Presentation Outline

1. THE SOUTHERN AFRICAN CUSTOMS UNION (SACU) AGREEMENT: PAST, PRESENT AND FUTURE PROSPECTSBYTayani L. CHANKULUBA

2. Presentation Outline • Introduction • The 1910 Agreement and its challenges • The 1969 Agreement and its shortcomings • The 2002 Agreement and its shortfalls • Assessment of SACU’s impact on the Botswana Economy • The Likely Future Prospects

3. Introduction • The Southern African Customs Union Agreement (SACUA) effectively dates back to 1893, when the Bechuanaland Protectorate entered into a customs union with Basutoland, the Cape Colony and the Orange Free State (Hudson, 1981). It is the oldest CU. • Following the formation of the Union of South Africa in 1910, the first formal customs union agreement was signed between South Africa, Bechuanaland Protectorate, Basutoland and Swaziland (ibidem)

4. We attempted to identify the economically important issues for the SACU Agreement throughout its long history; its impact on the Botswana economy and what (we believe) the future holds for the SACU Agreement.

5. 1910 SACUA • The 1910 Agreement provided for the following (ibidem): • (a) The absence of customs duties on goods originating from within the custom union members. (b) That all the four member countries would charge the same customs duty on goods originating from outside Common Customs Area (CCA) and the same rate of exercise duty on goods produced within the CCA – provided for a common external tariff (CET)

6. (c)  That South Africa would be the custodian of the duties collected which will then go into a revenue pool. (d)  Each member country would receive a fixedpercentage of the total amount of the duty collected on an annual basis. (e)  The fixed percentages were to be immutable even if the patterns of consumption of dutiable goods among the member countries changed.

7. The 1910 Revenue sharing formula was:-

8. Where Botswana’s (then Bechuanaland) share was 0.28 percent, Lesotho (then Basutoland) was 0.88 percent, Swaziland was 0.15 percent and the bulk of the revenue 98.69 percent went to South Africa. • The percentages were based on estimates of duty on goods consumed by each member states during the period April 1907- March 1910.

9. After independence in 1966, Botswana, Lesotho and Swaziland (BLS), were increasingly dissatisfied with the 1910 Agreement on account of the following: • revenue accruing to BLS was inconsistent with their shares of total imports in the Customs Union • The CET had a significant price-raising effects on their imported goods • That there was an industrial polarization effect arising out of the SACU Agreement.

10. 1969 SACUA • persist complaints by the BLS members, led to the 1969 Agreement. • The unfortunate thing about the 1969 Agreement was that it merely confined itself to the revenue aspect and ignored the trade related shortcomings (e.g. the unilateral setting of tariffs by RSA).

11. 1969 Agreement • A new RSF was introduced in 1969, which had a compensation factor- which was meant to cover for three factors faced by the BLS members (i.e. price raising effect of the CET; industrial polarisation; and loss of fiscal discretion) • Just like the 1910 Agreement the 1969 had major shortings.

12. 1969 Agreement • Concerns identified by the BLS members as well as the relatively newly independent Namibia were that amongst others 1969 agreement:- • Did not provide for a dispute resolution mechanism • The unilateral setting of the CET by RSA was stifling FDI in smaller members

13. SACU was increasingly perceived as denying the BLNS members access to cheaper imports- just to protect inefficient RSA producers • The compensation factor was deemed inadequate, say in Botswana, where Leith (1992) found that Botswana in 1987 had paid R371 million above world market prices on RSA imports, while receiving only R296 million as revenue

14. 2002 Agreement • In 1994 the re-negotiation of the 1969 Agreement started- resulting in the 2002 Agreement. • 2002 Agreement covers three aspects, thus:- governance and administration; economic policies and regulation; and a revised RSF • The main objectives of the 2002 SACUA as captured under Article 2 are: • To facilitate movement of goods between member states; • Democratise SACU to ensure equitable trade benefits to members;

15. 2002 Agreement • Promote fair trade in SACU- enhance economic development, diversification, industrilisation and competitiveness of member states; • Increase investment opportunities within the CU; • Facilitate equitable sharing of revenue arising from customs, excise and additional duties levied by members; and • Facilitate the development of common policies and strategies.

16. 2002 Agreement • The institutional framework of the SACU • Council of Ministers; • Customs Union Commission –Senior government officials • Secretariat – administrative body • SACU Tariff Board- responsible for the setting-up of CET • Tribunal –adjudication of disputes between member states

17. 2002 Agreement • 2002 SACU RSF- what accrues to each member states is calculated after the subtraction of the operating costs of SACU. • The 2002 SACUA revenue sharing formula has three components (customs component, excise component and the development component).

18. 2002 Agreement • customs component- custom duties are distributed to each country in proportion to its share of intra-SACU imports; • excise component- 85 percent of excise duty collected within SACU is distributed in proportion to each country’s GDP share to the total SACU GDP .

19. 2002 Agreement • Development component- 15 percent of excise duties collected within SACU, and is distributed inversely to the GDP per capita. • Formula is:-

20. 2002 Agreement • The 2002 RSF has a deliberate bias towards the smaller members. It is only in SACU that intra-customs union imports are used as a basis for revenue sharing. However, this was done to address issues such trade diversion, polarisation, and price raising effect of the CET.

21. 2002 Agreement • The inclusion of the excise component- which is not trade related, was also intended to mitigate cost of SACU membership to the BLNS states. • Furthermore, the RSF has a development component- which is biased towards the least developed members (Botswana with the highest GDP per capita in the region gets the smallest amount from this component)

22. Implication of SACU to Botswana • Conventionally the economic gains of a Customs Union are:- • Trade creation:- when citizens of a member state switch from consuming goods produced in the domestic market (at a relatively higher cost) to goods imported at a lower cost from a partner country. (the opposite of trade creation is trade diversion).

23. Implication of SACU to Botswana • Dynamic gains/ effects:- these include propensity for higher output growth, investment and development. Membership to CU will result in income growth through expansion of market and productive capacity; increase competition and productivity-which can stimulate greater investment.

24. Implication of SACU to Botswana • The question that we ask is “Has Botswana been able to attain the economic gains associated with a CU, from her 100 years membership to SACU?”

25. Implication of SACU to Botswana • We accept that from a revenue generation perspective, SACU receipts remain significant to the government revenue. • Membership to SACU has also provided Botswana with ready access to South African Market. • BUT! Have we been able to fully attain the benefits associated with a Customs Union? The debate continues…

26. Likely Future Prospects • Third party agreements have proven to be a major challenge to SACU- e.g.. The SADC –EU Economic Partnership Agreement (EPA); reconciliation problems with South Africa’s Trade, Development and Co-operation Agreement (TDCA) with the EU.

27. Likely Future Prospects • The proposed coming into existence of the SADC customs union in 2010 implies the demise of SACUA. • The on-going review of the RSF • Perceptions that SACU payments are a fiscal burden to South Africa by the South African public and parliament .

28. Likely Future Prospects • Coming up with common trade and industrial policies for SACU. • it would seem that SACU faces an uncertain future owing to the advent of free trade negotiations and the proposed SADC customs union, whose co-existence with SACU is impractical .

29. Thank you for your valuable time!