Posted: February 15, 2017
Contribution to SONA Debate
|Mr President, in the SONA you referred to continued uncertainty in the global economy. Nowhere is that more evident than in the arena of international trade. Not only does global trade growth continue to underperform even the insipid levels of global GDP growth, but a tsunami has struck the dominant paradigm that has shaped international trade negotiations over the past quarter century. In my contribution to this debate, I want to suggest what this might mean in terms of re-aligning our trade policy to the objectives of radical economic transformation.
There is by now a significant body of writing from the school of what are called heterodox economists that has established the point that all countries that have become industrialized, without exception, have passed through a phase where they have nurtured, supported, defended and protected emerging industries. Later as these industries became more competitive, the same countries moved to adopt a more free trade stance, even to the point of wanting to deny to other late comers access to the very same policy tools they themselves used to get to where they are. This phenomenon was first described by the nineteenth century German economist, Friederich List, as “kicking away the ladder”. We have seen much of that in the last quarter century. But it is important to recognize that historically those who had the courage to say “thanks, but no thanks” when receiving such advice, were the ones that advanced. I recall reading about how a U.S. Congressman in the first phase of US industrialization at the end of the 19th century responded to the call from Britain for the U.S. to liberalize by saying that the U.S. would do what Britain did, not what Britain said. The rhetoric of free trade, moreover, is constantly at odds with the reality that all governments regularly deny liberalization to protect vulnerable sectors, or for a variety of legitimate or vested interest driven public policy reasons. Take the reality of highly protected and subsidized agricultural sectors in the developed world, defended fiercely by governments that preach free trade to others. Or contrast the push for freer trade in industrial goods with ongoing efforts to strengthen protection against technology flows or the movement of labour.
For the past quarter century, global trade has operated within a rules based framework developed through a system that can be styled hegemonic multilateralism. At the pinnacle of this has been the World Trade Organisation established by the 1994 Marrakech agreement and replacing the previous GATT. Many countries, including ours, have accepted that a multilateral rules based system is desirable. It creates space for all of us, developed and developing countries alike, to participate in negotiating binding and enforceable rules. But the reality in the WTO as in other multi-lateral bodies is that the outcomes and ideas that became hegemonic have been shaped by the power relations existing within them, meaning that the dominant industrialized economies have called the shots, even if perhaps to a lesser extent than they were able to in the past. Informed by an ideology variously described as neo liberalism or the Washington consensus, this system drove an ambitious and unprecedented tariff reduction in the 1990s which became an important feature of the most recent phase of globalization. One element of this was a “one size fits all” narrative suggesting that ambitious trade liberalization was as good for the poorer and weaker as it was for the richer and stronger, resulting in a compression of differentiated obligations between rich and poor countries and a reduction of policy space for developing countries. Driven by new digitized technologies, global trade expanded as global value chains emerged albeit in an uneven manner and concentrated in a few regions and sectors. While some developing countries with robust and decidedly non-orthodox industrial policies, like China, were able to take advantage of greater market openings in the developed world, many others, including ourselves, were persuaded or cajoled to cut tariffs and open up markets to an extent that, with the benefit of hindsight, moved too rapidly beyond our capacities as developing countries. South Africa was further disadvantaged by the fact that the apartheid regime declared in the GATT that ours was a developed country. In the implementation of the Uruguay Round in the 1990s, we were accordingly victims of an historical injustice that required us to cut industrial tariffs deeper and faster than many peer developing countries
The new era we seem to be entering is being shaped by a major backlash against the paradigm that became hegemonic in the 1990s. Contrary to the expectations of some, the most visible form this has taken to date has been a right wing nationalistic populism in the developed world positing itself as anti globalization, and anti free trade. The social base of this is strata of what are called the middle class that have seen their jobs, economic security and living standards under threat. A number of studies have shown that these fears are indeed not unfounded. Many other what Stiglitz has called “discontents” have been evident for years in both the developed and developing world, again with real concerns. A rearguard action from defenders of the status quo has sought to shift the blame for the evident economic insecurity and widening inequality on to the technological changes of the 4th industrial revolution: the emergence of digitized technologies like robotics, three d printing, the Internet of Things etc, that are predicted to lead to disruptive changes in the organisation of production across entire value chains. But the real issue is that both the technological changes and trade liberalization have occurred in context of a visible absence of inclusive growth. Rather than seeing a widespread sharing of the benefits of technological advances, we have witnessed a mushrooming of winner takes all markets with winners reaping huge rewards while others get little or nothing. Globalization has meant that this phenomenon is increasingly defined on a world rather than national scale. All of this has widened inequality with the numbers of people at the top who own as much wealth as the bottom half now being recorded in a smaller double digit numbers year by year. Make no mistake, globalization and the 4th industrial revolution are realities that could in other social contexts deliver significant opportunities for improvements in the human condition. But, in the words of Nobel economics laureate Joseph Stiglitz, up to now we have had “a globalization that works for a few but not for everybody”.
To be sure there are many voices arguing that this crisis of the dominant neo-liberal paradigm needs to be a signal for an advance towards a more inclusive progressive multilateralism: a multilateralism characterized by real cooperation and solidarity, a multilateralism that is sensitive to the needs of the poorest, which recognizes their need for policy space, and cooperates to prioritize the developmental challenges that continue to confront much of the world. Certainly that continues to be our vision and we will continue to do what we can to advance it. At the same time, however, we need to be acutely aware that the political trends that are most likely in the immediate future to shape the trade landscape are something else. What is emerging in the developed world is a backlash with the potential to propel us from the hegemonic multilateralism, I have described, into a new era of outright mercantilism. At its worst this could see trade wars between major economies whose repercussions will without doubt impact on us and every other smaller economy. At its most benign, we will almost inevitably see a more blatant pursuit by powerful economies of an openly partisan agenda seeking to prioritize the addressing of perceived disadvantages to themselves in multinational, regional and bilateral trade arrangements.
So how then should South Africa respond? As a small open economy, accounting for only 0, 5 per cent of world trade, if we become overly protectionist, we risk being denied access to other markets on whom jobs and productive sectors in our country depend. If we break trade rules there will be consequences and we risk retaliation. But within those constraints, the emerging new circumstances call on us to be more resolute, and indeed smart, in advancing and defending our own national interests. This will include defending our right to take tariff decisions based on our own needs and to deploy appropriate trade remedies. It will also mean paying attention to detail so that we clearly understand the implications of proposals emanating from others and have the courage to say no to those that would decommission or restrict important policy tools. At a time when others are becoming more resolute in defending or advancing their interests, we cannot afford to be less resolute in defending ours. But as a relatively small player we need to redouble our efforts to build and strengthen the influence of the groupings we are part of starting with the African group in the WTO.
The resoluteness and vigilance I was talking about earlier means, to give a current example, recognizing that when trade partners, or domestic importers, tell us that problems in our poultry industry are due to competitiveness challenges, their point of departure is not a desire to improve performance of our industry but to persuade us not to take steps to reduce their imports. In this case, yes, there are issues of competitiveness and inclusion and it is for that reason that we have established a government-industry task team to address a wide range of matters in the sector. But we must also recognize that if we don’t act against the surge of imports we might not have an industry to raise the competitiveness of. The fact is there are serious structural distortions in the global market for poultry products. Consumers in the developed world eat more white meat. This means that poultry producing developed countries have a surplus of brown meat, or bone in portions, that they cannot sell in their own markets. Their best option is to sell them at a price just above marginal cost in the developing world. We need to learn the lessons from the experience of other countries like Ghana, Cameroon and Ivory Coast that were required to open up to these imports through structural adjustment programmes. Cameroon lost 92 per cent of its poultry industry and 110.000 rural jobs between 1999 and 2004, while 1500 enterprises employing15.000 workers closed shop in the Ivory Coast.
We also need to be clear as a country that localization is an imperative. Everyone is using this policy tool, in one form or another, even those that preach against it. We must therefore remain steadfast in not signing the WTO’s “Optional Protocol on Transparency in Government Procurement”. If we did, we would have to open up government procurement to all other state signatories on a non-discriminatory basis and disable procurement as the tool of local development and radical economic transformation which the President referred to in SONA. Likewise we must politely but firmly say no, as we have done, when proposals are put forward for further WTO disciplines on procurement. For similar reasons we must resist the entreaties of our friends to sign the Environmental Goods Agreement. If we did we would hobble the local industrial development potential of the roll out of renewable energy.
In a context where the International Settlement of Investor Disputes system is facing a crisis of legitimacy, we must be vigilant in the face of proposals that would allow the recreation in another form of a system that would allow investors to challenge governments’ legitimate rights to regulate in the interests of environmental responsibility, consumer protection and also of industrial development. Trade negotiations have to be recognized now more than ever as being what they have always been, a process of giving and taking driven by competing interests. That requires a constant and serious assessment of the balance of gains against the payment required for them. Above all, we must be wary of signing away policy tools that are either important now or which may be so in the future.
In the SONA, the President outlined a number of the trade arrangements we are working on or are in place. Our overriding priority is to work to promote African regional integration. More precisely it is to pursue a broadening of integration across existing regional communities within a development integration framework. Practically, this means taking steps to enlarge the free trade areas existing in SADC and other regional economic communities into larger more expansive FTAs, but also to complement this with active cooperation to address infrastructure deficiencies. The aim of this is to promote more intra African trade and support industrialization through the creation of large regional markets that can support the development of regional value chains. This approach is wholly compatible with trends in successful emerging economies. Countries like India and China are now turning to building their domestic markets as the basis to expand their productive capabilities and move up the value chain. The problem we have in emulating them is that colonialism divided Africa into 54 separate countries, none of which on its own has a population or market to support deep industrialization. However, as large groupings we do begin to reach the numbers that can support the growth of new regional value chains. The Tripartite SADC-Comesa-East African community FTA once concluded, will create a market of 26 countries with a population of 625m and a combined GDP of US$1.6 trillion. The Continental Free Trade Area negotiations that are underway will create a market of over 1 billion people and a combined GDP of over US$2 trillion. These integration processes will put the African continent on a sustainable development trajectory.
While we have been involved in the TFTA for rather longer than initially expected, I am pleased to be able to indicate that significant progress has been made. The framework agreement is in place and will be presented to Parliament in the second half of this year. The more commercially meaningful tariff negotiations between the SACU and the EAC are quite advanced and we aim to conclude these before the end of the year. Progress has also been achieved in the tariff negotiations with Egypt. The TFTA is a building block for the Continental FTA, it is envisaged that the key deliverable of the CFTA this year will be the legal framework.
Next month, as you mentioned Mr President, SADC will hold a Special Summit to consider and hopefully adopt its regional industrial strategy, building on the framework adopted at an earlier special summit last year. We as South Africa have put a lot of effort into ensuring that we have a credible, implementable action plan that can give real meaning to the third pillar of our developmental regional integration agenda – cooperating to promote real regional industrial development. The primary orientation of the strategy is the necessity for the structural transformation of the SADC region by way of industrialization, modernization, upgrading and leveraging the FTA to lock-in regional value-chains. The regional industrial work programme is a priority so as to reduce regional economies vulnerability to global shocks due to heavy reliance on exports of commodities.
The African market is very important for South African producers, particularly for those producing value added products. Almost 29% of South Africa’s merchandise exports in 2015 were sold in other African countries. We are also involved across the continent as investors and providers of services. While we need to continue to pursue all opportunities for mutually beneficial trade and investment with other countries on the continent, we need also to prepare to move into other new places in regional value chains, particularly as other countries industrialise and seek to enter space currently occupied by our products. We have established a new division in the dti called Invest and trade Africa, which will look at ways in which investment led trade can move us into new supplier arrangements as we cooperate with other countries to promote developmental integration. There is also now a voluntary Code of Conduct for South African companies operating elsewhere on the continent, to assist in positioning ourselves as a real partner in development. That code I can report was extremely well received at the AU trade week held in Addis Ababa late last year and I would encourage companies operating elsewhere on the continent to seriously consider integrating it into their value proposition.
Beyond our priority in promoting African regional integration, we have been judicious in our pursuit of trade agreements elsewhere, whilst actively looking to promote concrete trade and investment opportunities in a large number of emerging and fast growing economies across the world.
The SACU-Mercosul Preferential Trade Agreement is now in force opening up over 1000 tariff lines for preferential trade with the most important regional grouping in Latin America. We have agreed to revive and speed up the PTA negotiations with India. Within BRICS we are pursuing an agenda of cooperation on a number of important issues, and seek to coordinate positions on many multilateral issues. Under our presidency, South Africa tabled a study on the promotion of complementary trade in value added products, that was adopted by trade ministers.
We participated along with our partners in SACU in the EPA negotiations with the EU because they held out the prospect of harmonizing our relations with our largest trading partner with other Members of the customs union, and also offered the prospect of improving the terms of access to the EU market for some agricultural products over that available in the bilateral Trade, Development and Cooperation Agreement in force since 2000. The SADC EPA (involving 6 SADC member states) came into force last year and provides us with an increased quota allowing the duty free entry of 150 million litres of wine and 50 million tons of sugar as well as improvements in access for several other product lines. Significantly, also, the EPA has allowed the recovery of some of the policy tools we had, perhaps inadvertently, renounced in the TDCA.
We engaged actively to preserve our access to The U.S. Africa Growth and Opportunity Act in the run up to the U.S. Congress’ decision to renew that arrangement for ten years in September 2015. AGOA is not a trade agreement as such, but a unilateral set of preferences granted to a list of African countries. While we had to pay a price, in the form of a limited opening of the South African market for U.S. meat products for as long as we remain in AGOA, our inclusion until 2025 is enshrined in an Act of Congress. That Act does provide for reviews by the Executive, but any recommendations have to be approved by Congress. We look forward to participating in the next AGOA ministerial forum in Togo later this year, and will report back to Parliament and the country on any further developments.
As the UK Government prepares to trigger exit negotiations from the EU, we need to prepare for a new trade arrangement with the UK. We have engaged with the UK government and reached an in principle understanding that there will be no damage to existing trade and investment relations that must be preserved. We also agree that the legal commitments under the EPA with the EU, including the UK, will continue to be the basis for our bilateral trade in the immediate future and that those commitments would be carried over into any new arrangement in future. We will have to pay particular attention to questions of how quotas, notably on agricultural products will be dealt with to avoid any damage to current trade.
In the WTO we have seen the promise held out at the 2001 Doha Ministerial of a developmental round fading as frankly too much was sought by the strong as payment for too little offered to the poor. The last ministerial held in Nairobi in December 2015, saw a number of developed countries distancing themselves from the Doha Development Agenda. The compromise in the final text reflected the reality, that while many developing country Members seek to pursue negotiations on the basis of that mandate, others seek to introduce new approaches and new issues into the negotiations. The larger dominant economies are clearly now seeking to prioritise a set of so called 21st century trade issues. There is a big push now for the eleventh ministerial conference that will be held in Buenos Aires at the end of the year, to mandate text based negotiations on electronic commerce. While we don’t deny the significance of e-commerce, and while we remain open to partnerships that will assist in harnessing it to the benefit of our own and broader African development, agreeing to negotiate binding rules at the WTO would be premature precisely because e-commerce is intrinsic to the wider digital transformation that is rapidly evolving and for which the implications are not well understood. It would be shortsighted to agree to negotiate rules that could entrench the dominance of existing major players and/or disable the very policy tools needed – now and in the future – to benefit from these developments, particularly in the absence of any developmental framework or programme. According to a 2015 UNCTAD report, the unevenness in digital trade is striking. In business-to-business e-commerce, by far the largest form of e-trade, four countries account for 80% of e-commerce. While Business to Consumer e-commerce is much smaller, it appears to be growing faster but, again, the regional shares vary considerably with the Middle East and Africa together accounting for only 2.5%. If these figures approximate reality, they underscore the scope and depth of the digital divide. The South Centre has also done valuable work on this topic which is assisting to inform us as we work with other governments on these and other matters.
As multilateral negotiations falter, we have witnessed a steady increase in legal cases being brought to the WTO to resolve trade disputes. The proliferation of disputes is challenging the capacity of the institution to keep pace and bring into focus questions of whether rulings will always be respected particularly where issues of core national interests are at stake. Again this is an area that must be closely monitored.
Madam Speaker, Honourable Members, I have tried to indicate some of the challenges, principles and concrete work that we have been engaged in on the trade policy front. Our approach has been guided by a strong sense of national interest, by the need to defend nascent industries as part of our efforts to industrialise, diversify and create a supportive environment for radical economic transformation, by the need to preserve policy space, to prioritise developmental regional integration in Africa, and our commitment to a fairer more development orientated global sales rules based system. I have suggested that we are likely to face new and more difficult challenges in the new environment we are entering. But at the same time we need to recognize that it is one that could create new opportunities to build our own more development orientated domestic and regional frameworks if we reaffirm a strong stance on those principles and have the courage to say no to unfair demands and proposals that we may encounter.