United States-Southern African Customs Union (SACU) Free Trade Agreement Negotiations: Background and Potential Issues
United States-Southern African Customs
Union (SACU) Free Trade Agreement
Negotiations: Background
and Potential Issues
Danielle Langton
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
Negotiations to launch a free trade agreement (FTA) between the United States and
the five members of the Southern African Customs Union (SACU) (Botswana, Lesotho,
Namibia, South Africa, and Swaziland) began on June 3, 2003. In April 2006,
negotiators suspended FTA negotiations, launching a new work program on intensifying
the trade and investment relationship with an FTA as a long term goal. A potential FTA
would eliminate tariffs over time, reduce or eliminate non-tariff barriers, liberalize
service trade, protect intellectual property rights, and provide technical assistance to help
SACU nations achieve the goals of the agreement. This potential agreement would be
subject to congressional approval. This report will be updated as negotiations progress.
On November 4, 2002, United States Trade Representative (USTR) Robert B.
Zoellick notified Congress of the Administration’s intention to launch negotiations for a
free trade agreement (FTA) with the Southern African Customs Union (SACU),
comprised of Botswana, Namibia, Lesotho, South Africa, and Swaziland. This agreement
would be the first U.S. FTA with a Sub-Saharan African country.
The first round of negotiations for the SACU FTA began on June 3, 2003, in
Johannesburg, South Africa. The negotiations were initially scheduled to conclude by
December 2004, but the deadline was pushed to the end of 2006 after negotiations stalled
in late 2004 and resumed in late 2005. The talks continued to move at a slow pace until
April 2006, when U.S. and SACU officials decided to suspend negotiations and instead
begin a longer term joint work program. On July 16, 2008, USTR Susan Schwab signed
a Trade, Investment and Development Cooperation Agreement (TIDCA) with trade
ministers from SACU.
Several possible rationales exist for the negotiation of an FTA with SACU. One
impetus derives from Sec. 116 of the African Growth and Opportunity Act (AGOA) (Title
I, P.L. 106-200), in which Congress declared its sense that FTAs should be negotiated
with sub-Saharan African countries to serve as a catalyst for trade and for U.S. private
sector investment in the region. Such trade and investment could fuel economic growth
in Southern Africa, by creating new jobs and wealth. SACU member countries have
achieved the most robust export growth under AGOA, and an FTA may expand their
access to the U.S. market. An FTA may also encourage the continued economic
liberalization of the SACU members, and it could move SACU beyond one-way
preferential access to full trade partnership with the United States. Finally, although
SACU is a customs union, its members’ investment and regulatory regimes are not fully
harmonized. A comprehensive FTA with the United States could force SACU to achieve
greater harmonization.
A potential U.S.-SACU FTA is of interest to Congress because: (1) Congress will
need to consider ratifying any agreement signed by the parties; (2) provisions of an FTA
may adversely affect U.S. business in import-competing industries, and may affect
employment in those industries; and (3) an FTA may increase the effectiveness of AGOA
and bolster its implementation. On January 9, 2003, a bipartisan group of 41
Representatives wrote to Ambassador Zoellick to support the beginning of FTA
negotiations with SACU.
The U.S. business community has also shown interest in a U.S.-SACU FTA. The
U.S.-South African Business Council, an affiliate of the National Foreign Trade Council,
announced the creation of an FTA advocacy coalition in December 2002. The Corporate
Council on Africa, a U.S. organization dedicated to enhancing trade and investment ties
with Africa, also supports the negotiations. For these business groups, a primary benefit
of an FTA with SACU would be to counteract the free trade agreement between the
European Union and South Africa, which has given a price advantage to European firms.
The FTA could also provide an opportunity to address the constraints on U.S. exports to
SACU countries, such as relatively high tariffs, import restrictions, insufficient copyright
protection, and service sector barriers.1 Some U.S. businesses have reportedly expressed
skepticism about an FTA with SACU, citing concerns over corruption and inadequate
transparency in government procurement, particularly in South Africa.2
On December 16, 2002, the interagency Trade Policy Staff Committee, which is
chaired by the USTR, held a hearing to receive public comment on negotiating positions
for the proposed agreement. Several groups representing retailers, food distributors, and
metal importers supported the reduction of U.S. tariffs on SACU goods that an FTA
would bring. Others representing service industries and recycled clothing favored
negotiations to remove tariff and non-tariff barriers in the SACU market. Yet other groups
opposed the additional opening of U.S. markets to SACU goods or sought exemptions for
their products. They included the growers and processors of California peaches and
apricots, the American Sugar Alliance, rubber footwear manufacturers, and producers of
silicon metal and manganese aluminum bricks.
Some U.S. civil society organizations are concerned that a SACU FTA could have
negative consequences for poor Southern Africans, citing potential adjustment costs for
1 The United States Trade Representative, 2005 National Trade Estimate Report on Foreign
Trade Barriers, p. 551.
2 “South Africa Trade Pact Meets Business Skepticism,” Inside U.S. Trade, January 17, 2003.
import-competing farmers, poor enforcement of labor rights, privatization of utilities, and
increased restrictions on importing generic drugs to treat HIV/AIDS.
Background
The South African Customs Union consists of Botswana, Lesotho, Namibia, South
Africa, and Swaziland: five contiguous states with a population of 51.9 million people
encompassing 1.7 million square miles on the southern tip of the African continent.
Although this figure represents less than 1% of the population of sub-Saharan Africa,
SACU accounts for one-half of the subcontinent’s gross domestic product (GDP). Wide
differences exist among the economies of SACU. While South Africa has developed a
significant manufacturing and industrial capacity, the other countries remain dependent
on agriculture and mineral extraction. The grouping is dominated by South Africa, which
accounts for 87% of the population, and 93% of the GDP of the customs area. SACU
member states had combined real GDP of about $158 billion in 2005.3
SACU is the United States’ second largest trading partner in Africa behind Nigeria-
whose exports are almost exclusively petroleum products. Overall, SACU is the 33rd
largest trading partner of the United States. Merchandise imports from SACU totaled
$10.0 billion in 2007, a 33% increase from 2005 and a 169% increase from 1997.4 They
were composed of minerals such as platinum and diamonds, apparel, vehicles, and
automotive parts. Major U.S. exports to the region include aircraft, automobiles,
computers, medical instruments and construction and agricultural equipment. The 2007
merchandise trade deficit with SACU was $4.4 billion.
The United States ran a services trade surplus with South Africa (the only member
of SACU for which service data are available) with exports of $1.6 billion and imports
of $1.1 billion in 2006.5 Services trade between the United States and South Africa has
increased steadily over the last decade, with both imports and exports doubling since
1996. The stock of U.S. foreign direct investment in South Africa totaled $3.8 billion in
2006 and was centered around manufacturing, chemicals and services. The stock of South
African investment in the U.S. stood at $652 million in 2006.6
FTA negotiations with SACU may result in the first U.S. trade agreement with an
existing customs union. SACU is the world’s oldest customs union; it originated as a
customs agreement between the territories of South Africa in 1889. The arrangement was
formalized through the Customs Agreement of 1910 and was renegotiated in 1969. In
1994, the member states agreed to renegotiate the treaty in light of the political and
economic changes implicit from the end of the apartheid regime. The renegotiated
3 The World Bank, World Development Indicators. In constant 2000 U.S. dollars.
4 Goods data compiled by World Trade Atlas. U.S. imports for consumption calculated as
customs value; U.S. domestic exports as FAS (free alongside ship) value.
5 Bureau of Economic Analysis, [http://www.bea.gov/international/xls/tab2b.xls]. Services
figures are calculated from current account data and thus are not directly comparable to goods
data above.
6 Bureau of Economic Analysis, [http://www.bea.gov/bea/international/datatables/fdipos/fdipos-
agreement was signed on October 21, 2002 in Gaborone, Botswana, and it is now being
implemented. Some observers are concerned that further integration of the customs union
may be threatened by individual member countries signing economic partnership
agreements (EPAs) with the European Union (EU), because these agreements would
include policies that SACU has yet to harmonize, such as rules of origin and customs
procedures. Some observers believe that SACU should only negotiate these policies as
a group to avoid roadblocks to harmonization.7
The 2002 Agreement. The 2002 Agreement provides for greater institutional
equality of the member states and effectively redistributes tariff revenue within the
member states. Its three key policy provisions are: the free movement of goods within
SACU; a common external tariff; and a common revenue pool. It also provides more
institutional clout to Botswana, Lesotho, Namibia, and Swaziland (BLNS) in decision-
making by creating a policymaking Council of Ministers. The agreement enhances the
existing Customs Union Commission, and it creates a permanent Secretariat based in
Windhoek, Namibia. The Agreement renegotiated the formula for disbursement of the
common revenue pool, which accounts for a large portion of government revenue in the
BLNS countries. BLNS disbursements were specified under the old formula, but under
the new formula they are variable and based on shares of intra-SACU trade. Both
formulas result in a redistribution of SACU tariff revenues from South Africa to BLNS,
but the new formula has its basis in some measure of economic activity. Recent estimates
indicate SACU payments accounted for 49% of government revenue in Lesotho, 69% in8
Swaziland, 25% in Namibia, 12% in Botswana, and 3% in South Africa in 2005.
SACU Tariff Structure. A 2003 WTO Trade Policy Review9 of SACU member
states examined the tariff structure and trade posture of the customs union. It noted that
the South African tariff structure, which was still the basis for the SACU tariff, was
relatively complex, consisting of specific, ad valorem, mixed compound and formula
duties. However, the South African government has embarked on a tariff rationalization
process to simplify the tariff schedule, to convert tariff lines to ad valorem rates, and to
remove tariffs on items not produced in the SACU. According to the USTR, the
complexity of the tariff regime has made it necessary for some U.S. firms to employ
facilitators to export to South Africa.10 The WTO found applied MFN tariffs averaged
11.8% in manufacturing, 5.5% in agriculture, and 0.7% in mining and quarrying. These
average tariffs represent a reduction from the previous WTO review in 1998, when MFN
tariffs averaged 16%, 5.6%, and 1.4%, respectively. However, tariffs are often bound11
much higher, with some bindings as high as 400%.
7 “EPA Threatens to Tear Apart Oldest Customs Union,” Africa News, Inter Press Service, May
8 Frank Flatters and Matthew Stern, Implementing the SACU Revenue-Sharing Formula: Customs
Revenues, USAID South Africa, March 31, 2005.
9 World Trade Organization, “Trade Policy Review: Southern African Customs Union, Report
by the Secretariat,” (WT/TPR/S/114), March 24, 2003, pp. ix-xi.
10 U.S. Trade Representative, 2002 Foreign Trade Barriers, p. 381.
11 A bound tariff rate is a rate which a country agrees not to exceed because of trade
commitments, such as those made in the WTO. An applied tariff rate is a rate that is actually
imposed on goods.
Progress of the Negotiations
After nearly three years of slow-moving and stalled negotiations, U.S. and SACU
trade officials called off the FTA negotiations in April 2006 in favor of a longer term
trade and investment work plan. On July 16, 2008, they signed a Trade, Investment and
Development Cooperation Agreement (TIDCA), which is the first of its kind. The
TIDCA is reportedly a formal mechanism for the United States and SACU to negotiate
interim trade-related agreements which may serve as the building blocks for a future FTA.
The agreement will also allow the two parties to work on key issues in their trade, such
as trade facilitation, technical barriers, investment promotion, and sanitary and
phytosanitary standards.12
Observers have cited several possible reasons for the halt in FTA negotiations. First,
the United States and SACU did not agree on the scope of the negotiations. Per their
mandate from Congress to pursue comprehensive FTAs, U.S. negotiators attempted to
proceed with negotiations including intellectual property rights, government procurement,
investment, and services provisions. However, SACU officials reportedly argued for
these provisions to be excluded from the negotiations. They called for making market
access commitments first, and then negotiating the other areas. Now that Congress has
extended the AGOA benefits to 2015 through the AGOA Acceleration Act of 2004 (P.L.
108-274), there may be less incentive for SACU countries to complete an FTA with the
United States. Also, the United States and SACU reportedly held different views on how
to include certain industrial sectors in the negotiations. The United States preferred what
is called a negative list, where all industries are negotiable unless specifically excluded.
Meanwhile, SACU preferred a positive list, where the industries to be included in the
negotiations are specified in advance, and additional industries may be included in the
agreement over time. Finally, the United States and SACU differed on issues concerning
labor rights and environmental regulations. Some observers have speculated that South
Africa may be leery of negotiating issues that are included in the current WTO
negotiations, so as not to influence their positions in the WTO.13
Former USTR Robert Zoellick has stated that the United States recognizes that
SACU is still an emerging entity. It has not developed harmonized policies on many of
the issues that would be included in an FTA, which may add to the challenges of
negotiating an FTA.14
12 “U.S. Signs Commercial Pact with SACU, Says Free Trade Agreement Still Possible,” BNA,
July 17, 2008.
13 “Business Must Not Miss This Boat,” Business Day (Johannesburg), December 15, 2005.
14 “U.S.-SACU Free Trade Negotiations Put on Hold; New Mechanism Being Created,”
International Trade Reporter, December 16, 2004.
Table 1. U.S. Merchandise Trade with SACU Countries, 2007
U.S. ImportsU.S. Exports
2 digit HTS CategoryImports2-digit HTS CategoryExports
Precious Metals, of which,$5,179 millionMachinery and$1,260 million
-Platinum-$3,788 millionMechanical Appliances
-Diamonds-$1,308 million
Iron and Steel$753 millionVehicles and Parts$1,066 million
Vehicles and parts $551 millionElectrical Machinery,$421 million
Equipment, and Parts
(includes
telecommunications
equipment.)
Ores Slag and Ash $511 millionOptical, photographic,$303 million
cinematogr aphic,
measuring, precision,
medical, and surgical
instruments and parts
Machinery and$435 millionSpecial Classification/$302 million
Mechanical AppliancesLow value
(primarily catalytic
converters)
Knitted Apparel and$391 millionAircraft and Parts$291 million
Clothing
Aluminum Products $350 millionOrganic Chemicals$205 million
Mineral Fuels and Oils $278 millionMineral Fuels and Oils $192 million
Organic Chemicals $251 millionPrecious Stones, Metals$189 million
Apparel and Clothing, not$212 millionPlastics$173 million
knitted
Inorganic Chemicals $154 millionCereals (primarily wheat$164 million
and meslin)
Special Classification/ low$98 millionMiscellaneous Chemicals $121 million
value exports
Beverages, Spirits, and$71 millionRubber$78 million
Vinegar
Edible Fruits and Nuts $68 millionPharmaceutical Products$73 million
Electrical Machinery$61 millionToys, Games, and Sports$69 million
Equipment
All Other$737 millionAll Other$793 million
Total$10.1 billionTotal $5.7 billion
Source: World Trade Atlas