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SACU’s uncertain future

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SACU’s uncertain future

Stewart Payne, tralac intern, discusses the challenges currently facing the Southern African Customs Union (SACU)

In the coming weeks, members of the Southern African Customs Union (SACU) are set to hold an urgent meeting, which has been billed as a “make-or-break conference for the struggling union” (Benjamin, 2013). Although this particular meeting is being organised at South Africa’s request, it appears to be the culmination of an extended period during which various members have expressed frustrations regarding the operation of the Union.

SACU is the oldest existing customs union in the world, having arisen out of an agreement concluded in 1889 (SACU, 2012). The most recent SACU agreement was concluded in 2002, after almost 8 years of negotiations, and was subsequently implemented in 2004. SACU has five member states, namely Botswana, Lesotho, Namibia, South Africa and Swaziland. The nature of a customs union means that these countries operate as a free trade area, behind a common external tariff. In addition to this, SACU also operates as an excise union and all SACU members apart from Botswana are integrated into the South African money and capital market (McCarthy, 2013). The 2002 SACU Agreement covers three main areas: governance and administration, economic policy and regulatory issues, and revenue sharing. The primary goal of this agreement is to facilitate the development of common policies and strategies among the member states, while also ensuring an equitable distribution of revenue from customs, excise, and additional duties.

It is the issue of revenue-sharing that last year prompted South Africa to request the upcoming meeting. South Africa is the dominant economy within the Union, having a significantly more developed industrial sector compared to those of the other SACU members. This inequality has led to a number of imbalances, not least when it comes to revenue-sharing. Increasing pressure on the South African budget as a result of inter alia the recent global economic slowdown and reduced demand from key trading partners such as China and the European Union, has renewed the push for a review of South Africa’s contributions to the Union (Benjamin, 2013).

According to South Africa’s Minister of Trade and Industry, Rob Davies, South Africa currently pays about R48 billion to the customs union annually, which constitutes around 98% of the common pool of customs and excise duties shared amongst SACU members (Benjamin, 2013; Davies, 2013). Of this revenue pool, 55% is distributed to Botswana, Lesotho, Namibia and Swaziland. This is in line with the revenue-sharing formula agreed upon in 2002, which allocates customs revenue according to each country’s share of intra-SACU imports. There is also a development component, which is allocated according to a country’s GDP per capita in order to assist the less-developed SACU members.

Some suggest that these contributions by South Africa should be recognised and treated as aid transfers (Benjamin, 2013). The smaller SACU members, such as Lesotho and Swaziland, are heavily dependent on the income they receive from the revenue-sharing arrangement. In the case of Swaziland, it is estimated that over 60% of the country’s budget is derived from SACU contributions (Nkambule, 2013). Even for Botswana, SACU earnings comprise roughly 40% of total revenues (Grynberg, 2013). South Africa is looking to change the revenue-sharing agreement such that countries would be obliged to spend a certain portion of the money they receive – which previously came with no strings attached – in pursuit of regional and industrial development. The South African government is reportedly adamant that such changes be implemented (Benjamin, 2013). This reflects the extent of the South African authorities’ frustration regarding the lack of progress in furthering a five-point plan agreed upon at the 2011 SACU Summit, which was intended to advance the region’s economic integration and development, and which included in its agenda a review of the revenue-sharing arrangement (Davies, 2013).

While the above paints a picture of SACU as a union which appears merely to be hampering South Africa to the benefit of the other, less-developed members, there is also another side to the story. In recent times, there has also been frustration on the part of these less-developed members, particularly Botswana and Namibia, who have complained of South Africa’s exploitation of the SACU market to the detriment of their own economic development.

The Namibian complaint surrounds the country’s inability to protect its fledgling industries, which are said to be “at the mercy of the big South African companies” as a result of the SACU Agreement (Nyaungwa, 2013). South Africa is the only SACU member that has a significantly developed and diversified industrial and manufacturing sector, and allegedly prevents other members from developing capacity of their own by dumping products on SACU markets. According to the Namibian Chamber of Commerce and Industry (NCCI), “the current SACU arrangement is benefitting South Africa more than any other country in the five-member trading block”’ (Nyaungwa, 2013). The NCCI identifies the problem as being South Africa’s view of the other member states merely as consumers, rather than producers in their own right.

Other reports have also expressed concern over South Africa benefiting from the arrangement at the expense of the other SACU members. Anecdotal evidence from the automotive industry in Botswana, where in 2000 a Hyundai assembly plant exporting to SACU was shut down following a South African challenge over rules of origin, has been used to illustrate South Africa’s unwillingness to foster regional development (Mguni, 2013). The impression is that South African industry’s only interest is in protecting its own dominance and exploiting the captive market. There is also a concern generally that external investors, attracted to the large SACU market and the incentives provided, choose to operate almost exclusively out of the more developed South Africa (Mguni, 2013).

It is evident that SACU faces a number of challenges arising from the diverse nature of its members. The SACU countries do vary dramatically in the sizes of their economies and populations, as well as their levels of economic, legislative and institutional development, and there is inherent difficulty in coordinating a common policy approach among such a diverse grouping of countries. Some countries view themselves as consumers rather than producers, and some treat tariffs as a source of revenue rather than a tool for industrial policy; this all leads to contrasting agendas when the five members come together at the negotiating table.

South Africa is undoubtedly SACU’s dominant member. As mentioned above, South Africa contributes 98% of the common revenue pool that is shared amongst the SACU members. Statistics recently released by SARS also reveal the extent of South Africa’s intra-SACU trade: in 2012, the country ran a trade surplus of R82.3 billion vis-à-vis the other members, with exports worth R103.6 billion. Earlier last year, the NCCI were of the opinion that if one was “to suggest the dismantling of SACU, South Africa would probably be the first country to defend SACU and try not to do so” (Nyaungwa, 2013). Yet, by the end of the year there were reports that that South Africa’s withdrawal from SACU was being considered, at least in some government circles. It is not clear however, if this was the official South African position. Undoubtedly, however, the Union’s future will depend to a large extent on the position the South African government actually takes.

It is thus clear that SACU faces a number of challenges going forward, and its future as a customs union is uncertain. It is also clear that South Africa’s decisions will play a large role in determining this future. Will South Africa view SACU as a hindrance to real economic development, and a fiscal drain? Or will it view the Union as a beneficial arrangement, with the potential to further both national and regional growth?

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References:

Benjamin, C. 2013. Sacu’s day of reckoning has arrived. Mail & Guardian. [online]. Available at: http://mg.co.za/article/2013-11-29-00-sacus-day-of-reckoning-has-arrived [Accessed 15 January, 2014].

Davies, R. 2013. South Africa and the Southern African Customs Union. Presentation to the Parliamentary Portfolio Committee on Trade and Industry. Cape Town, 30 July 2013.

Grynberg, R. 2013. There goes the neighbourhood. Mail & Guardian. [online]. Available at: http://mg.co.za/article/2013-11-29-00-there-goes-the-neighbourhood [Accessed 16 January, 2014].

McCarthy, C. 2013. A Perspective on Common Industrial Policies for the Member States of the Southern African Customs Union. tralac Working Paper No. S13WP01/2013. [online]. Available at: http://www.tralac.org/files/2013/01/S13WP012013-McCarthy-Perspective-on-SACU-Common-Industrial-Policies-20130116fin.pdf [Accessed 16 January, 2014].

Mguni, M. 2013. Study reignites prickly SACU industrial debate. Mmegi Online. [online]. Available at: http://www.mmegi.bw/index.php?sid=4&aid=183&dir=2013/September/Friday13 [Accessed 16 January, 2014].

Nkambule, M. 2013. Crossing the SACU bridge. Times of Swaziland. [online]. Available at: http://www.times.co.sz/news/94444-crossing-the-sacu-bridge.html [Accessed 15 January, 2014].

Nyaungwa, N F. 2013. SACU arrangement not fair – NCCI. Namibia Economist. [online]. Available at: http://www.economist.com.na/headlines/3352-sacu-arrangement-not-fair-ncci [Accessed 15 January, 2014].

SACU. 2012. SACU Annual Report 2012. [online]. Available at: http://www.sacu.int/publications/reports/annual/2012/annualreport2012.pdf [Accessed 15 January, 2014].

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