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Negotiating Free Trade Agreements when exports are down

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Negotiating Free Trade Agreements when exports are down

Gerhard Erasmus, tralac Associate, discusses negotiating Free Trade Agreements when exports are down

Recent media reports (China demand keeps SA exports afloatBusiness Report, 29 October 2012) on South Africa’s export performance provide serious food for thought on the principles which should inform negotiations on the establishment of African free trade arrangements such as the Tripartite Free Trade Area (T-FTA):

“Data in the medium-term budget policy statement last week showed just how badly South Africa’s exporters have fared this year. Export volumes contracted at an annual rate of 6.3 percent in the second quarter, after falling 1.5 percent in the first, according to the statement….

Demand for South African commodities from China kept the country’s trade buoyant in recent years, despite the poor performance in its traditional markets. But China’s growth has also started to slow: to about 7.5 percent from double digit levels in earlier years, reducing its appetite for goods from other countries……

This trend has been partially countered by a rise of nearly 19 percent in goods sold to India, and a 26.2 percent lift to the Southern African Development Community (SADC).

The stronger flow to neighbouring countries has boosted the SADC’s share of South Africa’s export markets from 2 percent in 2000 to 12.2 percent now, making it South Africa’s second-largest export market, just ahead of China, which buys 12 percent of the total.

Particularly encouraging, the SADC buys 22 percent of local manufactured goods, supporting a sector that has disappointed in recent years.

South Africa’s lacklustre export performance is also due to supply disruptions, particularly in the strike-plagued mining sector. The platinum sector, at the heart of the violent industrial unrest, has seen the value of its exports fall by 22 percent this year, according to the statement.

This all adds up to falling tax revenues and a widening current account deficit: the gap between income from exports of goods and services and the cost of imports.”

These trade figures confirm what several commentators, local politicians and officials have been saying for some time now; African markets are vital for South African exports, and manufactured goods in particular. How are these realities reflected in the South African policies underpinning the negotiations on the conclusion of new trade agreements with other African nations?

Successful trade negotiations lead to formal outcomes which ensure mutual benefits. Rules and institutions should be drafted to bring about lasting, legitimate and dynamic arrangements. That is why negotiations on the conclusion of trade agreements are comprehensive and difficult, but they must have the bigger picture in mind. They will not succeed if based on the pursuit of inflexible unilateral gains. All participating nations must believe the outcomes will allow for the possibility to benefit if playing according to the rules.

Trade agreements are not an end in themselves and they do not guarantee increased trade. They are enabling and preferably rules-based frameworks which will allow the private sector to exploit the opportunities which will generate growth, development and regional stability.

If these objectives are actively pursued they will be reflected in the specific legal instruments agreed upon. The rules of origin, which are essential for a preferential trade agreement, to prevent trade deflection, are a good example. The T-FTA will be an arrangement amongst the 26 member states of three regional economic communities; the East African Community (EAC), the Common Market for East and Southern Africa (COMESA) and the Southern African Development Community (SADC). In the T-FTA negotiations we are likely to see a battle of two regimes; the SADC regime on the one hand and the EAC-COMESA regimes, which are very similar, on the other. The case of clothing and textiles is an important example in this regard.  SADC rules of origin require a two-stage transformation process for garments to qualify for preferential tariff treatment, while the EAC-COMESA rules are simpler, using the generic rules that apply across the board. The SADC rules effectively limit intra-regional trade in garments, preventing especially smaller countries, many of which produce garments which they could export, from benefitting from the larger market that a regional arrangement such as SADC can facilitate.

As integration deepens the trade arrangement in question should speak with a collective voice in respect of those policy areas where joint decisions on standards, intellectual property, trade facilitation and customs issues are required.  And when trade disputes are to be resolved it should happen on the basis of predictable rules and independent adjudication. Governments should not be able to invoke arguments about sovereignty when they are found to be in violation of their obligations. It is an act of sovereignty to conclude international agreements and to respect the commitments which have been accepted for the benefit of mutual gain.

Are the negotiations about deeper integration in Africa and on the establishment of the T-FTA based on these considerations and objectives? If they are not, the results will be disappointing. Africa’s potential for growth through intra regional trade will remain unfulfilled. Developments elsewhere will remain the dominant factors which will determine our trade flows and our dependencies.

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