SA/EU Trade, Development & Cooperation Agreement Additional Protocol

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Trade and Industry

13 May 2008
Chairperson: Mr B Martins (ANC)
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Meeting Summary

DTI told the Committee that the SA/EU Trade Development and Cooperation Agreement (TDCA) was a strategic trade and investment partnership, largely to the benefit of SA.. As about 40% of SA's trade is with the EU, the increased market access to this high income market was very good for the integration of SA into the global economy. Its key features included its asymmetrical nature and the preferential basis South Africa enjoyed. T

he Additional Protocol dealt with the enlargement of the European Union. Ten additional member states had joined in 2004 followed by another two in 2007. The trade implications of this were explained as were the challenges for South Africa. The full impact would not be evident until the transitional period ended in 2012.

The key issues raised during the discussion were varied and comprehensive. A recurring question was whether the TDCA has been beneficial and what its benefits are. Exporting primary goods as opposed to producing value-added products or beneficiation was also touched on numerous times, with the response that this was a matter of competitive advantage for SA. However the long-term goal of encouraging the production of value-added products was in place. The phasing out of tariffs was questioned several times and clarity was sought. The delegation explained about the timeframes and products, highlighting that tariffs are a trade policy tool, not an income stream.

Reserve list products were also discussed with reference to the specific products on the list, protectionism by the EU and quotas. The deficit in trade with Romania and Bulgaria between 2003 and 2005 was queried. The response received was that this fluctuation was subject to changes in demand, exchange rate fluctuations and other market conditions. The unstable trade balance was expected to persist in the medium term due to the fact that Romania and Bulgaria were also developing nations. How the TDCA affected the poor, unemployment and the developmental state came under the spotlight and while the DTI did not have definite answers, they reiterated that their aim was to create a better environment for the improvement of the SA economy which would be to the benefit of these issues. Rules of origin were clarified. Other points raised were the possibility of reneging on TDCA, trade pressures outside the SA/EU regions, SMME support, reviewing trade policy agreements and imminent regional integration.

 

Meeting report

Mr George Monyemangene, Chief Director for Africa Economic Relations: DTI, explained that the Trade Development and Co-operation (TDCA) provided for a Free Trade Area (FTA) between South Africa and the EU over a transitional period of 12 years. Broadly the EU is a strategic trade and investment partner as 40% of South Africa's total trade is with the EU. It was a means for global integration of the South African economy. The main benefit of the TDCA was the open market to the higher income EU region.

The key features were the phasing out of tariff duties (over the next 12 years for SA), tariff quotas for certain exports, the agricultural safeguard clause, rules of origin and the reserve list of products. The briefing paid particular attention to the asymmetrical nature of the agreements with regard to preference and benefits for South Africa.


The objectives were to cement the SA/EU relationship (providing certainty to SA operators), improve market access for exporters on both sides, encourage SA's drive to open up the global economy and promote SA's development. The scope of the TDCA was about 90% of current trade between SA and the EU. The agreement covered a wide field of co-operation, which included provision for a FTA, trade related issues, economic co-operation and social and cultural co-operation to name a few. Other than being asymmetrical, the nature of the TDCA was described as open ended, comprehensive, differentiated in coverage and part of a tariff phase down group. Sensitive products were also considered by means of a reserve list on which no tariff reductions were envisaged.

Mr Monyemangene said that the TDCA was fully implemented on 1 May 2004. The South African Revenue Service's Customs & Excise Division implemented tariff cuts as set out in SA’s trade offer. The Department of Agriculture (DoA) implemented quotas granted by the EU and the EU implemented quotas granted by SA.

The Additional Protocol dealt with the enlargement of the European Union. Ten additional member states had joined in 2004 followed by another two in 2007. The trade implications of this were explained as were the challenges for South Africa. The EU enlargement process meant that from 15 member states it now had 27. The core issue was that the TDCA applied to any new members as the EU enlarges through the Enlargement Protocol. Romania and Bulgaria's trade with SA was said to consist mainly of raw material exports and value added product imports and was robust. The main point made about trade implications was the competitive advantage gained due to the preferential basis of trade. The major opportunity here was making the most of market access to the lucrative EU market. The major challenge: the competition threat of an enlarging EU. Special mention was made of the retrospective implementation and exporters would be reimbursed for fees paid since 2001. In conclusion he said the TDCA was one of the most ambitious co-operation agreements ever concluded by SA and that the full impact would only be felt in 2012, after the transitional period was complete.

Discussion
The question and answer session was opened by the DTI in the form of responses to the questions raised at the 27 March meeting on the same subject:

- Is the TDCA a good agreement for South Africa ?
The DTI was of the opinion that it was. It was a compromise from extensive negotiations. It was an asymmetrical agreement, largely in favour of South Africa. He noted that the phase down period on tariffs was longer than the EU's . Certain sensitive sectors are protected so as not to be injurious to South Africa.

-The extent of consultation was questioned.
The DTI did consult with the Southern African Customs Union (SACU). As member of SACU, South Africa cannot enter into agreements with third parties without SACU's approval.

- Why are we exporting primary goods as opposed to value-added products ?
Bulgaria and Romania are also classified as developing countries, however SA has the competitive advantage in these resources. This is not a long-term solution. South Africa must make an effort to produce and export value-added products.

- Does TDCA have benefits?
Enlargement does not open the agreement any more. It is merely an extension to the two new member states.

- Has integration been beneficial?
Integration has meant access to a larger income market for exports. The South African economy had been isolated in the past. Industry could now expand due to this access, so, yes, the economy had benefited. Pricing conditions had improved due to the interaction with the EU market, equalising access to resources. South Africa had also been brought in line with world standards.

- What does the transitional period of the agreement and its open-ended nature mean?
The agreement had created a certain environment in terms of duties and trade routes. South Africa had access to the EU market at a lower cost and was able to attract investment. The period assigned to the phase-out of tariffs was 12 years. The open ended nature meant the agreement was indefinite (subject to extension in future).

Ms D Ntuli (ANC) asked for clarity on the reserve list of products. What type of products were those and were reviewed periodically. Regarding implementation, she asked about the Department of Agriculture administering implementation and quotas. She wanted a better explanation of quotas. The change in exports of value-added commodities was questioned. For the sensitive products that were identified, what were the protective measures?

Mr Monyemanyene spoke to the reserve list. He said that agriculture was a sensitive component of the agreement due to EU protectionism. This created a need for trade barriers to protect domestic agricultural production.

Mr Tyini said that these products were immune to the tariff phase down. Some of the products were iron, steel, motors, meat, rice and sugar. On the EU side they were mostly agricultural products which enjoyed protectionism. Although the TDCA was asymmetrical in most senses, this did not apply to agriculture. In this area the EU had not opened up much. Managing quotas was the mandate of the DoA. A quota was defined as a quantitative restriction on imports or exports. Products that had quotas were canned fruit, cut flowers, frozen juices, wine and cheese. Sensitive value-added products were automotive parts, machinery, electrical goods and wine among others.

Ms F Mahomed (ANC) referred to the tables on Bulgaria and Romania and wanted to know the cause of the deficits between 2003 and 200. On market access improvement, she asked how exchange rate fluctuations affected global competitiveness. How did the TDCA affect the poorest of the poor? She said the impact on micro entities was great and shifts in global trends was given as the reason but she thought more care should be taken when opening markets. She highlighted the fact that these arrangements were all linked to the first economy. What was the response to the second economy? How could things be tightened for the whole constituency? She said the explanation of rules of origin was not satisfactory and asked how South Africa's trade balance could be stabilised.

Mr Tyini replied that the trade deficits were a matter of demand and supply. Mainly a drop in demand for exports led to the deficits. Exchange rate fluctuations also played a role with the euro having strengthened over time. Only a growing or sustained deficit would require intervention but that had not been the case. Price determination, exchange rates and competitive advantage would all affect demand and could lead to trade with the two new members not being stabilised, but would develop over time. Fluctuations were likely in the short to medium term.

On adding value to products to improve competitiveness, he said the willingness to engage foreign markets would have to improve and information on these opportunities must be made available. Involving the second economy was not a simple question. He referred to pre-1994 when South Africa was registered with the World Trade Organisation (WTO) as a developed country. This posed a challenge with the WTO as they were not able to afford any more tariff cuts. The DTI would offer assistance and subsidies to SMMEs. This was a work in progress. With reference to rules of origin, products needed to be value added and exports of raw materials were to be discouraged as a goal. He said there were requirements on how products originate. They were currently still negotiating with the EU on this. The aim would be protecting South Africa's rights to intervene. The diamond sector export quota restriction was an example of this. The DTI wanted to maintain the space to develop the economy and were pursuing this vigorously. They were resisting the EU's calls for reduced regulation and defending these spaces vigorously.

Mr Monyemangene addressed the question on rules of origin. He said they should not be onerous. He mentioned SMMEs and those who could not compete with cheaper exports. The DTI would be assisting them to become export ready through a number of incentives.

Mr J Maake (ANC) referred to the scope of the TDCA. The points on social and cultural co-operation and political dialogue were of particular interest and he wanted to know how these objectives were factored into the agreement. He asked what would happen if parties were to renege. What would the penalties be? He asked what other countries had similar agreements with the EU. He also asked how it was possible that iron was both exported to and imported from Romania.

Mr Tyini said that the import and export of iron was a matter of supply and demand and different types and forms of products. Countries could trade in the same product. It might be for different types of iron. Wine was a good example of this too. Many countries that produce wine also import wine from other regions. He said the Free Trade Area (FTA) between South Africa and the EU meant they could co-operate in certain areas of common interest, like conflict resolution in Africa. Other support received included grants and funding to housing, social development and other aid for South African organisations. Where the EU encroached too much, intervention would be needed. He said the possibility of reneging did exist.

Ms Kekeletso Mashingo, Deputy Director, DTI, said that formal notification would have to be given to terminate the agreement. Six months later the agreement would terminate.

Mr Tyini said the EU had similar agreements with many countries and territories including Switzerland, Norway, Iceland, Lichtenstein, Chile, Egypt, Morocco and Israel.

Ms D Ramodibe (ANC) said that economic growth had been emphasised. How had unemployment been reduced because of this growth, if at all? She requested clarification on the reduction of tariff duties. She finished by asking how the TDCA helped to build a developmental state.

Mr Tyini said he had no definite answers as to the TDCA's impact on reducing unemployment. The DTI's goal was to create an improved environment to promote investment and create employment. He said this was an area for study. Tariffs were not an income generating tool, rather they were a trade policy tool used to protect an economy and improve competitive advantage.

He said he had no definite answers to the developmental state question. He did however reiterate that the goal here was to protect the domestic economy (policy makers, small enterprises etc). This came in the form of securing preferential treatment and defending restrictions for the domestic economy. These were all broader objectives to a better environment.

Mr Monyemangene said the idea of a developmental state was not necessarily in conflict with the global economy. The idea of the TDCA was to create the best environment for the economy to thrive by deriving optimal benefit from exports and co-operation. He added that beneficiation to produce value added-goods was critical.

Dr P Rabie (DA) referred to investment in South Africa by the Ford Motor Company and other major automotives and asked what the effect of cheap Chinese and Indian imports was on the domestic motor industry. Broadly, he asked what the approach was to trade pressures from other countries.

Mr Tyini replied that the TDCA was between the EU and South Africa. It did not apply to China or India. China had much wider access to the world market due to its strong competitive advantage and it did not need an agreement to achieve this.

Ms Mahomed asked about the cancellation of the agreement. Was there any clause to protect the exporters? Growth should be seen in a holistic way and a synergy between service providers could help create employment.

Mr Tyini replied that in the event of the cancellation of the agreement, the benefits would have to be forfeited. The possibility of suspending the agreement existed only in cases of crises such as war and natural disasters. Only then could it be temporarily suspended without consequences.

Mr S Njikelana (ANC) raised several points or concern. He asked what the meaningful gain from the TDCA was. He referred specifically to the failure of the Doha Round of the WTO and noted the EU's insistence on protectionism for agricultural products. He asked about the negative impact on SMMEs and support for them. On trade policy, he said it pointed to a need for tools to manage the TDCA. He said that non-trade issues were not the domain of the DTI. He requested an update on the extent of support in other areas. He referred to the key trade agreements with Romania and Bulgaria and the benefits and asked if South Africa had gained or lost to them

Mr Tyini replied that limited incentives must be applied with strict rules, so as not to challenge the WTO. The DTI must become creative with the packaging, rather than adding new incentives.
The trade policy base was under review and would probably come before Parliament by next year.
Mr Monyemangene said they were reviewing trade agreements. He highlighted that trade policy functioned within regional integration and the FTA with SADC.

The Committee recommended approval of the Additional Protocol to the TDCA.

The meeting was adjourned.

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