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"Future lies in a free trade area from Cape to Cairo"

Tralac Executive Director Trudi Hartzenberg shows the centre’s yearbook on regional integration. Tralac is conducting a study on the tripartite FTA. (Photo: Servaas van den Bosch/IPS)

Inter Press Service | 17 Sept 2010

"Future lies in a free trade area from Cape to Cairo"

By Servaas van den Bosch

CAPE TOWN, Sep 17, 2010 (IPS) — African governments’ ambitious plan for a tripartite free trade area (FTA), stretching from South Africa to Egypt, could be more realistic than getting existing ineffective regional customs unions on the continent to work.

The envisaged tripartite FTA, conceived by the region’s leaders in Kampala, Uganda, in 2008 and enthusiastically backed by the European Union (EU), was under discussion at the annual meeting of the Trade Law Centre for Southern Africa (Tralac) on Sep 16-17. The non-profit Tralac provides capacity- building support to governments and other entities.

The three parties would be the Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC).

The bloc would include 26 countries, 578 million consumers and a gross domestic product (GDP) of 853 billion dollars.

It would only be rivalled by China and India in terms of market size and be ranked 15th in the International Monetary Fund’s list of world economies by nominal GDP, somewhere between Mexico and South Korea.

"It would be very big and size matters in economic terms," says Sean Woolfrey, a Tralac researcher. "Economies of scale would make it easier to diversify, boost industrial development and offer a multitude of trade partners for intra-regional trade."

Currently the countries that would form part of the bloc survive mainly on exports of a very narrow range of raw commodities to the EU and China while being heavily reliant on the import of capital goods. Intra-regional trade, especially in Africa’s southern regional economic communities (RECs), is low.

"Intra-regional trade is still only 10 percent, the same as 2001," comments Woolfrey. "The RECs are not promoting this as much as we would want them to." A look at economic powerhouse South Africa’s regional imports, representing just six percent of its overall imports, seems to confirm this.

COMESA’s customs union, launched last year, is largely seen as a misnomer; SADC is experiencing serious delays moving from its FTA to a customs union.

"There are very important issues around the implementation of the SADC trade protocol and other protocols and there are no mechanisms to monitor these processes, nor sanctions for states that do not comply," Tralac executive director Trudi Hartzenberg argues.

At the summit of SADC heads of state in August 2010 the customs union, to have been launched this year, was put on the backburner. This was a positive move, finds Hartzenberg.

"Establishing a customs union at this stage would be premature. A lot of work remains to be done on non-tariff barriers, a draft services protocol and services liberalisation. This can be done in the SADC FTA. We do not need a customs union for that."

The growing aversion against SADC trade integration, especially from Pretoria, has seen the tripartite FTA emerge as a more realistic and attainable alternative for Africa, Hartzenberg points out.

That is not to say it will be easy. "The tripartite FTA has undoubtedly a lot to offer but it will not magically materialise," comments Woolfrey.

Stumbling blocks include existing non-tariff barriers, harmonisation of tariffs and standards, a lack of coherent strategies, little diversification and the position of the Southern African Customs Union.

A main obstacle is South Africa itself, with its complicated rules of origin. With the disappearance of tariff barriers, rules of origin are a way to protect products and industry sectors.

Countries use them to exclude third parties from preferential trade agreements. An example would be preventing a Chinese product, repackaged in South Africa, finding its way into the EU under South Africa and the EU’s Trade and Development Cooperation agreement (TDCA).

The more complex the rules, the easier it is to shield industries like clothing and textiles from competition. But some analysts argue that this would put an impediment on intra-regional trade, as envisaged in the tripartite FTA.

"Most countries in the tripartite area have a shallow industrial base and would benefit from simple rules," said trade advisor Mike Humphrey. "But because of South Africa’s diversified economy the rules of origin for the SADC FTA are very complicated, with different rules for each subcategory.

"This has resulted in the SADC trade protocol never actually resulting in more trade."

The sub-regionally hegemonic powers South Africa and Egypt, at opposite ends of the proposed tripartite area, are expected to cling on to the policy space that complicated rules of origin award them, with possibly paralysing effects on intra-regional trade.

"The rules of origin will be the hardest to agree on in the tripartite FTA," notes Humphrey.

Hartzenberg agrees: "Both Egypt and South Africa see rules of origin as a means of protecting their domestic markets. The tension South Africa and Egypt bring into this process is perhaps the most important complicating factor in the negotiations."

A trade-off where the remaining 24 countries open their markets to South Africa, for instance for government procurement, could be a way out of the predicament.

"One of the other ways to diffuse this tension is to get the private sector more involved," Hartzenberg informs IPS. "The private sector will have a very different perspective, not only in the sensitive sectors like clothing and textiles but also in other sectors which may see the benefit of more liberal rules of origin."

The tripartite FTA, scheduled for June 2011, will probably take longer to realise because countries are still embroiled in negotiating economic partnership agreements with the EU.

 source: IPS