SACU – Time for Change? Trudi Hartzenberg trudi@tralac.org 18 May 2010 Agriculture Trade Forum - Windhoek

1. SACU – Time for Change? Trudi Hartzenberg trudi@tralac.org 18 May 2010 Agriculture Trade Forum - Windhoek

2. Overview • Background • Historical perspective • What are the challenges • Possible future developments • Implications

3. Background 1 • SACU dates back to the formation of the Union of South Africa (following the South African war 1899 – 1903); the Cape Colony, Natal, the Orange River Colony and Transvaal were joined as the four provinces of the Union. They were just four of many more British controlled territories in Southern Africa. • Several customs union arrangements preceded this: including the customs union between the Orange Free State and the Colony of the Cape of Good Hope (1889); in 1906 South African Customs Union was formed (Cape Colony, Orange River Colony, Transvaal, Natal, Southern Rhodesia, North-Western Rhodesia, Basutoland, Bechuanaland Protectorate, Swaziland) – all except Natal and Cape were under the British flag. • Establishment of the Union required an alignment of customs arrangements

4. Background 2 • Two Agreements were concluded: • Union, Southern Rhodesia and North-Western Rhodesia • Established SACU: Agreement between the Union and the High Commission Territories (Basutoland, Swaziland and the Protectorate of Bechuanaland) – basic uniform 15% ad valorem duty was adopted, managed by South Africa with distribution which left 98.7% for South Africa, with shares for the smaller territories remaining the same until 1965 (then adapted at the cost of Basutoland in favour of Swaziland and marginally Bechuanaland) • The 1910 Agreement remained in force until the independence of the HCTs, re-assessment resulted in the 1969 Agreement (independent Swaziland, Botswana and Lesotho held that they were not getting their fair share of the revenue collected and the effect of trade diversion resulting from a tariff designed to favour RSA’s industrial development). The 1969 Agreement specifically made provision for the development of the smaller states.

5. In Summary • Establishment of SACU – was not an agreement by independent, sovereign states • Successive agreements reflect the need to adapt to changing political environment • 1910 – Union of South Africa established • 1969 – Independence of HCTs • 2002 – Post-apartheid democratisation of SACU management (Negotiations:1994 – 2002) • Since 1969 plagued by persistent disagreement between members

6. Where to Now • Both CU and FTA agreements (GATT Article XXIV compliant) focus exclusively on trade in goods • A CU is distinct from a FTA - free intra-regional trade behind a common external tariff. This requires: • Agreement on guidelines for using the tariff as an instrument of industrial policy • Agreement on the weight attached to revenue and on the fairness of the distribution of CU revenue • Effective participation in CU organs (Tariff Board, etc) to manage the tariff and distribute the revenue

7. Update – Current Situation • Distribution of revenue, customs in particular, favours BLNS • Provides for ambitious organs in support of SACU as a rules-based arrangement • Decisions in strategic organs (Tariff Board and the Council) are made on the basis of consensus • Established as a legal entity with status of an international organisation (Article 4), with a common negotiating mechanism to be established and a clear determination that no member state will enter into new trade agreements without the consent of other member states (Article 31). • Tariff Board and the National Bodies of BLNS not yet operational with ITAC still serving as the SACU Tariff Board

8. Challenges • No progress yet: • Implementation of Article 38 on common industrial policies; use of the tariff in its broadest sense (including rebates) as development instrument, taking into account: • Disparities in economic development while addressing the ‘small economy’ constraint facing BLNS • Differences in CU expectations, notably BLNS emphasis on revenue and SA on industrial development

9. Challenges • Revenue Sharing Arrangement: • What options for dealing with revenue dependence? Eg Lesotho’s limited options ito other revenue sources. • SACU revenue serves as a potential mechanism for adjusting to external shocks in a fixed exchange rate (CMA) regime. • On South Africa’s part, what is responsible regional politics?

10. Challenges Collective CU management with unequal capacity to manage SACU on the basis of equal participation. Is the principle of consensus decision-taking workable given the disparities between economies and their diverse interests? Negotiations on a new SACU Agreement began in 1994 in the euphoric climate of a newly democratic SA with the aim of revamping an apartheid-era relic – Where are we now? Is it possible that the 2002 Agreement itself could be the undoing of the oldest Customs Union in the world? It is clear that change is imminent!

11. When push comes to shove… • Current pressing issues: • Revenue • EPA negotiations • South Africa’s position: SACU is compromising its policy space (revenue transfers to BLNS, strategic tariff policy to support industrial development (priority job preservation and creation), SACU institutions are seen as impediment to domestic policy priorities)

12. What now? SACU celebrates its centenary (April 2010): - First meeting of Heads of State and Government (commitment to meet again at end of July in South Africa) - Communiqué (New Vision and Mission; SACU as a building block for deeper integration in Southern Africa….. Renegotiation of Agreement…..) Possible scenarios: i) Implementation of 2002 Agreement, expand coverage to include eg services, expand SACU as core of SADC, renegotiate revenue sharing formula and perhaps other provisions too? ii) South Africa withdraws from SACU (provided for in 2002 Agreement, however process is prescribed, and WHAT WILL BE THE POLITICAL FALL OUT?) iii)Downgrade to FTA

13. Implications? i) Based on Final Communiqué (at centenary celebrations) Implementation of Agreement, a Summit for SACU, expansion of coverage, common policies (trade facilitation and competition), renegotiation of revenue formula ii) South Africa withdraws from SACU (Article 49) – time frame, political fall out?

14. Implications? iii) Downgrade to FTA - what will be the implications? - WTO issues (SACU has been notified to the WTO) - SADC issues (SACU tariff…. SACU as a building block for deeper integration no longer holds as this is a retrogressive step) - Disbanding SACU…. Current negotiations (EPA, India….) - National level implications (revenue issues for BLNS….) Regional development fund: funds from where? Regional policy/ies? Access to funds? How and by whom will such a fund be managed? Transition…….how long? What can BLNS do? Assessment of national priorities, options, challenges, engage (not just on revenue matters)….