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
Prof Erasmus of Tralac then proceeded to examine the Customs Union and noted that there were issues of sovereignty,
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.
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
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
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
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
Ms Hartzenberg then described how
In respect of imports, the European Union was still the most important source of imports to
Exports were mostly in precious metals to EU and
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.
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.
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
The common revenue pool held together SACU strongly.
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
Countries in Africa, the
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.
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.
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.
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
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
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
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.
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.
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
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
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 (
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
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
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
Ms Hartzenberg noted that there were significant imports from
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
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
Ms Hartzenberg noted that the question had been asked whether it was possible to develop common policy..
The role of
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.
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
Ms Hartzenberg said that this came back to Contonou and the WTO waiver. The
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
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
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
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
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.
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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