into standards, quality, metrology, etc. This research will be vital in identifying those areas whereby RSA will have to improve its own standards, quality arrangements, etc. Thereafter proposals should be made in order to see if the South African companies on their own can make the necessary adjustments. Should they be unable to do so then the government should examine ways offering these companies targeted support so that they can adapt.
It is disappointing to note that the social clause (see Article 85 of the Agreement entitled "Social Issues") contained within the Agreement does not contain any teeth - especially in relation to core ILO conventions. Labour had proposed during the negotiations to the DTI that there should be a direct linkage between any country within the EU obtaining trade preferences and that country formally ratifying the requisite ILO conventions. What was adopted, particularly as it relates to labour standards, is in our view substantially weaker than what could have been achieved in discussions with the EU.
Although the Agreement is nominally between South Africa and the EU, in effect it involves the whole of SACU as well as having implications for the Southern African region as a whole. By concluding a deal with South Africa, the EU has unilaterally transformed the basis of its trade relations with the BLNS countries (Botswana, Lesotho, Namibia and Swaziland) from a non-reciprocal preferential trade agreement to a reciprocal preferential trade agreement. COSATU is concerned about the potential effects of the Agreement on SACU countries. These countries will be negatively affected both in terms of possible displacement of their own domestic industries by cheaper European imports and by losses in revenue from the SACU customs duties revenue pool, as well as to a lesser extent by loss of exports to South Africa.
It would be irresponsible for South Africa not to take steps in ensuring that these potential consequences are mitigated. There have been some indications of EU support to the region, and South Africa in conjunction with the affected countries needs to ensure that these commitments translate into meaningful injections of resources. Monitoring is also required to ensure that any aid/compensation offered does not simply come out of what these countries would have received anyway. Lastly, in finalising and implementing the SADC Protocol South Africa needs to be sensitive to the negative effects the region and SACU in particular are likely to be experiencing as a result of the EU Agreement.
The Agreement will obviously lead to both winners and losers in the South African economy. It would be simplistic to think that workers who lose their jobs in an industry negatively affected by the Agreement would simply be able to gain alternative employment in another industry benefiting from growth opportunities emanating from the Agreement. This would be constrained by, amongst other things, the limited mobility of factors of production. An important redistributional role thus arises for government in ensuring that the "losers" from the Agreement, particularly those workers with limited alternative options, are supported. Specific proposals for this are set out below. We also support the recommendation in the committees' comments on the Agreement for the production of a "user friendly" document illustrating in an accessible manner how broad industry categories or product lines will be affected.
With the operationalisation of the Agreement it is clear that there could be many firms / sectors / regions / portions of the labour market (e.g. women) in the economy that could experience severe difficulties in adjusting to the increased penetration of the RSA market by EU products. Should this happen substantial number of workers could lose their jobs. It would be patently unfair that workers should have to take the brunt of the effects of the Agreement. COSATU proposes that government immediately identifies those sectors of the economy that would be particularly vulnerable to the effects of the Agreement. This would enable strategies to be implemented to these vulnerable sectors to adapt, or soften the impact.
COSATU tables four key proposals in this regard:
Sectoral restructuring funds can be instituted, to be jointly managed by government, business, and labour, to fund supply side measures for negatively affected sectors. Furthermore, government should adjust the existing government supply side / industrial support incentive programmes in order that affected firms or sectors can withstand some of the shocks that the Agreement may present. In some instances it may be necessary for government to introduce entirely new support measures. The type of initiatives which could be supported both by sectoral restructuring funds and by independent government initiatives could include investment incentives, technical assistance with restructuring, accelerated research and development, support in overcoming the EU's non-tariff barriers, and skills training for workers in the sectors.
COSATU proposes that as soon as this Agreement comes into effect a programme should be immediately implemented to assist all those workers who are dislocated as a result. Consultative studies would be required to attempt to identify and quantify job losses which come about as a (direct or indirect) result of the Agreement. The support measures proposed by COSATU will require the establishment of additional support measures over and above those existing resources that emanate from the Unemployment Insurance Fund; the Social Plan; and training programmes. COSATU has tabled proposals in this regard in other forums. Furthermore, there should be appropriate retraining and reskilling of affected workers to maximise their chances of finding alternative employment.
Specific attention is drawn to Articles 23 and 24 of the Agreement relating to "Safeguards" and "Transitional Safeguard Measures". Generally these clauses will allow the RSA to clampdown on EU originating products should they be imported in quantities and under conditions as to cause or threaten to cause serious injury to domestic producers, and in certain instances to "infant industries" and/or entire "sectors" whereby "difficulties will produce major social problems". It is important that the government fully publicises the available safeguard mechanisms, and takes overall responsibility for monitoring the opportunities for bringing them into effect.
The overall Review mechanism should be real, open, and accessible.
Specifically in terms of the agricultural sector, COSATU proposes the establishment of a trade monitoring system in areas vulnerable to CAP distortions, with particular sensitive product groups being "red flagged" with South African customs authorities so that priority is accorded to monitoring trade flows (and changes in EU export refund levels) in these groups.
On the assumption that this Agreement may offer significant economic opportunities for the RSA, the question is posed as to how the RSA will be able to maximise these potential opportunities. While the business sector will play a major part in the maximisation of these opportunities labour is of the view that government must play a lead role in this initiative.
COSATU tables the following specific proposals :
The DTI (in conjunction with other affected government departments e.g. agriculture; forestry; sea fisheries) should be requested to design and deliver a comprehensive educational / information programme regarding the opportunities that this Agreement will offer the South African economy. We acknowledge the fact that the DTI has already begun alerting potential exporters as to upcoming opportunities, but believe that this needs to be done more comprehensively. The general and sector specific programmes should concentrate on how the RSA can :
- encourage the promotion of its exports;
- attract new investment that will be able to take advantage of the new trade preferences;
- focus on opportunities for Small, Medium and Micro Enterprises (SMME's);
The programme should not only look at the advantages that could accrue to the RSA as a result of tariff changes, but also some of the advantages that may be gained because of the opportunities that have been created under the "Economic Co-operation", "Development Co-operation", and "Co-operation in other Areas" aspects of the main Agreement (see titles IV, V and VI).
COSATU would propose that the programmes should not only be drawn up by those people charged with the specific responsibilities for export promotion and investment, but that it should also involve those people who were active in the negotiation of the Agreement itself. (It will be these people that will know why the RSA made concessions in some areas in order to "gain" concessions in others.) Should it be necessary the government should provide additional financial resources to sectors so that they can do thorough research on what new opportunities have been created.
All these programmes should be finalised prior to the coming into force of the Agreement.
Agreement: European Union - Republic of South Africa Agreement on Trade, Development and Co-operation
BLNS Botswana, Lesotho, Namibia and Swaziland
CAP Common Agricultural Policy
DTI Department of Trade & Industry
EU European Union
ILO International Labour Organisation
NAAgreement North American Free Trade Agreement
NEDLAC National Economic Development and Labour Council
NTB Non-Tariff Barrier
PTA Preferential Trade Agreement
RSA Republic of South Africa
SACU Southern African Customs Union
SADC Southern African Development Community
SMME's Small, Medium, Micro Enterprises
TESELICO Technical Sectoral Liaison Committee (a NEDLAC sub-committee)
WTO World Trade Organisation
The following studies have been finalised. The quotations from the report try to summarise some of the main findings
- "Economic Assessment of the proposed Free Trade Area between the European Union and South Africa" Institute for development Studies, Bureau European de Recherches, Data Research Africa, Trade Policy Monitoring Project, University of Sussex : undated.
This extensive research project was commissioned by the EU Commission in order that it could assess the impact of the Agreement on the European economy.
With regards the non-agricultural impact of any potential Agreement the draft report noted:
"When the Agreement is fully implemented, the relative improvement in market position will be greater for EU exporters than for South Africans, since the overall initial level of protection in South Africa is much higher. Against this, the asymmetrical transition period may mean that in the early years this relative position is reversed. [ Draft Vol 1 Chapter 2 "Summary of Findings"]
With regards the agricultural impact of any potential Agreement the draft report noted :
Given the overall supply situation in the EU and the volumes currently trade by South Africa, it is not likely that improved access would create any significant problems for the European Industry" [ Draft Vol 1 Chapter 2 "Summary of Findings"]
With regards a general assessment of the impact of a potential Agreement on the EU economy the draft report noted :
"Trade with South Africa is small in relation to EU activity. This is the case even in those sectors where it is most significant. Hence, rapid growth of trade has small impacts, positive and negative, on the EU economy.
"Trade liberalisation is likely to produce effects which are smaller than the exogenous increases in trade which we have used in our base scenarios. In consequence, the impacts of trade liberalisation, per se, are very small indeed.
"Even the attempt to model only the negative effects of trade growth produces small impact. The model gives no grounds for believing that liberalisation of EU-South African trade in manufacturing would cause serious adjustment strains in the EU economy." [ Draft Vol 1 Chapter 3 "Overall Assessment: Conclusions"]
"the impact of the proposed free trade area Agreement on bilateral trade flows is likely to be uneven, with a relatively large effect on SA's imports from the EU and a comparatively small effect on its exports towards this market" (p2)
"it is very clear from the above analysis that from a purely mercantilist point of view South Africa stands to lose from the Agreement" (p 32)
"There is a danger of negative trade diverting effects swamping any positive trade creating ones for South Africa in a SEAgreement [SA-EU Agreement]" (p10.
"We find that an Agreement between the EU and South Africa has a much bigger impact on South Africa than on the EU." (p17)
AGRI-South Africa Submission
EU-SA TRADE DEVELOPMENT AND CO-OPERATION AGREEMENT (TDCA)
However in the short term more expeditious measures/assistance will be needed as Article 52 hinges on a long term approach. Agri SA is of the opinion that the EMIA-scheme administered by the Department of Trade and Industry which is aimed at developing export markets should with respect to especially primary Export Market Research, outward - selling trade missions and exhibition assistance, be more readily accessible to the agricultural sector as well. More tailor-made export support can also be considered as this is still permissible i.t.o. WTO.
5. FISCAL IMPLICATIONS FOR THE BLNS OF THE TDCA
Various studies indicate that losses to the total revenue pool resulting from the agreement could reduce SACU tariff revenues by between 31% and 51%, depending on the final structure of the agreement. Losses estimated between 5,3% and 22% of total government revenue in the BLNS countries can apparently occur as a result hereof. Merely replacing these revenue losses by expanding VAT, income tax or sales tax seems not to be viable in most cases. Fact remains that these revenue losses can impact on South Africa as well via increased unemployment and loss of spending power in the BLNS.
BLNS have in a sense been drawn into Regional Economic Partnership Agreements (REPA's) which should have formed part of the re-negotiation of the Lomé-agreement.
This boils down to BLNS having lost a critical aspect of their true status as ACP-countries. Agri SA is of the opinion that applicable support from the EU to find practical solutions in this respect should be addressed as a matter of urgency.
Allowing for cumulation (which is currently not possible) in the case of South African inputs being used in the production of BLNS or even SADC produced goods, destined for export to the EU under the terms of the trade provisions of the Lomé Convention can in our view alleviate the fiscal problem in a constructive way.
6.SANITARY AND PHYTOSANITARY MEASURES
In a study done as part of the World Banks Integrated Program of Research and Capacity Building to enhance participation of developing countries in the WTO 2000 negotiations it was found that "amongst the surveyed countries (65), SPS-measures are considered the most important impediment to agricultural and food exports to the EU". Although difficult to determine beforehand, SPS-measures can exercise a major influence on export costs. The implementation of Article 63 (i.e. consumer Policy and Protection of Consumer's Health) should thus also be tailored in such a fashion as to keep these costs to a minimum.
7. COMPETITION POLICY
Article 34(b) refers to the incompatibility with the proper functioning of the agreement if "abuse by one or more firms of market power in the territory of the community or of South Africa as a whole or in a substantial part thereof" takes place. Agri South Africa takes it that this section also refers to price discrimination - which is also an abuse i.t.o. South African legislation -by dominant firms in order to e.g. avoid low transfer pricing between related firms thus jeopardising local industrialisation/ competition.
Agri SA publicly declared its support with the broad outline of the TDCA, especially with respect to the improved market access opportunities vis a vis the initial approach of the EU. It should be noted however that agricultural products of major concern to South Africa, like meat, maize and various fruit products, are still excluded from an improved trade dispensation with the EU. An evaluation of the position of these products in future should obviously take the legitimate fears of SADC-partners with respect to subsidised products entering the South African market into consideration. Finally it must be noted that the agricultural sector will, due to intensified competition resulting from various trade arrangements and a low level of support locally find itself in an extremely competitive environment, making it difficult to pursue social goals like increased employment creation and accommodating new entrants into the sector.
The Alternative Information & Development CentreSubmission on EU/SA Free Trade Agreement
This submission seeks to register a number of concerns we have on the potential impact of the European Union - South Africa Free Trade Agreement for the development process in South Africa and for the Southern African region. The submission is only restricted to the trade aspect of the agreement.
- We wish to highlight a point of procedure. It is of great concern for the democratic process in this country, which is still young and hence fragile, that the Agreement has been signed by the South African government prior to having been fully discussed, debated and formally ratified by the South African parliament. We believe this is a general concern in relation to Trade Agreements. They generally take the form of obscure and inaccessible documents which the broader public is unable to relate to. They tend to be the preserve of a small group of technocrats while their impact can potentially have devastating consequences for reconstruction and development and for the South African economy. The relevant portfolio committees need to examine ways in which it can empower parliamentarians and broader civil society so that they are able to contribute to these issues from an informed position. These for instance could include translation of the agreement into simple text.
- We also wish to highlight a general concern in relation to free trade between unequal partners. It assumes that there is a level playing field between the two parties, and they can compete fairly and equally. However, free trade between unequal partners (developed and developing countries) not only reinforces different levels of economic development between the two parties, but actually undermines the developing country's attempts at industrialisation and sustainable development, thereby reinforcing the global status quo.
We are not anti - free trade nor are we protectionists. What we are saying is that free trade should be applied where it is appropriate. In simple terms, free trade should be between developing countries or between developed countries.
- Reciprocal trade relations assumes two more or less equal economies which is not the case between SA and the EU. Existing trade is highly imbalanced in favour of the EU, both in terms of quantities and in the nature of the goods exchanged- with South Africa's exports overwhelmingly in primary products which have low added value, in contrast to the industrial products imported from Europe. Analysis done by Unctad, (May 1999) points that South African imports from EU are machinery, mechanical appliances and electrical appliances and this constitutes the bulk of the import (39 %) from the EU. In contrast, South Africa exports to the EU totals 36 % which is precious stone and jewellery.
- It is a matter of great concern that it seems that no official impact assessment study has been undertaken on the net impact of the agreement for the South African economy. Unofficial assessments (NIZA, July 1998, UNCTAD May 1999) on the impact on bilateral trade flows to be uneven, with a relatively large effect on South Africa's imports from the EU and a comparatively smaller effect on its exports towards this market. There will be a likely increase of South Africa imports from the EU of between 2.3% and 12.3% with an increase of South Africa exports to EU of 1.3%. Hence it is likely that the trade deficit will widen in the favour of the EU. To that effect we are calling our government develop and implement industrial development strategy as a matter of urgency. We further call our government to initiate and lead regional industrial development strategy. This, we believe is a medium to long term strategy that will take South Africa and Southern Africa region out of core - periphery trade relations and put it in position to participate and realise the benefits of free trade with the developed countries.
- It was our expectation (partly as a result of the claims made by DTI officials) that the EU-South Africa FTA agreement would be shaped in such a way that it will foster and promote economic development of South Africa. We further expected that the agreement will take into account the development needs of the region. However, we have serious doubts if this is going to be the case.
- Our observation has been that EU is protective where it is not competitive. A classic example is European Union's agricultural products that amount to 20% that are excluded from the agreement which , the deliberate forcing of wine and spirits out of the European markets (the port & sherry fiasco), the protectionists practises of subsidisation such as the Common Agricultural Policy that are anti-free trade. How do you justify for instance subsidies in a context of free trade.
- We further noted EU protectionist tendencies when it comes to tariff elimination. EU tariffs are not limited at the beginning of tariffs reduction period. The case in point is the clothing sector's tariffs that will be liberalised after three years (phase 1) and six years (phase 11) after the signing of the agreement. It is because of these tendencies that we question the notion that South Africa is going to benefit from free trade.
- We expected the EU-South Africa FTA to be preceded by the SADC protocol. This is not to question the right of South Africa to negotiate its own trade agreement with any other country or economic block. It is an open secret that South Africa is shouldering economic burden of the region, the influx of labour from the region to the country is a testimony to that. Secondly, because of South Africa's geographical position and its industrial capacity as well as its huge markets, it has an obligation to stimulate industrial development in the region.It is from this that we believe that any free trade agreement between South Africa and the economic block from outside the region will have a direct impact on the ability and possibity of the region to develop. The impact of the agreement to the region because of trade diversion effect is already recognised. We infact question the appropriateness of the finacial support as a result of revenue loss incured by BLNS countries. The finacial support is not a substitute for rural and industrial development in the region. It is our believe that finacial support does not translate into economic development, rather it creates economic dependency. The adjustment costs for our neigbours like Lesotho are too heavy to sustain given their low level of economic development.
- We note with great surprise that South African government has let strategic economic development areas such as government procurement, services and intellectual property rights to be part of free trade agreement. These are what OECD members were forced to abandon by being exposed when they secretely tried to negotiate these provisions among themselves behind closed doors. Because these are sensitive areas, they tried to get a common agreement among themselves in order to safeguard their interests, then force the developing countries to sign the agreement that does not serve their interest.
Our understanding is that these areas are not supposed to be free traded because:
- Government Procurement - It is our belief that tenders should be used to stimulate and develop local and emerging business. In this regard, we fail to understand how will emerging enterpreneurs be able to compete with the well established and alredy advanced companies from the North under the rules of fairness and equity.
- On services - It is our belief that services such as water, hospitals etc. should not be liberalised.
Because of the legacy of apartheid it is our understanding that these services are still not fully established in disadvantaged communities. We believe it is the responsibility of the state to offer those services. In a situation like ours where there is high rate of unemployment, underemployment and poverty those services once liberalised they will not be accessible to the people. Our belief is backed by international experience which shows that when services are privatised they become unaffordable to low income groups, thus unaccessible.
- Trips - It is our belief that South Africa should continue to protect as it is protecting intellectual property.
However, we object to intellectual property rights being used to monopolise knowledge and technology and as the way of denying access to cheap medicine as was the case with the row with the department of health and multinational companies backed by the US. It is our understanding that TRIPS are being used to force technological dependency of Sothern countries to the Northern countries. It is from this that we are calling the government of South Africa to modify Trips to include indigenous knowledge and community knowledge that are not recognised in Trips at the present moment. Modified Trips should for instance recognise the knowledge that is being taken away from the Sangoma's by reasearch institututions and medical doctors who write thesis and make medicines on the basis of that stolen knowledge. knowledge.
- Aspects of the agreement like anti-dumping provision, Agricultural Safeguard Clause, etc needs monitoring. We are interested to know if there is enough capacity and resources to monitor these provisions, given the fact that South Africa is engaged in many other trade agreements like SADC protocol, WTO etc. We also need to take into account the fact that this agreement is going to be implemented at the very beginning of next year. If not, we request the government to speadily make necesssary arrangements such as training and employing staff in order to make full use of those provisions.
AIDC would like to make a call to DTI to make use of Safeguard Clauses and other provisions in order to protect the economy from the worst situation that could be a result of this agreement.
7. Implementation of the Agreement
26 October 1999
Thank you for the opportunity to address the committee on an issue that consumed a fair amount of time and effort since the council of the European Union approved a negotiating mandate on 12 June 1995. As was to be expected at the time, agriculture in general and specifically issues such as asymmetrical market access in favour of the local agricultural sector remained contentious up until the conclusion of the agreement in February this year. During the initial stages of the process a new trade and tariff policy for the local agricultural sector also received attention. The fact that imports of cheap (i.e. subsidised) food was at one stage mooted as a possible way of deriving a more acceptable level of food security for the country created serious concerns in agricultural circles with respect to the stance the South African-negotiating team would have taken towards creating a better dispensation for the local agricultural sector within the context of the negotiations.
Especially during the latter stages of the negotiation process these perceptions appeared to be unfounded as people like Mr Alec Erwin and Ambassador Links, supported by officials of the Department of Agriculture and Trade and Industry, really came out in favour of a better dispensation for the agricultural sector. Agri SA publicly expressed its gratitude towards the negotiating team in general and the aforementioned individuals in particular. The positive role played by the portfolio committee in this respect was also acknowledged.
Given the expectancy that the process would include all stakeholders in agriculture the mandating process within organised agriculture started with a trade conference in August 1995 where the following was agreed to:
It would be useful to assess what sort of a deal has been struck under the South African / European Union Trade & Development Agreement for the sector that I represent in South Africa namely the Textiles sector.
Back in the heady days in mid 1996? amidst much media hype it was announced that an asymmetrical trade deal between SA and the EU was to be entered into. We had mistakenly believed that the much vaunted asymmetry would be in South Africa's favour. In the case of textiles, clothing motor vehicles, agriculture and a number of other sectors this could not have been further from the truth.
Early on in the negotiation process the asymmetrical bubble for textiles was burst when the EU laid down its negotiation parameters for an Agreement to include textiles as a symmetrical component of the deal.
After a multitude of negotiating rounds culminating in some smoke screening histrionics by fishing and narrow agricultural interests a deal was finally struck earlier this year.
2. TRADE BALANCE
Well what of the textile component to the deal.
I would like to first look at the most recent pattern of textile trade between SA and the EU (Slide 1).
Last year 1998 a total of R1055 million of textile and clothing products was imported into SA from the EU. This represented 20% by value of all textile and clothing imports into South Africa.
During the same period South Africa exported R1145 million of textile and clothing products to the EU which represented 36% by value of all textile and clothing exports out of South Africa. In total textile and clothing trade it currently more or less in balance between SA and the EU. (Slide 2).
It is however useful to analyse the make up of the textile and clothing trade flows. If we break them down into raw materials (eg fibres yarns and fabrics) as one group of product and finished goods (eg made up textiles, clothing and miscellaneous textiles) as the other group then SA imported R908 million of raw materials as opposed to R147 million of finished goods while we exported R773 million of textile raw materials to the EU and R373 million of finished good. (Slide 3).
Obviously for South Africa there is development scope in further beneficiating the textile raw material that we export into higher value added finished product.
3. TARIFF REDUCTIONS
Let us turn to the actual tariff deal on textiles and clothing that has been struck. (Slide 4).
In the case of yarns SA duties for EU exports will decline from 17% in year 1 to 5% in year 8 giving the EU a 10% tariff preference in year 8 over all other MFN exporting countries.
By contrast EU duties on yarns will reduce from 4-5% in year 1 to 0% in year 3. This will give SA a 4-5% tariff preference in yarns. (Slide 5).
If we turn to fabrics SA duties for EU fabric exports will decline from 22% in year 1 to 10% in year 8 with the tariff preference enjoyed by the EU over MFN countries increasing from 5% in year 1 to 12% in year 8.
In exchange the EU duties on fabrics from SA will reduce from 7% in year 1 to 0% in year 7 giving SA a tariff preference of about 8% in year 7. (Slide 5).
A similar picture emerges for made up textile goods where the EU tariff preference over MFN countries into South Africa will increase from 3% in year 1 to 15% in year 8 while SA's tariff preference for exports into the EU will increase to about 10% in year 7 of the arrangement. (Slide 7).
For clothing the EU will enjoy an increasing tariff preference which in year 8 will be 20% while SA will receive in exchange a 12-14% tariff preference by year 7. (Slide 8).
To draw this all together and using the detailed 1998 textile and clothing trade pattern between the EU and South Africa, we compute that for this sector the average duty paid by imports into SA from the EU will decline from 24% currently to 19% in the first year and to 8% in year 8.
In exchange the average duty on textile and clothing exports from SA to the EU will decline from a current 6% to 5% in year 1 to 0% in year 7.
In conclusion I will leave it to you the audience to decide on the degree of symmetry that has been negotiated for textiles and clothing under the SA/EU Trade Agreement.
Be that as it may the crucial aspect is to have this agreement implemented as soon as possible, so that what limited benefits and trade advantages there may be, these are not further diluted and minimised through the further passage of time.
3.A strategic approach to trade relations
The Chairperson, Dr R Davies, noted that the business for the day was not to decide on the ratification of an enabling document, as was the case the previous day with the hearings on the SADC Agreement, but the ratification of the product of an agreement - the European Union-South Africa Trade, Development and Co-Operation Agreement. The hearings began with the Submission by the South African Chamber of Business (SACOB).
South African Chamber of Business
Mr Ken Warren from the parliamentary office of the
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