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SACU – the Day of Reckoning has Arrived

South Africa has been courting major player Botswana’s support for changes to SACU.

South Africa has been courting major player Botswana’s support for changes to SACU. (Mail & Guardian)

The Mail & Guardian reveals that South Africa has requested an urgent meeting with members of the Southern African Customs Union (SACU) for as early as ­February next year in what could be a make-or-break conference for the struggling union.

In July this year, a clearly frustrated Trade and Industry Minister Rob Davies told Parliament that there had been little progress on a 2011 agreement intended to advance the region’s development integration, and it was stifling its real ­economic development.

South Africa’s payments to SACU currently amount to R48.3-billion annually – a substantial amount, considering the budget deficit is presently R146.9-billion, an estimated 4.5% of gross domestic product.

In the past, South Africa has had some room to reposition itself, but as Finance Minister Pravin Gordhan has pointed out, the South African fiscus has come under a lot of pressure as a result of factors such as the global slowdown, reduction in demand from countries such as China for commodities, and reduced demand from trade partners such as the European Union.

South Africa, which according to research data, last year contributed 1.26% of its GDP, or about 98% of the pool of customs and excise duties that are shared between union countries including Swaziland, Botswana, Lesotho and Namibia, wants a percentage of this money to be set aside for regional and industrial development.

The four countries receive 55% of the proceeds, and are greatly dependent on this money, which makes up between 25% and 60% of their budget revenue. South Africa has very little direct benefit, except when it comes to exporting to these countries. It receives few imports.

Changing the revenue-sharing arrangement

Efforts to change the revenue-sharing arrangement so that money can be set aside for regional development would result in less money going into the coffers of these countries.

It would also mean that a portion of the revenue that South Africa’s SACU partners now receive with no strings attached would in future include restrictions on how it is spent.

A source close to the department said adjustments to the revenue-sharing arrangement and the promotion of regional and industrial development were issues on which the South African government was not willing to budge.

So seriously is South Africa viewing the lack of progress on the 2011 agreement, a document prepared for Cabinet discussion includes pulling out of SACU as one of its options, a source told the Mail & Guardian.

This could not be confirmed by the government, but two senior sources said South Africa was very aware of the dependence of its neighbours on income from the customs union, in particular Swaziland and Lesotho, and the impact its collapse could have on these economies.

Professor Jannie Rossouw of the University of South Africa’s department of economics believes a new revenue-sharing arrangement is essential for the long-term sustainability of SACU countries.

South Africa’s contribution

He also said that South Africa’s contribution as it presently stands should be recognised as development aid and treated as such by the international community.

Between 2002 and 2013, total transfers amounted to 0.92% of South Africa’s GDP, which exceeds the international benchmark of 0.7% set by the Organisation for Economic Co-operation and Development, he said in his research.

“It is noteworthy that South Africa transfers nearly all customs collections to SACU countries. Total collection since 2002 amounted to about R249-billion, while transfers to SACU were about R242-billion,” Rossouw said. The South African Revenue Service (SARS) recognises that inclusion of trade with Sacu would have a substantial impact on South Africa’s ­official trade balance.

South Africa’s total trade deficit for 2012 was R116.9-billion and, according to SARS, had trade with the union been included, it would have been much reduced to R34.6-billion.

South Africa has budgeted to increase its allocation to SACU from R42.3-billion in the 2012-2013 financial year to R43.3-billion this financial year and in the 2014/2015 financial year.

In 2002, the SACU agreement was modified to include higher allocations for the most vulnerable countries, Swaziland and Lesotho, and it established a council of ministers, which introduced a requirement for key issues to be decided jointly. In 2011, a summit was convened by President Jacob Zuma in which a five-point plan was established to advance regional integration.

Review of the revenue-sharing arrangement

This involved a review of the revenue-sharing arrangement; prioritising regional cross-border industrial development; making cross-border trade easier; developing SACU ­institutions such as the National Bodies (entrusted with receiving requests for tariff changes) and a SACU tariff board that would eventually take over the functions of South Africa’s International Trade Administration Commission (ITAC); and the development of a unified approach to trade negotiations with third parties.

Davies told Parliament that there had been little progress in the past three years on these five issues.

Xavier Carim, the director general of the international trade division of the department of trade and industry, said there had been positive developments regarding agreements on trade negotiations, such as those with the European Union and India on trade, and progress had been made on the development of SACU institutions, but progress was slow on the other issues.

Davies told Parliament it was difficult to develop common policy among countries that varied dramatically in economic size, ­population and levels of economic, legislative and institutional development.

He cited differences over approaches to tariff settings as an example.

“South Africa views tariffs as tools of industrial policy, while for other countries tariffs are viewed as a source of revenue,” Davies said.

A proposal that cause all the problem

“A key problem that led to differences was the proposal by one member for lower tariffs to import goods from global sources that were cheapest, which ultimately undermined the industry of another member. This was primarily an issue of countries who viewed themselves as consumers rather than producers.”

The South African government is trying diplomacy as its first option. A senior government source said issues around SACU made up a large part of talks last week between Botswana and South Africa on the establishment of co-operative agreements on trade, transport and border co-operation.

Catherine Grant of the South African Institute of International Affairs said Botswana had long been considered the leader of the four countries. It would make sense for South Africa to bring Botswana on board before the meeting.

Grant said the SACU agreement needed to be re-examined and modernised.

“There needs to be a review of the revenue-sharing formula that is less opaque and is easier to understand. The present system is complicated, making it hard to work out exactly how much countries are getting. It’s clear that Rob Davies feels hamstrung by SACU and has done for some time, because decisions cannot be made without the agreement of all five members, who have different needs and requirements.”

The trade balance is one of the elements that resulted in South Africa’s current account, which has recorded significant deficits in recent months, coming in as high as 6.5% of GDP in the second quarter of 2013.

Trade between South Africa and SACU has always been recorded, but for historical reasons it has been kept separate from official international trade statistics. Source: Mail & Guradian

 

SACU’s Choice – ‘Common policy or irrelevance’

imagesCA31PQJGThe Minister of Trade and Industry, Dr Rob Davies briefed the Parliamentary Portfolio Committee on Trade and Industry regarding the progress on the implementation of the five-point plan in Cape Town. This is a work programme which was approved by the 2nd Southern Africa Customs Union (SACU) Summit convened by President Zuma in 2011 premised on the following pillars;

  1. Work programme on cross-border industrial development;
  2. Trade facilitation;
  3. Development of SACU institutions;
  4. Unified engagement in trade negotiations and
  5. The review of the revenue sharing arrangement.

The five-point plan emerged from realization by SACU Member States of a need to move SACU beyond an arrangement held together only by the common external tariffs and the revenue sharing arrangement to an integration project that promotes real economy development in the region.

Minister Davies noted that progress on the implementation of pillars of the five- point plan is uneven. SACU has registered good progress on trade facilitation and there is greater unity of purpose in negotiations with third parties (Economic Partnership Agreement (EPA), SACU-India and Tripartite Free Trade Area).

However, there is limited progress on the review of the revenue sharing arrangement and hence lack of adequate financial support for the implementation of cross-border industrial and infrastructure development projects. The SACU revenue pool is raised by South Africa from customs and excise duties. Mr Davies told MPs that in 2013-14 the total disbursement from the revenue pool would be about R70bn of which the BLNS countries would receive about R48bn. There is also lack of progress on the development of SACU institutions as a result of divergences in policy perspectives and priorities of Member States.

Enabling provisions provide for the establishment of National Bodies and a SACU Tariff Board. The SACU Tariff Board will make recommendations to Council on tariffs and trade remedies. Davies added that, until these institutions are established, functions are delegated to the International Trade Administration Commission (ITAC) in SA.

The minister warned that the lack of agreed policies would hinder effective decision-making on regional integration and industrialisation, which had made little progress since the 2011 summit convened by President Jacob Zuma. South Africa believes SACU needs to move “firmly towards a deeper development and integration”.

Minister Davies said SACU risked becoming “increasingly irrelevant” as an institution if it did not develop beyond operating a common external tariff, and a “highly redistributive” revenue-sharing arrangement. The lack of progress in developing new SACU institutions was primarily due to policy and priority differences among members. “Against this background South Africa needs to reassess how best to advance development and integration in SACU.”

Among the disagreements on tariff setting between South Africa and its neighbours highlighted by Mr Davies, was that South Africa saw tariffs as a tool of industrial policy while they regarded them as a means of raising revenue. For example, the other Sacu members wanted to include the revenue “lost” on import tariff rebates offered by South Africa into the revenue pool.

The pool provides these countries with a major source of their national budget. Rebates were seen as revenue foregone for which additional compensation should be sought. South Africa, on the other hand, argues that the rebates (for example on automotive imports) are part of its total tariff package and serve to attract investment and boost imports and therefore, contribute to expanding the revenue pool, not diminishing it.

He emphasised the development of a common approach on trade and industrial policy as the prerequisite for establishing effective SACU institutions in future.

He highlighted that a discussion on appropriate decision-making procedures on sensitive trade and industry matters that takes into account SACU-wide impacts is required. Source: The Department of Trade & Industry, and BD Live.

Ready for a cock-fight?

Brazil has taken the first legal step at the World Trade Organisation to challenge South Africa’s use of anti-dumping measures on shipments of Brazilian poultry meat, the global trade body said in a statement on Friday. Brazil has “requested consultations” with South Africa over South Africa’s accusation that Brazilian imports were “dumped”, or sold at an unfairly low price that damaged South Africa’s own poultry sales, the WTO said. If the consultations fail to resolve the issue, in 60 days’ time Brazil could ask the WTO to set up a panel to adjudicate.

The statement did not give any more details, but South Africa’s International Trade Administration Commission (ITAC) has imposed anti-dumping duties on frozen chickens and chicken meat imported from Brazil after investigating suspected dumping in 2008-2010. In 2010, Brazil accounted for 94.2% of South Africa’s total 26,916 tonnes of boneless chicken imports and 44.6% of the total 29,039 tonnes of whole chicken imports, ITAC’s investigation report said in January.

After calculating the extent of the unfair competition, South Africa put a provisional anti-dumping duty of 62.93% on whole chickens and 46.59% on boneless cuts from Brazil, except for boneless cuts from Aurora Alimentos, which would incur a duty of 6.26%.  The dispute is the first between Brazil and any African country and only the fourth brought against South Africa at the WTO.

All of the previous three cases, brought by India, Indonesia and Turkey, also concerned South Africa’s use of anti-dumping measures to protect its market from unwanted imports. None of those three disputes advanced to the panel stage. India and Turkey did not press their cases and Indonesia withdrew its challenge after South Africa withdrew its anti-dumping measures. Source: News24