Trade Negotiations Update: Departmental of Trade and Industry Briefing

Meeting report

Trade Negotations Update by Department of Trade and Industry (dti)
Mr Xavier Carim, Deputy Director of International Trade and Economic Development (ITED) Division of the Department of Trade and Industry, thanked the Committee for their support during the negotiations, some of which he said were at a critical point. Although this was not the major focus of the presentation, nor included in the documents, he gave a background to the Economic Partnership Agreement (EPA), which he described as the biggest immediate threat to regional integration both in Southern African Development Community (SADC) and Southern African Customs Union (SACU).

The Doha Round
Mr Carim noted that since the beginning of this year there had been an intensification of the negotiating process within the World Trade Organisation (WTO). It had been agreed that there was a need to reach agreement on key issues by June or July, before the USA entered its election phase. Several key challenges still needed to be addressed. The continuing lack of clarity on the level of ambition in agriculture militated against progress on all other issues.
There was intensifying pressure for developing countries (called the NAMA 11 countries) to agree to an ambitious outcome in Non Agricultural Market Access (NAMA), together with other issues before clarity on concessions could be reached. This was complicated by the recent US Farm Bill, which, by providing increased support to US farmers at a critical point in the negotiations, further undermined the prospects of progress in agriculture.

High global food prices also raised questions about the new range of cuts in trade. This range would have to be substantially lowered to have any real effect and meet the Doha objective of “substantially reducing” support.

Other issues which remained unresolved included special safeguard mechanisms for developed and developing countries, preference erosion and tropical products. Mr Carim said there was intense pressure on the NAMA 11 to make significant cuts in NAMA. Although there was now a range of options for tariff cuts for developing countries, these options remained constrained and would still require disproportionate cuts for many developing countries, including South Africa.

A revised NAMA text recognised, for the first time, the specific situation faced by South Africa, which, in the Uruguay Round, undertook severe tariff cuts. The text now proposed additional flexibility of up to 16% for South Africa, but these had to be negotiated. South Africa’s position (like the NAMA 11) was that flexibility and co-efficient should not be linked, and that the spread of co-efficient between developed and developing countries should be 25 points, in order to preserve the principle of less than reciprocity in reduction commitments. South Africa saw the 16% flexibility as a minimum requirement.

Mr Carim stressed that South Africa remained committed to concluding the Doha Round but not at the expense of its broad development objectives and specific positions agreed by the NAMA 11 and the G20. He again stressed that in the NAMA negotiation – probably the most important issue for South Africa – two central questions needed to be resolved: that of the co-efficient, which would determine the death of tariff cuts; and greater flexibility. The country’s approach was to remain engaged in the negotiating process and there was still a chance that these would progress, although that chance was diminishing day by day.

New Economic Partnership For Africa’s Development (NEPAD), Southern African Development Community (SADC) and Southern African Customs Union (SACU)
Mr Carim then dealt with NEPAD, SADC and SACU agreements.

He pointed out that African development and integration was probably the most extensive single area of engagement. Over the past four to five years the Department had followed a methodology for engagement with bilateral partners. Priority countries in Africa, with whom South Africa would engage, had been chosen for both political and economic reasons, especially in the context of post-conflict reconstruction. Areas of need and interests had been identified for co-operation at a bilateral level between South Africa and these countries. This co-operation had taken the form of promoting infrastructural development, trade and investment as well as technical exchanges and support.

The success registered in such bilateral co-operation in Southern Africa was being increasingly extended to the rest of Africa. At the multilateral level, South Africa had participated in continental processes, African Union (AU) ministerial meetings and NEPAD, and was trying to refine its objectives around African economic development and regional integration and to build an “Africa-wide” approach.

The other main component of multilateral work was the engagement by Africa with partners outside of the continent. The Africa-European Union (EU) summit last year was part of this engagement and there were also recent engagements between Africa and China, India, South America and most recently, Japan. At a regional level, SADC and SACU were the main instruments of co-operation.

SACU (the oldest customs union in the world) had two main items on its agenda. The first was revenue collection and distribution, and the second was the review of revenue-sharing formulae, which took up a lot of time. The Department’s main interest in this aspect of SACU’s work was its desire to shift the focus from a single-minded attention to revenue to a broader concern with balanced economic, industrial and agricultural development in SACU countries such as Botswana, Lesotho, Swaziland and Namibia, so as to lessen the dependence by these countries on revenue. This was a time-consuming, complex and difficult challenge, which included looking at the need for cohesive regional agricultural and industrial policies.

SADC had shown progress in regional integration such as the Free Trade objectives set in the Maseru Protocols of 1996. At a summit planned for August this year, an announcement would be made on progress with regard to the FTA (Free Trade Areas). The real question facing SADC was where it would now start to focus, after the achievements of the Economic Partnership Agreement (EPA). Another core concern in SADC was the industrial and agricultural underdevelopment of the region, and South Africa’s domination of trade, despite the advent of the EPA.

The Economic Partnership Agreement (EPA)
Mr Carim noted that all of the debates about developments both in SADC and SACU had been overtaken by what was happening in respect of the Economic Partnership Agreement with the EU. SACU was for the first time facing a serious threat to its existence, as a result of this agreement. Firstly, several provisions in the EPA would have a negative impact on South Africa’s scope for development policy, for example, using export taxes for development. There was also a concern about whether, because of the EPA, the EU could challenge South Africa’s Black Economic Empowerment (BEE) programmes. The EPA also had provisions that could undermine regional integration and the manner in which decisions on integration policy were taken.

There were at present five such EPAs between SADC countries and the EU, which would make regional integration within SADC much more complicated. Some of the countries within SADC had been faced with a very difficult choice because if they had not signed these agreements in November last year, they would have lost their trade preferences to the European countries. Although South Africa was not threatened to the same degree, it was concerned that if it did not solve these problems, it would not be possible for the country to join the EPA, and this in turn would have an adverse effect on the future of SACU. It would also mean that it could no longer take common positions on negotiations with third parties and it would also have an effect on revenue. Another meeting between South Africa and the European countries was planned towards the end of the year and although there were no guarantees, it was hoped that progress would be made.

India- Brazil- South Africa agreement (IBSA)
Mr Carim noted that IBSA was a broad engagement driven by the Minister of Foreign Affairs and it involved a great degree of political co-operation and engagement between the three countries. It also involved an economic component , which was led by the Department of Trade and Industry and conducted by the Trade and Investment Working Group.

There were two main areas of work; the first was a collaborative work programme with India and Brazil, built around trying to exchange information around investment and trade opportunities and addressing barriers to mutual trade. Secondly this was complemented by the Preferential Trade Agreement negotiations, which were tariff negotiations between the three countries. In April 2008, SACU and MERCOSUR (the Latin American bloc) concluded negotiations for a preferential trade agreement and this awaited ministerial signature and ratification by Parliament. The third leg of the negotiations, between India and SACU had started in October last year and would take another year to conclude.

The next step was a Trilateral Trade Arrangement (TTA) between SACU, MERCOSUR and India, which had already been initiated and was in progress.

Trade Policy Review
Mr Carim described the Trade Policy Review as an important project, which had never previously been conducted by the Government, and had been initiated in November 2007. Its aim was to review key elements of South Africa’s trade negotiations over the past 14 years, to make an assessment of trade performance and to make recommendations on the direction of the country’s future trade policy. Key areas on which recommendations were to be made were the link between trade, industrial and tariff policy, between trade and investment, regional policy, South-South trade, competition and intellectual policy, and so-called new generation issues, which South Africa needed to consider in a more systematic manner. A document was being drafted and it was hoped it would be followed by engagement with Government, Civil Society and Parliament.

Discussion
Mr L Labuschagne (DA) asked Mr Carim to explain the concept of the co-efficient in layperson’s terms.

Mr Carim replied that the level at which the co-efficient was set became the ceiling for the tariff. If the developed countries adopted a co-efficient of 7 to 9, this would mean that they would not have a tariff beyond 7 or 9. If developing countries adopted a co-efficient range of 19 to 26, then no tariffs would be higher than that. When a country agreed to a co-efficient, it also indicated the depth of tariff cut it could take on its highest tariff. The formula for cuts was that the highest tariff took the deepest cuts. South Africa was demanding higher co-efficients and a flexibility clause to protect it and especially its more sensitive sectors from deep cuts.

Mr Labuschagne asked about South Africa’s involvement in the so-called Mtwara Development Corridor.

Mr Carim replied that South Africa had been leading the coordination for the development of the corridor. This had reached a certain level of development and had been handed over to Tanzania. The groundwork had been done and the dti had played a crucial role.

Mr Labuschagne asked whether, in South Africa’s negotiations with the EU, it adopted a two-pronged approach to bilaterally convey its views to sympathetic governments.

Mr Carim replied that South Africa did indeed lobby bilaterally with EU member states. The country’s ambassador in Brussels often met and lobbied with the representatives of such states. He said that some results had been shown from such lobbying. The EU Council had met in May and one of the key items there had been the issue of the EPA. Quite a strong statement had been issued, indicating that they had recognised, for the first time at ministerial level, for the first time some of the concerns of the African, Caribbean and Pacific (ACP) countries. They had urged the Commission to exercise the utmost flexibility in addressing some of those concerns, in ensuring that the process was as inclusive as possible and urged that it should include regional integration.

He said it was important to put as much pressure on different parts of the EU system around these issues, because it was clear that the direction in which the Commission was going would divide and weaken the region. He said that it was clear, from the way in which the EU’s integration had happened over the past 40 or 50 years, that they had never faced an external threat in the way that the African region had.

Mr S Rasmeni (ANC) said he was worried that the negotiations on tariff cuts would have a negative impact on the country’s industrial policy. However, Mr Carim’s presentation had allayed his fears in emphasising that South Africa’s commitment to the Doha Round should not be at the expense of its broad developmental objectives. He said that was critical because the Committee had endorsed the industrial policy and needed to see progress in this regard rather than the addition of obstacles impeding further implementation of action plans. He said the overall picture seemed to be one of the EU and the USA scrambling for Africa’s resources. He expressed the view that this was no different from “re-colonising” Africa. He warned that if South Africa and Africa generally were not vigilant, they might find themselves re-colonised by these negotiations with the West. South-South negotiations and trade co-operation might be a way of thwarting this threat by the superpowers. He asked whether the dti had enough personnel to deal with South-South co-operation.

Mr Carim said that the perception of the re-colonisation of Africa was not a perception that the Commission was explaining to its member states. Their view was that South Africa was isolated in this perception and it was thus important for South Africa to give member states another perspective, and to explain that there was indeed a widespread perception that the EPA was a serious threat to economic development in the region.

Mr Carim agreed that the prioritisation of South-South co-operation was very important. It was clear that the major gains in the next period from trade and investment would be more likely to arise by opening up trade with other countries of the South. The economies of India, China and Brazil were the fastest growing economies and therefore presented huge opportunities for South Africa. However, it was also important to remember that these countries were also strong competitors and as such posed threats to South Africa, which therefore had to find a strategy to get the benefits without undermining its own development.

Dr P Rabie (DA) noted that Treasury had expressed concern about the future existence of SACU. In his opinion, countries like Swaziland and Lesotho were especially vulnerable to any threats to the continued existence of SACU. Their main source of revenue was the Customs Union and if it were abolished, this would have profound implications for South Africa’s neighbours.

Mr Carim replied that National Treasury had raised questions about the sustainability of the current revenue-sharing formulae. Under these formulae there had been a year-on-year trend of more funds being disbursed to the “BLNS countries” (Botswana, Lesotho, Namibia and Swaziland). There was a debate about whether these formulae could not be better structured to provide support for regional integration in SACU. However, he pointed out that the more serious threat to SACU came from the impact of the EPA. If the EPA came into force as intended, it would force a radical and fairly quick think of revenue-sharing, which was premised on a single, external tariff. He reminded Members that the EPA, on the other hand, set two separate external tariffs – one for South Africa and another for the other countries in the region.

Mr Carim said that the threats to the existence of SACU and SADC had to be understood as part of the region’s developmental unevenness. As long as the countries in SADC were uneven, they would be vulnerable and therefore there was a need to promote a more even development as part of future strategy. He said that the EU had faced a similar challenge in the past and had deliberately sought to overcome this. It had succeeded by creating a convergence in levels of economic development in EU countries. He said there seemed to be a better chance of using SACU rather than SADC as an instrument to achieve this aim.

Mr Carim said that ITED would be guided by the Minister on the matter of any request by Parliament for an observer role.

Mr S Njikelana (ANC) said that international trade was crucial to South Africa’s economic prosperity. He asked Mr Carim to give examples of those industries where tariffs needed to be protected against cuts and how it was intended to do this.

Mr Carim replied that dti was trying to procure the highest co-efficient possible, so as to protect sensitive sectors of the market. The suggested range between 19 and 26 was still too low and dti was pushing for higher tariffs as well increased flexibilities. As things stood, about 20 % of tariff lines would be cut and dti was trying to secure a regime in terms of which fewer tariff lines were subject to cuts.

Mr Njikelana referred to Mr Carim’s comment that South Africa’s approach to regional integration and development was underpinned by a strong bilateral focus, and asked how that was balanced with multilateralism.

Mr Carim replied that these were bureaucratic processes, which always tended to “get stuck” in certain channels. The multilateral track had been separate from the bilateral track despite having common overall strategic objectives. The Department had been trying to strengthen those linkages so that South Africa  could use its strong bilateral relations with certain countries as a base for advancing a common multilateral approach. It should be remembered that South Africa’s bilateral partners took some multilateral issues into multilateral discussions. This was an ongoing process and a lot more work needed to be done in this regard.

Common Market for Eastern and Southern Africa (COMESA), SACU and SADC
Mr Carim then went on to discuss the Common Market for Eastern and Southern Africa. He noted that the EU had for some time adopted the stance, during negotiations, that it was not the EPA that had caused divisions in the region, but that these divisions had been in existence for some time, between SADC, SACU and COMESA. He said it was true that there were problems which had complicated decision-making on trade and political alignment, since what made sense politically did not always make sense economically. However, the EU was using such divisions and their problems to permanently divide the region.

Discussion
Mr Njikelana asked why, in the context of IBSA, which involved multilateral negotiations, there had not been a trilateral arrangement between South Africa, Brazil and ASIAN. He asked what role the Portfolio Committee was expected to play in the IBSA process, together with the Portfolio Committee on Foreign Affairs.

Mr Njikelana further asked whether there was still a reluctance on the part of the three partners to IBSA to bring on board countries like Russia and China, which had recently expressed interest in joining, and if so, why there was this reluctance.
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Mr Carim replied that the decision to have a trilateral trade agreement (TTA) between South Africa, India and Brazil was based on customs jurisdictions. When a country was negotiating trade agreements involving tariff cuts, such tariffs applied to a customs jurisdiction. SACU was one customs jurisdiction with one single tariff, and MERCOSUR had a single tariff for Brazil, Paraguay, Argentina and Uruguay, but India’s customs jurisdiction was for that country alone and was not part of ASIAN.

As for Parliament’s role, Mr Carim said there had been some attempt to have Parliamentarians participating in IBSA processes. He suggested that it might be necessary to look at IBSA in a broader context. This would involve adopting a strategic perspective on South-South relations, and then see where IBSA fitted into that.

Mr Carim said that as far as he was aware, South Africa had not been opposed to Russia and China joining the IBSA process, but that there might be some political dimensions to this issue.

Professor B Turok (ANC) said the Committee should indicate its strong support for the dti in their endeavours in this regard.

Prof Turok said he was a little surprised that the tariff cuts South Africa undertook were those of a developed rather than a developing country, and asked the reasons for that. He commented that what emerged strongly was the almost hostile position adopted by the EU to these negotiations. It was puzzling why such a wealthy continent should be so stubborn on relatively small issues. Professor Turok suggested that the Committee send a delegation to meet with the country’s “friends” in Europe who were sympathetic to South Africa. It was not as if South Africa was asking for charity. He believed that this was not a matter for quiet negotiation.

Prof Turok also commented on the expansion of so-called new generation issues into Africa. At every meeting he had attended the question of the industrialisation of Africa had been a high priority. At a World Bank meeting the previous day there had been a protracted debate on whether aid or remittances were more effective in stopping migration from Africa to Europe. Senior World Bank staffers had spent months debating this question. He believed that the most effective way to stop migration from Africa to Europe was simply to build Africa’s economy, through industrialisation and trade. The new generation issue however, went in exactly the opposite direction.

Prof Turok commented that the African development programme seemed to be somewhat fragmented. Rather than talking of meetings and agreements, he suggested that there be more discussion on quantification and hard results and of the outcomes in practical terms for negotiations and agreements for African development.

Prof Turok said that there was a lack of leadership in NEPAD and that NEPAD should not be the shared responsibility of the dti and Department of Foreign Affairs, but rather the responsibility of the former alone because it was about economic development and not about foreign diplomacy.

Prof Turok commented that with regard to the regions, he endorsed the dti’s view that supply-side measures to boost production, rather than customs unions, were the right way to go. Governments were looking for revenue, and the imposition of duties was an easy way of providing this, but in fact the productive side of the economy was more important. He thought that an approach was needed that looked at production relations and concrete economic advances, rather than who belonged to what. Such issues were peripheral. There should rather be a focus on developing socio-economic production plans.

Mr Carim replied that he agreed with Professor Turok that there was a need for better quantification on the outcomes of the African development programmes. He stressed however that the work of ITED was about policy development rather than promoting investment and exports. It was more about shaping discussion and the frameworks within which one could advance such programmes.

With regard to the importance of maintaining the space for the industrial policy framework, Mr Carim said it was clear that dti wanted to retain as much industrial policy space as possible to use tariffs to protect the country’s industries, within the rules of the World Trade Organisation (WTO). If the Doha Round was concluded, there would be tariff cuts imposed on South Africa, as on other countries. Dti, therefore, was trying to ensure in the negotiations that it had sufficient space to protect those most sensitive sectors from such cuts. Dti realised that tariffs were not always the most important restraints to industrial development, but there were many others.

Mr Carim said that Parliamentarians should perhaps also be engaging and issuing statements around the SADC/SACU division.

Structure of Negotiations
Mr Carim noted that within Government, the dti and ITED were the two bodies responsible for South Africa’s trade and investment negotiations. ITED currently had approximately 158 people employed. In recent years, it had tried to break down the divisions between different desks and to develop a negotiating team that dealt with all the issues in a consistent manner. As a result there were many more personnel available and the only problem was around logistics.

ITED also did not work alone. For example, when it negotiated on the EPA, the Department of Agriculture was part of the negotiating team. The idea was not to see these negotiations as separate and discreet processes but processes that were interrelated and interdependent. What happened in the WTO affected what happened in SACU and so on. The Department had therefore tried to have a much more integrated approach to negotiations and had made some progress in this regard, although ITED remained the most important negotiator on trade and investment.

Discussion
Mr Rasmeni asked whether, as it went about negotiating internationally, the region consolidated itself and different bodies such as SADC, in the same way as the EU had done.

Mr Carim replied that this was indeed the case

Professor E Chang (IFP) asked for clarification on the USA Farm Bill, which had recently been passed. She asked, why, if the spirit within the WTO had been to scrap tariff barriers, they had not seen this happening. She asked what would happen if all tariffs were scrapped, given that tariffs were Government’s biggest source of income, and what would replace them.

Mr Carim replied that a central objective of the negotiations on agriculture since 2001 had been to ensure that the support that the developed countries gave to their farmers, amounting to $1 billion a day, was significantly reduced. This was because that $1 billion, when given to a few relatively small populations in the USA and the EU, could act as an obstacle to agricultural development in developing countries. If such trade were to be opened up, this would result in the accelerated growth of agriculture in developing countries in Africa.
The reason such support was provided to OECD countries was because they were no longer agriculturally competitive. Clearly there was a contradiction between such practices and the principle of free trade espoused within the WTO.

With regard to the US Farm Bill, the proposal of the Chair had been not to eliminate support to farmers but to reduce such support to a range between $13 billion and $16.5 billion per year. The Farm Bill, however, foresaw increased support for farmers in the USA and it appeared that Congress was not concerned about honouring the process. The reality of the tariff issue was that no one was prepared to cut tariffs in areas where it wanted to maintain some protection. South Africa’s approach, in the Doha Round, he said, had never been to support tariff cuts for their own sake but rather as part of a developmental strategy. In other words, the developed countries had to undertake tariff cuts so as to make it easier for the developing countries to expand their exports, thus encouraging development.

Mr Carim agreed with Mr Njikelana that the bottom line for South Africa should be its industrial development policy framework. He mentioned that trade unions at NEDLAC had argued that South Africa had suffered an “historic injustice” in that under the previous regime, it had agreed to tariff cuts for developed countries and had seen itself as a developed country but was now being asked to pay again.

Mr Carim mentioned that the EPA strategy had been to force the region to choose between access to their markets and regional integration. This, he said, was a false choice, but the manner in which they had negotiated had forced countries like Swaziland to make this uncomfortable choice. He said that it was unfortunate that countries had been forced to make a choice, but this kind of strategy had to be understood in the broader context of global competition for markets.

The Chairperson told Mr Carim that the Portfolio Committee would do whatever it could to support the dti and ITED in its negotiations and endeavours. The Committee had earlier this year expressed appreciation for the work that was being done but also expressed the need for realism with regard to progress on  issues such as SADC and SACU. There was an appreciation of the fact that some countries had had little choice but to sign with the EU and of the role that South Africa had played and still sought to play in negotiations. At the end of the day, however, South Africa had to look after its own interests. Although South Africa could try to persuade its neighbours to help maintain the status of SADC and SACU but could not force them to do so.

Mr Carim replied that he had the sense that sometimes these countries failed to realise what they would risk by indeed signing. They knew what they were gaining but not what they were placing at risk.

The Chairperson also said that it was important that the Committee see financial statements so as to see how funds were disbursed and utilised by a specific department.

Mr Carim assured the Chairperson that there would be a budget attached to the presentation in future.

Mr D Olifant (ANC) commented that, with due respect to Mr Carim and dti, the Committee had for a long time been talking about being party to the negotiating process and it should pursue this through Parliament.

Adoption of Minutes
The Committee adopted the Minutes of the last meeting.

The meeting was adjourned.