Report and briefing on the Ratification of EU and South Africa and its Members Agreement

Meeting report

PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY
02 November 2005
REPORT AND BRIEFING ON THE RATIFICATION OF EU AND SOUTH AFRICA AND ITS MEMBERS AGREEMENT

Documents handed out:
 

PowerPoint Presentation: ‘Additional Protocol to the TDCA
Explanatory Memorandum to the Additional Protocol to the TDCA
Useful Websites from DTI: International Trade and Economic Development Division [see Appendix]

SUMMARY
Mr W Smalberger of the Department of Trade and Industry briefed the committee on the Additional Protocol to the TDCA. Committee me raised concerns and queries regarding the benefits of the Agreement to South Africa. The Committee queried South Africa’s relations with the EU in the light of the new membership. It was felt that scientific and technical assessments were needed to ascertain what the mutual benefits were. Furthermore, there was a necessity to look beyond the data towards the potential social consequences. Parliament needed to be updated on the current review of the TDCA, involving stakeholders. Mr Smalberger assured the Committee that the agreement was of benefit to South Africa, as was the increased market access provided by the new membership. Development was needed to enable South Africa to take full advantage of some of the provisions on quotas and cumulation with regard to rules of origin requirements. The Additional Protocol to the TDCA was adopted by the Committee.

Presentation
Mr W Smalberger (Head of the European Union desk at the Department of Trade and Industry) briefed the committee on the Additional Protocol to the Trade Development and Cooperation Agreement (TDCA). The European Union (EU) had grown organically. The rules of the game were therefore established and any new member had to join on the basis of these rules. The TDCA was signed and ratified in 1999 and had been applied on a provisional basis since 01 January 2000. The last EU member had ratified it in April 2004 and it had entered fully into force on 01 May 2004. The new members of the EU would therefore have no say in the TDCA. The purpose of the Additional Protocol to provide a legal basis for the extension of the TDCA to the new members of the EU and to effect technical changes to the TDCA.

Article 22 said that parties were entitled to sovereignty vis-à-vis third parties. The agreement did not prohibit the possibility of the EU extending further into Europe but there was provision for consultation. There was a provision in the Protocol for further consultation, including with stakeholders. The National Economic Development and Labour Council (NEDLAC) had been fully consulted. Feedback had been obtained in particular on two product groups: TV sets and household appliances or white goods. There were a number of articles in the Agreement making provision for a review of the TDCA. This was expected to happen after five years. As five years had elapsed, the process was now in motion and would be finalised by the end of 2006. The current status of Non-agricultural Market Access (NAMA) products was outlined.

From 01 January 2006 all industrial products from South Africa would get duty free entry into the EU with the exception of certain products that had been excluded from the Agreement. South Africa had also excluded some products on their side. Some of these products had been dealt with in terms of tariff quotas.

In conclusion the Additional Protocol to the TDCA is insignificant in practical effect as it simply extends the agreement to the ten new EU member states. Trade relations with these countries were not as developed as with the original 15 member states. Due to the Agreement, there would be an increase in trade with the ten new member states. This would apply to both imports and exports. In the assessment of the Department of Trade and Industry, the Agreement would have a beneficial affect on South Africa’s economy.

Discussion
Prof B Turok (ANC) said that economic benefits rather than monetary benefits should govern the approach. It should be primarily "economistic" rather than "legalistic". The concern was that the ten new states of the EU were developing countries. This raised new issues in relation to the agreement between South Africa and the EU. For instance there was likely to be comparability and competitiveness between South Africa and the new states. Statistics were needed to provide an idea of the balance of benefits.

He felt it was time Parliament was given an update on EU negotiations. There were awful delays on negotiations and in the end the benefit went the wrong way. This had been admitted by the Europeans. He questioned the benefit that South Africa would derive from the agreement. South Africa received duty free access but so did the EU. The direction of the World Trade Organisation (WTO) suggested that this free access would extend into services. There was concern that Europe would access South Africa’s economy on a grand scale whereas South Africa’s access to Europe would be governed by subsidies. There was an unequal relationship between Europe and Africa and between Europe and South Africa. The mutual benefits needed to be examined. This included aid. Aid was a part of traffic as the question of transfer of aid was often linked to trade.

Relations with Europe needed to be reassessed on a scientific and technical basis to ascertain who would benefit. In particular, the current situation was of importance as these were developing countries and accepting such an agreement which included them might adversely affect South Africa.

Mr M Stephen (UDM) agreed and wanted an update on the negotiations. He asked what the financial implications were of the fact that Europe currently received 57% of imports under zero duties, which was due to increase to 86% at the end of the 12 year period. He enquired as to what percentage of South Africa goods were exported under duty free to Europe. There was a need to compare European benefits with South African benefits. The trade agreement itself must be fair, but more importantly, so must the consequences resulting from it.

Mr S Rasmeni (ANC) asked why, in relation to imports, the quotas were not exploited by importers. He asked what the administrative problems referred to were.

Prof E Chang (IFP) asked about rules of origin and how these affected the agreement between Europe and South Africa. He enquired if South Africa would find itself in a better trading position with other parts of the world if it were not constrained by this agreement.

Mr Smalberger stated that some of Prof Turok’s points had been at the philosophical level of policy. For instance, the assumption that the new members of the EU were developing countries. The economic dynamics of these countries were not the same as the rest of Europe but they were fast catching up with them. The agreement would be implemented by 2012 so there would be time for South Africa to reflect on the dynamics of the ten new member states. He agreed that what was done should be done on a scientific basis. A study had been commissioned the previous year into trade flows between South Africa and the EU. This could be made available. However, statistics provided a strong basis but did not give the ultimate answers.

In reference to the judgement that the agreement was in the EU’s favour, it would be necessary to wait until the agreement was fully implemented before the impact could be fully analysed. Even the study commissioned the previous year had been done too early but had been forced by the impending review of the TDCA. All stakeholders were involved in the review, consideringf the future of the agreement between South Africa and the EU.

The EU was a customs union. South Africa was part of a customs union in its membership of SACU. However the agreement under consideration was not between the EU and SACU but between the EU and South Africa. This was because the EU already had an agreement with the African Caribbean and Pacific (ACP) group of countries. The review of the TDCA therefore offered a historical opportunity to request the consolidation of the agreement by incorporating SACU.

Article 31 of the SACU agreement included a negotiating mechanism that may enable South Africa to do what it could not do in the 1990s in this regard. SADC was not a customs union. Even if SADC were to negotiate a free trade agreement with the EU, it should be encouraged to negotiate with the EU on the basis of SACU. SACU provided the only solid basis for such negotiations. There was, therefore, a menu of opportunities for South Africa to utilise in strategic considerations for the future. If Prof Turok was correct in his concerns, there would be an opportunity to address them.

Regarding the question of services, this was not covered by the agreement. There was a cooperative arrangement but no commitment in terms of market access. This would have to be consolidated first in terms of SACU and if possible SADC. It was not useful to prejudge the outcome of current multilateral negotiations.

South Africa was currently only party to two agreements of substance in relation to trade policy. The agreement with the EU and the SADC agreement. The agreement with the EU occurred because South Africa wanted to become part of the global economy and decided to begin with the EU to see how it fared. The SADC agreement was in effect the opposite direction for South Africa as it involved South Africa opening up to other SADC states in an effort to promote development in Southern Africa, rather than South Africa itself.

There were also talks in process with Brazil, Argentina, Paraguay and Uruguay. These were not yet finalised but were not in relation to the creation of free trade areas, but rather preferential trade areas. South Africa was also in negotiations with the US which had restarted at the end of the previous month. There was still a long way ahead. Negotiations with Switzerland, Norway and Iceland were basically concluded and an agreement would soon be submitted to Parliament for approval. The objective here was to harmonise trade relations with all of Western Europe. As these states were so closely integrated with the EU it did not make administrative sense to treat them differently.

As for the 12 year phase down period it was difficult to do a dynamic assessment of the impact on government revenue. There was a need for a quantitative model of South Africa linked to those of its main trading partners. This had been considered but was abandoned due to costs. There was also doubt as to its value. With such trade mapping exercises, because of the complexity and size of the Librium model used, and the assumption it had to be based on, the outcomes generated were not precise. Judgements based solely on quantitative analysis were not good. There was a need to consider qualitative analysis in the final judgement. This was the reason for the involvement of stakeholders in South Africa in the review process. There were many working groups set up in different sectors.

With regard to the administrative problems affecting the use of quotas, the situation was complicated. For instance a 5 000 ton cheese quota given to the EU at a preferential duty was not exploited due to the high price of cheese in Europe. South Africa would be negotiating with the EU on the basis of Article 17 of the Agreement. This provision stated that South Africa would open its market under preferential conditions subject to the lowering of export subsidies.

In trade between the EU and South Africa there were forms used to administer rules of origin. These were Form A and Form EUR1. Form A was used to administer the Generalised System of Preferences (GSP). The GSP was a unilateral system. Under the General Agreement on Tariffs and Trade (GATT) developed countries could not discriminate in granting preferences to developing countries. An agreement given to one must be available on the same terms to all others. The intention of the EU was to transpose the GSP into the agreement so that there was one harmonised trading regime between South Africa and Europe. Some products were subject to quotas. Once the quota was exhausted there was a need to revert to the GSP. This system was unhelpful so this was the rationale behind transposing the GSP into the TDCA. However, the current situation meant that a number of products benefited more from the GSP than from the TDCA. Example were cut flowers and automobiles. The challenge for South Africa was to ensure that when the GSP was transposed into the TDCA that South Africa would not be worse off. In conclusion, some rules of origin were restrictive but the government policy regarding this was to deal with it on a case by case basis. Exporters were free to contact the government.

Prof Turok said those interested in development economics took the approach that certain international agreements were desirable at the technical level but not at the social level. They may look good at the level of data but the consequences may not be suitable or sustainable for developing countries. The mutual benefits needed careful consideration. Parliament had a duty to go beyond the technical level and anticipate the social implications. South Africa was governed by the rules of the WTO. In relation to Article 17 of the Agreement, if it was possible to have a clause which undermines the WTO and notions of subsidies, why would there be the controversies surrounding these in Europe and the US?

Prof Chang repeated the question concerning rules of origin and their constraining effect on South Africa’s trading options.

Dr E Nkem-Abonta (DA) said that South Africa was constantly seeking trade policies which benefited the few producers over the majority. What was needed was economic development which benefited the majority. Consumers benefit from subsidies. Surely South Africa would benefit from the access to a wider market afforded by this agreement. South Africa was not in a position to refuse.

Mr Smalberger said that when the social impact of trade agreements was considered there were two dimensions: multilateral and bilateral. A bilateral agreement was compatible with the WTO insofar as it was compatible with Article 24 of GATT 1994 and the basic principles employed when negotiating mutual free trade areas. The enabling clause of GATT 1994 means that preferences can be extended on a limited number of products. The TDCA was subject to Article 24. The WTO had not been notified yet and the Committee for Regional Trade would be given the agreement to asses whether Article 17 was compatible with Article 24 of GATT 1994.

The question on rules of origin was very complicated. The point had to do with cumulation. There were various kinds of cumulation. For instance bilateral as between South Africa and the EU in the terms of this agreement. For example if South Africa wanted to assemble a car it could import all components from Europe and all of these would become from South Africa for the purposes of rules of origin. There were cumulation provisions in the agreement with the EU and in the agreement between the EU and the ACP which would for instance allow South Africa to import tobacco from Malawi, make the final product in South Africa and export to the EU under their duty agreements. South Africa did not have enough tobacco to satisfy the export potential in the provisions for cumulation and they had not been able to put in place the administrative procedures to take advantage of these provisions. For example under SADC, if South Africa want to import from SADC with the view of assembling and exporting to Europe, provision was in the agreement but the administration to use it is not in place. South Africa had submitted a memorandum to the EU for their consideration which would enable South Africa to do this. It was an area for development.

It should be remembered that not all benefits would be passed onto consumers. South Africa was a free economy in which companies have the right to pass on benefits or keep them for themselves. This was why competition was so important. Trade policy must benefit, and sovereignty to enable South Africa to walk away from the deal was also important. It was a difficult decision which needed a philosophical level of judgement. The bottom line was that trade policy should promote industrialisation.

The chairperson moved that the Additional Protocol to the TDCA be adopted. Mr Stephen and Mr Rasmeni heard the motion. The additional protocol to the TDCA was adopted.

The meeting was adjourned.


Appendix

The "Trade, Development and Cooperation Agreement" can be accessed at
 

If you are interested in exporting to the member states of the EU, the EU’s current tariff can be found at:
 

THE DTI

INTERNATIONAL TRADE AND ECONOMIC DEVELOPMENT DIVISION SOUTH AFRICA

Useful websites

SA/EU