South Africa’s Regional Trade

Agenda: Reflections on SACU, SADC,

EPAsTrudi Hartzenberg

Trade Law Centre for Southern Africa

trudi@tralac.org

2

Overview

Key developments in global economy

Overview of South Africa’s trade profile

Trade Policy Priorities

Regional Integration Trends:

- Multilateralism and Regionalism

- Deeper Regional Integration

Regional Integration in Southern Africa: South Africa Priorities

EPA Negotiations: Where does South Africa stand?

Conclusions

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Key developments in the global economy

New Clusters of Manufacturing Excellence/Competitiveness (many located in developing countries eg BRICSA)

Production fragmentation

Role of Services (in economies, employment creation, in competitiveness, in trade)

Governance developments (1995 – WTO, proliferation of regional trade arrangements, new trade agenda)

4

Export Profile

Exports still predominantly mining and basic processed goods

Some diversification of exports

Share of total exports by sector (1992 vs 2006)

-5.0

5.0

15.0

25.0

35.0

45.0

55.0

65.0

Agriculture & Forestry Mining Basic processing Advanced manufacturing

%

1992 2006

Source: Quantec

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South Africa’s Export Profile

Trading partners are primarily developed countries

Exports to SADC account for 9% of total exports

Exports to EU are approx 35% of total

Asia has become an important destination for SA exports (what do we export to Asia?)

Japan has become the single most important country export destination

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South Africa’s Export Profile

SA trade by region: exports 1992 vs 2006

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

EU MERCOSUR NAFTA SADC Australia andNew Zealand

Eastern Asia South-central Asia

South-eastern Asia

Western Asia

Sh

are

of

tota

l S

A t

rad

e

1992 Export 2006 Export

7

South Africa’s Imports

SA trade by region: imports 1992 vs 2006

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

EU MERCOSUR NAFTA SADC Australia andNew Zealand

Eastern Asia South-central Asia

South-eastern Asia

Western Asia

Sh

are

of

tota

l SA

tra

de

1992 Import 2006 Import

8

South Africa’s Import Profile

Asia has become an important source of imports, particularly China:

- China accounted for ±1% in 1992, today ±10% - now 2nd most NB source after Germany

Trade surplus with NAFTA as exports R45.7 bn vs imports of R40.5bn

EU still primary trading partner

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What are we exporting and to whom?

Source: Quantec

Exports to key trading partners still predominantly resources adn resource intensive manufacturing

Exports to SADC of advanced manufacturing There has been some diversification: increased exports of machinery & vehicles

to NAFTA

EU Export

Share of total category exports NAFTA Export

Share of total category exports SADC Export

Share of total category exports

H71:Precious Metals 20,969 19.12% H71:Precious Metals 16,694 15.22% H84:Machinery 4,876 15.64%H84:Machinery 17,920 57.49% H72:Iron and steel 5,648 13.91% H27:Mineral fuels and oils 4,468 12.98%H27:Mineral fuels and oils 17,335 50.37% H87:Vehicles 4,121 12.64% H87:Vehicles 2,528 7.75%H72:Iron and steel 14,007 34.50% H84:Machinery 2,917 9.36% H85:Electrical machinery 2,209 26.72%H26:Ores res, slag and ash 8,460 39.99% H76:Aluminium 2,752 20.89% H72:Iron and steel 2,128 5.24%H87:Vehicles 8,086 24.80% H26:Ores res, slag and ash 2,298 10.86% H73:Iron or steel 1,870 33.33%H08:Edibles fruits & nuts 4,407 54.77% H28:Inorganic chemicals 1,774 24.73% H39:Plastics 1,658 41.32%H76:Aluminium 3,230 24.51% H29:Chemicals 1,257 20.25% H48:Paper and paperboard 1,017 27.19%H22:Beverages 2,883 57.36% H22:Beverages 729 14.51% H38:Misc. chemical products 1,006 20.02%H85:Electrical machinery 2,762 33.40% H08:Edibles fruits & nuts 685 8.51% H31:Fertilizers 929 81.15%

South African Trade with Significant Trading Partners, 2006 (R m)

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South Africa’s Fastest Growing Exports

Fastest growing exports mostly resource-based incl. manuf.

Top 20 Fastest Growing Exports (R mil): 2001-2006 2001 2006 Growth Rate

H2603: Copper Ores And Concentrates 70.2 778.0 61.78%

H8407: Spark-Ignition reciprocating Or Rotary Internal Combustion Piston Engines. 123.7 1,359.5 61.52%

H9301: Military weapons (ExcludingThe Arms Of Heading No. 9307) 50.3 469.7 56.36%

H2616: Precious Metal Ores & Concentrates 3,638.0 3,067.3 53.17%

H2709: Petroleum Oils And Oils Obtained From Bituminous Minerals, Crude 406.4 3,045.3 49.60%

H8501: Electrical Motors Andgenerators (Excl. Generating Sets). 1,114.0 778.0 47.51%

H8541: Diodes, Transistorsand Similar Semi- Conductor Devices 109.8 698.4 44.77%

H7404: Copper Waste And Scrap 414.1 2,569.6 44.06%

H2849: Carbides, Whether Or Not Chemically Defined. 50.9 307.5 43.28%

H7502: Unwrought Nickel. 138.1 780.6 41.40%

H6804: Illstones Grindstones Grinding Wheels and The Like 54.5 303.0 40.92%

H3302: Mixtures Of Odoriferous Substances (Including alcoholic Solutions) 51.0 226.4 34.69%

H8704: Motor Vehicles For The Transport Of Goods. 1,632.6 7,220.0 34.63%

H7103: Precious Stones (Excl.Diamonds) & Semi-Precious Stones 52.6 225.9 33.82%

H2610: Chromium Ores And Concentrates 539.7 2,110.9 31.36%

H7219: Flat-Rolledproducts Of Stainless Steel,Of A Width Of 600 Mm Or More. 2,647.4 9,909.7 30.21%

H7105: Dust And Powder Of natural Or Synthetic Precious Or Semi-Precious Stones. 75.4 2,784.0 29.85%

H2825: Hydrazine And Hydroxylamine And Theirinorganic Salts; 213.9 739.3 28.15%

H9406: Prefabricated Buildings 66.4 229.2 28.12%

H2915: Aturated Acyclic Monocarboxylic Acids 122.4 414.0 27.59%

Source: Quantec and Own Calculations

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South Africa’s Regional Trade Agenda

Free Trade Area (liberalise substantially all trade, within a specified period of time – Art XXIV GATT) ie eliminate tariff and non-tariff barriers on intra-regional trade, but member states maintain their own tariff policy towards third parties

Customs Union (common external tariff - CET, common customs territory) ie surrender policy space to determine CET

KEY Development: Deeper Regional Integration (beyond trade in goods to services, investment, competition, govt procurement..), this reflects the evolution of the NEW Trade Agenda - WHY IS THIS IMPORTANT?

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South Africa’s Regional Trade Agenda

South Africa is a member of SACU, SADC and has concluded many bilateral trade agreements (eg Malawi, Zimbabwe, EU) and is negotiating or considering negotiations with other partners (eg India, China, MERCOSUR, US...)

Trade Policy Priorities: South – South Agreements, Look East

How does this fit with South Africa’s multilateral trade agenda eg on services

How is trade policy made in South Africa (role of dti, Treasury, Foreign Affairs, post-Polokwane era)

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SACU

Oldest functioning customs union

2002 Agreement:

- Legal and institutional development – annexes and new institutions incl SACU Tribunal, Tariff Board; common negotiating mechanism (Art 31)

- Common Policy Development (Part 8: common policies on industrial development, agricultural policy, cooperation in enforcement of competition policy and unfair trade practices)

BUT: strong focus on revenue sharing (dependence of small countries’ govt budgets)

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SACU cont’d

Press Reports recently indicate that South Africa strongly support SACU – what needs to be done for sustainable regional development (incl South Africa’s)

- Legal and Institutional Development (SACU Council meeting 4 April), what could be on the agenda?

- Annex on Tariff Board (collective determination of the CET, remedies)

- Annex on SACU Tribunal (rules based dispensation)

- Common Policy Development (mandate to the SACU Secretariat to start process of common policy development)

- Mandate to the Secretariat to develop a deeper regional integration agenda ( eg services – although not directly covered, it is by implication there through common policies for industrial development, addressing revenue dependence)

-A SACU Summit (Heads of State and Government), and

15

SADC’s Regional Integration Agenda

SADC Protocol on Trade > SADC FTA (legally binding commitment)

Regional Indicative Strategic Development Plan (RISDP – enjoys political legitimacy but is not legally binding) > SADC Customs Union, 2010

SADC Extra-Ordinary Summit, October 2006, reaffirmed CU objective (again in Lusaka in August 2007)

Debate on the appropriate model for the SADC Customs Union takes place in the SADC Task Force on Regional Economic Integration

Taking a step back: why a customs union? - What will a customs union achieve that an FTA cannot?

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Towards a SADC Customs Union?

Customs Union:- adoption of a common external tariff (CET)- a common trade policy/ loss of independent trade policy making (compromise of policy space)- no anti-dumping or safeguard measures against other parties- the need for competition policy and laws- no need for preferential rules of origin but non-preferential (or MFN) rules of origin towards third countries- policy coordination & institutional frameworks

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SADC Customs Union (Cont’d)

Overcoming the CET challenge largely depends on the rationale or motivation of forming the CU

Not clear from policy pronouncements such as the RISDP

Regional Integration targets follow text book theory on economic integration and draws on European experience:- SADC FTA (2008)- SADC Customs Union (2010)- SADC Common Market (2015)- SADC Monetary Union (2016)- SADC Economic Union (2018)

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SADC Customs Union (cont’d)

Enhancing intra-regional trade remains a rather weak basis: - intra-regional trade patterns: low levels of intra-regional trade f lows, except bilateral trade flows with South Africa (BLNS, Malawi, Mozambique, Zambia and Zimbabwe)- ROW dependence for the rest of SADC economies- industrial structure and trade potential- evidence from the SADC FTA process

Therefore, the rationale has to be sought elsewhere? Gradual integration into world economy?

19

SADC Customs Union (cont’d)

Wide differences exist on objectives and rationale behind tariff structures: protection of sensitive sectors, industrial policy goals or revenue generation

For example: South Africa and Mauritius are now emphasizing industrial policy motivations for lower tariff regimes > this worries Lesotho and others that are tariff-revenue depdendent

Can a common agreement be reached on the principles of establishing a CET?

The challenge is to reconcile the differences in motivation for tariff setting

20

SADC Customs Union (cont’d)

For a large number of countries, customs revenue constitutes a significant part of government revenue

The level and extent of dependency on customs revenue in SADC varies, e.g. South Africa (2.9%), Angola (5.9%) Madagascar (41%), Lesotho (42.9%) based on 2005 data

For example, applying Mauritius tariff as a basis for the CET, there will be large revenue adjustments in Tanzania, Zimbabwe, Malawi, Lesotho and Madagascar.

Revenue collection will also be a problem whether based on collection at the point of entry or at destination. Consider landlocked countries!

Designing an appropriate revenue sharing mechanism such as in SACU is problematic too.

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South Africa and EPAs

South Africa concluded the TDCA in 1999 (came into effect 1 January 2000) – free trade area (12 year implementation time frame)

African, Caribbean and Pacific countries: Lomé Conventions (from 1975) provided preferential access to EU markets (no reciprocity), however such unilateral preferential arrangements are not WTO compatible. Two sets of developments:

1. When SA became democratic: requested access to Lomé, access to trade provisions denied: led to negotiations to conclude TDCA

2. ACP countries and EU negotiated Cotonou Agreement (2000) which continued preferential market access to EU, EU applied for a waiver from WTO to be able to do this until 31.12.2007. Cotonou paved the way for WTO compatible EPAs

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EPAs cont’d

EU indicated that it preferred to negotiate with regional groupings of countries rather than 77 countries (ACP) individually, but it did not specify which groups should negotiate together;

Groups of countries then elected to negotiate as coalitions, and the SADC-7 was formed (Botswana, Lesotho, Namibia, Swaziland, Mozambique, Angola and Tanzania), with SA as a result of its SACU membership as an observer in the group

(Note that SADC member states are in 4 different EPA configurations (SADC, EAC, ESA, CEMAC))

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EPAs cont’d

2004 SADC Negotiating Guidelines (regional service integration agenda to be linked to EPA commitments, flexibilities)

2006 SADC Strategic Framework: no binding commitments on services but only capacity building support from the EU, South Africa to join as a full negotiating member (paradigm shift)

EC response: no fixed obligation to liberalise services, support regional service liberalisation commitments, no blank cheque for capacity building support, SA admitted as negotiating partner

24

EPAs cont’d

Negotiations during 2007

- Emergence of key differences: scope of agenda (SA wants trade in goods agreement, EC wants full EPA, smaller SADC states want trade in goods and services and trade-related issues)

- Key challenge: WTO Waiver and its implications for Botswana, Namibia and Swaziland (developing countries – fall back position is GSP, but beef is not included)

- Least developed countries (Lesotho): Everything but Arms

- South Africa: TDCA

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EPAs cont’d

Negotiating Infrastructure

How does the EU negotiate? European Commission gets a mandate from the member states via the European Council (supranational institution)

How does the SADC EPA negotiate (no institutional construct for the SADC EPA Group – SADC EPA Unit, national level, chief negotiator – Botswana), role of private sector, civil society? Eg Namibia: ATF (Govt negotiates on our behalf)

What happened: B, L, S, M initialed an Interim EPA – Nov 2007, Nam initialed with concerns on 12 Dec, SA did not sign.

B, L, N, M are entering phase 2 (services and investment)

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EPAs cont’d

Contentious Issues

Services: close link to cost efficiency and competitiveness (role of services in economy eg manufacturing)

Consider South Africa’s Services Agenda: eg

Telecoms: managed liberalisation (introduction of competition in fixed line telephony – decision made in 2004, but no competitor for Telkom yet, meanwhile fixed line remains a key constraint on other telecoms developments eg mobile, broadband, and as a result other services eg education, healthcare and also overall economic activity (manufacturing) and poverty

Financial Services (bank charges,.... Nam and SA among highest in the world)

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EPAs cont’d

Without support or motivation for a domestic regulatory agenda, what can a trade in services agenda do?

- Example: Liberalisation of services in EPAs (Botswana or Mozambique) eg financial services, or telecoms

How to develop a services liberalisation agenda?

1. Prioritisation of Services sectors for liberalisation?

2. Cost-benefit analysis (domestic development priorities, efficiency gains)

3. Assessment of priority sectors in partner’s economy (is telecoms in the EU internationally competitive?)

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EPAs cont’d

Investment

Links to job creation, growth and enhanced trade performance

Questions of investment governance (a rules-based system) if we do not have this, what then:

Examples: RAMATEX and others

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Conclusions

What are South Africa’s trade policy priorities?

South Africa’s role in the region, in Africa

Integration into the Global Economy (South – South relationships, Look East)

Scope of the trade agenda (beyond trade in goods – implications for policy making)