DTIC on challenges, benefits of SACU-Mozambique EPA with UK & AGOA to provincial economies

Meeting report

Opening Remarks by the Chairperson
Mr M Mmoiemang (ANC, Northern Cape) was the Acting Chairperson, on account of Chairperson Mr Rayi (ANC, Eastern Cape) recovering from an illness. He opened the virtual meeting, welcoming the Members and the delegation from Department of Trade, Industry and Competition.

The Chairperson gave the context in which the meeting was taking place. He noted that in addition to the Members present and announced that the Select Committee (SC) would be supported by an administration team. He noted the apology received from Ms B Mathevula (EFF) and also gave appreciation to the media team from Parliament.

Briefing by the Department of Trade, Industry and Competition

SACUM-UK EPA and SA-US Trade Relations, including AGOA
Ambassador Xavier Carim, Deputy Director-General (DDG): Trade Policy, Negotiation and Cooperation, Department of Trade, Industry and Competition (DTIC), led the Department delegation. The team included: Ms Elizabeth Van Renen, Director: SADC, DITC; Ms Niki Kruger, Chief Director: Trade Negotiations, DTIC; and Ms Tsholofelo Mushi, Parliamentary Officer: Office of the Minister, DTIC.

Mr Carim presented.

The purpose of the presentation was to provide an update on the SACUM (Southern African Customs Union) that includes South Africa and Mozambique EPA (economic partnership agreement) with the United Kingdom (UK). It also provided an update on South Africa-USA trade relations; specifically, where things stand and what to expect.

SA-UK Trade Relations
The UK is SA’s (South Africa’s) fifth largest trading partner with total trade amounting to R110 billion in 2019. This is up from R73 billion in 2014. SA exports amounted to R 68.1 billion, which was a 12.6% average annual growth since 2014, from R37.6 billion. The main exports platinum, motor vehicles, citrus and other fresh fruit, catalytic converters and iron ore.

Imports from UK accounted for R41.3 billion, with a 3.1% average annual growth since 2014, from R35.2 billion. Main imports there were printed materials, machinery and computer equipment, motor vehicles, whiskies, electric equipment including sound and visual equipment.

In March 2017, the UK formally notified its intention to leave the European Union (EU). The UK formally left the EU on 31 January 2020 through the so-called Withdrawal Agreement. The Withdrawal Agreement stipulates that EU trade agreements will continue to apply to the UK until 01 January 2021. Soon after the UK notified its intention to leave the EU, SACU, Mozambique and UK agreed to initiate negotiations to “roll over” the trade arrangements of the EU-SADC (Southern African Development Community) EPA into a new bilateral agreement. SACU, Mozambique and the UK concluded negotiations and signed the SACUM-UK EPA in October 2019. This ensures trade between SACUM and the UK continues uninterrupted when the UK leaves the EU (European Union).

SACUM-UK EPA
The terms of the SADC-EU EPA have been largely transposed into the new SACUM-UK EPA. However, some changes were required in respect to:
- Tariff rate quotas
- Sourcing inputs from the EU into products traded between the UK and SACUM
- Transitional arrangements
- Geographic Indicators (GIs)
- Built-in agenda

SACUM-UK EPA (TRQs)
A TRQ (Tariff Rate Quota) establishes a tariff preference for a specific volume of imports. Under the EU-SADC EPA, the UK shares TRQs with other EU Members on exports of eight agricultural products to the SACU. SA has 13 TRQs to the EU of which a share had to be carried over to the UK under the new arrangement. Shares were calculated on historical trade covering 13 products for export to the UK, notably wine, sugar, canned fruit, fruit and fruit juices. TRQ volumes will increase annually
If the quantity of that volume of imports is exceeded, then a higher tariff applies. There is a quantitative limitation on particular imports.

SACUM-UK EPA (Cumulation)
Negotiated a new provision that would allow the UK and SACUM to fully cumulate with EU inputs for production to export to each other, meet the Rules of Origin requirements and obtain the preferential tariff. With some of the cars the UK sends to SA and vice versa, these may have components sourced from the EU; SA wanted to make sure that is the case even if UK leaves the EU. SA will then continue to benefit under a new agreement.
• Ensures continuity of highly integrated value chains across the EU, SA, UK, notably in automotives.
• Provision is applicable for three years pending the outcome of a new trade arrangement between the UK and EU.
• Period can be extended or revised if deemed necessary by SACUM and the UK.

SACUM-UK EPA (Transitional Arrangements)
SACUM-UK EPA contains transitional arrangements to carry over measures and actions from EU SADC EPA. This includes continuation of the current safeguard on imports of poultry. The parties agreed that UK safety and health regulations affecting agricultural trade would continue to match those of the EU. On Customs matters, there is continued recognition of Certificates of Origin as issued under the SADC-EU EPA. If changes are effected in future, the UK is obliged to provide sufficient time for SACUM exporters to adjust to new regulations and requirements.

SACUM-UK EPA (Built-in Agenda)
A Built-in Agenda was agreed to address areas of interest that could not be resolved during negotiations. For SA, areas of interest are:
- DFQF (Duty free, quota free) market access or increase of TRQ volumes into UK
- Regional cumulation to allow BELN (Botswana, Eswatini, Lesotho, Namibia and Mozambique) to cumulate with SA products (especially basic agricultural product inputs)
- Treatment of vehicles with engine capacity of 1000 cc and less
- Export taxes
- Enhanced cooperation on TBT (Technical Barrier to Trade), i.e., standards, conformity assessment procedures, etc.

SACUM-UK EPA
- SA Parliament ratified the SACUM-UK EPA in December 2019.
- UK, Botswana, Lesotho have also ratified.
- Eswatini and Namibia are at an advanced state of ratification.
- Once ratified by all, instruments of ratification have to be deposited at the SACU Secretariat (Windhoek, Namibia) by 30 November 2020 so the agreement is in force on 01 January 2021.

SA-US Trade Relations
The US remains a very important trading partner to SA; it is SA’s third largest trading partner. Since 2001 SA exports enter the US under three regimes:
- The MFN (most favoured nation) tariff rates that are applied to all WTO (World Trade Organisation) members;
- GSP (generalised system of preferences) that offers preferential tariffs for most developing countries on around 4 650 products; and
- AGOA (African Growth and Opportunity Act) that offers preferential tariffs for eligible sub-Saharan African countries and that covers GSP products and an additional 1835 products.

Being eligible for GSP is a prerequisite for preferences under AGOA and while the GSP is subject to annual reviews, AGOA benefits are locked-in for extended periods of time. AGOA was established in 2000 and has been renewed twice – in 2008 and again in 2015 for duration until 2025. These extended periods aimed to foster greater certainty in market access and encourage productive investment in sub-Saharan African countries. Nevertheless, both schemes are subject to considerable discretion by the US Government, and countries can and have been removed from the schemes from time to time.

The total two-way trade in goods between SA and the US grew from $7.3 billion in 2001 to a peak of $16.3 billion in 2011. Since then, bilateral trade declined steadily, to $12.3 billion in 2019. SA exports to the US increased from $4.3 billion in 2001 peaking at $10 billion in 2008 at the time of the global financial crisis, and then steadily declined to $7.6 • billion in 2019.SA imports from the US increased from $2.8 billion in 2001 to $7.1 billion in 2012 but declined to $4.6 billion in 2019. Over the period 2001 to 2019 the trade balance often favoured SA due to high levels of SA’s commodity exports (notably platinum, diamonds and gold).

GSP and AGOA offer SA preferential market access for exports of higher value added manufactured goods. SA’s top higher value-added exports under GSP include chemicals, iron and steel, precious stones, metals, machinery, plastics, and auto components. Under AGOA they include autos, iron and steel, fruit and nuts, organic chemicals, beverages and spirits. The share of SA exports under GSP and AGOA increased from 20% in 2001 to 44% in 2014, but fell to 26% in 2019. GSP exports increased from 11.4% in 2001 to 17% in 2005 but then declined to 10% in 2019. The share of AGOA exports (excluding GSP) increased from 9.4% in 2001 to 31% in 2013 but then declined to 16% in 2019.

SA exports under MFN contribute the largest share of SA exports to the US. In 2001, MFN exports accounted for 79% of all SA’s exports, and declined to 56% in 2013, before rebounding to 74% in 2019. SA is seeing a steady return of a greater share of commodities in its total export basket to the US. A corresponding decline in the value of the US market for SA value added manufactured products. The US ranking in our global trade has declined from a share of 8.7% in 2010, to 6.9% in 2019.

In general, the decline is due to poor trade conditions since the global financial crisis in 2008 in which demand and growth in the US real economy has been subdued. There have been significant shifts in the US import policy stance with greater focus on supporting US manufacturing, particularly under the Administration’s “America First” policies. The changes affected SA in various ways:
- In March 2018 citing national security, the US imposed WTO inconsistent tariffs of 10% and 25% respectively, on aluminium and steel imports from all except six WTO members.
- SA steel exports to the US declined by 33% between 2017 and 2018 (to US$ 187 million).

In 2018 the initiation an investigation into tariffs in the auto sector generated uncertainty for SA auto exporters. This led to changed decisions on sourcing, with the effect that SA auto exports to the US (worth $1.2 billion in 2017) fell 51% in 2018. In June 2020, the US announced an investigation into vanadium imports. SA exports of vanadium may be at risk. SA has also faced the prospect of being removed from the preference schemes if certain US market access or policy concerns were not addressed.

In 2015 the US enacted new AGOA legislation that introduced an ‘out-of-cycle’ review of SA’s AGOA eligibility. Under the threat of removal from AGOA, SA granted the US an annual quota of 65 000 tons for poultry imports subjected to WTO legal anti-dumping duties. In October 2019, the USTR initiated a review of SA’s GSP eligibility-based on concerns of some US firms who argue that SA’s Copyright Amendment Bill undermines their commercial interests. The President’s decision on 16 June 2020 to return the Bills to Parliament due to constitutional concerns has delayed a final decision by the US. All this has a dampening effect on exports and trade. (Exporters get nervous when they hear about reviews; they then make adjustments to their export strategies.)

SA-US Trade Relations (AGOA)
The AGOA will expire in 2025. The US has indicated that it will not extend the Act and, if it does, it will not include developing countries such as SA. The GSP scheme is also under review that could bring changes to the eligibility criteria. At the annual AGOA Meeting in September 2019 the USTR (US trade representative) announced a new post-AGOA policy approach to sub-Saharan Africa. The USTR proposed to negotiate an FTA (free trade agreement) with one African country that would serve as a model for others. The USTR indicated that it recently concluded US-Mexico-Canada FTA would be the model for such FTAs.

US FTAs are demanding and the scope for flexibility is narrow. They require close to full tariff liberalisation for trade in industrial and agricultural goods. There are no rules to limit the large support provided to agricultural sector. There is an “unfair advantage” in agricultural trade because of the huge subsidies. US FTAs limit government measures on preferential procurement and localisation, and seek access to government procurement markets. The FTAs require extensive liberalisation and deregulation for trade in services (finance, telecommunication amongst others); they include stringent (WTO-plus) rules to protect intellectual property rights while restricting policies for technology transfer. On digital trade, the FTAs prohibit customs duties on electronic transmissions, localisation programmes and local content requirements but there are lock-in provisions for free flow of data.

- SA will need to carefully consider post AGOA trade relations with US.
- SA-US trade remain important.
- SA continues to benefit from AGOA and GSP.
- The US remains an important source of investment and technology for SA.
- The SA government, through the DTIC continues to cooperate with the US Government and Embassy in SA to enhance trade and investment, and to address issues of concerns on both sides.

Implications for Provinces
As a national department, the DTIC uses official trade data provided by SARS (South African Revenue Service). SARS trade data (exports and imports) is aggregated at the national level. DTIC also receives trade information in NEDLAC (National Economic Development and Labour Council) and the Agricultural Trade Forum from exporters, but also at national level. Export data covers approximately 6 400 products that can sourced from across the country. Import data is collected at ports of entry but DTIC does not collect or record data of final destination within SA. DTIC broadly knows some provinces specialize in certain major exports. For example, Gauteng, KwaZulu-Natal, Eastern Cape (autos); Western Cape (fruit and wine); Limpopo, North West, Northern Cape (minerals); Mpumalanga (metal products and machinery, minerals); Free State (chemicals). However, DTIC does not have precise data at the provincial level.

Discussion
The Chairperson thanked Mr Carim for the presentation, which included various key areas of the trade relationship between SA and the UK, and between SA and the US, and taking into account the EPA that involves SACUM and the UK. It also looked at the regime governing trade relations between South Africa and the US under AGOA.

He opened the floor for engagement on the issues canvassed by the DTIC.

Ms M Moshodi (ANC, Free State) welcomed the presentation. She only asked for an explanation of what AGOA is.

The Chairperson replied that AGOA means the African Growth and Opportunity Act; it governs trade relations between developing countries and the US.

The Chairperson said that there is a slide on policy positions, specifically the concerns that the US will have with some of the policies that SA will be advancing. Among the US’s concerns was the Copyright Amendment Bill. That Bill is currently before Parliament. A number of engagements have taken place between the Portfolio Committee and the leadership of the Department. There is a sense of appreciation now with regard to where SA comes from with this Bill. He was more concerned about the concession that SA had made with 65 000 tonnes of poultry; is this concession only given to the US? What about the EU countries that SA is trading with, particularly the UK in this instance? Will the UK take this matter further to say that SA has made a concession for the US on poultry? What about the UK?

There is an opportunity within the Africa Free Trade Agreement which has the potential to become the largest free trade area in the world. Such an agreement could unite 1.3 billion people, and uniting them in a $3.4 trillion economic block. For him, this is an opportunity for SA; the country must embrace it, taking into account the policy uncertainty on the part of the US, which threatens SA’s commitment to redressing the imbalances of the past. There is the preferential procurement policy and the Copyright Amendment Bill which is dealing with the legacy of the past but is also appreciating the need to intervene on the challenges that are faced by the beneficiary artists because of failure on their part to log certain key points in their relation with promoters. Therefore, as a country, SA has a responsibility to deal with that. It is also important to appreciate the fact that this happens within a period where the last election result favoured President Donald Trump, so South Africa is looking forward with keen interest in terms of the outcome of the contest between him and Mr Joe Biden. With the decisions that South Africa takes as a country, it stands to gain or lose, depending on who wins between Biden and Trump, because of the US putting pressure on South Africa to desist from progressive policies that are addressing the imbalances of the past. SA is also taking into account what the opportunities will be there between these two countries in terms of trade relations within SA’s broader attempt to deal with the economic recovery under SA’s economic reconstruction plan.

Assuming that AGOA ends in 2025: What could be done to ensure that SA has put in place measures to mitigate ripples (as it did with the UK leaving the EU), in order to ensure that there is continuity of SA’s trade relations? What would also be critical is: How does SA ensure that whatever happens beyond 2025, SA’s export market will not be under threat? It will be critical to ensure that there is a process followed to mitigate the damage that could follow AGOA coming to an end.

Having ratified the EPA between SACUM and the UK in December, what has happened between December and the emergence of a total shutdown? Between the total shutdown and now, has there been any engagement? Has the Department gotten a sense of whether UK Prime Minister, Boris Johnson, is still pursuing the issue of the UK leaving the EU? Are there any lessons that SA needs to learn that must be taken into account? Are there areas that might not have been canvassed in the negotiations between SA as part of SACUM and the UK that might need to be revisited?

Mr M Dangor (ANC, Gauteng) was concerned about the new trade agreements being reached between Europe, Africa and the Caribbean. How does that impact upon what SA is doing? From his previous experience, he reckoned that Europe will always dictate the direction Africa in which should go or should not go. In that kind of thing, does Mr Carim see any kind of problems that could arise?

Mr T Brauteseth (DA, KwaZulu-Natal) said that he had no new questions.

Responses
Mr Carim appreciated the questions raised by Members and proceeded to respond to them.

On the first question on AGOA, he explained that it stands for ‘African Growth and Opportunity Act’ and it is US legislation. It is not something that SA negotiates with the US; it is a piece of legislation that was established and created by the US Congress, and it provides preferential access on approximately 1 800 products from sub-Saharan African countries. AGOA provides SA with a competitive advantage in the US market compared to other countries that are exporting those same products to the US. That is the value of it to sub-Saharan Africa. For sub-Saharan countries, SA is “perhaps the one country that has taken advantage of those preferences more than many other countries”; that is because SA has an economy that is more diversified than most other African countries.

Mr Carim had indicated that AGOA and the GSP are pieces of legislation by the US Congress; the legislation provides these preferences for the products, and gives an advantage over other competitors. But there are also eligibility requirements. For a country to benefit from these preferences it needs to be a market economy; it needs to be a democracy; it needs to have good governance; it needs to protect intellectual property; and it needs to protect investment. There are a range of criteria that are established at various levels of detail. If any Member of US Congress, or the Administration, is concerned about a policy of a country that is getting that trade benefit, then either one can ask that country to provide clarification; they will invite the country to explain what the measure is. If Congress or the Administration cannot agree with the measure, they have the option to remove that country from the programme. That country would no longer get preferential access. South Africa has encountered that; the first was at the time of the last extension of AGOA, where there were very serious concerns expressed by the US that its poultry exports to SA were being restricted by high anti-dumping tariffs. The US asked for some concession, and if SA did not negotiate, there was a big risk that SA would not get the congressional support for SA’s inclusion under AGOA.

It was in that context that SA started the negotiation. The 65 000 tonnes of poultry that was offered was the final deal that was agreed to. One the one hand, the US got access, and on the other hand, SA continued to get preferential access to the US under AGOA. The Act is not comparable to the arrangement that SA has with the EU or with the UK. SA’s trade relations with both the EU and the UK are conducted under different negotiated trade agreements between SA and the EU/UK. The economic partnership agreement with the EU, which up to today includes the UK, and after 01 January 2021, there will be a separate agreement with the UK. Those are negotiated agreements, and so the commitments are on both sides. One side cannot change the agreement automatically. One party could make a request that it would like to get preferential access, but because it is a negotiation, it would have to offer something in return. This type of arrangement is very different to the type of the arrangement that SA has with the US. With the US, it is a US Act; with the EU and UK, these are negotiated agreements.

On the opportunity of the AFCFTA (African Continental Free Trade Area), he responded that they all have great expectations that the AFCFTA negotiations will be concluded, and that it will come into force. The AFCFTA agreement does not have provisions that would limit SA on procurement, localisation, black economic empowerment, or support for small industries. The Department is looking forward to the AFCFTA being concluded and operationalised by 2021 or as soon as possible.

On the question on AGOA regarding the AFCFTA a concern for the Department, he responded that the Act would want to see the African Union (AU) members participate in AFCFTA. Ideally, there would be a focus on negotiating a deal amongst African countries, and not to be distracted by negotiations with third parties. This is SA’s preference and many countries in Africa agree. But of course it is not possible to determine the decisions of sovereign economies. If any member decided that it wanted to negotiate a bilateral agreement with the US, it would have the right to do so.

On the post-AGOA period and what SA should do to mitigate the fact that it may lose market access, he said that this is why the issue is being raised early; SA needs to think carefully about it. Some things that SA needs to think about is how it encourage [exports]; it could spend more time promoting exports to the US, and finding buyers in the US for South African products. Thus, there will be a much more strengthened export promotion set of activities. Another aspect of it is where SA is not able to get the access to the US, to what extent could those exports start to go to other markets, including the EU market of the UK market, or the African market? Perhaps SA might have to divert some of those exports to other markets, but SA has to look at all the options to mitigate the effect of losing the AGOA preferences in the US markets.

On whether or not the lockdown has had any bearing on the decision for the UK to leave the EU, he said that the Department has no information to suggest that there is a change in heart from the UK. The media reports are the UK is moving ahead with the plan to leave by 01 January 2021. There are intense negotiations, which are very difficult at the moment between the UK and the EU about the trade arrangements that will be in place. Media reports are not very optimistic at the moment, but the Department knows that there is still some engagement on trade arrangements. It does not look like there will be a reversal of the decision to leave the EU at the end of 2020.

On the role of the EU and the ACP, Mr Carim said that he had not prepared anything on this subject; he thought that it was a discussion that has to do with what happens between the ACP (Countries of Africa, the Caribbean and the Pacific) and the EU when the current Cotonou Agreement runs out in a few years, and what type of arrangement will replace that. These are still discussions that are ongoing, but what the Department can say from a South African point of view, and a southern African point of view, is that there is an agreement already in place with the EU on the trade side. SA’s agreement with the EU, the EPA continues to be the framework, and will remain the framework for SA’s trade relations with the EU, irrespective of what happens with the Cotonou Agreement. But of course, SA participates in that process as well.

The Chairperson replied that there was a question by Mr Dangor on the Caribbean and African trade relations; was that the question where Mr Carim had not prepared anything?

Mr Carim said it was about the ACP and the ACP post-Cotonou negotiations; he did not prepare it for this meeting.

The Chairperson asked if there were follow-up questions.

None of the Members had any follow-up questions.

Closing Remarks by the Chairperson
The Chairperson expressed thanks on behalf of the Committee to the Department. The briefing shed more light on where SA is regarding trade relations, as centred on the SA-US trade relations, but also as part of the SACUM-UK EPA. An overview was given on where SA is, taking into account different trade regimes that govern trade relations, whether it is on the UK side or the US side. It also noted where SA is regarding the possibilities in the future where a certain Act on the part of the US might be changed, and its impacts on SA’s exports and imports. He believed that regarding the balance of trade between SA and those two countries, what was more critical is SA’s ability to ensure that the decline in exports and imports is arrested. SA is mindful of where it is regarding the broader impact of COVID-19 on the global economy, and the fact that it is only this month that SA is opening itself to the rest of the continent and the rest of the country. The Committee is in a better position to understand where SA comes from regarding the various products which form SA’s basket of imports and basket of exports.

The Chairperson expressed appreciation to the Members. Earlier that day (Tuesday, 20 October 2020), the SC had been engaging with the Deputy Minister in the Presidency, together with the Statistician-General, Mr Risenga Maluleke. Despite the long day, the Members had an opportunity to display a high level of commitment to ensure that this meeting formed a quorum. He also appreciated the support given by the Committee Secretary, the Content Advisor, and the Researcher.

The Committee would not deal with the minutes in this meeting; they would deal with those two weeks from date, when Members return from provincial week.

The meeting was adjourned.