Trade Negotiations Insights • Volume 8 • Number 6 • August 2009

The Future of the Southern African Customs Union

by Peter Draper and Nkululeko Khumalo

Discuss this articleShare your views with other visitors, and read what they have to say

Tensions over the future of the Southern African Customs Union (SACU) and trade relations with the EU are rising, as reflected in the plethora of recent media reports. Unfortunately they are so complex that they defy simple categorisation.

The most difficult problem concerns the future of revenue distribution within SACU. South Africa substantially subsidises the smaller members - particularly Lesotho and Swaziland - and the South African Treasury is uncomfortable with the subsidy’s extent, given competing domestic fiscal demands. Furthermore, South Africa’s new Department of International Relations and Cooperation may administer an aid budget in the future; should that happen, the SACU transfer is the most likely source of funds.

By virtue of their membership in SACU, the smaller member states (Botswana, Lesotho, Namibia, and Swaziland - BLNS) are entitled to a share of the customs revenue. South Africa has a historical obligation to support them owing to the economic polarisation their membership of SACU apparently causes and their historical cession of trade and industrial policy autonomy to South Africa. However, those states must realise that South Africa cannot indefinitely subsidise them at current levels.

Secondly, the member countries vary substantially in their trade and industrial policies. As noted, the BLNS have historically ignored these issues since they received revenue in exchange for ceding sovereignty to South Africa. That bargain changed under the 2002 SACU Agreement. The BLNS now have a say and are paying them greater attention. Accordingly Botswana, Lesotho, and Swaziland (BLS) recently signed the interim Economic Partnership Agreement (IEPA) with the EU. They are keen to diversify trade and investment away from overwhelming dependence on South Africa’s embrace. This ostensibly requires liberalising some import tariffs and opening up competition in domestic network services sectors (i.e., energy, transport, communications, finance).

South Africa is on a different path, favouring a sector-based industrial policy incorporating potential tariff increases, a renewed emphasis on state-owned enterprises in network services sectors, and a retention of policy space. These policies do not easily lend themselves to a binding liberalising agreement with the EU, nor to the BLNS’ economic diversification agenda.

This dichotomy is at the heart of the differences concerning trade negotiations with the EU. The EU desires more access to the South African market - clearly the major prize - and naturally exploits this divergence. South Africa, which already has a free trade agreement with the EU, feels no compulsion to conclude a new one. The BLNS are caught in-between. It is therefore not surprising to find major tensions in EPA negotiations.

This highlights the third divergence: foreign policy orientation. Central to this is an old African conundrum - how to relate to former colonial masters and the West. In SACU two countries are at the centre of this tussle: Botswana and South Africa. Tensions were sharpest under the Mbeki Administration, and centred primarily on policy toward Zimbabwe. In some South African government quarters Botswana is viewed as a Western, particularly British, client as evidenced in the strongly critical stance the Khama government has taken towards the Mugabe regime. This connects to a drive within some quarters of the governing tripartite alliance to reorient South Africa’s trade relations towards emerging developing countries, away from the West. Hence the totemic issue in the EPA negotiations is the ‘MFN clause’, which requires all parties to offer the same trade concessions they accord to major emerging markets (i.e., Brazil, India, and China) to all EPA signatories. Unfortunately, the EU’s insistence on this issue has aggravated matters.

So it is scarcely surprising that talk of dismantling SACU is in the air. But what are the implications? We start from the standpoint that it is easy to destroy, but difficult to create. SACU is deeply enmeshed in the five member states’ economic fabric. Do we truly understand how much South African investment there is in the smaller member states, or how much trade is tied up within SACU’s frontiers?

If the customs union was abandoned, what would replace it? Since all SACU members are also members of SADC, the SADC Free Trade Area would govern trade among the parties if SACU were to collapse. The SADC FTA came into force on January 2008 with an estimated 85 percent of all trade in goods having been liberalised, and the remaining tariff lines are expected to be phased out by 2012.

One problem with SADC is that it does not have strong enforcement mechanisms. Though the SADC Trade Protocol specifies a dispute settlement system modelled on the WTO, the chances of a country failing to implement the findings of a SADC dispute settlement body are high; hence the prospect of a ‘trade war’ cannot be discounted. However, if the SACU collapse provoked a country to raise tariffs in violation of its SADC FTA commitments, it would no longer be dealing with its SACU counterparts only but with other Members of SADC.

This change will be very difficult for SACU Members since they have liberalised so much under the SADC FTA. But if any SACU Member decided to disregard SADC and raise tariffs, its WTO commitments would then provide the upper limit or ceiling. Since most countries’ applied tariffs are often substantially lower than their bound rates, a current SACU country could legally raise import tariffs within the limits of the law if SACU dissolved.

From a trade perspective it would be extremely unwise for any BLNS Member to attempt to ‘punish’ South Africa by raising import tariffs since such a measure would be tantamount to self-destruction, given their reliance on South African imports. However, the revenue reductions resulting from SACU’s dismemberment would impel the BLNS to either raise tariffs on imports from South Africa (their main import source) and external trade partners, or drastically raise domestic taxes. The former would reinforce the potential for a regional trade war, and both would choke economic growth in the BLNS, thereby decreasing the very revenue it seeks to raise. And if South Africa pulled the plug on revenue transfers, the administrations in Lesotho, Namibia, and Swaziland would collapse overnight. That would propel thousands of poor people to join their Zimbabwean, Mozambican, and other African citizens to cross South Africa’s borders in search of economic opportunities. Given the xenophobic riots that gripped South Africa in 2008, that nightmare scenario is scarcely in anybody’s interests.

Consequently, this high stakes EPA poker game calls for cool heads. We don’t have a ready resolution at hand, but believe it should encompass at a minimum the following:

First, the obvious quid pro quo is for the BLNS to accept less revenue, possibly on more onerous terms, in exchange for South Africa affording them greater say over trade and industrial policy. The former may encompass ‘conditionalities’ in some form; the latter would require South Africa to recognise that the BLS have legitimate interests which, while perhaps divergent to the current South Afican policy thrust, could nonetheless be potentially accommodated within a consolidated SACU. The terms of that consolidation should be the core focus of discussions over the coming months and years.

Second, South Africa and Botswana need to engage in a top-level process to give guidance to the quid pro quo described above.

Finally, the EU would help matters immensely by dropping its insistence on the MFN clause in the IEPA negotiations. In our view the economics of this clause are not troubling, but its politics clearly are. South Africa, Angola and Namibia correctly argue such a clause would have the effect of limiting their policy space and is not in line with the provisions of the WTO governing free trade agreements. The EU has its own internal constraints, and to provide this ‘favour’ to SACU would invite other regions negotiating EPAs with the EU to request the same. Nonetheless, since the EU avers strongly that EPAs are supposed to promote regional integration, it should act on its own principles.

Authors

Peter Draper is the Trade Programme Head and Nkululeko Khumalo is a Senior Researcher at the South African Institute of International Affairs.