Discussions

SACU Retreat announced by President Zuma

SACU Retreat announced by President Zuma

17 Jun 2016

1. Background

On 9 June 2016 the South African Presidency issued an important statement. After consultations with member states of the Southern African Customs Union (SACU), a Ministerial Retreat of Ministers of Finance and Trade and Industry will now be convened. The intention is, according to the Presidential statement, to turn “SACU into a vehicle for regional development which will benefit all the SACU members …. [including] building regional infrastructure, supply-side capacities, industrial development and value chains to stimulate regional growth and development.

The report from the Ministerial Retreat will be presented to the SACU Summit, which will contain a clear roadmap “on how to take SACU forward to increase the resilience of the SACU economies and to push for greater integration of our respective economies”. President Zuma stated that: “SACU as an important instrument for industrialisation and economic development must economically empower and benefit all its member states and their people.”[1]

This Retreat has been in the making for a long time. It is potentially the moment when the five Member States will take a hard look at the present impasse in SACU and come up with proposals for setting the Organization on a new course. Will they be able to do so?

2. What are SACU’s Problems?

It is, at the best of times, quite difficult to integrate the economies of unequal partners. There are examples in Asia and in NAFTA where major regional integration benefits have been realized by the members of unequal arrangements; a hegemon can also be an engine of regional growth. Such endeavours call for enlightened approaches and a sound understanding of the needs and the development potential of the individual Member States and of comprehensive trade liberalization. And there should be an acceptance of the benefits of a politically stable region and access to regional markets.

South Africa is the regional hegemon of Southern Africa. Its economic interests are sui generis. It is not comfortable with the legal and institutional deals concluded as part of the 2002 SACU Agreement; in particular the SACU Tariff Board with jurisdiction over the Common Extremal Tariff (CET) and all tariff related decisions. At the same time it is quite dependent on the regional markets of Southern Africa, especially now that is domestic economy is in a crisis.

The SACU Retreat does not come at a convenient moment. In addition to national economic crises the Members lack a legitimate institutional framework for resolving their most critical issues and developing joint approaches. SACU has not lived up to the promises of the 2002 Agreement. The failure to fully implement that Agreement has resulted in a regional arrangement in limbo and policy paralysis.[2]

The essence of the present impasse involves two diverging sets of expectations and different approaches regarding a potential solution. The official view of the BLNS countries is that the 2002 SACU Agreement is a binding legal instrument to which all Members have agreed; it should be implemented. The outstanding institutions (especially the Tariff Board, National Bodies, Common Negotiating Mechanism and the Tribunal) should be established and become operational. South Africa, on the other hand, is on record that it cannot allow its national interests (and in particular its policy space to use the import tariff as a policy tool of its industrial development) to be subjected to a supra-national organ and consensus decision-making.

These two views are at loggerheads; with the danger that the search for a joint solution could become mutually exclusive. Enlightened leadership will be critical for moving the debate to a new terrain where common benefits become possible. SACU needs a new game plan.

SACU has considerable potential for advancing regional integration; if a formula could be found to make the trade in goods agenda (and the focus on tariffs) less dominant. Other sectors such as services, trade facilitation and better governance should be given sufficient emphasis. Certain domestic reforms are necessary. The Members need to focus on “needs of a customs union in the 21st century and ….current developments in international trade relations.”[3]

SACU’s history shows that the Members have succeeded in attaining some important goals; albeit it not always by official design. The region is a well-integrated commercial space with many benefits for private traders and investors in terms of harmonization of payments, transport regimes and standards. SACU consists of a single customs territory; there are no tariffs levied on goods traded amongst the Members. It is also an excise union, while four of the five Member States are in the Common Monetary Area.

3. What will the Retreat discuss and how?

South Africa is the present SACU Chair and has set the ball rolling by announcing the Retreat. It would, however, be necessary see the unfolding process as an inclusive SACU initiative. It should be owned by SACU.

Practical/strategic issues should be separated from matters of substance. The former refers to the procedure now to be adopted for embarking on this important journey. (What exactly is the journey about?) The latter deals with the substantive issues (South Africa emphasizes regional infrastructural and regional value chains/industrial development) as new SACU priorities. What are the BLNS’ views? Will they e.g. be prepared to sacrifice the benefits of the present revenue sharing formula and to have it replaced by a SACU Development Fund, as has been mentioned before?

What is the status of the Retreat? This aspect should be clarified at the outset – to make clear that all member states are entitled to submit proposals which all other Member States should ponder.

This Retreat should preferably agree on a (relatively brief) time frame for the submission of national issue papers and to convene a properly prepared SACU Summit. If the whole set of issues is kicked upstairs to Summit level it can only realistically happen once all technical issues have been properly canvassed. It is not yet known what such a list will include. The Secretariat may play a useful role in assisting in the technical aspects of the preparations.

SACU needs to agree on a new programme to ensure forward momentum after the Retreat. What happens after this Retreat and in terms of what Modalities?

4. What are the bigger Regional Integration Issues?

South Africa prefers that further regional integration for SACU should happen via SADC and the TFTA. Both are in trouble. It becomes increasingly uncertain whether the TFTA will ever be concluded. There is a strong likelihood that it will be overtaken by the more comprehensive CFTA negotiations. SADC seems unable to move towards deeper regional integration and has been debating its Regional Indicative Strategic Development Plan (RISDP) for quite some time. New ideas are needed. Where do the CFTA, SADC EPA, MERCOSUR and AGOA figure regarding SACU’s unfolding agenda? They might eventually become more important for the region.

The development of regional value chains has become an often repeated viewpoint. What it entails is unclear. It will be very difficult to translate regional industrial development into action in a manner which will advance the industrial development of all the BLNS countries. They have been locked into South African patterns and structures of industrial development and do not enjoy policy space over tariff matters – the CET of the CU demands one tariff regime; which South Africa’s International Trade Administration Commission (ITAC) controls.

ITAC administers the CET, functions under SA legislation and under the oversight of three South African Ministries. It becomes increasingly necessary to consider (even as an interim arrangement) the conclusion of a SACU Annex for how ITAC acts on behalf of SACU.

The BLNS states will also have to develop policies to attract sufficient investment. They should ponder the legal basis of investment agreements with care. A repeat of the South African decision to tear up its BITs (Bilateral Investment Treaties) will send the wrong signal.

Trade facilitation should remain a SACU priority. The intra SACU borders show signs of improved technical cooperation but also of more administrative controls. In this regard much may be gained from adhering to the new WTO Trade Facilitation Agreement; it offers technical and other forms of support.

5. Trade Negotiations

The world will move on while SACU ponders its future. Trade negotiations will continue and the SACU Members States will have to adopt national and common positions. The BLNS needs differ from those of South Africa in many ways; for trade in goods as well as for services and other trade related disciplines.

Services are not covered in SACU’s Agreement. To accept a joint SACU agenda on services now would be premature and unwise. This cluster of issues needs thorough investigation and a proper understanding of what the BLNS countries want. Do they have proper services agendas? Services are also a vital component of industrial development – in areas such as finance, investment, transport communication, banking etc.

The CFTA negotiations will kick off with an inclusive agenda which will cover goods, services, investment, competition and intellectual property, amongst other things. It seems far more logical for SACU Member States to negotiate services and related matters in the CFTA context.

7. Revenue Sharing

It is well known that Pretoria is unhappy with the present revenue sharing arrangement. The idea seems to be to transform future revenue sharing into a tool for regional infrastructural and industrial development. How and for which projects such a Fund will be utilized will require careful planning and a firm legal foundation. The BLNS countries lag behind on the industrial development front. Industrial development is closely linked to tariff policy; where South Africa is on record that it will not accept the Tariff Board’s jurisdiction.

Formal amendments and a new SACU institution might be necessary to launch a SACU Development Fund. Article 34 of the 2002 SACU Agreement provides for a development component; to be funded from a fixed percentage of the excise component. “Each Member State shall receive a share of the development component and the distribution of this component shall be weighted in favour of the less developed Member States.” A regional infrastructural and industrial development fund will be founded on a very different philosophy.

Experience also shows South Africa’s dominance over SACU institutions. A new about decision-making, secure access to funding, and dispute settlement. What would happen if South Africa, as the main supplier of the Fund’s revenue, faces domestic or balance of payments constraints and wants to suspend transfers? If private parties are contracted to implement regional programmes they will need contractual certainty.

The acceptance of a proposal to replace the present SACU Revenue Sharing Arrangement in total and as part of a single “reform” initiative will have very disruptive consequences. If accepted such a ‘deal’ will require careful phasing in and compensation for the loss of what is presently a legally secure source of revenue for the BLNS countries.

8. Should there be a comprehensive Review of SACU Agreement?

It is important to recognise that discussions about SACU’s future take place in the framework of an existing and binding International Agreement with its own provisions on how changes are to be adopted. Changes to it should be carefully weighed; as amendments in terms of the Amendment Clause in Article 43 or as new Annexes in terms of Article 42.

A complete overhaul of the present legal arrangement should preferably be avoided. It could put everything in the air without any guarantees about what will replace the present arrangement. Whatever is decided should not be implemented in haste. The BLNS countries are also entitled to sufficient adjustment time and transitional arrangements.

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[2] See the Trade Brief Does SACU face a Crisis? in today’s tralac Newsletter.

[3] Preamble, SACU Agreement 2002.

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