Discussions

How to forge a better SACU? Not by following the News Headlines

How to forge a better SACU? Not by following the News Headlines

02 Nov 2016

Gerhard Erasmus, tralac Associate, discusses the need for reform in the Southern African Customs Union (SACU)

The news of the day tends to shape the news of the day. South Africa’s most recent Medium Term Budget Policy Statement[1] was delivered against the background of media reports about “a domestic political crisis”. The Minister of Finance faced trumped-up criminal charges,[2] a ratings downgrade is said to be imminent, economic growth expectations are adjusted downward every time they are discussed, evidence about “state capture” surfaces almost on a daily basis, the President refuses to sign legislation which is vital for bringing South Africa in line with international banking rules and procedures,[3] and the ruling political party cannot muster the resolve to deal with mounting corruption, nepotism and governance failure.

It is understandable that local news about how to reform the Southern African Customs Union (SACU) will find it difficult to compete with what is presently on offer. A year ago it was different. Advice on how to fix SACU’s problems (actually only one aspect thereof) came thick and fast when budgetary issues were discussed. One editorial then argued that “at a time of fiscal constraint and balance of payments deficits, SA can ill afford to shell out more than its due” to the BLNS countries. South Africa’s “development aid” has to be granted “in a more targeted and transparent way…. That aid should be conditional on much better management of neighbouring economies, some of which have relied on Sacu to fund activities that are anything but developmental.[4]

Another editor had it against the “apartheid-era scheme” of SACU transfers which “has gone completely haywire[5] A security studies expert claimed that “a total overhaul would make explicit that SACU is a disguised South African development project”.[6]

SACU is definitely not perfect but much of what is reported is simply wrong, oversimplified or incomplete. This arrangement goes back to colonial times and has grown into a well-functioning single customs territory in which many business-related benefits (regarding trade in services, common legal traditions, payments, standards etc) have become part of cross-border commerce. The SACU region’s de facto integration goes way beyond what the Agreement covers. When equipment used in in Windhoek e.g. breaks down today, the replacement part can be delivered from Johannesburg overnight. There will be no customs related delays at the border because SACU is a single customs territory. Payment can be made immediately and electronically because both countries belong to the Common Monetary Area.

South Africa plays the dominant role in SACU and carries the bigger responsibility for solving its problems. The management of the Common External Tariff is done by Pretoria and includes rebates and duty drawbacks which are extensively used as part of South Africa’s industrial policies. The BLNS countries do not enjoy effective policy space over their own industrial development plans but have to live with the consequences (such as expensive automobiles) of being in this close relationship with a regional economic hegemon; which will naturally have different policy needs. South Africa has, on occasion, stated quite bluntly that lack of BLNS policy space is the price to be paid for the transfers under the Revenue Sharing Formula. Some argue that this is too high a price and in any case related to an unsustainable formula.

SACU needs reforms; for the sake of all its members. The 2002 Agreement does not function as designed and the very scheme of things has to be improved. The SACU Tariff Board was never launched because Pretoria would not allow decisions about tariffs to be shared with the four smaller economies. The Technical Liaison Committees do not function any more, common policies for industrial development, agriculture and unfair trade practices were never developed; despite being promised in the post-apartheid SACU Agreement. The Common Negotiating Mechanism was watered down beyond any capacity of generating joint policies for negotiating new trade agreements, tariff schedules, or rules of origin to suit the needs of all the members. The SACU Tribunal never saw the light of day and the private sector increasingly litigates in national courts against protectionist measures and import restrictions adopted by several SACU member states.[7]

The irony is that there are clear linkages between what South Africa has to do in order to get its own house in order and ensuring better regional economic policies and governance. South Africa is intrinsically part of the SACU market and the SACU institutional dispensation. This region is very important for South African exporters, service providers, investors and professionals. Namibia and Botswana feature consistently among the top 10 destinations (sometimes among the top five) for South Africa’s export goods. With Lesotho there are vital water-related agreements. The SADC EPA agreement, which is the trade arrangement with the biggest foreign trading partner, is a joint deal. Last year’s difficulties to renew South Africa’s AGOA benefits demonstrated how enmeshed trade in the 21st century has become.

SACU needs to act together because the member states are in the same boat. Economic growth in sub-Saharan Africa this year is set to drop to its lowest level in more than 20 years, reflecting the adverse external environment, and a lackluster policy response in many countries. For the SACU member states the way forward, to achieve improved global and continental integration and domestic economic growth, can only be possible if they find a formula to retain and upgrade historical benefits, to develop a more viable modus operandi amongst themselves, and to create a healthier platform for joint action vis-à-vis third parties. Regional integration between countries at different levels of economic development is never easy. However, the evidence suggests that SACU member states stand to be better off together than going their separate ways. It is worth the trouble to find out whether this is indeed the case. The private sector should have a voice in this debate.

In June this year the five SACU governments met at a Retreat and decided to revisit their mutual Agreement. They declared themselves committed to improve SACU’s practices and institutions. Since that time nothing has happened. Hopefully the South African domestic political crisis will soon become less dominant and we will see other (regional) developments to feature more prominently in the media. SACU too needs a stronger and healthier government in Pretoria.

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[1] National Treasury, www.treasury.gov.za

[2] Officially withdrawn by the National Prosecuting Authority on 31 October 2016.

[3] See Financial Mail report of 27 October 2016 on the importance of amending the Financial Intelligence Centre Act (Fica) of 2001.

[4] Business Day: Sacu formula needs revision, 10 March 2015.

[5] Financial Mail, 5 March 2015.

[6] ISS Today, Time to pull the plug on SACU? 12 March 2015.

[7] The Namibian bans on imported chicken and UHT mild resulted in court cases in Windhoek. South Africa’s ban on livestock from Namibia caused the same in South African courts.