Trade negotiations and existing trade agreements and trade relations, with Deputy Minister

Meeting report

Opening Remarks
The Chairperson greeted the Committee Members and everyone who was connected on the online platform.

The Secretary confirmed that the meeting was quorate and presented the agenda.

The Chairperson informed Members that the main item was a briefing on ongoing trade negotiations and existing trade agreements and trade relations, including an update on the SACU relations and the SA relationship with the United Kingdom (UK).

Briefing by Department of Trade, Industry and Competition (dtic)
Ambassador Xavier Carrim, DDG: Trade Policy, Negotiations and Cooperation, dtic, explained that he had a long presentation but he intended to focus on SACU, the African Continental Free Trade Area (AfCFTA), SA’s relationship with the European Union (EU), and the SACU – UK relationship, as well as the country’s trade relationship with the United States of America (US).

Ambassador Carrim explained that SA’s trade policy had to support industrial development in the country. African integration was a major priority and the country advanced a “development integration” approach that combined opening markets with industrial and infrastructure development initiatives.

He explained that African integration was a longstanding continental objective that was being attained via the African Continental Free Trade Area, although intra-Africa trade was low. He noted that Africa was by far the second most important export market for most African countries, behind the EU. The 1 July 2020 deadline for operationalizing the AfCFTA had been delayed due to the suspension of meetings following the Covid-19 pandemic. In May 2020, Heads of State had agreed that a Summit be held in December 2020 to finalise outstanding issues and that the AfCFTA be operationalised by 1 January 2021 contingent on the evolution of the pandemic.

SA had taken over the Chair of SACU on 15 July 2020 for one year. Recent ministerial meetings had agreed to a new work program prioritising regional industrial cooperation, and investment and export promotion in the context of the wider African integration agenda.

SACU and Mozambique had concluded an agreement with the United Kingdom (UK) in Oct 2019 to avoid
trade disruption when the UK leaves the EU customs union. Parliament had ratified the agreement which would be implemented on 1 January 2021 when the UK was expected to leave the EU.

The US was SA’s third largest trading partner but regular reviews of SA’s eligibility for the (US) Africa Growth and Opportunity Act (AGOA) and the Generalised System of Preferences (GSP) had created degrees of
uncertainty for SA exporters. AGOA would expire in 2025 and the US proposed that, post AGOA, it would seek free trade agreements (FTAs) with individual countries, using the recent US Mexico Canada Agreement as the model. However, Ambassador Carrim warned that US FTAs were extensive and demanding, and the scope for flexibility was narrow, so SA would need to carefully consider its future trade relations with the US.

China and India accounted for 94% of SA’s trade with BRICs countries (Brazil, Russia, India, China, South Africa) but the major concern was regarding the content of SA trade with BRICS as SA manufactured goods accounted for only 24% of SA’s exports while 94% of its imports were manufactured products.

(See Presentation)

Discussion
The Chairperson thanked Ambassador Carrim, saying that the issue of AfCFTA was appealing and was especially important in promoting beneficiation in SA. Considering the times of the rain, etc., in different areas of Africa, African countries could supply all the produce required within the continent.

Mr M Cuthbert (DA) thanked Ambassador Carrim for his informative and detailed presentation. He asked if the SA delegation decided on a candidate for the new Director-General of the World Trade Organisation (WTO)? What had informed that decision and who had the delegation chosen? What was the progress on deciding on digital industrial policy and transfer at the WTO at that stage? He understood that no rules had been developed and tabled, and requested feedback on the progress on that issue. What had SA’s input been on that issue?

He noted that in terms of rhetoric, SA was pro-China but if one looked at the numbers, SA was on the end of a bad deal. Regarding the large, almost R6 billion trade deficit with China, he asked for more detail on any discussions with the Chinese about a more beneficial arrangement for SA. Was it not time for a more formal trade agreement with the Chinese? He had seen other African countries in East and West Africa fall into the Chinese trap through the ‘one belt, one road’ initiative. African countries allowed their debt to be taken on by the Chinese who came in and built infrastructure that was not of good quality and fell apart within a matter of years. Those countries signed away their sovereignty because they thought that, by aligning with the Chinese as opposed to Western countries, they were somehow progressive. He did not believe it to be the case. A trade deal was a trade deal and matters should be dealt with on a case-by-case situation. The Department should look at the merits in favour of SA and those that were not. Mr Cuthbert asked for additional clarity on that issue.

Ms T Mantashe (ANC) appreciated the presentation. She asked about sugar. SA was flooded by imports of sugar from Brazil through eSwatini. That was a major threat to the SA industry. Could there be an intervention, by the Department, similar to the poultry interventions?

Ms Mantashe appreciated the negotiations with the SA Development Community (SADC) but how would the dtic ensure that there would not be separate agreements between SADC countries and the UK and EU so that all countries could have the same tariffs. What progress had been made in respect of the SACU revenue-sharing formula negotiations? What progress had been made on the BRICs strategy, especially in terms of trade and investment in manufacturing and processing of minerals? What was the latest on SA’s position in regard to AGOA?

Mr W Thring (ACDP) agreed that the trade policy had to support industrial development and there could never be a truer statement because if trade policies did not support industry, the industrial policies would fail. That was what was happening. SA’s failed policies had resulted in shrinking industrial development. It was not trade policies that had failed, but also fiscal and monetary policies.  Add to that the disastrous Covid-19 policies that had pushed SA to explosion.

He noted that the imbalance in trade with the BRICS partners was largely as a result of 94% of the imports from BRICS, especially from China, being manufactured goods, as Mr Cuthbert had correctly indicated. SA’s strength lay in the agricultural sector as well as raw material export. SA had to capitalise on that as it was both a competitive and comparative advantage. However, the policies on beneficiation and manufacturing continued to move at a snail’s pace while the rest of the world hurtled along implementing economic policies. That had to change. What was being done to change those imbalances and to fast track beneficiation and industrialisation.

Mr Thring noted that dispute mechanisms were hamstrung because of the suspension of the SADC Tribunal. That was concerning because agreements would be worth nothing if there was no enforcement and no mechanism to sort out disagreements. Larger powers would flout the SACU agreements and make bilateral agreements directly with various countries, which was already happening. What did the AfCFTA dispute mechanism look like, particularly in the light of the possible termination of AGOA by 2025? How were the existing agreements going to be drawn into the AfCFTA? What were the “poor trade conditions and restrictive measures” that had resulted in the 50% decline in trade with the US?

Mr Thring asked a final question. When did Ambassador Carrim envisage reform would take place in the WTO to address the existing imbalances?

Mr F Mulder (FF+) said that trust was a critical factor in the economic investment process and SA had had a significant breakdown in trust by the international trading partners in the recent past. SA had to compete against other emerging investment destinations in Africa and, despite the fact that SA had a relatively stable economy, the Rand was the most volatile currency in BRICS. SA had not been successful in delivering economic growth, which was so vital to addressing unemployment and poverty. Was SA still seen as a trusted trade and investment partner? What was SA’s rating as a trusted trade and investment destination?

Ms J Hermans (ANC) noted that SA chaired SACU in the current year but most of the year had been given over to the Covid-19 pandemic. How was SA going to mitigate the effects of Covid-19 so that SA’s chairmanship could be seen to have borne fruit?

She noted that Eritrea was not part of AfCFTA. It was a small country, but why had it not signed the AfCTA?
She believed that there was a threat to SA’s position in the Continent with the US having decided to negotiate FTAs with individual countries. What was SA doing to mitigate the effects of the end of AGOA and the creation of new agreements?

Mr S Mbuyane (ANC) asked about the emergence of universalism and particularism and disregard for the route-based trading system: how had that affected SA’s trade agenda, in particular, and global trade in general?  How had Covid-19 affected the implementation of AfCFTA? He requested an update on AfCFTA.
How was SA going to deal with the trade deficit? Was SA being assisted by BRICS which had been established as a forum for dialogue and not for the kind of trade that was being seen?

Ms T Msane (EFF) said that there were too many trade agreements in Africa. That was commonly referred to as a spaghetti bowl. Had there been talks about SADC integrating agreements to avoid any form of duplication and perhaps to align the agreements in a linear path. SA got involved in too many agreements and certain member states appeared in both, e.g. BRICS and another agreement. Could those agreements not be aligned? For example, a few weeks ago, Russia had recommended that SA drop the use of the US dollar as a standard. What was SA’s stance in that regard? What would it take for the continent to use another form of currency? She was asking because the Abuja Treaty had indicated that a single currency was its end goal. How many of SA’s trade agreements were with common markets?

She noted that Mr Cuthbert had spoken of some African countries getting into debt with China. Had there been talks in Africa about the deals with Americans, European and now the Chinese in order to preserve the independence of the African countries? They get trapped and that would compromise the idea of an independent Africa because those countries could lose their sovereignty.

Ms Motaung added that SA was ranked no 84 out of 191 globally on the ease of doing business. How had the portal increased trade for SA? What would it take for SA to expand trade to the continent, especially to West and North Africa?

Response by dtic
Ambassador Carrim noted that some of the questions fell outside of the responsibility of his branch and some were even outside the responsibility of dtic. He would indicate who could answer the questions. The answers could be submitted in writing.

Ambassador Carrim stated that SA’s position on the WTO DG post was very clear and had originally been determined by the position taken by the African Union and that was to support African candidates. From the start of the process, SA had offered support to the three African candidates. They came from Egypt, Nigeria and Kenya.  There were now only two candidates – a woman from Nigeria and a woman from South Korea- who were vying for the top position. There would be an outcome of the process by 7 November 2020.

He responded to the questions on the digitalisation at the WTO. It was correct that there were no specific rules. A group of countries had developed a set of rules for proposal but the process was still underway.
There was a range of issues that had to be discussed. He was not sure whether the proposal by that group would obtain the approval of all members of the WTO. The real challenge was to overcome the digital divide. eCommerce globally was dominated by a few companies and a few countries. Africa played a marginal role in ecommerce and SA was more concerned about having the space to digitalise industries, communications, etc. The impact on employment, the taxation and anti-competitive rules could be a concern. There was a need to understand the rules and the implications of rules before finalising the rules.

Ambassador Carrim responded to the question on SA’s deficit with China. It was a complex problem because SA was still heavily dependent on the commodities market, such as mining and agricultural products and the export basket was not sufficiently diversified. Export from South Africa to the African continent was much more diversified and included manufactured goods. It was important to understand that there had to be a continued focus on the export of high value-added products. That had been done with BRICS and was being done with China. SA had to do more to build up the industrial support mechanisms. His colleagues in dtic who dealt with industrialisation were in a better position to respond to the question. The concept of a trade agreement with China would be extremely difficult to implement if SA was intent on building up its industrial base as SA would have to reduce its tariff requirements to somewhere close to zero. Under such conditions, the pressure from China on the domestic industry would be unbearable. He believed that it was necessary to promote value-added investment and to promote investments from other countries into the manufacturing sector.

He agreed that the sugar coming into SA was a serious matter for the sector. There was a Sugar Master Plan and part of that plan was to promote imports via eSwatini if there was a need.  It was part of a broader set of questions relating to individual members of SADC signing individual agreements with the US. It would be preferable to sign any new agreements through SADC. There was, however, no way to prevent an individual SADC country from signing an agreement with another country as that was a sovereign decision.
 
Ambassador Carrim noted that there had been attempts to negotiate a revenue-sharing formula amongst SACU countries but the discussions had not come to fruition. The question about the negotiations could be answered by saying that the agreement of 2002 was the status quo. National Treasury could explain that in more detail.

He responded to the question about the eligibility of SA under AGOA. There were regular reviews of the system of preference (GSP) and of AGOA in the US. There was no indication at present that SA would be made ineligible for preference. From time to time, companies or public representatives queried SA’s policies that they disagreed with but at that moment there was no question of the eligibility of SA.

Ambassador Carrim agreed with Mr Thring’s comments on industrial policies but suggested that his colleague in the Industrial Division of dtic would be best suited to respond to the question about local manufacturing policies. He had mentioned that the inability to enforce issues in SADC was a concern. There were instances where SA’s exports to SADC had experienced problems and so far SA had been relatively successful in resolving issues by working with a country directly. The good trade balance with SADC countries showed that the current system was working.

He referred to Mr Thring’s question about setting up existing agreements within AfCFTA. In setting up the agreement, it had been determined that the negotiations would be between countries that did not already have preferential treatments with a particular country. For example, SADC custom agreements would not be re-negotiated. They would be put into an overall set of AfCFTA tariff arrangements to open up trade as much as possible. He referred to Ms Msane’s “spaghetti bowl” and explained that it was the unfortunate reality. There were overlapping agreements but they were legal and could not simply be done away with, although they did form the basis for aligning agreements with other countries. Over time, those differences would be reduced.

In response to the question on US restrictions on SA trade, Ambassador Carrim stated that tariff impositions on products such as steel and aluminium had had an impact. When the US had started a review of its auto industry as part of an investigation, SA companies that had been exporting cars to US, made a decision that they would not export from SA but would increase production in the US-based plants. The impact was a significant drop in SA’s car exports to the US. The 50% drop in 2019 was in cars exported to the US, as he had attempted to explain in the presentation. It was not possible to give a reliable answer to the question of future developments in the US trade policies as it was an ongoing process and there were many possibilities on the table.

Ambassador Carrim told Mr Mulder that he was not aware of any trust index against which one could measure SA’s trust rating but SA continued to trade with most countries in the world and to draw investments and that might be an indicator of trust in SA.

He informed Ms Hermans that while SA was the SACU Chairperson during the pandemic, the country had tried to ensure a flow of essential items and had eased the export restrictions very quickly so that SACU countries were not negatively impacted. Currently, there was a process of trying to mitigate the effects of the pandemic by attempting to create greater coordination in development in the region with a view to participating more effectively in the AfCFTA. He could not provide a reason for Eritrea not joining the AfCFTA but discussions with Eritrea were ongoing.

He suggested to Mr Mbuyane that the real concern was getting products into certain countries as protectionism was a form of managing trade. The real question was whether or not that protectionism was violating the rules of the WTO, and some did violate the rules. In the absence of a dispute mechanism in the WTO, there could be an issue. The real concern would be when policies were violated.

Ambassador Carrim added that BRICS was not a trade agreement but it provided for a forum to push for investments and the export of SA goods. The proposal to do away with the dollar was an ongoing discussion and National Treasury was best placed to answer such a question. He told Ms Msane that, generally, there were many free trade agreements between countries but common markets in Africa would include SACU, EAC (East African Community) and ECOWAS (Economic Community of West African States). There could still be some restrictions on labour, etc. in those common markets.

He stated that concerns about China offering loans was one aspect of the providing of loans to Africa as several countries did the same and that was an issue receiving attention at the International Monetary Fund (IMF). It was a question about debt relief for Africa, especially following the pandemic.

Ambassador Carrim explained to Ms Motaung that his Branch did not deal with the ease in doing business in SA. That was essentially the work of InvestSA. There was an undertaking by dtic to improve performance in that respect, but it was not an issue in international relations. There was ongoing work on expanding trade into North Africa and the Export Promotion Branch in dtic was working on that.

The Chairperson said that the Committee would have to follow-up on issues in other branches and the National Treasury. He asked Ambassador Carrim to arrange with the Secretary to present written responses in response to the questions relating to the other branches of dtic.

Consideration of Minutes
The Minutes of 1 September 2020, 2 September 2020, 6 October 2020 were read and approved with no objections. The Minutes of 7 October 2020 were amended by removing the name of Ms Msane as one of the attendees of that meeting and approved with the amendment.

Mr Cuthbert noted that the National Lottery Commission (NLC) had not forwarded the responses in writing. He pointed out that generally entities were not adhering to the seven-day deadline for submitting responses in writing.

The Chairperson requested the Secretary to follow up on responses to questions not answered in the meeting and to which the NLC was supposed to respond in writing.

Concluding remarks
The Chairperson stated that there were no further engagements on the agenda. He thanked Members for their participation, and especially for being timeous at the start of meetings. He requested all Members to switch on their videos when responding to the roll call and, if possible, when speaking.

The meeting was adjourned.
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