DONALD MACKAY: How SA has shot itself in the foot with trade precedent

President Cyril Ramaphosa may, through neglect or design, be stifling the birth of the huge continental African market he needs to create for his ambitious manufacturing localisation policies at home to take root.

While SA does not have an internal market big enough to support manufacturing growth on the scale of China, Russia or the US, the rest of Africa represents a real opportunity. But despite the importance of the African Continental Free Trade Agreement (AfCFTA), there is a real possibility the agreement will never function. It may be signed off and “implemented”, but there is not much hope of it actually working, and a big part of the problem lies with SA. It may have lost its leadership of the project.

On January 1, SA published its tariff position for the rest of the African participants, but only implemented it for Egypt and São Tomé and Principe (two islands, one country). In this case, “implemented” means it is part of our Customs and Excise Act. Implemented in law, in other words. Anyone importing goods that qualify for a preferential duty from those two countries would be eligible for the lower duty.

Outside the Southern African Development Community (Sadc),  Egypt is the third-largest exporter to SA in the AfCFTA region and the fourth-largest importer of our goods, so Egypt matters and the treatment we accord it will be closely monitored by other negotiating states.

If we look at the tariff code for the largest textile trade out of Egypt (5603.11.90), our imports have increased from R81m in the first quarter of 2020 to R135m in the first quarter of 2021. The normal duty on this textile is 10% and it has attracted an 8% duty out of Egypt since the agreement was implemented on January 1. The duty saving for the first six months of 2021 is thus R2.7m. Or is it? And how long will this preference last?

This same tariff code forms part of the rebate of duty created recently by the International Trade Administration Commission of SA (Itac) for the manufacture of clothing — as long as the clothing you make with this textile is not exported. Itac is the government body that decides how much duty is paid on products imported into the Southern African Customs Union (Sacu); other Sacu states (Eswatini, Botswana, Lesotho and Namibia) have to pay the duty if they wish to export to SA, causing a catastrophic failure of some of their clothing factories. Those that survive do so by cutting their labour costs to compensate for the duty disadvantage they experience. How will the rest of Africa view this example in our negotiations with them?

I have no idea why we implemented our preferences on January 1 when no-one else did. Aside from promising to do so at the president’s investment conference in September 2020, there would appear to be no logical reason. By implementing them into law, as opposed to providing our offer and keeping it as an offer until we have agreement, we have lost an enormous amount of leverage in keeping the negotiations moving forward.

Do not be fooled by the bonhomie of the politicians from the various African states. The big prize for every other country in Africa is access to the SA market, the most industrialised country on the continent. Once SA solidified its duty rates for imports, it gave other countries a reason to slow down and change their offers.

How will we deal with other African countries that want similar access to that given to Egypt and São Tomé? Will we tell them they first need to implement their concessions into law before we add them to the list of beneficiaries, when we didn’t insist on that for these two countries?

I think we have four options, none of which is particularly appealing. We could give all other African states the same duty preferences as Egypt and São Tomé, but then we are out of the negotiations. After all, what would be left to negotiate if our positions are set in law for the continent? If we disappear from the negotiations, I can’t see what would hold the rest of the states together, so I believe that option kills the agreement. 

We could try implementing a set of bilateral agreements with each state or set of states. If we exclude Sadc, Egypt and São Tomé, this will leave us with up to 34 different bilateral agreements. If all the other countries adopt a similar stance, it would result in more than 900 permutations of the agreement across the continent. This is clearly a ludicrous situation, leaving the agreement stillborn.

We could keep fumbling along, periodically putting out pointless platitudes to the media and see where it all leads. “Trading under [the AfCFTA kicked off on 1 January [2021]. The coming months will likely witness a convergence of fruitful outcomes of multiple moving parts,” says African Renewal. Or, from trade, industry & competition minister Ebrahim Patel: “AfCFTA will help manufacturers in SA expand into new markets available in West, Central and East Africa.”

This is the religious opium of the “US of Africa”, being flogged to the masses. It feels good, it sounds good, but how long can you live on words alone? The agreement could get implemented (in the normal English sense of the word) but remain in a vegetative state for a long time. This is the path we are now on, and it’s as bad as the 900 variations of a bilateral agreement.

How does Africa pick itself up from this? It will be decades before anyone has the courage to unplug the patient and start again. We may be stuck with a zombie agreement, leaving the continent in a worse state than it is in now. We could reverse the implementation of the AfCFTA preferences in our customs act, but this would require a serious pair of kahunas. It would be embarrassing, but I think it’s the only workable option. Notice would have to be given to importers that have ordered goods thinking they had a preference when they placed their orders. The longer this goes on, the bigger the problem becomes. So we need to act quickly.

The president will need to have an open, honest (and awkward) conversation with business. Politicians will be embarrassed, and aspirant exporters will be angry, but at least the process can move forward. And a fickle, easily directed public will soon find other shiny outrages to fixate on.

Growth through free (-er) trade is the core principle of any trade agreement, but there is little indication that any of the African states are truly committed to this principle. SA can change that, but we have to be prepared to eat a large portion of humble pie to keep the dream of a thriving African continental market alive.

• MacKay is founder and director at XA International Trade Advisors.