SA Customs Union: Functions And Challenges: Tralac briefing

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Trade and Industry

10 March 2008
Chairperson: Mr B Martins (ANC)
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Meeting Summary

The Trade Law Centre for Southern Africa briefed the Committee on trade issues in South Africa, with particular reference to regional integration and the Southern African Customs Union. The first presentation detailed the key developments in the global economy, the overview of the South African trade profile, the trade policy priorities, and where South Africa stood in relation to the Economic Partnership Agreements. It was noted that the greatest exports still lay in metals and minerals, and largely in unprocessed goods. Trade in services was considered. The establishment of the World Trade Organisation (WTO) provided an institutional anchor and this had led to significant liberalisation of trade in goods. The relationship between the Free Trade Agreements and the WTO was discussed. The position of South Africa was described, with its exports and imports being detailed. European Union was still the most important source of imports to South Africa, but there were growing imports from Asia. Free Trade Agreements were then described, and the process of the Southern African Development Community (SADC) agreements was detailed. The setting up and current composition of the Southern African Customs Union (SACU) was also set out. There was much still to be done to implement the 2002 SACU agreement. The impact of the rules-based system, still to be introduced in SACU, was also discussed.

Prof Erasmus of Tralac then proceeded to examine the Customs Union and noted that there were issues of sovereignty, South Africa’s role and the necessity for Parliament to play a role. He highlighted those areas of the Union that were not working effectively or that had not been implemented, and discussed how the framework being imposed upon the original structure was in some ways inhibiting its working. There would have to be a gradual and sensitive process to maintain regional stability. Political conditions must be conducive to deeper integration. Some common policies and institutions had not been implemented and there were fears that momentum had been lost. South Africa’s signature of the agreement with the European Union was not in line with the logic of the customs union, and careful policy guidance was needed. The view was expressed that the Customs Union was not yet equipped for a rules based system. If the common institutions were not put in place, then the new SACU could not function and the new agreement would still amount to merely a revenue sharing mechanism. Roles and responsibilities would have to be more clearly defined. There was not yet sufficient clarity as to what South Africa wanted to do and how to look forward.

There was extensive discussion by Members on the issues, and the Chairperson noted that not all issues could be examined, but this must be seen as the start of a process. Questions included how the Customs Union could deal with diverse development of its members, linkages of large and small economies, statistics around the common revenue pool, the difference between customs unions and free trade agreements, and whether there were advantages to be offered by unions. There were many questions asked around liberalisation of the services and whether this was desirable, and the broader implications. Members were concerned that within the last ten years the issues had not been clarified, and wondered if the entering of free trade agreements before integration of the region was not premature. The important issue of lack of enforcement mechanisms was mentioned, and the implications of government procurement were raised.

Meeting report

Trade Law Centre for Southern Africa (Tralac) Briefings
The Chairperson noted that there had previously been a joint meeting with Department of Foreign Affairs, but this Committee had decided it was imperative for Members also to receive independent briefings from practitioners and academics in the field, to give their critical understanding of the issues, to enable them to make more informed decisions based on wider perspectives.

Ms Trudi Hartzenberg, Executive Director, Tralac, noted that Tralac was a capacity building organisation working on trade issues in East and Southern Africa. It undertook training, provided analysis and research. The book distributed to the Committee looked at regional integration matters from different perspectives.

She noted that there had been discussion on the Economic Partnership Negotiations. She would also cover the priorities and look at regional trade arrangements, including the SA Customs Union (SACU), SADC and economic Partnership negotiations.

There had been a first meeting with counterparts from India, and she said that she would be looking at Indian potential trade. Trends in relation to the regional trade agenda would refer to the relationships between free trade agreement and the multilateral trade agreements and World Trade Organisation (WTO). Tralac had also considered what type of provisions should be in the agreements.

Ms Hartzenberg set out the key developments in the global economy. New clusters of competitiveness, particularly in the manufacturing field, were developing in developing countries. IT, clothing and textiles were most likely to come from China or India, newly developing countries, instead of from developed countries. Global commodity chains for motor vehicles were no longer based in the developed countries only. Another important trend having implications on governance and international trade agreements related to production fragmentation - where the production of a product would take place at different geographic locations. This was made possible, efficient and competitive because of important changes in technology, related to transport and other key services. Communication and financial services were also required, and there were closer links between manufacturing process and services. It was also important to bear in mind the role of services in all of the economies. About two thirds of economic activity was accounted for by the services sectors. In the European Union (EU) about 90% of the new jobs were created in the services sectors. This was important when looking at international trade, as trade in services could take place through different modes of supply, including internet banking. It was no longer necessary for the service provider to be located in the same place as the clients. There had been significant developments in international trade governance over the last ten or fifteen years. This crossed international geo-political boundaries. The establishment of the World Trade Organisation (WTO) in 1995 provided an institutional anchor and this had led to significant liberalisation of trade in goods. Developments on trade in services had not quite reached the same stage.

WTO rules applied to all 151 members of the WTO. Alongside the rules were regional trade agreements (RTA), or free trade agreements (FTA). This proliferation was part of the South African trade agenda. The scope of trade agreements was growing, both in complexity and coverage. Import duties and quantitative restrictions had been liberalised considerably. Import duty on many products was low. The new trade agenda was focusing on many significant issues that used to be in the domestic policy arena. Services liberalisation would have to take into account what was happening in domestic regulation. She cited the example of telecommunications, noting that in South Africa fixed line services were still in the hands of a single provider. Even the developments in the mobile sector were linked to fixed line, so the one would affect the other. Despite the decision being made to allow a competitor for Telkom, no outside supplier had been allowed to enter the market. If it were decided to open trade negotiations on telephony services with, for instance, India, that would have an effect on the domestic regulation. Investment, competition policy, government procurement, and intellectual property were all featuring more on the international trade agenda, and being seen in free trade negotiations, both in the regional and international context.

Ms Hartzenberg then described how South Africa fitted into the arena. She noted that exports were still predominantly mining and basic processed goods (including steel and iron ore). The agricultural sector produced less than 4% of the total economic output, but it did remain important. Advanced manufacturing was increasing quite significantly. Exports to SADC accounted for 9% of total exports. The trading partners were still primarily developed countries, with EU accounting for 35% of total exports. However, advanced manufacturing mostly went to SADC. This had an impact on competitiveness. South Africa was competitive in the region, but not necessarily internationally. Asia (from India right through to China and other countries) had become an important trading partner, but exports to there were primarily primary commodities of metal and basic processed products (coal, steel, iron ore, gold which was beneficiated in India). Most of the imports were predominantly manufactured goods.

In respect of imports, the European Union was still the most important source of imports to South Africa. However there were growing imports from Asia, particularly China, and these were mostly manufacturing products. This reflected the shift in manufacturing competitiveness to developing countries.

Exports were mostly in precious metals to EU and Americas. Advanced manufacturing was only a major export to Southern African Development Community (SADC). The fastest growing exports were not in manufactured products, but were precious minerals and other concentrates. This was important to bear in mind when considering industrial policy and beneficiation.

Ms Hartzenberg noted that there was a framework within which free trade agreements and regional trade agreements were negotiated. All Free Trade Agreements had to be compatible with WTO. FTAs meant that the parties must liberalise substantially all trade in goods within a specific period of time. They were not clear what "substantially all trade" meant, other than that trade must be free. A customs union meant that member states who had liberalised trade amongst themselves would go one step further and adopt a common position on trading matters, by determining a common tariff for imports. This was very significant, because their interests in industrial development might be different, so one country might have to compromise to favour another. The content and scope of those agreements must be studied closely, in the context of a deeper regional trade agenda, and this would include services liberalisation, investment and other policies.

South Africa was a member of Southern African Customs Union (SACU) and SADC (which included all the members of SACU), and had also concluded bilateral agreements with many countries, including Malawi and Zimbabwe. It had also concluded an agreement with EU, and was negotiating or considering negotiations in India, China and American countries. South Africa seemed to be focusing on South-South agreements, including India, China and Brazil. It also had an Eastern policy, with Asian partners. All of this had important institutional implications. The Department of Trade and Industry (dti) was the focal point for trade, but if the trade agenda grew to include services and investment, then other sector regulators and institutions would become important to the policy and must be involved in the negotiations.

Ms Hartzenberg briefly described SACU, which was the oldest functioning union. It operated under a new agreement concluded in 2002, which had been implemented since 2004, but the process of implementation had been slow. A number of annexes to the agreement must still be developed and new institutions had to be established. There was still to be establishment of a tariff board and SACU Tribunal and a common negotiating mechanism. Member states must decide together on their trade policy. This did not exist as yet. Import duties were still important, for instance in regard to clothing and textiles, where import duties of 40% still applied to some garments. South Africa had determined the tariff policy for the SACU. This would have impacted on the scope for industrial development. The SACU Tariff Board was in future to determine and manage tariffs.

Another important aspect of the SACU was that in Part 8 of the agreement, member states were required to develop common policies on industrial development. The relationship between industrial and trade policy was very close, as import tariffs could be used to protect newly-developing industries internally. It also required members to cooperate on competition policy (although South Africa was at this stage the only country with a policy, a law and a regulatory authority). Competition policy was important because one country could not accuse another of dumping goods (selling below the cost of production in the home country) in their territory. Some Namibian companies were concerned about increased competition from South African firms, in products such as beer and pasta. Within a customs union, where there was free trade, smaller companies would feel increasing pressure, and this could only be counteracted by development of a competition policy. At this stage those firms had nowhere to take their complaints.

The common revenue pool held together SACU strongly. South Africa, as a result of its imports and excise duties, was apportioning a larger sector of the revenue pool to the smaller countries, who relied significantly on this revenue; Lesotho might rely on this pool to fund half of its government budget. There was still much work to be done to implement the SACU agreement.

South Africa supported the SACU. The question was what South Africa could do to support and motivate for development of SACU. There would be a SACU Council meeting on 4 April. This agenda would be considering the Annex on the Tariff Board, developed more than one year ago but not yet adopted. There was also an annex on the Tribunal, being a rules based dispensation. Common policy development was also to be considered, and whether there should be a mandate to the SACU Secretariat to move the process forward. The 2002 SACU agreement did not cover services, although industrial development must include services. SACU did not have a summit, and this could be important at a political level.

The SADC regional and integration agenda was quite well known. The nine member states signed the SADC Trade Protocol in 1996, in terms of which they agreed to establish a Free Trade Area (FTA). In 2003 a Regional Indicative Strategic Development Plan (RISDP) was implemented, setting out ambitious targets. This called for a free trade area in 2008 and a SADC Customs Union in 2010. However, it was not legally binding; it was only a strategic plan and could be amended. However, it enjoyed strong political commitment. SADC was strongly committed to regional integration and there were ongoing discussions as to what form the SADC Customs Union could take. There was little interrogation of the costs and benefits of this Union. South Africa would need to be very cautious on the implications.

Countries in Africa, the Caribbean and Pacific had enjoyed unilateral preferential access to European markets under the Lome Conventions, from 1975. However, they did not have to open their markets to exports from Europe. South Africa was originally excluded, but after independence it asked for the same access. The EU refused on the basis that South Africa was more developed and robust. Instead, South Africa ended up negotiating the Trade and Development Cooperation Agreement (TDCA) with the EU, and this came into effect in 2000. South Africa agreed to liberalise 86% of its trade over a 12-year period. That was presently being implemented.

Ms Hartzenberg noted that these unilateral conventions were not WTO-compatible. Therefore the Cotonou Agreement was negotiated in 2000, in terms of which the unilateral preferences continued until the end of 2007. During the period 2000 to 2007 countries would negotiate WTO-compatible Economic Partnership Agreements (EPAs). The EU, to avoid concluding a host of bilateral agreements, instead suggested that the other countries should themselves form into coalitions or negotiating configurations to negotiate with the EU. This was how the SADC-7 was constituted. South Africa was not included in the negotiations, because of its existing TDCA, but was given observer status. The member states of SADC ended up in four EPA configurations. In 2004 the SADC-7 developed negotiating guidelines covering the scope of the agreement, linking the regional services agenda with the EPA commitments. As discussions progressed the SADC Strategic Framework was developed, which led to a paradigm shift. It was proposed that South Africa become an active member of the SADC-7 group. Eventually the EU accepted South Africa as a party.

A number of important developments emerged. SADC-7 itself did not agree on the overall agreement. The TDCA was undergoing a mid-term review.  Part of the proposal was to use the TDCA Tariff Schedule as the basis for the EPA negotiations, to align all countries on a common position to the EU. However, divisions became evident. South Africa did not want to include services or other new issues in the agreement, and preferred to stick to trade in goods. The waiver expiry was not important for South Africa, as it had a fall-back position in the TDCA. However, it was vital to the less-developed Namibia, Botswana and Swaziland. Beef exports in these countries faced significant change because this was not covered by other agreements, and they would lose their foothold against countries like Argentina and Brazil, if supermarket chain relationships were broken by a break in the exports.

In April 2007 these countries were then offered duty free, quota free access (DFQF). There was much discussion on the inclusion of services and other trade related issues. South Africa was not keen to include this, but smaller countries recognised the importance of services for their own economies. Botswana, Lesotho, Swaziland and Mozambique entered an interim EPA, and Namibia eventually signed on 12 December, noting several concerns. South Africa did not sign. Those countries were now preparing for Phase 2. Namibia and South Africa would remain part of the process, as discussions would continue. Those signing would need to offer liberalisation of at least one services sector by the end of 2008. Botswana had concentrated on liberalising the banking and financial services sector. The countries would also have to do an assessment of EU service providers.

Another issue was investment, both on the international and domestic agenda. The question was on what terms would investment be brought in, and under what terms of governance. Investors would often link to job creation, growth and enhanced trade, but could demand tax holidays, special tariffs for electricity and so forth. The rules-based system, that would allow these countries to object to requests on the basis that EU agreements prevented the concessions, did not exist. Ms Hartzenberg gave the example of a Malaysian textile company that had shopped around considerably to look at different investment locations, in the absence of a rules-based system.

SACU Functions and Challenges: Briefing by Professor Gerhard Erasmus
Prof Gerhard Erasmus, Senior Research Fellow, Tralac, indicated that the regional integration policy was in limbo. He would examine why this was so, and how South Africa could play a role in the region to help it to get out of this activity. He would also discuss features of the SACU agreement, and why the implementation of the newer agreement had fallen behind. There had been a problem with sovereignty. He would also suggest what role Parliament could play.

Prof Erasmus noted that regional integration was about independent sovereign states doing business with each other. In theory they exercised jurisdiction within their own states. However, trade involved movement of goods, services, capital and people across borders, making them subject to the jurisdiction of other states. Climate, disease and crops did not recognise boundaries. It therefore made sense to try to establish other arrangements.

Prof Erasmus distinguished Customs Unions from FTAs. Customs Unions set common external tariffs to bring down obstacles and costs in importing to one country and distributing to others. SACU was a bloc within SADC. FTAs did not involve a common external tariff. Both were aimed at addressing problems of fragmentation. With both came the need for common standards and policies, and how to enforce them.

Successful examples of regional integration had involved the establishment of institutions to support the structure - such as the European Commission. Integration should be a joint way of doing business in a single customs territory. There was no single blueprint to be used; it depended on the context and the countries. The regional pattern in SACU had grown since 1910 into a definite paradigm of what was happening in the region.

The new SACU aimed to be a streamlined, modern and democratic outfit, that could deal with the challenges of the 21st century, including the establishment of the WTO. It was to be rules-based and have a Tribunal to decide disputes. SACU wanted to be more than a revenue-sharing mechanism. However, one of the problems was that revenue-sharing had always been the "glue" that kept it together. Revenue sources and excise went into the pool, but were paid out differentially. There was uneasy cooperation, with concerns expressed that the formula was one-sided. However, as already pointed out, some countries were dependent on this source for budget revenue. There would have to be a gradual and sensitive process to maintain regional stability. Political conditions must be conducive to deeper integration. Other challenges included the fact that the common policies and institutions had not been implemented. Prof Erasmus said he was concerned that the momentum seemed to be lost.

The 2002 agreement did not completely discard features of the old agreement. The Council still existed, but was a forum for representing national interests. The Secretariat had been added. The Tribunal and Tariff Board annexes for establishment had been prepared, but had not been adopted. Until they were in place, the new SACU could not function as it was supposed to. The Tariff Board would decide all tariff changes, rebates, anti-dumping, countervailing, but at the moment they were being decided by International Trade Administration Commission (ITAC) in South Africa. There were still disputes, and there were many unclear areas in this agreement, which included old habits of acting unilaterally. Some sections in the agreement were unattractive. Article 25, for instance, was taken over from the old agreement and allowed member states to impose tariffs. This was in direct conflict with other articles. There was not yet a common negotiating mechanism, as required by Article 31.

Prof Erasmus noted that the TDCA was not in line with the logic of the Customs Union, nor was squared with Article 24 of the General Agreement on Tariffs and Trade (GATT). Goods entered the South African market from EU in accordance with rates and tariffs that would be dropping over time. The fact that tariffs were being dropped would have an effect on the poor. It had an effect on the common external tariff. The idea was linked to Article 31. Those in a customs union should be acting with one voice to agree tariffs with other countries. This problem had arisen before the EPAs, because of the TDCA. Now, it seemed that the EPA trade by Botswana, Swaziland, Lesotho, Namibia and Mozambique would be trade on QFDF access. This brought in new challenges and called for careful policy guidance and leadership in the move forward.

Prof Erasmus then considered whether SACU was equipped for a rules based system. He said that in reality it was not, because of the absence of important institutions, and because there seemed to be no clear deadlines with regard to establishment of these institutions. The SACU agreement provided for the possibility of the framework being developed over time, with addition of annexes, which would fall under the jurisdiction of the Tribunal and be binding.

Prof Erasmus said that sovereignty was a legal feature and principle. He said that there was an argument that there was potential for tension between sovereignty and a rules-based system, because the adoption of policies and steps could affect sovereignty. This could not be true. South Africa was a member of WTO and SADC, and had agreed that the Tribunal could have certain functions. International agreements would not bind a state unless it gave consent. Ratification was in itself an act of sovereignty. Once this was done, then the argument could not be used that the domestic law prevented application of the international law. There was concern around the Tribunal and the governance. He suggested that there was a need to sort this out now. He pointed out that perhaps an appellate body should be considered.

Prof Erasmus then moved to consider democracy in SACU. He pointed out that the democracy here was different to what it was in the national context. When the preamble emphasised the important of democracy, it was attempting to stress that matters should not be the same as they had been under apartheid policies.  Decisions should be taken on the basis of consensus. Most modern international organisations would not try to exercise vetos but reach consensus. It was more about governance, transparency, accountability and access to information. SACU still had much to do on these aspects, as the new SACU would have to have features of democracy.

Common policies were listed in Part 8, and not all were linked to the same type of obligations.

If the common institutions were not put in place, then the new SACU could not function and the new agreement would have some vital building blocks missing and it would amount to merely a revenue sharing mechanism. There was still a need to consider who spoke on behalf of the collective.

Challenges for political leadership would include the incomplete framework and how to take it forward. Questions around who should share the responsibility and where would it be driven must be considered. The EPAs were not final; the services were still to be negotiated and these were the controversial aspects. Angola and South Africa were not included in the SADC- EPA. Namibia would not be negotiating on service issues. This EPA must be notified to the WTO. It would create a focus on SACU, the relationship of South Africa that was currently outside the EPA, and how to work a way forward to ensure the health of the organisation, sound policies and stability and development in the region.

Prof Erasmus suggested that the role for National Parliament would include the consideration of separation of powers and oversight. The international agreements would need approval of Parliament. There was sometimes a challenge in determining what did require approval. The Supreme Court of Appeal had recently ruled that the international trade remedies imposed by ITAC must be in line with international obligations under the WTO. The domestic regulations did not fully reflect that, and were declared invalid. Although international agreements were negotiated by the Executive, parliament would then be required to take action to implement local legislation and its oversight. Many challenges lay ahead in the areas of multilateral trade and the notion of regional integration in Southern Africa. He believed that there was not yet sufficient clarity as to what South Africa wanted to do and how to look forward.

Discussion
Prof E Chang (IFP) asked for background and information on SACU. She wondered if the notion of equality could be explained, and whether it was ever achievable. Noting the divergency of development in the SACU countries, she wondered how the policies could be developed to try to help each other. She pointed to the quotas being imposed. SACU noted that bilateral agreements would also be affecting countries. When South Africa was imposing a quota other countries were not always informed. She asked for more clarity on the cross-border implications.

Prof Erasmus replied that the fact of the matter was that SACU's present agreement was a framework agreement. It was sometimes easier to devise a new agreement. The approach here had been to take an existing organisation and put the framework around the existing sections. To use Prof Chang's own example of quotas and unilateral action, there were indeed principles that had not been respected. The common negotiating mechanism was not in place. SACU was continuing to act in a certain way, despite the building blocks being absent. It was possible that this would continue. As long as the structures were not in place, nothing would change. He suggested that perhaps they could engage on this later.

Prof Erasmus said that one large economy (South Africa) next to a small one (Lesotho) could be linked in terms of commonalities. Because there was a common external tariff, Lesotho had always been bound into South Africa's tariff policy. Small countries could argue that this was the price they paid for the benefits obtained from the arrangement.  It was not possible to have a legally binding industrial policy binding individual countries; they must move as a region. The tariff policies would by necessity develop with the structure. He believed that the emphasis would lie on how to tackle the matter, not when it would be tackled.

Ms Hartzenberg said that least developed countries were not required to open their markets. The question was whether the opening up of markets by least developed countries was always a bad thing. She gave an example that Mozambique may not have a motor vehicle industry. In negotiating a FTA with EU, it might well say that it wished to lower the import duty on vehicles coming in, to allow them to become cheaper to buyers in Mozambique. This would therefore open up its market to a greater number of people. This might not be a bad thing. Import duties did raise revenue, and there would be a loss there, but the benefit of opening the market may have a better effect within the country. It was not necessarily a blanket answer to say that liberalisation was always bad. The fact that in WTO they were not required to do that gave them flexibility. In the context of SACU this was important.

Ms Hartzenberg noted that all of these challenges of SACU would be magnified many times in speaking of the possible SADC Customs Union and it was important to look at the lessons from SACU critically. The Least Developed Countries (LDC) in SADC had diverse industrial development, which would cause some problems if there were to be a customs union in SADC. Twenty or thirty years down the line such a SADC Union may make sense, but the question was whether it was appropriate now, and what the were the implications for revenue sharing. There would be 15 diverse countries, as opposed to the 5 of SACU. 

Ms F Mahomed (ANC) asked if there were any statistics on the SACU common revenue pool. She was concerned about the EPA negotiations and that these amounted sometimes to re-colonisation.

Prof Erasmus said that he was not sure what the term "recolonisation" meant, but it could involve other issues. That would need to be unpacked. Economists were looking at how to do business with the rest of the world to be competitive. It was more important, in his view, to ask what South Africa was doing about its own policies, than to ask Lesotho what it was doing, because South Africa was a dominant economy It had to lead the policies and decide how best to interact and deal with stability problems. He noted that it was not possible to share the burden between equally balanced countries.

Ms Hartzenberg said that she would share the statistics with Ms Mahomed; they showed the context of the revenue sharing and how it acted to hold SACU together. However, the revenue dependence did prevent countries from looking at the bigger picture and the longer term development. These lessons must also be taken on board.

Ms Mahomed asked what the Customs Union would achieve that FTAs could not. The challenges to it seemed to be so large that the Secretariat could not cope, or deal with the least developed countries. The fact that SADC was not negotiating with one voice was of concern.

Ms Hartzenberg said that it would be easier to trade in FTAs. Customs unions of necessity did not allow one country to determine its tariffs as each country would have to agree with all others. One country without its own motor vehicle industry might want to lower the tariffs, but another country might want a 50% tariff in order to protect its own motor vehicle industry. These issues needed to be taken into account. There was no reason, why, in the context of FTA, countries could not discuss common policy areas. SADC was starting to discuss services, and had a trade and investment protocol. It was not necessary  to have a customs union to do this. A service agenda could be developed.

Ms Mahomed asked when Tralac thought that SACU might work. The 2002 agreement was already old, and she wondered how its future could be predicted.

Ms Mahomed noted that although it was a mixed economy, she wondered what the mix was, as it seemed to have a huge export balance.

Ms Mahomed asked what the research had shown in relation to delaying or not talking about services. She would like to know what percentage services represented.

Ms Hartzenberg said that services accounted for about 67% of economic activity. Agriculture was around 3%, and manufacturing 20% - 25%. There was a shift in the composition of the manufacturing which meant that South Africa was becoming more developed. Service sectors grew and agriculture declined, and manufacturers would start to produce more advanced products. This would have effects on decisions around competitiveness and how to integrate the global economy and how to trade. South Africa had been slipping in the rankings and the question was why. Competitiveness challenges often related to skills constraints. It was also important to look at the infrastructure services sectors and the costs for phone calls, bank charges and the like. The impact on small businesses of these costs was great. Energy sources must be reliable in order to maintain competitiveness. Infrastructure services therefore could be improved and this would have a very strong effect. There was a strong argument to protect the services industry, but the short and long term consequences and benefits of protecting telecommunications and IT must be looked at carefully. Services affected everyone every day. The inefficiencies were shared by all. So far there had been protection of the domestic regulatory environment. There was no strong motivation to liberalise the telecommunications sector

Ms Hartzenberg added that there was a  trend in the modern FTAs, no matter whether between developing or developed countries, to include services. They were playing an increasingly important role in our own economy and international trade - such as tourism, transport, technology in supplying services, business processing outsourcing. At this stage, if they were not included, she asked what would rule domestic policy, and if it was desirable to have a governance gap. That left a country open to individual investors holding a country to ransom by claiming larger benefits, as she had described earlier.
 
Ms Mahomed asked if Tralac could speak to Middle East issues and trade there as part of the economy.

Ms Hartzenberg noted that there were significant imports from Saudi Arabia. It was a region to look at.

Ms Mahomed then referred to the example given of South African and Mauritian industrial policy. She wondered if a single industrial policy for SACU might be achieved.

Prof Erasmus noted that he believed that the question lay in not when matters might be achieved, but how they could be worked. The region would have to work together with joint institutions. At the moment there was a problem that the joint institutions were not in place, so it was not possible to develop joint policies. This was why there had been some unilateral actions.

Mr J Maake (ANC) could not see how it was possible to develop common policies, and without that he felt it was not possible to move forward. He had not received a clear indication of the solution to the problems, and did not know how the point would be reached where there could be a move forward. If there was no customs union within SADC, it would be difficult. He commented that the various institutions and agreements were scattered.

Mr Maake asked if the agreements signed in December 2007 by Namibia, Botswana and others had included an opening upon the services area, and whether they would be able to renege from this.

Mr Maake wondered why within a period of ten years matters had not been clarified further. He believed that the same problems would recur if there was no focus on common policies.

Ms Hartzenberg said that countries had to decide with whom to negotiate and what would drive the impetus to negotiate with one country instead of another. The answer was not found in a single source. It was necessary to look at trade issues overall. The trade and industrial profiles were linked, in that trade policies should also enhance the capacity to produce goods and services and improve efficiency and competitiveness. There was a need for careful consideration. Trade was at the moment taking place predominantly with developed countries. The question was what kind of agreement to conclude. An FTA with China or Brazil would be no easier than negotiation with EU. There were specific interests and the developing countries competed in many of the same markets, particularly motor vehicles, clothing and textiles. India would be pushing for inclusion of services, as it had made a strategic decision to liberalise telecommunications a few decades ago. Call centres in India were providing services all over the world. South Africa was exporting gold to India, which India then beneficiated and India would export gold jewellery to countries, including South Africa. There was in effect no difference between exports of gold and primary commodities. There was a need to have a sober look at what determined the trade agenda and strategy and what it had to get out of those agreements. The priorities in negotiating with any country must be clearly set. Governments would negotiate trade agreements, but they did not trade. The private sector should be telling government what it wanted to get out. That interface was not being done consistently or effectively enough. There was a need for closer conversation on trade matters and what could be achieved.

Ms Hartzenberg noted that the question had been asked whether it was possible to develop common policy.. Lesotho exported water, clothing and textiles to South Africa. South Africa had a more developed economy. There was a need to clarify what was meant by industrial policy. Until recently, it meant incentives to support manufacturing industries. Since then, there had been discussion on broadening the incentives to include reference to services. Her view was that industrial policy relied less on incentives and support and focused on creating an efficient business environment. This brought the issue back to infrastructure and services. The focus had shifted significantly. It was possible to find common ground. In the case of SACU all member states should look to infrastructure development, including transport, communication, financial services and a more efficient business environment. If necessary, there might need to be a compromise. It was necessary to decide how to view the import tariff. These issues also raised the role of South Africa. The industrial development had benefited from having a policy that would not necessarily have supported industrial development in small countries.

The role of South Africa as the largest economy must be considered. If there was poverty, unemployment and lack of development in the region, South Africa would carry the burden. South Africa thus had an interest in driving the regional development to create greater stability and regional development.

The Chairperson noted that the briefing had indicated where the respective countries within SADC and SACU were at present, and also had highlighted the contentious issues to be decided. He would like to add a dimension seldom exposed. In regard to existing agreements and protocols, there was not enough about enforcement mechanisms. More time and energy needed to be spent on this aspect to put the proper value on agreements..

Prof Erasmus agreed with these concerns. The SACU agreement did create a Tribunal, whose decisions were to be final and binding, but it had no provision to give domestic effect to the binding decisions. In fact that old recipe could not be properly transformed into a rules based system, and enforcement, implementation and monitoring had been lost. From a legal point of view, it was possible to argue that there was of necessity an implication that the decisions were binding on the member states, but there still was no an indication of how this implication would be effected.

Ms Hartzenberg noted that the tariff phase-down schedules were implemented in 2001. In August 2007 it was however noted that one country had only done a single phasing down. Most of those outside SACU had not stuck to this provision. Nothing could be done because of the lack of a mechanism for non compliance. This was a major challenge. South Africa had signed numerous protocols. There was no point in doing so if there was no way to implement them, and without enforcement, she agreed that regional integration was really meaningless.

Mr S Rasmeni (ANC) noted that the speed of entering negotiations, especially with EU, was perhaps not consistent. He asked for comment why the EPA agreements were entered into before the SADC region had been integrated. He asked how long it had taken for the EU to become integrated, and whether it would be proper for a young democracy such as South Africa to push ahead.

Ms Hartzenberg said that this came back to Contonou and the WTO waiver. The Cotonou agreement spoke of concluding WTO compatible agreements by the end of 2007 - a seven year time frame. However, looking at trade policies, there was no evidence of any country preparing to negotiate immediately – all had delayed. This was a lesson to bear in mind when negotiating. The other negotiating country may already have strategically identified those countries from whom it could benefit, and South Africa must plan well in advance, and develop an ongoing strategic approach to trade negotiations. The sequencing of whether to wait until the region was integrated was a concern, because it was not known how long it would take, given the diversity, for the region to get itself ready to negotiate. She believed that there may be instances where trade negotiations could usefully be used to kickstart internal matters. For instance, a country might ask that the banking sector not be opened. Should it later take a strategic decision to open up this sector and offer offshore banking, it could motivate more internal competition amongst existing banks. There was no set answer and each matter should be considered case by case after extensive analysis. 

Mr Rasmeni understood the issues around services, particularly that many benefits had been highlighted. He asked what other negative impacts should be considered that made South Africa cautious about entering into this.

Ms Hartzenberg said that the services issue was complex because each sector was different to others. Much more learning was needed in the region. The positive consequences of opening up telecommunications, for instance, might be that the cost of doing business might drop. However, if the sector were opened, there would be a competitor for Telkom. Government, as part-owner, might experience a drop in the revenue from Telkom.

Mr Rasmeni understood that government procurement must be considered and there was a fear that this might impact negatively on policies such as economic empowerment and other issues. He asked for comment.

Ms Hartzenberg said that the aim of domestic policy must be considered, and socio economic priorities taken into account. It could be that a sector could be opened, and joint ventures would be allowed, but those could be brought into liberalisation. Large multinationals might refuse to enter joint ventures with smaller local firms, so the implications of restrictions must be taken into account. She noted that America had been keen to include government procumbent when it started to negotiate with South Africa. This was becoming a very important instrument for development. Government could promote small business development, or BEE or regional interest. Opening that up could lose some policy direction in promoting domestic priorities, but it might be a way to get cheaper products and services. That was why government had to decide on its priorities.

Mr Rasmeni asked for clarification on the benefits to society as a whole of liberalisation. There might be other unintended consequences such as job losses - for instance, by Mozambique importing motor vehicles rather than getting these from the region. In terms of employment in the region, South Africa had played a major role in attracting people, and still did so If the region was integrated, he wondered what the effect would be, as the local industries would be competing with South African industries. He asked how the relative benefits would be weighed up.

Ms Hartzenberg said that ultimately if the role of trade in economic growth and development was taken into account, the increase in imports, Trade in goods agendas, and where benefits would come from, must all be considered. She used services as an example. Telecommunications had become indispensable to any kind of economic activity. It however also demonstrated linkages to education , healthcare and transport. Access to broadband and the high costs were stunting the costs of offering education over the internet, of starting call centres, despite the fact that South Africa was ideally placed geographically, and providing connectivity. Tourism and transport could not operate effectively if there were hindrances in power supply.  In order to make good trade policy there must be a understanding of the new economic development and linkages between manufacturing and services. Procurement was important as power outages might make people miss deadlines.

Mr Maake asked how revenue sharing would work.

Ms Hartzenberg explained that when any product came into a port, there was a duty levied at the border. All duties were then collected together. The SACU revenue pool was currently managed by National Treasury The SACU agenda was the terrain of dti but Treasury dealt with revenue. The formula after collection was three phased.  One related to customs duties, then there was a development component. The Customs component did not take into account how much each country separately imported, but was based on how much the countries traded with one another, and the revenue was shared out on a quite complex formula. 

Ms Mahomed asked that further information on the FTA versus the Customs Union be sent on. She would like to hear whether they could overlap

Ms Hartzenberg said it was possible for any member state to be a member of more than one FTA. It was not possible to belong to more than one Customs Union. Tanzania, for example, belonged to SADC, and the East African Customs Union.  If SADC were to introduce a customs union Tanzania would have to belong to one or the other.

Mr Rasmeni noted the comment that there was a need to define industrial policy and strategy. He requested that if any documentation was available the Committee should receive it.

The Chairperson commented that one session could not highlight all issues, but this had to be the beginning of a process. He thanked the presenters sincerely for their input, which would enable the Committee to improve the breadth of its knowledge and oversight.

The meeting was adjourned.

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