The fourth in a series of webinars focusing on trade agreements in South Africa looked at how trade agreements are being utilised in the country. The webinar was sponsored by Access Bank and presented by Donald Mackay, founder and director of XA International Trade Advisors, and Francois Fouche, founder and director of Growth Diagnostics and a research associate for Centre for African Markets and Management at GIBS Business School.
Trade agreements in South Africa
Free trade agreements – along with preferential origin requirements – have expanded in number and complexity over time. As well as increasing trading costs though, this increased complexity may also have diminished the appeal of some of these preferential agreements to traders.
While 24 World Trade Organisation (WTO) members currently grant unilateral trade preferences to the world’s least developed countries (LDCs), the split of trade agreements between countries is not evenly weighted across the globe.
According to the WTO, the EU has the most trade agreements, with about 45 in place with individual countries and other free trade areas (including SADC), plus a free trade agreement with themselves. On the opposite side of the scale, countries with no trade agreements are mostly found in Africa, where trade agreement density is generally fairly low.
However, it’s important to realise that a country doesn’t need a free trade agreement in order to trade with another country – it simply needs the ability to ship goods there. As an example, South Africa doesn’t have a free trade agreement with China, but we can and do trade with them, and our Chinese exports have grown significantly over the last decade.
South Africa and free trade agreements
South Africa currently has a number of free trade agreements in place. However, research shows that far more of our trade happens outside trade agreements than within them, and this has consistent since 2010.
For example, while South Africa’s trade with the EU has grown since 2010, this growth has mostly been in trade outside of trade agreements. There is nothing wrong with this per se, but given that the majority of the tariff book is at a preference with the EU, one would expect this duty preference to have a greater impact. In the same way, the bulk of trade between South Africa and the rest of the SADC region happens outside of our trade agreement with them.
Why don’t we see better utilisation levels?
At the aggregate level, it appears that South Africa is not doing a whole lot with the preferences it has under all of its current trade agreements. So why don’t we see better utilisation of trade agreements in the country?
- They’re not negotiated for economic purposes and hence poorly negotiated. For example, when South Africa’s democracy started in 1994, it seemed to be “fashionable” to have trade agreements, and South Africa entered into many of them without serious thought. Beyond political motivations for these agreements though, there is very little evidence that the important components needed to make the agreement work were actually properly addressed.
- There is no connection between negotiation and utilisation. Companies who are actively involved in the negotiation of a trade agreement are far more likely to use it, so utilisation rates are higher with people who are sitting around the negotiation table – and they may be few and far between.
- Business barely participates in any meaningful part of the negotiations. This is not a uniquely South African problem: we see this in the EU as well where after government does the negotiations, they do very little to connect companies with the benefits of the agreement once it is in place.
- There is no follow up to help business utilise the agreements. In South Africa, the negotiations for trade agreements are done by one group of people while the promotion of trade is done by a completely different group – and there isn’t good handover between the two.
Which opportunities should South Africa pursue?
While we mainly export mining products such as platinum, in almost no country do minerals attract a duty, so these products wouldn’t benefit from a trade agreement. South Africa’s automobile industry is good at utilising trade agreements, but it is an industry that is subsidised by the South African government. And then some agricultural industries, such as the citrus industry, do benefit from trade agreements.
Beyond citrus though, there are many other material opportunities for better trade agreement utilisation within the agricultural sector. Given this, which opportunities should South Africa pursue?
- Get involved with the AfCFTA process. This agreement is currently being negotiated, and it’s important for South African businesses to get involved. While direct participation is not typically allowed and is done by sector, it is important to remain aware of what is going on with it, so that when the agreement is finally implemented, business is in the position to utilise the benefits that flow out of it.
- Work with experts to find opportunities in existing agreements. There are several trade agreements that aren’t widely known about, so there’s an opportunity to look at them and see how they can be leveraged more fully.
- Leverage agricultural products. While the agricultural sector has done well, there are significant opportunities which are simply not being considered around trade agreements and exports. This pertains not just to primary agricultural products, but also to agro-processing and products made with agricultural goods too.
- Get training on trade agreements. It’s important to understand how trade agreements and rules of origin work in order to fully make use of the benefits to your business. For example, this could be done either by importing raw materials and components to make your business more competitive, or exporting to regions you are not currently active in and where the agreement may help you have better access to those markets.
Overall, there are huge opportunities for South African businesses with the trade agreements currently in place, and if the utilisation these improves, they will begin yielding a larger economic benefit. The onus therefore is on business to learn more about these opportunities and how best they can be leveraged for competitive advantage – not just at a company level, but also for the country as a whole.
