SAR, Vol 15 No 4, May 2000
SOUTH AFRICA - EUROPEAN UNION TRADE PACT
BY STEPHEN GREENBERG
Stephen Greenberg is a policy researcher at the Environmental & Development Agency (EDA) Trust. This paper was written in his personal capacity and does not necessarily reflect the position of the organisation.
After 5 years of negotiations the SA-EU Trade, Development and Co-operation Agreement (TDCA) was signed at the end of 1999. It deals with "substantially all trade" between South Africa and the European Union (EU), including trade in agricultural products.
The South African government approached the negotiations with two misconceptions. The first was that global trade liberalisation was a fait accompli that South Africa must accept. Integration into the global economy was the only option. The second misconception was that trade liberalisation is beneficial to most, if not all, South African citizens.
These misconceptions need to be dispelled.
Agriculture in the TDCA
To shed some light on the first misconception, recall that since the formation of the General Agreement on Trade and Tariffs (GATT) in 1947, international agricultural negotiations have been battles between the US, Europe and Japan about how best to protect domestic producers while simultaneously ridding themselves of their vast agricultural surpluses. Until the 1986 Uruguay Round of GATT, agriculture was barely considered a topic for international negotiation. At that time, the US effectively blocked any agreement to reduce subsidies to domestic producers. The EU did the same in the preparatory talks for a new round of trade liberalisation negotiations in Seattle in 1999. Regarding trade in agriculture, what we see is a fluid situation with no clear (much less inevitable) trend towards liberalization.
Under the TDCA, this pattern holds: South Africa has not achieved fully liberalized access for its agricultural products. The EU will give duty free access to 61 percent of South African agricultural imports and another 13 percent will be subject to preferential tariff rates. The EU buys 40 percent of South African agricultural exports, making it a significant market for South African exporters. Yet these imports account for less than 2 percent of EU's total agricultural imports. More importantly, some of the more lucrative exports have been given quotas for their preferential tariffs rather than full duty free access. These exports include canned fruit, fruit juice, dairy, cut flowers, wine and sparkling wine. Approximately 26 percent of South Africa's agricultural exports have been put on the `reserve' list, meaning they have been excluded from the agreement for now.
South Africa, in contrast, will provide duty free access to 83 percent of EU agricultural imports. The EU contributes a significant 20 percent of South Africa's agricultural imports. The trade agreement, therefore, is not equally free on both sides, with the EU gaining greater access to the South African market than South Africa is accorded to the EU market.
Tariffs and subsidies
Domestic markets may be protected either by imposing customs duties (which increases costs for competitors) or by offering producer and export subsidies (which reduce costs for domestic producers). The emphasis of the TDCA is to reduce and in some cases do away with customs duties, thereby reducing the costs for exporters.
Indeed, since 1994 South Africa has focused on reducing agricultural tariffs as a means to make its agricultural exports competitive, cutting them at a rate faster than required by GATT. Thus the TDCA will push South Africa further down this path. The EU, in contrast, has emphasized subsidies under the Common Agricultural Policy (CAP) rather than tariffs as a way to protect exporters. EU subsidies to farmers under the CAP were valued at US$40 billion in 1998 - as much as the South African government's entire annual budget. Subsidies are not affected by this agreement.
South Africa should itself consider protecting small farmers as they struggle to become self-sufficient by offering well targeted subsidies. In this way the government could enhance local economic development and protect emerging black farmers from competition from highly subsidized products that are dumped on the South African market.
Even if over the longer term trade liberalisation forbids such measures, at present, it is still possible to use domestic policy to build the capacity of small and subsistence producers to remain competitive in local markets. Domestic agricultural policy can and should focus on building capacity and resilience for local food security by injecting resources into small farmer development, rather than unnecessarily emphasizing export production and sacrificing the local market. But such an approach would require that the national government change its attitude. At present, however, the government does not consider state support for food production to be a priority.
At present, most state resources for agriculture are allocated for conservation, establishing of small farmers on the land and administration. But merely putting a few farmers on lands is patently different from providing the resources and support required for them to sustain themselves in the long run. Central government cut-backs have seen agriculture's share of the budget decline from 0.49 percent in 1999 to 0.34 percent in 2000. Agricultural support is a provincial competency, meaning that nine provinces receive on average about R80 million to spend on agriculture each year. This has not been enough money to prevent the collapse of basic extension services to poor farmers. Thus the provincial government have been unable to do more than preside over the gradual decline of state support to agriculture.
Who gains? (who loses?)
The National Department of Agriculture predicts that South Africa could make a net gain of up to R2 billion on the agreement. This figure is arrived at by deducting potential customs duties losses from the gains made through duty free access for exports. However not everyone gains equally. The state will lose customs revenue, and private exporters will gain through reductions in tariffs. The agreement therefore benefits a small minority of large scale private exporters at the expense of the public sector.
Since the late 1980s, the powerful white commercial farming lobby has been pushing for deregulation of agriculture in domestic markets. The Agribusiness Chamber of South Africa has been the driving force behind the government's policy prescriptions for domestic and international trade liberalisation in recent years. The National African Farmers' Union (NAFU) tends to support this approach, with export markets the goal of some of the few bigger commercial African farmers. Meanwhile, resource poor and subsistence farmers and farm workers have virtually no effective voice, and are mainly disorganised and marginalised from the debates around policy.
The TDCA in no way puts the rural poor at the centre of the transformation of the rural economy. It merely entrenches the status quo in the countryside. The South African government has not given enough thought to transforming the rural economy to benefit the rural poor, which was its historical mandate.
Impact on farm workers
Indeed, the second misconception of the South African government is the notion that South Africa has one "national interest." The suggestion has been put forth that an inter-state trade agreement benefits all citizens. This, however, is untrue, as the potential effects of the agreement on the agricultural and rural sector show.
The agreement is liable to result in a shift in commercial production patterns to emphasize more profitable high value crops (e.g. horticultural production). In other sub-sectors one can expect intensified global competition that will cut prices and profits in domestic markets. Since horticulture is labour intensive the result may be more jobs but not necessarily better conditions for farm workers.
Moreover, export orientation places producers at the mercy of fickle consumer fashion. For example, South African apple growers have been leading exporters since the early 1990s. Yet now they are discovering how quickly consumer demand in rich countries changes. Some apple growers have been unable to respond rapidly to the changes - even to produce the new varieties of apples that are in demand. To over-emphasize export-orientation without a counter-balancing focus on local and household food security is therefore a dangerous strategy.
Export earnings will remain in the hands of private companies. The benefits to workers in these industries are supposed to come about through the infamous `trickle down' effect. But few farm workers in South Africa have yet experienced the benefits of sub-sectoral economic growth and there seems to be little reason why this might change soon. The TDCA does not offer transformation, merely intensification of the privileges of a small and already wealthy segment of the population.
The other side of the coin will be the closure of farms unable to compete with highly subsidised European products (up to 48 percent of the production costs are subsidised through the CAP). In the early 1980s, a third of (mainly small and medium sized) white commercial farmers were so debt that they were a credit risk. The situation has worsened since then and there has been a wave of farm closures during the 1990s.
One can expect that as the commercial agricultural sector is restructured to engage in the global economy, some farms and associated processing labour will bear further losses. Farm workers are hardest hit since they have no land or assets to protect them once they are thrown off the farms. Like resource poor farmers, farm workers are very disorganised and the conditions faced by progressive unions are extremely as they try to organize the approximately 800,000 workers in this sector.
Small scale and subsistence farmers
South Africa has a history of national food security but not local food security. Indeed, a large proportion of the population do not have enough to eat on a daily basis. While the country as a whole is self-sufficient in key food items - like grain, vegetables and meat - this masks high levels of food insecurity locally and within households.
It would be possible for domestic policies to be developed to support and build local food security capability amongst the approximately 823,000 subsistence farm households in the former homelands. About 72 percent of these are headed by women. As yet, there are no internationally agreed upon rules that prevent the government from supporting a program that would transfer land rights (whether collective or individual) in communal areas to the people living in that area. It is also possible under the current international trade regime to support the production of locally-needed food crops that can generate and circulate income and resources locally.
Yet the Department of Agriculture has chosen export orientation at the expense of local food security. The primary reason for this is that agriculture is viewed as a way to earn foreign exchange rather than a way to produce locally required food. This is in line with the government's economic strategy, Growth, Employment and Redistribution (GEAR), which asserts the need for an export-oriented growth strategy.
Nowhere is this more evident than in current proposals by the Department of Agriculture together with the United Nations Food and Agriculture Organisation (FAO) to draw communally-owned land in the Eastern Cape into "the market driven economy." Tracts of communal land in the Transkei will be leased to multinationals (or a combination of domestic and foreign companies) on terms that are "attractive to investors." The chiefs will be the ones to lease the land. Small scale producers will lose access to the land for their own production (formerly they had at least had nominal access to the land) but will "benefit" from the scheme as sub-contractors for the agri-business consortia.
Contract farming has been a global trend in agriculture for some decades now. Multinationals dominate the sector both through inputs like seed, fertilisers and credit and final products processing, packaging, marketing and retailing. They prefer to sub-contract the least profitable and riskiest aspect of the production of food commodities - the actual production of the crop or livestock.
Small and subsistence farmers will at best engage in dependant contract farming, and at worst be marginalised entirely from surplus food production for local needs. Soon, small-scale farmers may become dependent on the multinational for income and hence food. This undermines the already weak local food security by disrupting those few local markets that have been built up tenaciously - against all odds - over decades and that are responsive to local supply and demand conditions.
Impact on the Southern African region
The TDCA is a matter of grave concern to countries in the southern African region as well. The agreement contains no special provisions for the Southern African Development Community (SADC) or the Southern African Customs Union (SACU). Botswana, Lesotho, Namibia and Swaziland (BLNS) - who together with South Africa form SACU - share a common external tariff with South Africa. Therefore they will be forced to reduce their tariffs on EU products at the same rate as South Africa. Yet these countries were excluded from the negotiation of the agreement, even though they asked to be involved.
The BLNS countries rely heavily on tariffs for state revenue. Lesotho relies on tariffs for 60 percent of government revenue. The agreement will result in an estimated 21 percent reduction in these revenues. Swaziland could lose up to 22 percent of its revenues as a result of the TDCA.
South Africa has granted SADC countries preferential tariffs under regional agreements. But, the TDCA undermines this by allowing duty free access for highly subsidised EU products. A substantial portion of the trade component of the TDCA deals with "rules of origin," which essentially say that only those products that are certified as originating in South Africa will be given preferential access to the EU market. The combined effect is to undermine SADC regional economic integration and could potentially result in the (re-)concentration of production and processing in South Africa. It is also estimated that unfair competition from EU products will cost the BLNS countries at least 12,000 jobs.
The agreement therefore has caused tension between South Africa and its neighbours. Many in SADC and in the African, Caribbean and Pacific (ACP) trade bloc feel that the SA-EU agreement has established a precedent for the formation of regional trading blocs. The EU is attempting to pressure these groups into doing away with the old Lome Convention-type agreement based on preferential trade and replacing it with `reciprocal' trade agreements between the EU and a number of separate fragments of the ACP. The 71 ACP countries see this as unfavourable since reciprocity will require that they further open their domestic markets to the EU. It also promises to give them less bargaining power as the EU plays one regional bloc off against another.
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