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"It's significant that one of the first decisions South Africa's newly elected democratic government made on international economic relations was to take the country into the Southern African Development Community (SADC). Also significant was its application to be admitted to the Lome Convention, the multilateral development aid and preferential trade arrangement that Europe maintains with some 70 former colonies in Africa, the Caribbean and the Pacific (ACP)." Dot Keet documents post-apartheid South Africa's negotiations with the European Union and its apparent lack of concern for the impact of those negotiations on its neighbours.

vol 12 no 1

Cap in hand? South Africa and the European Union
Dot Keet


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Southern Africa Report

SAR, Vol 12 No 1, November 1996
Page 12
"Globalization"

CAP IN HAND?
SOUTH AFRICA AND THE EUROPEAN UNION

BY DOT KEET

Dot Keet is a senior research fellow at the Centre for Southern African Studies, the School of Government, University of the Western Cape.

It's significant that one of the first decisions South Africa's newly elected democratic government made on international economic relations was to take the country into the Southern African Development Community (SADC). Also significant was its application to be admitted to the Lome Convention, the multilateral development aid and preferential trade arrangement that Europe maintains with some 70 former colonies in Africa, the Caribbean and the Pacific (ACP).

Many criticisms can be made of Lome's inefficiencies and dependency-reinforcing effects. Recent studies do suggest that technical and financial benefits to the ACP may be less than supposed. However, in terms of favourable trade access to the European market, Lome has been very important. The Convention not only allows traditional primary exports of the former colonies into Europe duty-free; it makes it possible for ACP countries to evade prohibitive tariff barriers. Under Lome's "regional cumulation" terms, its members can jointly accumulate the necessary local (ACP and/or EU) content in their products to qualify for duty-free entry to the EU market.

This provision has worked mainly to ensure that European investors in ACP countries can freely export goods produced there back into Europe - and to try to prevent other foreign investors in the ACP from doing the same. But regional cumulation could provide a boost to the weak domestic manufacturing sectors in most ACP countries by encouraging them to enter into joint production ventures amongst themselves. Such combined and complementary manufacturing ventures would not only allow greater economies of scale and improve competitiveness, but could also produce mutual benefits and promote more equitable and effective development.

Lome was an important option for South Africa to gain greater access to the EU for its agricultural exports, as well as to improve project tendering and other rights. But above all, Lome membership could provide South Africa's relatively weak industries with preferential access to EU. Equally importantly, it could encourage collaboration between South African enterprises and their counterparts in the other SADC member states, all of which are members of Lome. With South Africa's relatively developed industrial base, plus Lome access to the EU's vast market, joint manufacturing ventures in Southern Africa could help to advance economic development and diversification across the whole region. This, in turn, would play an important role in the consolidation of an effective new economic grouping in Africa.

An economically integrated Southern Africa would have a combined population of more than 130 million and constitute one of the most richly endowed regions of the world in mineral and other natural resources. With the addition of the relatively advanced industrial, financial, transport and communications infrastructures, and scientific/technical resources of South Africa, SADC could:
* create the basis for more integrated, balanced, self-sustaining and sustainable development for all 12 member countries;
* provide a base for its members, separately and together, to negotiate better terms for their relations with the international economy;
* provide, at last, one of the economic `building blocks' for the recovery and development of Africa, both by example and through future support and cooperation; and
* play an important role in the necessary revision of some of the more invidious terms of the new world trade order.

Initial European response to South African interest in Lome was that the least developed countries (LDCs) in Lome would feel threatened by South Africa's relatively higher level of economic development.

The more likely underlying reality was that European authorities were not prepared to see a country, rather more developed and competitive than the ACP countries, get duty-free access to the European market. Whereas many of South Africa's agricultural exports are the same as those produced in the EU countries, very few of South Africa's potential exports to the EU would compete with those of the ACP countries. Furthermore, South Africa had promised the ACP members that it would not claim the right to draw on Lome financial/technical aid programmes and would settle for qualified Lome membership.

With the SADC countries stressing that South Africa's entry into Lome was important for the consolidation of the Southern African region, the ACP countries supported South Africa's admission. It was also felt that South Africa's economic and political weight could strengthen the ACP countries in their negotiations with the EU on the current functioning and future prospects of the Lome Convention itself.

Another argument against South Africa's admission to Lome is that World Trade Organization (WTO) criteria officially classify it as a developed, middle-income country. The South African government has, hitherto, seemed somewhat reluctant to oppose this categorisation - possibly in order not to `discourage foreign investor confidence'. However, South Africa is one of the most grossly uneven economies and distorted societies in the world, a fact recognized by the European Commission during the apartheid years. South Africa is characterised by `first world' institutions and infrastructures superimposed upon a vast `third world' base. Life expectancy, child mortality rates, the incidence of TB, adult illiteracy and a host of other indicators for the majority black population are as bad as, and often worse than, those in many other less developed countries.

Viewed in this light, and as part of a region that includes a number of the very poorest countries in the world, South Africa has a strong case that its admission to Lome would not - despite the EC's argument - be incompatible with the WTO's provisions for LDCs. Despite much discouragement from Europe, in November 1994 South Africa formally communicated its desire to be admitted to Lome. Although the European Parliament indicated its support for South Africa to be granted "non-reciprocal market access equal or similar to that available under Lome," the European Commission shifted the goal posts and offered instead a `two track' approach. South Africa could be admitted to some of the provisions of Lome, as outlined above, but not to the trade access it offers. Instead, the EU proposed separate bilateral trade relations through a reciprocal free trade agreement (FTA). Qualified access to Lome was linked to progress in such free trade negotiations.

The EU's FTA proposal to South Africa

The EU's proposal is that such a free trade agreement between South Africa and Europe should eventually cover 80 - 90% of their respective exports and be phased in over 10 years, according to WTO rules. In practice, this means that the EU would have to increase the coverage of duty-free imports from South Africa by about 7% to fulfil WTO requirements. South Africa would have to increase the coverage of duty free imports from the EU by about 46% to do the same. Analysis of the EU's terms for the proposed FTA shows it to be thoroughly uneven in detail, and in the immediate and future implications for the respective sides.

Despite the `asymmetrical' phasing in of free trade - with Europe opening up more rapidly to South African exports than vice versa - it's clear the product coverage of such an FTA would require far less immediate adjustment costs for the EU than for South Africa. Furthermore, EU members have excluded over 40% of South Africa's agricultural exports to the EU which are considered to be competitive. South Africa, on the other hand, would be required to remove tariffs on a total 95% of European agricultural exports; 50% within the first year of the agreement. Furthermore, under the terms secured for the European Common Agricultural Policy (CAP) in the Uruguay Round, South African producers would, in the early stages of such an FTA, be competing with European agricultural exports that are still heavily subsidised.

Similarly, the increasingly free movement of up to 88% of EU manufactured goods into South Africa would start with 53% in the very first year and, under the current competitiveness of South African industries, this would certainly favour European enterprises. In fact, an internal assessment by the European Commission of the proposed FTA, concludes that " it is obvious that the European Union has much to gain from an FTA with South Africa." From South Africa's point of view, such an industrial trade liberalisation would be more profound and rapid than that presently envisaged under its existing GATT terms, although even these terms are being questioned by business and the trade unions in some of the more vulnerable industrial sectors in South Africa.

An EU-SA free trade agreement also poses immediate questions about its effects upon the other members of the Southern African Customs Union (SACU) of which South Africa is the dominant member. SACU is based upon a common external tariff (CET) around all five members, which would be reduced and removed by a free trade agreement between South Africa and the EU. The most immediate effect would be the loss of the customs duty revenues upon which the Botswana, Lesotho, Namibia and Swaziland (BLNS) governments are heavily dependent. In the interim, it would also result in complicated and destabilising revenue changes year by year with rapidly changing customs duty income. The longer term effects are even more difficult to quantify, but free trade access of European goods into South Africa, and therefore into the rest of the customs union, would aggravate the impediments to industrial development that the BLNS have long suffered under South African economic domination. Similarly, for other members of SADC, the duty free influx of European products into the South African market would exacerbate their own existing difficulties in competing with other producers and importers in what is one of the few sizeable markets where they could have some competitive advantages.

The potential benefits of preferential trade arrangements within SADC would be countered by an extensive external free trade agreement between South Africa and Europe. An FTA also carries broader implications for the anticipated negotiation of investment cooperation and industrial development agreements between South Africa and the rest of the Southern African Development Community. The orientation towards such an FTA with Europe reflects, and will reinforce, the tendency in some quarters within South Africa to prioritise trade relations with Europe and `the global market' over and above South Africa's strategic/development relations with the rest of Southern Africa. While Europe is the focus of some 40% of South Africa's exports, these are overwhelmingly in the traditional commodity fields - precious stones and minerals. South Africa's rapidly expanding trade with Africa, and more specifically Southern Africa, although a smaller proportion at about 32%, and into much smaller markets, consists mainly of manufactured consumer and capital goods and processed food and chemical products.

Markets in Europe are undoubtedly important but so - for different reasons - are South Africa's trade, and industrial development relations with its immediate neighbours. Trade relations with Europe cannot be restructured in a manner that will actively prejudice South African industrial development - directly and through its economic relations with its neighbours. A free trade agreement between Europe and South Africa could pre-empt, and will certainly complicate longstanding and essential plans for the creation of an effective and stable regional economic grouping in Southern Africa. The European Commission is exerting considerable direct and indirect pressures upon South Africa not to question the `carefully negotiated, joint European mandate,' and to expedite the process. Yet such pressures militate against the kind of careful scrutiny and debate required within South Africa and between SA and its SADC partners, to respond to this new EU strategy.

Development analysts in Europe are pointing out that this proposed EU-SA FTA is of significance not only to South and Southern Africa but to all the ACP countries and other least developed countries throughout the world. The projected EU-SA FTA is something of a `pilot project,' a precursor of what will be proposed as an alternative to Lome. EC policy analysts are already arguing that the preferential and `discriminatory' provisions within the Lome Convention are bound to come into conflict with the terms of the new multilateral world trade system and WTO rules. This position can be queried on the basis of the `special and differential' concession towards the particular needs of LDCs inserted into the Uruguay agreement - although the full import of this fragile gesture needs to be spelled out and given substance.

At this stage, however, it is being argued that Lome as an encompassing multilateral preferential arrangement between the EU and the ACP, cannot be renewed at the end of its current phase at the end of the century. One suggestion is that more focused and variable regional agreements should replace the current Lome system. On the face of it, there could be some merit in such an approach. However, if the EU were motivated to defend Lome in something of its broader current form, it could argue for a WTO waiver on the basis of the concession towards the development needs of LDCs incorporated into the WTO. What is, however, now emerging in the EU is a dangerous combination of neoliberalism and New Realism in its global strategies. In a multilateral free trade world dominated by neo-mercantilist struggles between giant economic blocks, a new drive is underway to divide up the rest of the world into free trade adjuncts to, or extensions of the dominant blocks. The competition between the EU and NAFTA to `co-opt' the South American economic grouping, MERCOSUR, illustrates this. Similar struggles are beginning in relation to the Asian Pacific Economic Community (APEC).

The European Commission's assessment of the advantages the FTA offers the EU concludes that "[t]he further opening up of the South African market in the context of such an agreement will create competitive advantages for EU exporters compared to exporters from the USA, Japan and other suppliers to South Africa." The danger for South Africa is that Europe's plans to steal a march on the US and Japan through a bilateral free trade agreement with South Africa will, under current WTO rules, almost inevitably have to be extended to them as well. This would be to the prejudice of the EU's plans, but it could be very much more serious for South - and Southern - Africa.

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BOX:
THE EU'S PROPOSAL
- - - - - - - - - - - - - - - - - -

Agricultural products

EU
- eliminate duties on 55% of imports from SA
- in three phases over ten years; starting with 25% in the first year, 5% over next three years, 25% over 10 years;

SA
- eliminate duties on 95% of imports from EU
- in two phases over ten years; starting with 50% in the first year, 45% over the remainder of the ten years.

- - - - - - - - - - - - - - - - - -

Non-agricultural products

EU
- eliminate duties on 97% of imports from SA
- in two phases over three years, starting with 93% in the first year;

SA
- eliminate duties on 88% of imports from EU,
- starting with 53% in the first year, 15% in the next three years, 20% up to 12 years.

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