News and Analysis • Volume 11 • Number 3 • May 2007

Lexus vs Toyota: The Southern Africa-EU Trade Agreement

Do More

See also

The European Union and its former colonies in Africa, the Caribbean and the Pacific are nearing the conclusion of new potentially far-reaching trading arrangements. For Africa, reaching the right outcome is vital.

The Economic Partnership Agreements (EPAs) between the EU and six regional blocks of the African, Caribbean and Pacific (ACP) group have been under negotiation for five years. Four of the regions are on the African continent. If the parties fail to sign an EPA by the impending end-2007 deadline, the current preferential access regime, known as the Cotonou Partnership Agreement, will be vulnerable to substantial challenge generating significant consequences for Africa.

The EU’s current EPA agenda is a Lexus: it includes everything comprising a modern reciprocal trade negotiation: goods, services, intellectual property rights, customs regimes, government procurement, investment regulations and competition policy. Its breadth is a significant source of tension, particularly given that chunks of it (the ‘Singapore issues’) were rejected by the Africa group in the WTO. Another major challenge in the negotiations is the future of the EU’s development assistance package for the ACP (EDF-10) and the extent to which it will be linked with EPA outcomes.

Africa and EPAs

Unlike most civil society activists, I am in favour of a broad liberalisation agenda, under certain conditions. The economics, rooted in well-known African development challenges, point convincingly to this. These fall roughly into two categories: supply-side constraints and trade constraints.

The former consists of a host of infrastructure needs: physical, institutional, financial and technological. Solving them will take time, direct investment (especially foreign), appropriate regulations and implementation thereof, as well as money. The same logic applies to the litany of constraints traders encounter in doing business on, with, or from the continent. The two agendas are intimately connected and need to be tackled comprehensively. The EU could play a stronger role in addressing this agenda through greater direct investment, more focused and responsive development assistance, as well as market access guarantees.

Market access is guaranteed for least-developed countries (LDCs) through the EU’s ‘Everything but Arms’ (EBA) preference scheme, albeit with restrictive rules of origin. The concerns of non-LDC ACP states, with the exception of South Africa, appear to have been largely accommodated through the Commission’s recent offer to extend EBA-like access to them conditioned on concluding a WTO-compatible economic partnership agreement.1

African import liberalisation must match this offer. Europe produces a host of productivityenhancing commodities and consumer goods that Africa requires; to impose duties on these products does not make economic sense. Yet, any tariff liberalisation package must be sensitive to fragile tariff-dependent government revenues and the need to shield African agricultural producers from subsidised EU products. There may also be a case for maintaining tariffs to develop domestic industries,2 but these caveats do not undermine the broader liberalising logic.

Beyond historical relationships and the ‘feel good’ factor, can a business case be made for significantly increasing European foreign direct investment (FDI) into the continent, beyond resource extraction? Such a case hinges on significant regulatory upgrading and economic liberalisation in African states. Unfortunately, there is no guarantee that FDI will flow if these conditions are met; hence they are best thought of as necessary, but not sufficient, preconditions.

So, the broad EPA agenda is appropriately framed. But the details – especially regarding the regulatory issues – are important; the regulatory agenda should not intrude unduly into African states’ policy space. The key question is: what does ‘unduly’ mean in different contexts? Clearly, the agenda must be tailored to specific political and economic peculiarities.

Regulatory issues must be adapted to African states’ capacity to negotiate EPAs and, more importantly, implement the agreements; this should determine the overall scope of negotiations, commitments and sequencing. African negotiators’ overarching goal should be to establish an implementable and modernising regulatory agenda that not only extends and locks in reforms, but is also supported by adequate resources or an ‘aid for trade’ agenda.

Metaphorically-speaking, African EPAs should be Toyotas rather than Lexuses. And therein lies the rub(ber): the EU seems to insist on a Lexus in the face of widespread African opposition, whilst apparently conditioning aid for trade on Africans ‘purchasing’ the Lexus. This is a recipe for entrenching drip-feed dependence. And the EU holds almost all the negotiating cards: market power (access to the common market), financial power (development assistance) and negotiating muscle.

For EPAs to be truly development-friendly, EU negotiators should listen to their African counterparts and agree to properly tailor and sequence the broad agenda to African capacities. That means concluding the core goods market access deal first, before the end of 2007. Then the complex regulatory agenda should be tackled piecemeal, possibly via revision clauses, in tandem with a targeted resource package. In principle, the European Commission’s recent concession to non-LDC ACP states makes this outcome substantially easier (see page 18).

The Southern Africa EPA

So how do the EPA negotiations between the EU and the Southern African Development Community (SADC) measure up? Unfortunately, not very well, and despite the looming deadline, official negotiations have yet to begin. Why?

Southern and Eastern Africa is divided into two EPA negotiations groups not corresponding to Regional Economic Community (REC) boundaries, complicated by the fact that several countries in the region are members of two or more of the ‘available’ RECs. The SADC EPA group currently consists of eight countries: those of the Southern African Customs Union (SACU) – Botswana, Lesotho, Namibia, Swaziland and South Africa3 – plus Mozambique, Angola and Tanzania. A number of problems arise from this configuration.

First, South Africa has its own trade arrangement with the EU, called the Trade, Development and Co-operation Agreement (TDCA). This de jure excludes its customs union partners, although de facto they are subject to it since most of their trade transits South Africa. This peculiar circumstance arose because the EU, in its mandate to negotiate the TDCA with South Africa, excluded South Africa’s customs union partners. It apparently did so because Botswana, Lesotho, Namibia and Swaziland are full ACP members whereas South Africa, owing to its apartheid past and comparably higher level of development, is not. Hence, the EU treats South Africa as a powerful regional hub on par with EU member states.4

Second, as a customs union SACU shares an external tariff, and must thus negotiate all external goods arrangements as a group, i.e. any tariff reduction offer must be made jointly. Obviously, the TDCA predicament undermines this legal requirement and drives a wedge through the heart of the customs union. It also raises the troubling political issue of why South Africa – a new country on the global stage and one deserving every consideration given its apartheid past, major development challenges and central role in the region – is being singled out for differential treatment.

Furthermore, as the other SACU members were excluded from the Trade Development and Co-operation Agreement negotiations, they understandably want to place their own defensive concerns with respect to goods imports on the table. So far, however, the EU has not been willing to countenance tariff increases in EPAs.

Given the potential for trade diversion, formulating tariff offers and the associated rules of origin is complex. Logically, SACU sought to remedy this problem by requesting the EU to grant South Africa the same market access conditions as those enjoyed by Botswana, Lesotho, Namibia and Swaziland. It argued that this would build SACU as a regional integration arrangement, simultaneously correcting an historic EU blunder and meeting one of the EU’s key stated EPA goals. Sadly, that was formally discarded by the EU Council and recently confirmed in the 4 April market access announcement.5 Yet, if the EU’s logic is strictly applied, European countries should be accorded differential access to the SACU market based on their level of development (less for Spain, more for Lithuania, for instance?). Notwithstanding the absurdity of their position, EU member states are unmoved.

Besides, SACU contains a revenue-sharing component whereby South Africa effectively massively subsidises its partners (Botswana being the least dependent), and the revenue pool is based on tariff collections. This gives the weaker SACU partners an incentive to avoid tariff reductions. Together with South Africa’s newfound reluctance to undergo tariff liberalisation, the result is a strong defensive constituency.6

Worse, Mozambique, Angola and Tanzania are not SACU members and their tariff regimes differ substantially from each other, never mind SACU. Furthermore, as LDCs they are not obliged to reciprocate unless they wish to conclude an EPA. In addition, Tanzania belongs to a different customs union: the East African Community (EAC).7 Here, the situation is reminiscent of Mercosur where members have a plethora of their own trade deals independent of their customs union partners. One can only wonder about EAC’s future.

Yet SADC (the original one with 14 members) has a longstanding, if inconclusive, process in place to conclude a services liberalisation package, and through various protocols, there is a substantial degree of regulatory harmonisation on paper. Some SADC EPA members – notably South Africa – would prefer to harmonise regulations within the Southern African Customs Union before doing so with respect to an external partner. But some observers – myself included – worry that according primacy to regional regulatory harmonisation would lock the region into South Africa’s high-cost growth model. Others have concluded that South Africa is exploiting the impasse to its advantage. South African negotiators argue that the EU’s desire to first conclude a regulatory package with the country will entrench regional divisions. Meanwhile, the EU’s suggestion that development assistance be linked to adoption of the regulatory agenda is a further complication. 8 In short, suspicions abound and the SADC EPA group will struggle to negotiate regulatory issues with the EU unless the latter is prepared to sign separate deals with each member state. Yet the regulatory agenda should be pursued – albeit cautiously in some areas – with a view to deepening and locking in domestic and regional reforms. A commitment to negotiate may also solve the market access puzzle. Furthermore, given the parlous state of the Doha Round and hence the WTO’s questionable future as an instrument of rule-making, I am also sceptical of the notion that these issues should only be negotiated in the WTO. First prize would be for regional governments’ to unilaterally reform and upgrade their regulations, but given weak capacities and a poor track-record, this is unlikely. Thus EPAs are a good second-best alternative, although the details will require close monitoring.9

So how will this conclude? Most likely Mozambique, Angola and Tanzania will part company from SACU, and Angola may not sign an EPA at all. And while there has been longstanding speculation that Mozambique will join SACU, that does not seem imminent. Tanzania logically should join its EAC partners in the Eastern and Southern Africa EPA group. That would leave SACU, and South Africa, to slug it out with a truculent EU.

Peter Draper is Trade Research Fellow and Project Head at the South African Institute of International Affairs in Johannesburg.

ENDNOTES

1 Conditionality will extend to services and other aspects of the regulatory agenda. Transitional arrangements tariff rate quota will apply to sugar and rice.

2 While I am not convinced of this, the notion retains strong political support in Africa.

3 Until recently, S.A. was an observer.

4 It appears that in the EU 133 committee, S.A. is regarded as a competive threat on par with Brazil, Russia, India and China. This does not reflect economic reality.

5 According to a senior EC official involved in the March 2007 Gaberone meeting, the EU may be prepared to consider according South Africa EBA access provided it signs up to the regulatory agenda. South African negotiators regard this as an inappropriate exchange of concessions.

6 Draper, P. and Sally, R. Business Day, 8 February, 2006. ‘S.A. Needs to Get the Basics Right’.

7 The other founder members are Kenya and Uganda. Rwanda and Burundi acceded in 2006.

8 Discussions with officials involved in the March 2007 Gaberone meeting. Director- General of the European Commission’s ACP relations division, Stefano Manservesi, draws a distinction between ‘conditionality’ and a ‘factual’ linkage between negotiated outcomes and development support, arguing that financial assistance can only be allocated once the trade package is in place.

9 Some argue that if the EU’s primary concern is African development, it should not link regulatory reforms to market access for its companies. I think market access is a mutually beneficial objective.