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NiZA Occasional Papers; No. 1 (July, 1998)

THE EUROPEAN UNION - SOUTH AFRICA NEGOTIATIONS:

The sting is in the tail

by Anne Graumans
Amsterdam
July 1998

Netherlands institute for Southern Africa
P.O.Box 10707
1001 ES Amsterdam
The Netherlands
Tel.: ++ 31 20 5206210
Fax: ++ 31 20 5206249
e-mail: niza@niza.nl
URL: http://www.niza.nl






Table of contents


Glossary





THE EUROPEAN UNION - SOUTH AFRICA NEGOTIATIONS

 

The sting is in the tail

 

Anne Graumans1

 

Introduction

The negotiations between the European Union (EU) and South Africa are stalemated. Again. It is four years that South Africa was welcomed back into the international fold of nations. The new ANC-led government made an immediate start with normalising its external relations. The negotiations on a trade and co-operation agreement with the EU are a part of that. South Africa joined the Southern African Development Community2 (SADC) in August 1994. South Africa also invigorated its role in the Organisation for African Unity (OAU) and commenced negotiations to reform the Southern African Customs Union (SACU).

In the bilateral negotiations with the EU South Africa started off with requesting access to the Lomé Convention3, which caters for the most beneficial, non-reciprocal trade arrangement possible with the EU and of which all other SADC member states are signatories. However, the EU refused South Africa access and instead proposed to negotiate a free trade area (FTA) agreement. These negotiations officially started in November 1995. The first part of the paper will give a brief outline of the past four years of negotiations.

The key issues of disagreement in the negotiations centre around taking into account the different level of development, e.g. a-symmetry and the inclusion of sensitive sectors like agricultural products. Linked to that are the adjustment costs for South Africa's partners in the immediate region, e.g. the regional dimension. South Africa is bound to a customs union agreement with Botswana, Lesotho, Namibia and Swaziland (the BLNS countries). Furthermore in the wider region, SADC adopted a Protocol on Trade in August 1996, which should lead to free trade between SADC members within eight years. The EU has expressed its support for regional market integration in southern Africa on several occasions and it envisages South Africa to play a key-role to advance this process. The EU has stressed that any agreement it concludes has to be compatible with regulations laid down in the World Trade Organisation (WTO). The second part of the paper will deal with these issues.

The bilateral negotiations between the EU and South Africa are one of the sets of trade negotiations South Africa is involved in. The other most important one is with SADC. The EU is in a way also involved in negotiating a dual track with southern Africa. At the one hand it's negotiating with South Africa, at the other hand it starts negotiations on a successor agreement to the Lomé Convention in September 1998. The dual tracks used both by the EU and South Africa calls into question the issue of credibility and coherence. The third part of the paper will try to outline the hybrid of dual tracks, their rationale and the timetables.

Options and a likely scenario will be presented in the fourth part of the paper. The final part will present conclusions. Appendix one provides a timetable for South Africa, SADC, the EU and the WTO.

 

1. Background EU-South Africa negotiations4

The ANC government inherited the 'legacy of trade discrimination' from the apartheid-era. Years of boycott and sanctions came to an end with the general elections in April 1994. The EU offered South Africa a 'package of immediate measures' which main contribution was the expressed intent to continue aid, technical assistance and to improve market access for South African products on the EU market. At that time around 80 per cent of all South Africa's exports entered the EU market duty free. This is explained by the fact that the majority of South Africa's exports to the EU comprise primary and processed primary products, which enter the EU market duty-free. For the EU, 44 per cent of its exports enter South Africa duty free. Another factor is that, on average, EU tariffs are three times lower than South African tariffs.5 Figures for 1996 show that trade between the EU and South Africa was considerable, the EU accounts for 40 per cent of South Africa's imports, 30 per cent of its exports and 50 per cent of foreign direct investment (European Commission, 1998(b):1).

Regarding market access, the EU offered South Africa Generalised System of Preferences (GSP) status for industrial products in September 1994. GSP status for agricultural products was delayed until October 1995. The package furthermore called for an interim agreement, which subsequently was drafted and signed by December 1994.

In the same month, South Africa requested to accede to the trade provisions of the Lomé Convention. It proposed a 'Lomé-minus' option, which would be acceptable to and in the mutual interest of all partners. In practice South Africa would not seek access to the Special Protocols6 and would not draw from the European Development Fund (EDF).7

The EU rejected South Africa's request and offered a Lomé Protocol to South Africa instead. This offer meant that South Africa would take part in the political dialogue between the EU and the ACP, would be able to tender for 8th EDF projects (1995-2000) and that the EU would look into extending the cumulation of the rules of origin to South Africa. Regarding financial assistance, the EU prolonged its aid programme for South Africa8 and committed considerable funds to the European Programme for Reconstruction and Development (EPRD). The EPRD runs until 1999.9

The second part, or 'track' in EU jargon, entailed a proposal to engage in negotiations leading to a bilateral trade and co-operation agreement. At the official opening of the negotiations, 30 June 1995, the EU invited South Africa to start negotiations leading to a bilateral free trade area agreement. Separate agreements were envisaged for wine and spirits, fisheries and science and technology. In September 1995 South Africa accepted the invitation, on the understanding that 'nothing is agreed until everything is agreed'.

The European Council approved complementary negotiating directives in March 1996. These directives entailed a more detailed offer and proposed that an FTA should cover at least 90 per cent of trade at the end of a ten-year period, with a possible element of differentiation. Asymmetry would be applied to take into account the different development levels of the EU and South Africa. The directives further stipulate that liberalisation should comply with the principles of the Common Agricultural Policy (CAP), should not affect the implementation of other community policies and should take account of the interests of the EU's preferential partners and their economic interests.

The EU proposal contains a rather lengthy list of exclusions to which no tariff liberalisation will apply, comprising close to 50 per cent of total current South African agricultural exports to the EU. After implementation of the EU offer, the share of South Africa's exports which enter the EU market duty-free would have increased from 75 per cent at present (85 per cent of all industrial products and 7 per cent of all agricultural products) to 94 per cent (100 per cent of industrial products and 50 per cent of agricultural products) in 2011 (Cassim, 1998).

The realisation that the EU was playing hard ball and that it was not interested in normalising the tariff structures applied to South Africa with those of similar countries was, after the presentation of the complementary directives, well-embedded in South Africa. The South African government still chose to continue with the negotiations, although it realised that the EU proposal was far from what it could accept and what would be beneficial for South and southern Africa. It therefore launched a consultation period in which it drafted its own mandate, the Trade and Development Agreement (TDA).

The TDA was presented in November 1996 and addressed basically two issues, which the South African team believed were not taken into account sufficiently. These were the immense difference in development levels between the EU and South Africa, which needed to be translated into a greater degree of asymmetry. This would be envisaged through a longer phase-in period for South Africa and the EU opening up a greater share of its market. In general a trade agreement should be geared towards supporting the restructuring of the South African economy. Secondly, the TDA emphasised that South Africa's relations with its SACU and SADC partners are ignored in the EU proposals. On the short term, an FTA with the EU would directly impact on the SACU members. SADC adopted a Protocol on Trade in August 1996, which will lead to free trade between the SADC member states. Therefore the TDA calls for an agreement to take account of the needs and interests of SACU and further stipulates that reciprocal tariff concessions to the EU should be phased in so that they don't negate tariff concessions made to SADC countries.

The TDA further emphasised de-linking the trade negotiations from the parallel negotiations on agreements on science and technology, fisheries, wine and spirits, and the Lomé protocol. This subsequently led to the signing of a science and technology agreement in December 1996. In February 1997, talks resumed to finalise the terms of South Africa's qualified accession to the Lomé Convention. South Africa's accession was ratified at the ACP-EU Joint Council of Ministers meeting in Luxembourg on 24-25 April 1997. From June 199810, South Africa is able to reap the benefits of its qualified membership. It can now tender for the implementation of 8th EDF projects, of which the EU has approved projects worth 1.7 billion US dollars.

South Africa presented its line-by-line trade offer to the EU in November 1997. This offer was prepared in consultation with the BLNS countries. In this offer South Africa proposes to not exclude products but to draft 'development protocols' in identified sensitive products and sub-sectors in South and southern Africa. This would give the South African government more manoeuvring space to protect and nurture sectors like the motor vehicle industry and textiles. Revision of tariff liberalisation for these protocols, covering around 20 per cent of total trade (or 2500 tariff lines), would take place in the 4th, 6th and 8th year of the transition period (European Commission, 1998(b):5).11

The EU presented its corresponding offer in January 1998 and since then negotiations have centred on these two offers. An official from the High Commission in London pointed out at the end of June that there are still over 1000 issues, which the EU-South Africa negotiators have to resolve.

The parallel negotiations on wine and spirits and fisheries have not progressed. The negotiations regarding wine and spirits especially face difficulty concerning 'appellations'. Spain and Portugal oppose South Africa calling its port 'port' and its sherry 'sherry'. Regarding fisheries, the negotiators have only met twice and progress will only be witnessed after South Africa has set up its own fisheries agreement, according to the official in London. Fisheries represent 1.3 per cent of exports to the EU.

 

 

2. The status quo of the negotiations

It was widely believed that during the British Presidency of the EU, which ended 30 June 1998, agreement would have been reached on an FTA. President Mandela was invited at the European Summit 'rounding off' the British presidency, to sign the agreement. But notwithstanding the fact that the Council of Ministers had allowed the Commission greater flexibility to negotiate at the end of March, it became clear at the 18th round of negotiations that the mid-1998 deadline could not be met. The 19th round of negotiations that ended on the 11th of June confirmed this.

This section will map out what the main areas of contention are. These have been identified as agriculture, the regional dimension and WTO compatibility. All seem to originate in the diverging development levels of the two negotiating countries. Asymmetry will be applied, but disagreement remains on the exclusions in the agricultural sector and the degree of asymmetry.

2.1 Agriculture: protected and subsidised

From the start of the negotiations agriculture has been a contentious issue. The first proposal of the EU already excluded 40 per cent of South African agricultural exports to the EU. The consultations within the EU member states even further increased the list of to be excluded products.

Professor Pinheiro, commissioner of Directorate General VIII (development), emphasised that in the FTA negotiations with South Africa it is the first time the EU included agricultural products.12 He also stressed that the list of exclusions contains popular and highly successful South African export products such as apples, pears, oranges, wines and cut flowers. The applied tariffs for these products are between 10 and 25 per cent and the Commission argues that it has been proven that the exporters of these products can pay the tariff and still sell these products at the EU market in large quantities (Pinheiro, 1997:6).

Dr Elias Links, the head of the South African negotiating team, emphasised at the end of 1997 that South Africa does not want to negotiate agriculture if the EU is not willing to incorporate its Common Agricultural Policy (CAP) in the discussions. The CAP is to be reformed, due to several reasons, elaborated in box 1.

In July 1997 the European Commission unveiled its 'Agenda 2000' report, entailing amongst others, proposals to reform the common agricultural policy (CAP). This reform is inevitable since the current CAP cannot be sustained after accession of the Eastern European countries to the European Union. At the moment 40 per cent of funds goes to sustain CAP. A second reason why reform is inevitable is the commitment made at the GATT Uruguay Round. The EU is supposed to cut the volume of its exports subsidies by 21 percent over six years. The next round of the WTO negotiations is expected to start in the year 2000 and it is likely that pressure will be increased to reform the CAP. A third reason is that with the deepening of the Union, for example the single currency, budgetary constraints will be more severe. The high costs of supporting the agricultural sector are therefore under scrutiny (IDS Policy Briefing, 1998). However, recently the European Commission decided to raise the budget for the CAP once more


.

It is unlikely that the huge machinery the EU has set in motion to adapt the CAP to its and the world's new realities, will be influenced by the proceedings of the negotiations with South Africa. The South African agricultural exports to the EU entail a small percentage of total South African exports to the EU. Even if the EU excludes agricultural products, an FTA with South Africa could still meet the WTO criteria for free trade area agreements. The current EU practice definitely makes a mockery of the way the WTO likes to see FTAs concluded but at the same time might well be the reason that the agricultural sector was included in the negotiations in the first place. Observers have argued that a next WTO multilateral negotiating round will be necessary to restructure the CAP substantively.

Impact studies have shown that those South African products likely to benefit from improved access to the European market have a strong agricultural bias. Precisely a labour-intensive sector which has potential for growth (Stevens and Kennan, 1995:46). Dr Links further stressed that the problem is not only the exclusion list, but the subsidies granted in the framework of the CAP.

The subsidies for European farmers' agricultural exports lead to a price that undercuts the local price paid. Better known as dumping, striking cases have been registered regarding the export of beef to West and southern Africa. But also in other sectors EU subsidies undermine local capacity to trade and to compete with imports from the EU. In South Africa a good example is the canning industry in the Western Cape. The Langeberg factory in Paarl had to close down as a direct result of being pushed out of the market by EU subsidised canned fruit. It had to lay off 2000 seasonal and 400 permanent workers. Furthermore, EU subsidies have been accused of pushing South African canned fruit products out of the Japanese market (Monthly Regional Bulletin, May 1998:2).


Subsidies are an ongoing contention and not likely to be part of history in the near future. The European Commission decided recently to raise subsidies for European wines so as to improve their position vis-à-vis South American, Californian and South African wines. In the case of subsidies, disadvantaged countries can take issues regarding unfair competition to the WTO.13

2.2 Regional dimension

As said, South Africa is a member of an operational customs union with a common external tariff, i.e. SACU. The following box gives a brief background of SACU and the negotiations to reform SACU.

South Africa is bound to a customs union agreement with Botswana, Lesotho, Namibia and Swaziland (BLNS) whose antecedents date back to the end of the previous century. SACU provides for free trade amongst its members and a common external tariff. It also established a common revenue pool, which is redistributed via a revenue sharing formula. The current formula has a compensation factor of 42 per cent for the BLNS, which must be seen as compensation for the loss of fiscal discretion, the polarisation of economic development towards South Africa and possible price raising effects due to trade diversion. Renegotiations started behind closed doors in November 1994 and centred on the institutional arrangements, tariff levels and the revenue sharing formula. Although commitment exists to democratise the decision making structures the negotiations have stalled exactly regarding this issue. South Africa wants to do away with the current revenue sharing formula and move to a more contribution based distribution of the common revenue fund. The BLNS would loose out and thus oppose this.


 

The highly integrated BLNS countries therefore either enter into the bilateral EU-South Africa arrangement or will have to re-install customs control. Complex rules of origin would need to be adopted to stop EU products entering the territories of the BLNS countries duty free. Furthermore the BLNS countries will loose out on their income from import revenue. The EU accounts for about 40 per cent of imports of the SACU and research has shown that income out of import duties amounts to a considerable percentage of total government revenue. This percentage ranges from 16 to 50 per cent. Although the EU has committed itself to contribute financial assistance to adjustment costs, it does not include losses in customs revenue.

The recognised benefits of an FTA with the EU include cheaper consumer goods, cheaper imported inputs for domestic industry and increased competition. The latter, as the SACU study14 argues, will force industries throughout SACU to modernise and improve their efficiency. This will not only bring benefits to consumers, but to the economy as a whole, as better use is made of available economic resources (ACP-EU Joint Assembly SACU group, 1997:9). However, as the SACU study recognises, the extent to which benefits are gained and losses minimised will depend on the ability to respond to the challenge of increased competition, the extent of increased competition and whether competition takes place on a level playing field. Especially the EU subsidies in the agricultural sector prevent the latter to materialise.

The regional dimension goes beyond paying the short-term adjustment costs. The BLNS countries have their own industries that need protection and since they are all members of the Lomé Convention they enjoy preferential access to the EU market. The SACU study argues that exactly those products enjoying duty free access or preferential access to the EU market are deemed sensitive by the EU and have therefore been put on the list of exclusions. This would mean that after the year 2000 the BLNS countries might loose this preferential access. Products and sectors that are excluded from the current EU FTA proposal include:

 

TABLE 1: BLNS countries' products effected by the EU FTA proposal

  Botswana Lesotho Namibia Swaziland
Fisheries     *  
Meat and meat products *   * *
Processed vegetable products   * * *
Sugar       *
Textile and clothing * * * *
Cut flowers and horticultural products     * *
Fruits and nuts     * *

Source: (ACP-EU Joint Assembly SACU group, 1997:25).

Of these products (cane) sugar and beef enter the EU market in the framework of product specific protocols the Lomé Convention caters for.15 The following table indicates the preferential access to the EU market the BLNS countries currently enjoy and it indicates the percentage of exports likely to be excluded if the EU-South Africa on the current (EU) terms is concluded.

 

TABLE 2: Preferential Access BLNS countries to the EU market

  Botswana Lesotho Namibia Swaziland
Current percentage of exports enjoying a significant margin of preferences* 59,2 87,2 43,3 83,2**
Percentage of exports likely to be excluded under current EU-SA FTA proposal 56 87 40 81**

(source: ACP-EU Joint Assembly SACU group, 1997:26)

      Notes:
      - (*) value of exports to the EU in 1994
      - (**) including sugar
      - implementation of the Uruguay commitments by the EU does not really affect these percentages.

The BLNS countries have limited manoeuvring space to cushion potential losses arising out of an EU-South Africa FTA. Keeping in mind that quite a few Southern African countries are transforming into more democratic regimes characterised by the respect for essential principles of good governance, the rule of law, human rights and democracy, a loss of government revenue could jeopardise delivery on economic and social objectives.

2.3 WTO compatibility

The EU has stressed that a trade agreement with South Africa should be compatible with WTO regulations. Box no 4 summarises the rules which currently exist.

Regarding preferential trade agreements the WTO caters for three principal routes. Under Article XXIV, countries that are creating an FTA or customs union may lower trade barriers amongst themselves without generalising this deal to third parties. But to be acceptable, the arrangement must cover 'substantially all' trade and be completed within 10 years or a 'reasonable length of time'. All WTO members must approve such arrangements unanimously. A second route is the 'Enabling Clause', which is designed principally for developing countries. Under the Enabling Clause industrialised states may offer preferential market access to developing countries. Finally, if all else fails states can seek waivers under Article XXV but these can, by definition, only be granted for any purpose by a 75 per cent majority vote (Graumans, 1997(b):28).

 

Differentiation based on development levels is thus possible. However, since South Africa is labelled a 'developed country' in the WTO16, an FTA with the EU will be tested against Article XXIV demanding an implementation period of 10 years and coverage of substantially all trade.

Within the WTO an initiative has been launched to provide the least of the less-developed countries (LLDC) with bound zero-duty free access to the OECD countries after the year 2000.17 Within SADC, Mozambique, Angola, Malawi, the Democratic Republic of Congo, Tanzania, Zambia and Lesotho are classified as LLDCs and therefore will be able to benefit from preferential access to the OECD markets if this initiative materialises.

In the following discussion on credibility, coherence and options it is paramount to keep the diverging levels of development between South Africa and the EU, and within Southern Africa in mind and the rights attached to them.

 

3. Enter dual tracks: the issue of credibility and coherence

If one simplifies the situation of trade negotiations in South Africa one can argue that there are basically two sets of negotiations, an FTA with the EU and an FTA with SADC.18 The same accounts for the EU, it is negotiating an FTA with South Africa and at the same time it is preparing to negotiate a successor agreement with the ACP countries of which the SADC states are member states. This section will first deal with the dual track of the EU. What is it's rationale and how credible and coherent is the current approach? The second part will deal with South Africa and its current negotiations with the EU and with SADC.

Multilateral liberalisation of trade is bringing down tariffs already. This means that South Africa, the EU, SACU, SADC and the ACP will face more competition in their 'preferred' markets regardless of the outcome of current negotiations on a bilateral EU-South Africa agreement, a regional SADC FTA agreement, the Lomé Convention and the LLDC initiative.

3.1 The European Union

The initiation of FTA negotiations with South Africa comes forth out of the 'new rationale' the EU applies to its relations with third countries. Integration of developing countries into the world economy is advocated and 'locking' them into a tariff liberalisation agreement is seen as one of the ways to succeed in this. Besides the economic gains for the EU of such agreements, security considerations especially where there is geographical proximity play a great role.

South Africa has a credible government and is therefore focused on the economic benefits, i.e. especially trade creation, of an agreement.19 The exclusion list of labour-intensive products in the agricultural sector has caused major upheaval in South Africa and delay in the negotiations. Has the EU misjudged the situation? As said before, it is the first time that the agricultural sector is included in FTA negotiations. In the case of South Africa, agricultural exports account for only 6 per cent of the EU's total imports from South Africa and by excluding almost 50 per cent of current agricultural exports an FTA agreement would still be WTO compatible.

As such one can wonder what the additional rationale is for the EU to invest in an FTA with South Africa. Firstly, the EU gains from it. Opening up the South African market will lead to an increase in exports and a more beneficial situation for the EU vis-à-vis its competitors like the United States and Japan. Secondly, one can think of securing the considerable investments especially the UK and Germany have in South Africa. Thirdly, South Africa is seen as the engine of growth in Southern Africa. In economic terms South Africa is envisaged to instigate the 'take off' of both regional integration and economic growth. In political terms it is seen as the vehicle to export the essential elements (democracy, rule of law, human rights and good governance) to the region.

At the same time the EU is preparing to negotiate a successor agreement to the Lomé Convention. All SADC member states, apart from South Africa, enjoy duty free access for the majority of their exports to the EU. In its proposals for a new Lomé dispensation the EU wants to depart from this special status and introduce reciprocity and differentiation. These proposals are inspired by the failure of the past Lomé Conventions to promote development and diversify exports. The following text box gives a brief background of the debate and the current proposals regarding trade.

In November 1996, the European Commission published a 'Green Paper on relations between the EU and the ACP countries on the eve of the 21st century' with the objective to trigger a wide ranging debate. The two main issues of contention in the Green Paper were the introduction of differentiation and reciprocity. In the Guidelines (October 1997) and later in the 'draft mandate' (January 1998) these two issues were further developed. The draft mandate proposes to split up the ACP group and negotiate free trade areas with regional groupings in the ACP. These negotiations would last two years (2000) followed by a transitional period of five years. Implementation of the FTAs would start in 2005. LLDCs will remain eligible for Lomé style preferences and countries not part of a regional grouping will be phased in the General System of Preferences (GSP)

 

The EU has expressed several times that it supports regional integration initiatives in Southern Africa. An EU official from the Task Team on South Africa envisages the EU-South Africa trade agreement as a model to be applied to the rest of SADC in due time [15-20 years]. Besides the precipitance of this approach, it is also not a school example of coherent policies. The EU has formulated objectives for its relations with the SADC states in the Berlin Declaration, signed in September 1994. This Declaration stipulates, amongst others, the promotion of regional integration. The current EU approach could even cause polarisation effects between the EU and southern Africa and within southern Africa to worsen. As has been argued by some scholars, there might be absolute gains from an FTA between SADC and the EU, this does not solve the relative gains problem of distributing the costs and benefits equally among the partners (Hentz, 1998:6).20

3.2 South Africa

Already in June 1995, at the official start of the negotiations the -then- Minister of Trade and Industry, Trevor Manuel, emphasised that

Up to the end of 1995, South Africa was persistent in requesting access to the Lomé Convention. It would harmonise its trade relations with the EU with those of its partners in SADC and the EU. The acceptance to negotiate an FTA led to South Africa's own dual track. Up to the presentation of its mandate in January 1997, there seemed to be tension within the South African government regarding economic and political priorities in its trade and foreign policy. The Trade and Development Agreement (TDA) spelled out clearly that South Africa's priority lies in the region. Although some have argued that the SADC FTA was used as leverage to enforce a better deal from the EU, the EU was eager to link tariff liberalisation between the EU and South Africa with tariff liberalisation between South Africa/SACU and the rest of SADC from the start of the negotiations. The need for South Africa to ensure preferential access for SADC over the EU in its market has created a greater urgency for South Africa to speed up the SADC tariff negotiations.

The current SADC Protocol on Trade, adopted in Maseru August 1996, is a result of negotiations between the SADC member states since the accession of South Africa in 1994. Officials from the South African Department of Trade and Industry stressed that it was committed to present SADC better terms than the EU was presenting in its offer to South Africa. The South African government/SACU presented its SADC FTA offer to the parliamentary committee in June 1998. Mfundo Nkuhlu, Chief Director of Africa Trade Relations, told the committee that the proposal entails South Africa abolishing almost 80 per cent of its import tariffs within five years. For the most sensitive products like textiles, sugar and automotive industry products, which constitute 22,1 per cent of South Africa's imports from SADC, special protocols are envisaged. Existing bilateral agreements in the region would be incorporated in the SADC FTA (Monthly Regional Bulletin, June 1998:10-11). Hope has been expressed to start implementation of the SADC free trade accord in January 1999.

The implementation of simultaneous tariff liberalisation to different partners and securing borders with customs union neighbouring countries could create an administrative nightmare for customs officials. A central component of an FTA is to ensure that there is a rule of origin clause to prevent abuse (Cassim, 1998). Having arrangements with the SADC region and other regions as an individual country are not necessarily mutually exclusive but do create legalistic, practical and often political problems.

The current situation does not advocate coherence. Although the South African delegation in Brussels has informal meetings with its SADC partners on a monthly basis, and the EU uses its rhetoric at every major conference, a concerted effort must be taken or enforced by the SADC countries to be part of the negotiations. There is definitely scope for that. Under Article 12 of the Lomé Convention, the EU is committed to inform the ACP states when it envisages to do something which could affect them (Percival, 1997). Furthermore, under Article 19(1) of the SACU agreement21 and Article 28(2) of the SADC Protocol, South Africa cannot enter an agreement with a third party without the consent of its partners in SACU and SADC.

The bi-annual SADC/EU Ministerial Conferences can be used to raise issues of coherence. The described processes in this section and in section 2.3 urges for a stronger vision to materialise. It is not only South Africa negotiating with the EU. The economic interests of thirteen other southern African countries are at stake, of which seven are LLDCs. The SADC/EU Ministerial Conference in Austria, November 1998, can contribute to map out clearly the different interests and the options on the table.



4. Options

In the following, four options will be presented. In a sense they are arbitrary. One does not go without the other, or needs to be combined with another option. The purpose though is to revisit, again, the costs and the benefits and make the options and a likely scenario more concrete.

4.1 Option 1: Bilateral EU-South Africa FTA

If the parties experience another breakthrough in their negotiations during the forthcoming rounds, a bilateral FTA could be signed before the end of the year. Ratification then still has to follow which especially in South Africa will face opposition in Parliament under pressure from for example the trade unions, which won't be able to sell the current FTA to their constituencies. The domestic situation in South Africa is underplayed and issues around, for example employment losses, have not been resolved.

A second issue that still creates tension is the exclusion of BLNS countries in the negotiations. South Africa will have to look after their interests in concluding the agreement. Although the BLNS countries were involved in drafting the detailed offer to the EU in November 1997, the medium costs and impact on their economies can only be estimated since the renegotiations on the SACU agreement are not concluded and Lomé renegotiations are still to start. South Africa will also have to think about how to resolve the introduction of border controls at its borders with the BLNS countries and with the rest of the SADC member states.

An other issue is the cumulation of the rules of origin. Currently, under its qualified membership of the Lomé Convention, South Africa can provide input in the products produced by its immediate neighbours on an ad hoc basis.22 The BLNS countries especially favour the scrapping of the ad hoc nature and define in what sector it is possible to co-operate with South Africa, instead of applying for derogations the whole time like Botswana does.

The need to institute rules of origin and border controls will require major resources. If tariff margins might not accede two to three per cent, it can be doubted if it is worthwhile pursuing these negotiations. Especially recalling that the other SADC states do not want to open their markets to the EU and in 7 out of 13 countries do not have to open their markets since they enjoy special status as LLDCs.

4.2 Option 2: Regional EU-SADC FTA as a result of the EU-SA negotiations

The conclusion of an EU-South Africa FTA de facto means a free trade area between SACU and the EU, and in the longer term between SADC and the EU. It is not likely that this option will materialise since tariff liberalisation with the EU will be tuned to tariff liberalisation within SADC. The latter has started with negotiations regarding the SADC-FTA but these are not in and advanced state as yet.

The EU initially advocated this option. It proposed to link the EU-South Africa tariff liberalisation scheme with that South Africa would apply to its neighbours. This is in line with the Cross Border Initiative (CBI) the EU, amongst others, promotes in Eastern and Southern Africa. The principal aim of the CBI is to promote intra-regional trade through lowering of tariffs and facilitating cross border activities. Some have argued that the CBI should be linked to reciprocal trade relations with the EU to make intra-African trade more effective. An increased focus on trade facilitating measures can be witnessed in the -for the first time- allocation of 20 percent of the regional indicative programme for Southern Africa (121 million Ecu for 1995-2000) to trade, investment and finance. This option is EU-driven and as such lacks credibility both in South Africa and SADC.

4.3 Option 3: Regional EU-SADC FTA as a result of the Lomé negotiations

The EU is clearly in favour of a successor agreement to the Lomé Convention that includes South Africa. As it states in its Green Paper

In light of the EU's proposals regarding reciprocity and differentiation, this is likely to be a regional economic partnership agreement, for all clarity a region-to-region FTA. The advantage of this option over option 2 is that the time frame is more relaxed. In this option an EU-SADC FTA would be implemented ten years after the transitional phase, e.g. 2015 while in option 2 an FTA would effectively materialise after the SADC FTA is implemented and for some sectors if the EU-South Africa FTA is implemented in 2010.

Within WTO regulations, developed countries accord preferential treatment to LLDCs. In the case of SADC, 7 out of 14 countries are LLDCs and it is therefore less likely that they will agree to go ahead with free trade negotiations or the introduction of reciprocity to the EU.23 Furthermore, the SADC member states have emphasised their solidarity with the ACP group of countries and do not wish to split up this grouping.24

4.4 Option 4: SADC FTA

South Africa has committed itself to co-operate and integrate with its immediate region, the SADC. It thereby advocates a regional economic policy based on the realities of the different development levels in the region. Although there is concern that South Africa as the largest and most developed economy is uniquely placed to reap the benefits of an FTA, individual SADC states have been calling for an FTA with South Africa. This can be explained by the fact that most SADC states are currently implementing a structural adjustment programme in which context they are bringing down tariffs already.

The current offer will bring down South African (SACU) tariffs within five years, while allowing the other SADC member states eight years to implement the tariff liberalisation scheme. The asymmetry in the time frames and the variable geometry approach are not a guarantee for success. The wide diverging development levels within SADC call for redistribution mechanisms, be they investments, subsidies or payment of adjustment costs, to offset the costs of free trade for the poor and very poor countries, which are in the majority in SADC. Recalling SACU's experience, in which South Africa was almost the sole decision-making power, setting up a central structure dealing with redistribution and extra measures to avoid polarisation of the benefits, is called for. Currently, the Trade Negotiating Forum plays this role in co-ordination with the Trade Policy Unit for which Tanzania25 has the responsibility. In the near future the SADC secretariat will have to play a bigger role.26

The state of consensus within SADC should not be overplayed. It's a young grouping working in a region where other regional groupings (like Comesa) have been more successful regarding the promotion of intra-regional trade through tariff liberalisation. Arguing that SADC represents some sort of 'regional identity' is not necessarily based on facts. Its identity comes forth out of a historical context, e.g. the resistance against the apartheid-regime, which is not a viable rationale anymore. The transformation of SADC into a community and a grouping driven by economic incentives (opposed to political ones in the old days) has nothing to do with a political identity. The recent enlargement quest, bringing the Democratic Republic of Congo and the Seychelles into its fold, is a reflection of South Africa's mining interests in the former Zaire.

Domestic interests will probably prevail in the near future. As Hentz argues

Vis-à-vis relations with the EU there would be two options. The first one is in line with the favoured option of the ACP group of countries, that is an improved status quo of the current Convention for another five years. This would allow the ACP countries time to await the results from the LLDC initiative and the Millennium WTO multilateral trade negotiations round. The outcome of the latter will furthermore provide clarity on the direction the EU's CAP and the new General System of Preferences (GSP) it will introduce from 2004 on will evolve.

A second option would involve taking all trade provisions out of the EU-ACP partnership leaving the Lomé Convention to revolve around aid and political dialogue. Trade provisions would then be dealt with within the framework of the WTO. For the least developed countries within SADC this might prove to cater for the best preferential access to the EU market.

 

For SACU/SADC both options still mean that one of its members is going ahead with liberalising vis-à-vis the EU and that administrative controls have to be introduced and enforced.



5. Likely scenario

The bilateral EU-South Africa negotiations are likely to proceed and implementation is foreseen to start in 1999. The time frame for the EU-South Africa FTA will be informed by the progress in the negotiations of the SADC FTA. To make this dual track a successful one the interests of SACU and SADC should be reflected in the agreement with the EU. For example South Africa should demand a regional clause to backload the SADC sensitive products.

It would however not mean that an EU-SA FTA would be the model for a SADC FTA later on. It is clear that the SADC member states' relations with the EU will depend on the outcome of the forthcoming Lomé negotiations, the developments in the WTO regarding trade concessions to LLDCs and the GSP. It is likely that the status quo will be maintained for another five years, up to 2005. The question is if the implementation of regional FTAs will start by then or that the negotiations for a future ACP-EU partnership will only start after 2005.

The latter would mean streamlining the Lomé negotiations with reforms of the CAP and the introduction of a new GSP. The EU should be aware that the ACP countries are not interested in an FTA, which only brings benefits to the EU. For the ACP it will be important to study possible non-trade benefits and transform them into policy mechanisms.

Both South Africa's approach and the EU proposal vis-à-vis SADC favour differentiation. South Africa is proposing a variable geometry approach. The EU also advocates differentiation based on development levels. These two processes need to be tuned to each other to avoid administrative nightmares and maximise development potential. A testing case of the credibility and coherence of the EU's and South Africa's policies will be the extent in which the interests of the BLNS countries are represented in the bilateral FTA and to what extent flanking measures will be implemented to offset adjustment costs and polarisation effects.

 

Conclusions

One can argue that a kind of paradox is appearing. Or maybe one can call it a revisiting of the contradiction in terms. If one draws a vertical line with the EU on top, South Africa in the middle, the SADC countries at the bottom, there seem to be a resemblance of how the partner above is treating the partner below. South Africa's treatment of its neighbours resembles the EU's treatment of South Africa. The region has been calling for South Africa to lower its tariffs from 1994. South Africa has been calling for preferential treatment in the EU market since 1994. Two FTA's are currently under construction.

The dual structure of the South African economy complicates the situation. The developed sector will win in the case of SADC, and will probably loose not too much with the EU (since tariffs remain). The agricultural sector in South Africa looses in both agreements with the EU and with SADC. South Africa will need to implement a pro-active policy to offset employment losses while at the same time acknowledging its interdependence with the region, which go beyond trade issues and involve security in a wider sense.

The EU-South Africa trade negotiations are not taking place in a vacuum. Developments in SADC, regarding the Lomé Convention and the WTO are influencing the positions. Within SADC there is a need to define goals and have a holistic approach to what it wants out of the region and out of the EU. This could be the basis for different agreements and negotiations. There is no use of South Africa dictating the region or imposing trade agreements that are not necessarily beneficial for SADC.

In this regard the issue of optimising differentiation to serve development interests becomes relevant again. Different access levels within SADC to the European market are currently materialising due to the conclusion of the EU-South Africa FTA. At the same time South Africa is using a variable geometry approach in its tariff liberalisation offer to SADC. If these two processes can be reconciled and supported by flanking measures both by the EU and South Africa, this could contribute to pulling off development and regional integration efforts in Southern Africa.



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    Appendix one Timetables
South Africa
SADC
European Union
WTO
Dec 1996 LLDC-initiative
June 1998qualified Lomé membership
July 1998 start negotiations SADC FTA
Sept 1998 start negotiations Lomé Sept 1998 start negotiations Lomé
Oct 1998SADC-EU NGO conference Oct 1998SADC-EU NGO conference Oct 1998SADC-EU NGO conference
Nov 1998SADC/EU ministerial conference Nov 1998SADC/EU ministerial conference Nov 1998SADC/EU ministerial conference
Dec 1998 EU-SA FTA concluded
Jan 1999 implementation SADC FTA Jan 1999 implementation SADC FTA
2000 start multilateral trade negotiations round
Feb 2000 Lomé negotiations finalised
2004 new GSP
2005 start implementation ACP FTAs
2005 multifibre agreement phased out
2005 end of transition period ACP,
start implementation regional FTAs
Jan 2007 SADC FTA complete Jan 2007 SADC FTA complete
2010 CAP reformed
2010/12 EU/SA FTA complete 2010/12 EU/SA FTA complete
2015 EU-ACP regional FTAs complete

    Note: italics mean provisional or estimates


NOTES

1      This paper is prepared for the Netherlands institute for Southern Africa (NiZA), Amsterdam. The views expressed herein are solely those of the author and do not purport to reflect the thinking of the NiZA. The author would like to express her appreciation to Rashad Cassim, James Hentz and Gottfried Wellmer for commenting on the draft.

2      Current member states of SADC are: Angola, Botswana, the Democratic Republic of Congo, Lesotho, Namibia, Malawi, Mauritius, Mozambique, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe.

3      The Lomé Convention is a partnership between the EU and 70 countries in Africa, the Caribbean and the Pacific (ACP). It entails an aid and a trade chapter. The latter accommodates for duty free access for the majority of products originating from ACP countries. The current Lomé IV-bis Convention runs until February 2000 and negotiations on a successor agreement are due to start in September 1998.

4      This section is based on a paper prepared for the Foundation for Global Dialogue, Johannesburg, Anne Graumans, 'Redefining relations between South Africa and the European Union: An analysis of the South Africa-European Union trade and cooperation negotiations: 1994-1997', May 1997.

5      Due to the GATT Marrakech agreement the situation will have changed by the year 2000. 83 per cent of South Africa's exports will then enter the EU market duty free, and some 54 per cent of EU exports will enter the South African market duty free (ACP-EU Joint Assembly SACU group, 1997:6).

6      The Lomé Convention caters for special protocols for rum, beef, sugar and bananas. Under these protocols the ACP countries receive set prices for an agreed quota. These prices are above world market prices for products, which would normally be excluded from preferential access to the EU market.

7      The European Development Fund contains funds contributed by the EU member states on a five-yearly basis. The EDF disburses this financial aid through the regional and national indicative programmes agreed upon between (an) ACP state(s) and the EU

8      From 1986-1994, the EU supported anti-apartheid movements in South Africa through the Special Programme for the Victims of Apartheid. 450 million ECU was allocated to the Special Programme in this period.

9      No commitments for funds have been made beyond 1999 since the EU and its EU member states still have to negotiate its financial contributions to the EU budget. These negotiations will start in the autumn of 1998.

10     The accession of South Africa to Lomé is organised in article 364 of the Lomé IV-bis agreement, agreed upon in Mauritius in 1995. Due to slow procedures within the EU and the ACP countries to ratify the Lomé IV-bis agreement South Africa had to wait to make use of this 'hook-on' clause.

11     Products in these protocols are: textiles, cars, television assembly and parts, mineral oils and fuels (e.g. oil produced from coal), footwear, small arms and ammunition, dairy products, winter grains (barley, wheat), beef and veal, sugar

12     Recently, the planned negotiations for an FTA with the Mercosur grouping in South America was called off. France, Germany and the Netherlands were not willing to include the agricultural sector in the negotiations, while it is clear that Mercosur cannot accept an FTA excluding viable exports as beef, wheat and sugar (NRC Handelsblad, 18 July 1998).

13     Actually, the establishment of the WTO comes forth out of the recognised need to have a dispute resolution mechanism regarding trade issues. Especially the United States advocated the idea of a new multilateral institute, e.g. the WTO

14     Within the ACP-EU Joint Assembly, the SACU parliamentary group requested for an impact study regarding the bilateral EU-South Africa FTA. A study was subsequently commissioned and presented in July 1997.

15     The Sugar Protocol was annexed to the Lomé Convention in 1975 and is thus not an integral part of it. This also means that it is not subject to renegotiations.

16     However, classification in the WTO is by self-selection, and thus it is for South Africa to choose what category of country it falls under. The current classification dates back to 1945.

17     An Inzet study conducted on the WTO concluded that the LLDC initiative is far from being realised. The current EU and USA offer excludes sensitive products in their respective agricultural and textiles and clothing sectors. Furthermore, the study notes that 56 out of 97 developing country members do not participate effectively in the WTO (Inzet, 1998).

18     Mr Malik from the UK government rightfully noted at a recent ACTSA seminar that six out of fourteen SADC member states are negotiating with four different regional organisations. Furthermore there is dual membership between the Common Market for Eastern and Southern Africa (COMESA) and SADC (and SACU). Organisations, which might differ in focus but has tariff liberalisation as their main focus.

19     Cassim argues in this respect that the apartheid government would probably have entered an FTA with the EU, even if the economic benefits would be nil (Cassim, 1998).

20     General economic theory furthermore suggests that where market integration occurs between countries with economies of radically different levels of development and size, the benefits tend to accrue to the more developed party (Wellmer, 1998).

21     The catch is in Appendix XXXVI of the Lomé Convention which stipulates that the BLNS should apply the same customs tariff treatment to imports from the EU as to those from South Africa (Graumans, 1997(a):19).

22     The JCCC (Joint Committee of the ACP-EU) must define what and where cumulation of the rules of origin can occur

23     This is notwithstanding the EU foreseeing LLDCs belonging to a regional trade grouping to enter into FTAs with the EU. The EU acknowledges that this will require a greater adjustment effort from these LLDCs. This needs to be taken into account when assessing their needs for financial assistance and flanking measures (transitional aid, macroeconomic assistance, sectoral assistance, etc).

24     One of the basic principles of co-operation between the EU and other regions is the sovereignty of the region to decide on the composition of the group. The ACP group is institutionalised in the Georgetown Agreement of 1975 and thus can decide to co-operate as a group with the EU.

25     Within SADC countries carry the responsibility of sectors. This is to avoid a central bureaucracy. However, it has also meant as Buthelezi has argued that '...in all SADC operational co-ordination programmes there has been an absence of a specific framework for the regionalisation of economic activities, that is, a lack of an intra-regional perspective in planning, design and implementation' (Buthelezi, 1997:16).

26     One needs to stress the impact of structural adjustment programmes on preventing SADC to formulate a region-wide strategy regarding tariff liberalisation. A paradox is appearing since in the current situation SADC is expected to negotiate trade agreements with powerful bodies as the EU.

27     The problems with renegotiating a bilateral trade agreement between Zimbabwe and South Africa illustrate this. Domestic opposition existed in South Africa to renew the bilateral agreement. Major employment losses in the textile industry of Zimbabwe were the result. Another example is the use of non-tariff barriers by the South African government to protect its industry against competition from the BLNS countries.

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