Practical Challenges Await Region as SADC Trade Protocol
Comes into Force
31 January 2000
By Munetsi Madakufamba
After successfully putting pen to paper with 10 of the 11 signatories to the Southern African Development Community (SADC) Trade Protocol ratifying the four-year negotiated pact, some real challenges now await the 14-member region as it moves to formally launch an ambitious free trade programme later this year.
The trade protocol, signed in 1996 by 11 of SADC's then 12 members (Angola did not sign while the Democratic Republic of Congo and Seychelles were not yet members), technically came into force on 25 January 2000.
After four years of incessant criticism for allegedly dragging its feet, South Africa finally ratified the trade protocol on Christmas eve last year. With only eight members needed to achieve a two-thirds majority, Swaziland's endorsement, also in December, and Mozambique's in the new year was mere icing on the cake as this brought the number to 10 out of 11. Zambia is the only signatory that has shown no interest thus far.
Although the protocol came into force on 25 January (SADC requires 30 days to formally acknowledge instruments of ratification), the launch of the Free Trade Area has been put on hold pending further negotiations on some sticky issues such as rules of origin.
"The implementation of the SADC Trade Protocol will be launched in the second quarter of 2000 starting off with products that are categorized for immediate liberalisation and those under gradual tariff reduction," announced the SADC Acting Executive Secretary, Prega Ramsamy, mid January.
The protocol underwent a meticulous negotiating process involving the Trade Negotiating Forum (TNF), SADC's technical arm spearheading the negotiations, which came up with a 97-chapter handbook of tariff reduction schedules.
Although the handbook has laid down rules of origin, it is generally felt that separate, product-specific rules are needed to tighten any loopholes. The question of how much local content export products should have has remained a sticky point, especially as it relates to textiles and clothing.
Though determined to remove trade barriers to allow free movement of goods throughout the region, some member states have warned of the "China syndrome".
"Such rules (of origin) are designed to avoid the 'China syndrome' whereby very cheap shoes are imported into an African country from China and then re-exported to South Africa or the EU (European Union) with virtually no value added locally," said one economic commentator.
Pessimists argue that the rules of origin laid down in the 97-chapter tariff handbook will not stop countries from "importing to re-export". Hence the call for additional, product-specific rules of origin.
Under the trade protocol, a product is required to undergo substantial transformation with a specified amount of local content before it can be exported. This rule is important for various reasons including protecting domestic industries or preventing countries that have easier access to overseas markets from engaging in trans-shipment of foreign goods.
The product specific rules of origin are also seen as necessary to foster greater utilisation of regional resources and upgrading the level of manufacturing processes in the region through adoption of new technology and investment in the manufacturing sector. The SADC Secretariat also sees stringent rules of origin as important to promote intra-regional trade currently quoted at about 30 percent, but expected to rise significantly as trade barriers are removed.
Further, countries such as South Africa, which are facing mounting pressure from local stakeholders to "protect national interests", fear porous borders that have made it difficult to control smuggling thus far, would result in an influx of sub-standard products.
"South African business warns that rules-of-origin requirements are unlikely to be met because of the ease with which smugglers are able to evade customs procedures throughout southern Africa," says one regional analyst.
Realising the weaknesses that member countries have at their borders, the TNF has recommended the establishment of SADC Sub-committees on Customs Co-operation and Trade Facilitation. In addition, common customs and trade documentation and procedures are being finalised for use in member states along with the need for improved procedures.
But others say South Africa is blowing the problem out of proportion to justify its use of non-tariff barriers in the form of standards to keep out products from neighbouring countries. South Africa is accused of setting unrealistic standards, a claim the trade department says is necessary if the country is to "become a global player".
However, tariff reduction alone cannot result in significant intra-regional trade, a point conceded by all including the TNF which say that removal of non-tariff barriers is needed to complement the former.
"In fact non-tariff barriers are more serious obstacles to trade than tariffs because they are not transparent and therefore the business community cannot factor them into their business plans," writes Fudzai Pamacheche, an economist at the SADC Secretariat in Gaborone, Botswana.
Non-tariff barriers come in various forms, ranging from quantitative restrictions on imports and exports such as licences and permits; standards, quality assurance and metrology; to customs documentation and related procedures, all of which often add substantial costs to cross-border trade.
"The elimination of non-tariff barriers will add impetus to the regional integration process, as the cost of trade transactions will be reduced to the advantage of importers and exporters as well as the final consumers," adds Pamacheche.
But the controversy surrounding product specific rules of origin was not totally unexpected. A list of "sensitive products" was drawn up by the TNF, with a general agreement that such goods were not going to be excluded from liberalisation. Instead, the TNF allowed longer time for tariff reduction and made provision for "certain policies to be put in place before liberalisation."
The tariff handbook has a comprehensive reduction schedule. "The tariff schedules are such that under their joint offer, the SACU (Southern African Customs Union) countries will liberalise their tariffs faster than the rest of the member states; while special differential tariff reduction will be applied for the BNLS (Botswana, Namibia, Lesotho and Swaziland) and non-SACU countries in consideration of their relative underdevelopment," says Ramsamy.
He adds that it has been agreed that by year 2008, 85 percent of the goods entering the non-SACU market will be at zero tariffs. On the other hand, 97 percent or more of the exports entering the SACU market will be at zero tariffs. This would be in line with World Trade Organisation (WTO) rules, which require that all trade be substantially liberalised in a free trade area. It is expected that all trade would be fully liberalised by 2012.
But as the tariffs are removed, another challenge of asymmetry is likely to arise given the uneven level of development in SADC. Weaker economies are likely to experience acute trade deficits as imports exceed exports due to fragile manufacturing bases.
This fear has prompted some member states to call for the establishment of an "equalisation fund" to cushion weaker economies against the adverse effects of a Free Trade Area.
A related challenge is the supply side of trade - it is not enough to open up trade without a corresponding increase in the production of the goods needed for cross-border trade. This calls for a regional industrialisation policy strategy that is capable of underpinning the capacities of industry to produce tradable goods for the regional market. Such a policy strategy is even more crucial for member states with an underdeveloped manufacturing sector.
Given the diversity of challenges facing SADC as it moves to implement the much awaited Free Trade Area, the ratification of the Trade Protocol signifies nothing more than a mere expression of intent. Much more needs to be done at this crucial implementation stage. (SARDC)