Free Trade Agreement between European Free Trade Association & Southern African Customs Union: Approval for Ratification

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
3 November 2006
FREE TRADE AGREEMENT BETWEEN EUROPEAN FREE TRADE ASSOCIATION & SOUTHERN AFRICAN CUSTOMS UNION: APPROVAL FOR RATIFICATION

Chairperson: Mr B Martins (ANC)

Documents handed out:
SACU – EFTA Free Trade Area
SACU - EFTA Bilateral Agricultural Agreements

SUMMARY
Members of the Department of Trade and Industry and the Department of Agriculture briefed the Portfolio Committee on the proposed Free Trade Agreement between the Southern African Customs Union and the European Free Trade Association, which required to be ratified by Parliament. They mentioned the existing bilateral agreements with members of the European Free Trade Association. The Free Trade Agreement followed the structure of the agreement between South Africa and the European Union. There was great progress made with regard to trade in the industrial sector, although the European Association was not forthcoming with agricultural concessions, in most cases reserving the right to keep some form of support for its producers. The Customs Union had been given international trade recognition and was recognized also as a “single origin”.

Members asked questions on trade of textiles, and whether the rules of origin were based or one or two step conversions, why agriculture received preferential treatment, safeguard clauses and most favoured nation status. Further questions related to the advocacy of the agreements, how urgent issues would be handled, and the impact of the agreements on whale and trout fishing, as well as horse products. The impact on the infrastructure, motor products, and the textile industry were discussed. Details were sought on the effect of the agreements on agreements in the Customs Union, the interaction of the three South African trade instruments, and the effect on the second economy, as well as the genuineness of the commitment to liberalization and capacity building. The Committee agreed to recommend the approval of the Agreements.

MINUTES
Mr Xavier Carim, Chief Trade Negotiator, Department of Trade and Industry (dti) expressed the hope that the Committee would react positively towards the Free Trade Agreement (FTA) and Bilateral agreements. He introduced Mr Wilhelm Smallberger, Director Trade Negotiations, dti, who had led negotiations with the European Free Trade Association (EFTA) on industrial products and Mr Ralph Otto, Deputy Director, Department of Agriculture (DoA) who had led negotiations on agricultural products.

The Secretary general of EFTA had approached Minister Erwin in December 1999 to open up talks with South Africa. In November 2000 EFTA sent a delegation as a formal request for negotiations. Since then there had been technical exchanges, but slow progress due to South Africa’s mandate to include the rest of the Southern African Customs Union (SACU) members in the agreement. Article 31 stipulated that all trade agreements had to be entered into as a block, and this had delayed negotiations. Formal negotiations were conducted between May 2003 and October 2005 and the review of the agreement and the necessary signatures from Ministers were obtained this year. If parliament ratified the agreement it would come into effect in January 2007.

Mr Smallberger stated that although the European Union (EU) was a customs union, (where the EU doctrine of acquis de communataire was applied to all members) the EFTA was not a customs union. South Africa lost its Commonwealth status trade preference in 1973 when the United Kingdom joined the EU. This was only regained in 2000 when the free trade agreement with the EU was introduced, and South Africa’s access into the European market was further extended when the EU expanded by 10 members in 2004. The EU membership was to increase to 27 members by next year.

EFTA was a free trade association that was not closely integrated with the EU. Most of the members were non-voting members of the EU, except for Switzerland. The EFTA negotiations tended to be more complex as EFTA members did not share common trade policy nor did they pool resources.

South Africa had sought to harmonise its relations on the back of the Trade, Development and Cooperation Agreement (TDCA) and was seeking a single trading regime between the Southern African Development Community (SADC) and the EU, which would be adjusted along with the renegotiation of the African Caribbean and Pacific (ACP) countries’ agreement. In order for this to take place the SACU members must first adopt the principles of the TDCA, which would have to change to accommodate the needs of these other members. The review of the TDCA was scheduled for 2007.

The economic rationale behind this agreement was to formalise and contractualise the general system of preferences that were allowed to developing countries.

Mr Smallberger stated that trade with EFTA comprised only 1% of the South African export market, but this agreement would certainly improve trade relations, particularly for textiles and clothing. The scope of the agreement ranged from tariff dispensation (in terms of which SARS allowed goods to be cleared though a new column, subject to the rules of origin) to cooperative and rendezvous clauses on competition, public procurement and other issues. The SACU had been unable to commit to these issues owing to the sensitivity of some members.

The content of the agreement covered fish and marine fresh and processed products. Here, EFTA conceded duty free imports of SACU products, with Switzerland and Lichtenstein reserving the right of marginal product tariffs. SACU agreed to back loading tariff lines which would be phased down to completion 8 years from now. Agricultural processed product agreements stipulated access to EFTA and SACU each on par with their respective agreements with the EU. SACU withheld goods such as chocolate from the deal as there had been injury to the South African chocolate market following the TDCA agreement. More importantly the industrial section guaranteed to SACU duty-free and quota-free access to EFTA markets from January 2007.SACU agreed to give EFTA access on par with the EU, although some products were excluded from this owing to sensitivities in the SACU member states’ economies. The tariff reductions that SACU would put in place would follow a 7 stage list reduction strategy, according to sensitivity of products. Compromises were made on both sides. SACU agreed to fast track the reduction of tariffs as though the reductions had started on par with the EU in 2003.

A great accomplishment of the negotiations was that SACU was established as an origin in itself under the “Rules of Origin”. This would promote regional integration in the block and establish a positive value chain. This also meant that products “finalised” in South Africa would not apply for the zero tariff, zero quota allowance.

Mr Carim noted that EFTA had varying positions on agriculture, as there were no common import tariffs, and that therefore three separate bilateral agreements had to be made.

Mr Ralph Otto expanded on these bilateral agreements and explained that in order to ensure World Trade Organisation (WTO) Article XXIV compliance all sectors had to be included in a FTA The scope of the agreements followed the WTO definition of agricultural products, which excluded all processed agricultural goods that were included under industrial policy in the EU and EFTA policies. The EFTA agreement, however, did not include chapters 1-24 as these were included in industrial production.

Aspects of the bilaterals common to the FTA agreement included the Rules of Origin (as a cross reference) as well as Article 4. SACU had agreed to cooperate on and safeguard clauses that protected against injury to local industry arising from the liberalisation of imports that were both agriculturally specific and WTO general. Infant industry status had been awarded to the BLNS countries (Botswana, Lesotho, Namibia and Swaziland), although this would be looked at again in 3 years when the agreement would be reviewed and possibly improved.

Issues specific to the individual bilaterals were set out and explained. The bilateral with Switzerland and Lichtenstein was set to improve market access. The bilateral with Iceland, which was not a major destination for SACU exports, gave preference on two lines of products, and Iceland agreed to give SACU similar preferences to the EU, excluding meat. Norway had refused the subsidy clause, and therefore received no concession from SACU. However Norway conceded marginal improvements in tariffs on fresh fruit, vegetables and meat and also gave preferential access rates to Botswana, Namibia and Lesotho. The benefits of the Iceland and Norway agreements were marginal.

Mr Carim stated that these agreements had been put together to form the basis of a legal and institutional framework in discussions with the Aesean Free Trade Area countries in the future.

Discussion
Prof. E. Chang (IFP) congratulated the dti on their achievements, but said that more attention should have been given to the trade of textiles. She asked if the rules of origin were based on one or two step conversions and what this would mean for businesses which added value within SACU.

Mr Smallberger described the value chain in the textile sector as different from the agreement with the EU, where a 2 stage transformation rule applied, and the USA, where a one-stage rule applied. The EFTA agreement compromised on a single-stage transformation, subject to a 50% added-value rule. The preferential status was lost when value-adding processes caused textile products to bounce between SACU countries. The SACU conglomerate for rules of origin would suppress this trend. South Africa would access the preference partially through TCDA and partially through the ACP agreements.

Ms F Mahomed (ANC) referred to page XV in the FTA agreement and asked why only agriculture received preferential treatment. She asked what the “safeguard” clauses in the agreement would entail. She asked who the beneficiaries would be in the SACU rules of origin agreement, and asked the representatives to explain the value chain.

Mr Carim referred to Article 23, which he said was a fairly standard inclusion in an FTA, as the countries involved would be able to protect themselves from imports that encroached on fragile domestic industry.

Ms Mahomed asked who “most favoured nations” were on page VIII of the agreement.

Mr Carim explained that the Most Favoured Nation (MFN) status was the tariff levels that a country applied generally, which were submitted to the WTO, unless there were preferential agreements in place.

Ms Mahomed questioned whether South African infrastructure was ready for this increased level of trade.

Mr Carim felt that he could not answer the question regarding infrastructure but did say that the current levels of infrastructure had held up since the great increase in trade in 1994 and that he didn’t foresee much additional strain.

Ms Mahomed called for the advocacy of the trade agreement and said that dti should provide the subcommittee with lists of products and their categories.

Mr Carim conceded that efforts regarding the advocacy of trade agreements in the past had fallen short and that it would be a great responsibility of the Trade and Investment South Africa (TISA) agency. He mentioned that there were 7600 lines in the tariff book and that the current 7 categories of these explain the tariff phase down planned.

Mr Smallberger added that the Department did advocate the trade agreements but should do more. He did mention that they could inform at a sectoral but not at an individual level and said that the Department would be happy to provide speakers for functions.

Ms Mahomed asked how the department would deal with urgent issues if the review happened only once every few years.

Mr Carim replied that a joint committee had been put in place to convene if there were urgent matters to be dealt with

Dr P Rabie (DA) asked if the marine section of the agreement included whale products as Norway and Iceland were countries that refused to cease whaling. He also asked about the stipulations of trade in trout and other fish, where Norway in particular was a world leader. He questioned the effects of this trade on the West Coast fishing communities. He also asked the delegates to speak more on the issue of Icelandic horse meat.

Mr Carim explained that the ban on whale meat was governed by environmental agreements and that these agreements had not been superseded by the FTA agreement.

Mr Smallberger said that whale and trout was dealt with in Appendix 4 and said that the Convention was dealt with in the footnotes of this section. The FTA agreement did not replace import bans. Trout was an issue when it came to trade with Norway, and for this purpose SACU had reserved the right on these tariff lines. With the exception of these products, downscaling was set for 1 July 2004, and that eight years of phase out had been proposed.

Mr. Otto described the deal with Iceland as dealing with the two tariff lines associated with horses. Horses, being classified under line 1 were duty free. Horse meat had a low duty of 8c per kg, phased down to zero under this agreement. The Sanitary and Phyto Sanitary (SPS) rules applied to these imports but there was currently no ban on horse meat.

Mr Otto added that BLNS special treatment would not necessarily have applied to the bilateral agreements, but that cross-references had been included so that the bilaterals enjoyed the same status as FTA. He also mentioned that Switzerland, which also produced biltong, had allowed a quota of 20 tons of biltong from SACU to be imported duty free.

Ms. Mahomed insisted that the new roles of origin would increase exports considerably and that this would put a strain on infrastructure. She believed it was good corporate governance to communicate this to the sectors influenced, so they could accommodate the change.

Mr D Olifant (ANC) said that the motor products sector had had problems with imports and exports. He asked the delegation to elaborate as to how the FTA would impact on this.

Mr Smallberger said that automotive parts had been excluded from the FTA agreements with the EU. They currently carried a 10% duty at the moment. From 1 January 2008 these would be traded duty free and in anticipation of this two plants had been given contracts by their parent companies to act as an export base to the EU. EFTA would also have a zero-duty trading status for this sector from January 2007 but was not an important automotive destination. He added that there was a planned phase-down from 32% to 25% in this industry by 2012. In order to give cars from Europe preference this would be lowered still to 18%. Lowering further than this might harm local producers as manufacturers might prefer to import motor parts at a lower rate.

Mr Carim added that the agreement on the motor industry with the EU was not yet final and that the Department was still awaiting final formal agreements.

Ms Chang said that owing to the high level of value contained in woven and woolen garments the 50% single-stage limit on duty free textiles would not benefit South African producers. She also referred to the rebate that South Africa enjoyed on the import of yarn, and said this would not apply under the current agreement. She suggested that dti study specific South African needs in this light before making agreements that would do little to benefit the country’s producers.

Mr Smallberger said that when discussing the agreement with the textile sector in South Africa there was a positive reception. He said that much consideration had gone into this part of the deal as EFTA was not willing to give concessions on textile and did not concede even this final agreement until the end of negotiations. dti  had to think laterally about this as they felt it was more important to develop a benchmark on trade than to be more liberal and then get cornered into deals that were not beneficial in the future. He said that he was not sure about rebates but believed that a country could claim the rebate if it was going to export the products. South Africa would benefit from the one stage transformation agreement throughout the customs agreement. He said that the idea was complex but that he would consult the textile directorate for more detail. He added that the control of the movement of garments within SACU was difficult and that therefore the control of the rules of origin would be difficult.

Mr Carim said that if the question referred to exports within SACU then the rebate would fall away, owing to the new rules of origin with regards to SACU, and that this should be addressed.

Mr S Njikelana (ANC) asked dti to comment on the details of enlargement of the Customs Union from SACU to SADC, as referred to in paragraph VI (5). He asked the reason for the President’s Minute noted in the document and asked if the trade balances between EFTA countries would impact on the agreement.

Mr Carim answered that Article 2 of the main agreement contained a section that ensured that the SACU / EFTA agreements did not impede on agreements between SACU countries. Therefore, this agreement would not stipulate how countries in SACU treated each other. He added that there was an enlargement enabling provision for both blocks, although it largely applied to SACU as EFTA would become smaller rather than bigger in the future. He noted that in a similar deal with the USA this provision had not been made, and the USA had then enforced preferences given to SACU countries by other members.

He explained that the Presidential Minute was required to allow ministers to go to Geneva to sign the document.

Mr. Njikelana clarified that he had been anxious about the effect of the trade imbalances between the EFTA states on the agreement.

Mr Carim assured the member that trade issues among EFTA states were not an issue in this agreement.

Mr Njikelana asked about the three South African trade instruments, being the TDCA with the EU, the EPA between the EU and SADC countries, and the FTA with EFTA, and how they related. He also asked why bilateral agreements had been chosen over multilaterals as these were “weaker” forms of contract. He questioned whether the tariff reductions would benefit emerging business or the secondary sector. He also asked that the dti share key points of consideration that guided the negotiations, especially referring to the trade policy considerations on page 1.

Mr Carim answered the first question by saying that in 1994, when RSA was approached by the EU to make trade deals, it was facing the worst levels of tariffs on the pyramid of preference. This  was very damaging as over 40% of trade was with EU countries. South Africa requested a deal similar to the ACP arrangement, giving non-reciprocal duty free, quota free access. This was rejected by the EU, who considered South Africa to be industrialised beyond the ACP country level. The EU then proposed an FTA. This resulted in the TDCA, which South Africa was forced to accept in order to overcome the conditions on tariffs then prevailing. In hindsight, it was a problem that South Africa be treated differently to other Sub-Saharan African countries, as this was an obstacle in regional block negotiations. However, in 2004, the ACP agreements were examined again and a series of economic partnership deals were proposed instead, including SADC countries. This meant that the SADC countries were still divided on international trade although SADC had asked to be treated as one region. It was awaiting a formal response. Negotiations with EFTA jumped ahead as this agreement was with SACU as a whole, and therefore supported SACU’s trade policy of one regional agreement. He said that trade agreements would have to be reviewed so that South Africa was seen as part of the region in other deals.

Mr Carim could not comment on the second economy, but said that dti should note whether this sector was exporting or importing, and also note the effect on growth and trade performance of the sector due to trade environment changes following the deal.

Mr Carim stated that dti dealt with this agreement by looking at the EU agreement and making changes based on lessons learned in the TDCA process, and by categorising the sensitive sectors.

Ms Chang noted that inter-company trade in South Africa could face the same problems due to the rules of origin change.

Mr Njikelana asked about page 18 (29),  referring to the liberalisation of procurement markets and capacity building, aimed at levelling the playing field. He said that he was sceptical of these sentiments following the collapse of the DOHA round,  and asked how dti would know if there was a genuine commitment to level the playing fields, and to what extent the capacity building was meaningful.

Mr Carim replied that the sections on government procurement were not binding. Dti felt that SACU should harmonise its approach before making these commitments. This aspect would be considered in the review in 5 years time. He said that attention should be paid to the language in which these sections were written, referring to it as “best endeavour” type language. He said that it was not possible to bind EFTA to capacity building promises, but that South Africa already had bilateral donor agreements. The Department was unwilling to combine aid agreements with trade agreements.

The Chairperson read the motion for recommendation of adoption of the agreements to the Portfolio Committee

The Committee agreed to recommend the approval of the Agreements under Section 231(2) of the Constitution.

The meeting was adjourned.