Minister Rob Davies on regional integration, South-South cooperation and South Africa’s new industrial policy.

Rob Davies, South Africa’s Minister for trade and Industry, granted the following interview to Walter Sauer from the Southern African Documentation and Co-operation Centre (SADOCC) in Vienna, Austria, on Dec 7th, 2009. An abridged version (translated into Austrian German) was published in INDABA, the SADOCC magazine, no. 64 (Dec 2009).

SAUER: Minister, while the European Union continues to be South Africa’s biggest single trading partner, bilateral relations in the field of trade policy seem to be uneasy. Currently, there is disagreement on the so-called Economic Partnership Agreements (EPAs) proposed by the EU. Some countries in Southern Africa have already signed at least interim EPAs, others – like South Africa – have not. Why?

DAVIES: Well, the situation with the EPAs is that some members of the SADC EPA group have signed the interim EPA and three of us have not – that’s South Africa, Angola and also Namibia. And the reasons that we havn’t signed are that we consider that there are a number of clauses in the interim EPAs that continue to impede on our necessary developmental policy space. We managed to sort out a few of them when we met earlier in the year at Swakopmund, first of all Baronesse Ashton came to Southern Africa, we met her a couple of times, and we agreed on another negotiation session, and we sorted our a number of them. But there is a number of matters which are still outstanding, and these are going to have to be resolved favourably to create the conditions for the three of us to want to sign.

SAUER: Can you give an example?

DAVIES: One of the most important ones of these is that there is a provision in the agreement which says that any country or group of countries that you negotiate with and that has more than 1% of world trade – if you give them anything better that you give to the European Union, then you have to give the same to the EU. And the argument for that is that this is because the EU is offering duty-free, quota-free access. But it is not offering this to South Africa. So they say South Africa would just have to consult. But other members of the Southern African Customs Union would have to give the same to the EU while we would just have to consult. The problem is that we are all in the same customs union, so if one has to do one thing and somebody else has to do something else, we have an inconsistency, an incoherence in the customs union. I have been saying to the European Union that this would happen under very rare occasions. It would most likely be in the case of some subsidised agricultural products where we are prepared to give some third parties something better, and if we did this we would have to consult while Swaziland for example would have to implement. The likely cases would be very minor commercial interests of the European Union, but we are saying that by insisting on keeping such an arrangement in place it means that even such a minor commercial interest is more important than the supposed interest of maintaining and deepening regional integration. So we say that this must be resolved, and there is a couple of other issues that need to be resolved as well.
In the meantime – because some have signed and others have not signed – we have to do all kinds of technical work on rules of origin and on the tariff arrangements so that they don’t create inconsistencies in SACU. But I have to say that the EPA process has not been a very happy process. It has been a little bit better under the regime of Baroness Ashton, and we will wait to see what happens with the new Commissioner. But unfortunately during the negotiations there was a process where the previous Commissioner just forced these things through, take it or leave it, and if you leave it then you will face STET high tariffs on your exports, and this was not inconsiderable in the case of SACU countries, countries who were exporting beef. Under the previous Cotonou arrangement they had duty-free access but for a quota. If they initialled or if they had signed they would give them no quota, they could sell whatever they could produce duty-free. But if they didn’t the next arrangement they would fit into was the General System of Preferences and they would have to pay 90% duty, nine zero – so it was a very heavy gun held at the head of some of these countries. All along, I referred to a package of measures which were to try to impede the policy space of our countries so, three of us were not able to sign on that basis.
And the one which is very vulnerable at the moment is Namibia. Now, I think it is very important that Namibia is not paid to loose the preferences which it has got from initialling, by not signing. We want to continue with the process of negotiations and continue to resolve the outstanding issues and create the conditions under which Namibian preferences in access to Europe could be secured. So it would be an unfriendly anti-developmental act if anybody would block Namibian access to the EU. Hopefully that would not happen.

SAUER: But does that mean that SACU, the oldest regional organisation in Southern Africa, is practically broken already?

DAVIES: Well, not entirely, but unfortunately there are differences in terms of our relationships, in terms of the commitments that the different members of SACU have agreed to. And at least there is some understanding that we need to sort out the tariff and the rules of origin issues and to try to have a common basis on that. But potentially the damage is that we will have inconsistencies in terms of the commitments. For example, I have already described this one: because if some members of SACU are obliged to give to the European Union anything we may negotiate with China or anybody else out there and some of us are not, then that’s going to be some potential inconsistencies in the future. We need to resolve these matters to keep the customs union going.
We have felt that the fundamental issue or problem was that the pressure from the EU has created this situation, I mean, as I said before, very significant interests were at stake for the other countries in case they didn’t sign. So, some have done so, but I don’t think anybody thought that the agreement was good. It was just that some were more vulnerable than others. I think that’s the reality.

SAUER: Had it not been more conducive from the beginning if the European Union had offered only one EPA to the Southern African Development Community as a whole and not split them into different groupings?

DAVIES: What happened was that there were all kinds of reasons why different SADC countries ended up in different negotiation configurations, but the reality is that SADC members are in four different negotiation configurations, each of them on a different tariff phasing-down process towards the European Union. In the medium term there will be a coherence problem in SADC, but at the moment we have a free trade area arrangement within SADC and it is not a problem. It is not an absolute desaster but it is an element of incoherence within SADC. By the way, in the other configurations of SADC members some have signed and some have not, so the same story as within SACU is within the Eastern and Southern Africa group which is coordinated by COMESA.

SAUER: What is the significance of South Africa’s Trade and Development Cooperation Agreement concluded in the 1990s with the European Union?

DAVIES: You see, the situation is that South Africa has an alternative with the TDCA, and so does Angola. Angola is a Least Developed Country so it has Everything But Arms. We two have alternatives. In the end of the day we will have to look and see what does the EPA look like once it is finally negotiated through, how will it look like in comparison with the TDCA, is it worthwhile moving into the EPA. Those will be the kind of consideration we need to make as South Africa. Angola will have to do the same regarding their EBA. But Namibia is the vulnerable one because there is no more Cotonou nor is there any other arrangement. They have made the point, and I think they made a very good point, how is it that Angola is a LDC and Namibia is not? These are just calculations but a huge number of people in Namibia live in dire poverty and the problem is that they really would need an alternative.

SAUER: Some time ago you spoke of China or India as suitable trading alternatives to South Africa. In the European Union of course this was a bit controversial…

DAVIES: Well, not just China, but China and other emerging economies. The reality is that the centre of gravity of the world economy is changing, and the dynamic forces of the world economy now are a number of so-called emerging economies. And the reality is that everybody will have to position themselves by taking these into account. Obviously, we want to diversify trade relations, it is not that the EU relationship is not important, it is and continues to be and we make it a productive relationship. But at the same time trade diversification to the countries like India, Brasil, China and those kind of countries is a very important objective for any country or group of countries. What we have with a number of those economies, we have very good political relations also based on the fact that we understand that we are developing countries, we understand what it needs to promote industrialisation in developing countries, and there is much less baggage of the sort that we are facing in the EPA negotiations, much less baggage, and the possibilities of negotiating trade agreements or trade and development agreements, with different kinds of context, with those countries are very good.
We are involved in discussions focussing on India, but also in terms of SACU-India, we had a good SACU-India meeting at the WTO ministerial, but we are also involved in IBSA – India-Brasil-South Africa –, we have that relationship which is a very important relationship for us. There are important learning from Brasil and India for us, about industrial policy, about small and medium business development and things like that. And there is enormous potentiality from this relationship for us. Now, all these countries are now becoming very active forces in Africa, and I think it gives African countries a choice, no longer that it is just the old colonial masters to deal with – now there are choices. This is beneficial for development.

SAUER: The global financial and economic crisis has severely hit South Africa. Which lessons do you draw from that situation?

DAVIES: What we see in South Africa is that we look on the crisis as something which is propelling us to make a kind of structural change in our economy which we needed to make anyway. Before the crisis we had the longest period of uninterrupted growth any times since the 2nd World War, we had growth over 5% in a number of years, but during all of this time unemployment never got less than 21%. So this is trust that the issue is not just growth on the same path, we actually need to make structural changes.
Now with the crisis, it is actually damaging our industrial capacity, we have quite a significant number of vulnerabilities in a number of industrial sectors which have been impacted on us quite seriously. Our industrial sector has been one of the sectors most badly damaged in the crisis. We didn’t have a financial crisis as such, a systemic crisis, because in South Africa we had elements of exchange control, we have quite good credit laws which saved us from that, but the real economy is affected quite severely. Unemployment – we have lost between ¾ and 1 million jobs because of the crisis, so we need to make structural changes. We are going to have a much more active industrial policy. Our main countercyclical measure has been our infrastructural programme of which the 2010 World Cup is just a small part, the bigger part is energy, ports, rail, infrastructure – things like that, our industrial policy is going to emphasize that. We need to promote local industrial development opportunities to feed into that programme, that is going to be one major pillar. Another one is that we want to make big leaps into a green economy – solar water heaters, solar panels, biogas, wind power – all these things are going to be opportunities for industrial development.
And then we also want to do agro-industries, out of the food crisis. For the first time in many years we became a net food importing country, and it was mostly in processed agricultural produce, we had still surplus in unprocessed items, but a deficit in value-added. So when we launch an industrial action plan these are going to be three elements, but we also have to work on the established industries, motor industry, clothing and textile, some service sectors etc. But I think, all in all we want to make some structural shifts to create different kinds of industries, more labour-absorbing industries, also service sectors and agriculture, we got to make these changes and we got to make them now because even if there is a recovery now we cannot just go back. We are likely to be on a low-growth projection, and export trade to the developed world is not going to crack it for us. We actually need to build up our regional markets as well as to emphasize that trade diversification is necessary.

SAUER: South Africa has just signed an investment protection agreement with Zimbabwe. How do you see the situation in that country?

DAVIES: There has been South African investment all through the time of economic downswing. But now that they are beginning to recover I think there is a very big change in the course of this year by the installation of the Inclusive Government and the Global Political Agreement. There has been quite a bit of recovery and I think there is quite a lot of interest in investing in Zimbabwe. By supporting the economic recovery we will be contributing towards the advancement of the Global Political Agreement. We don’t think we should be holding back until all political demands are met before we come in, so we came in with the Investment Protection Agreement. This will provide certainty for South African investors, and there are quite a number of companies who came along with me to sign. This will be a step along the road. We will also be signing a Memorandum of Understanding on economic cooperation with Zimbabwe which will be about promoting investment exchange – so we think it’s going to become better. And we need it to become better because we have large numbers of Zimbabweans in South Africa. I am constituency MP for the Worcester Area in the Western Cape, and I read there was an indicent there, so I went up, spoke to those people who were there. They all were brought in by labour brokers in large numbers, you know, farmers there were preferring them to local people creating all kinds of tensions and things like that. While we need to protect them against abuses which they certainly suffered, the same time many of them tell me that when conditions are better in Zimbabwe they would like to go back! And we want to help create those conditions.

SAUER: Finally, one word on economic relations between South Africa and Austria?

DAVIES: Well, I was here a few years ago with a trade delegation, a business delegation, into Austria. Austria has an important role to play even as a gateway to Central Europe. Austrian companies are dealing with those countries. We also go and deal with those countries directly, we have been emphasizing the new members of the European Union for one obvious reason because we have a Free Trade Agreement – through the TDCA – with the EU, and as they became members of the EU, so the TDCA applied to them, but we don’t have much of a historical relationship. So I think Austria is in quite a critical position for that trade as well as having an important role in its own right. There is a growing but still below potential trade with Austria. So we think there is quite a lot more that can be done. Austrian companies are involved in South Africa, and we have quite a number of South African businesses who have invested in Austria, South African Breweries for example or Mondi Paper. There are more Austrian companies that have invested in South Africa but they are of much smaller scale, and the value invested is much stronger the other way. There are possibilities for Austrian companies to become investors in South Africa in some of the areas I mentioned earlier of our industrial policy that should provide opportunities for medium-size companies. (SADOCC)