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THE SACU-US FREE
TRADE AREA (FTA) NEGOTIATIONS IN LESOTHO: AN OVERVIEW
SACU
member states are currently engaged in Free Trade Area
(FTA) talks with the US as a block. The future of the
FTA, the first between the US and sub-Saharan Africa,
largely hinges on an established success with African
Growth and Opportunity Act (AGOA)…
Background
The
Southern African Customs Union (SACU) was established
in 1910 as a trade arrangement under which member
states have agreed to abolish tariffs and non-tariff
barriers to trade in commodities produced within the
union and maintain a common tariff structure against
non-union members. The current member states include a
larger economy of South Africa, and the peripheral
economies of Botswana, Lesotho, Namibia and Swaziland
(BLNS). All the five SACU countries are leading
beneficiaries of the US trade preferences under the
AGOA, which has likelihood to be extended to 2015
(originally, it was set to expire in 2008) AGOA was
designed by the US as an effective and pragmatic tool
to help Sub-Saharan African countries to make a
transition from reliance on aid to that on trade.
Consequently, the US market provides duty-free access
to substantial exports from sub-Saharan Africa.
Lesotho,
as the first of the BLNS countries, the second in SACU
and the fifth of the 35 sub-Saharan African countries
to qualify for the enhanced benefits under AGOA,
became eligible on the 23rd of April 2001. Its exports
have since enjoyed duty-free access into the US
market. The export-led economic growth strategy has
been promoted with an emphasis on manufacturing
sub-sector which has seen great growth levels in
textiles and clothing. These exports grew from 16 per
cent of GDP in 2000 to 30.6 per cent in 2003. Of
course, the positive spill-over effects from this are
many, and range from: Export growth, GDP growth,
improvement in employment levels, and improvement in
foreign exchange earnings, to mention a few. The
increase in employment from 21 886 in December 2000 to
51 160 in December 2003 underscores the improvement
due to AGOA benefits. As a result, this sector is the
biggest employer in the country. The contribution of
the manufacturing sector is truly significant because
it accounts for around 20 percent of GDP. Since AGOA
appears to be doing so well why negotiate a FTA?
The Rationale for the SACU-US FTA Strategy
Obviously, AGOA will expire in 2015 and its
reinstatement cannot be definitely ascertained, nor
can it be ascertained that all SACU members would be
eligible in subsequent initiatives. Thus the benefits
that accrue from this arrangement may soon disappear.
This dictates to the government to look for long-term
trade opportunities with sustainable benefits, and
this justifies the rationale behind the negotiations
for a FTA. A FTA is a trading arrangement under which
member states agree to eliminate all tariffs, and
non-tariff barriers to trade in commodities produced
within the area. However, members maintain independent
commercial policies with respect to non-members. AGOA
has demonstrated that there is a huge trade potential
for growth in SACU-US trade links. Hence, a FTA would
continue to exploit this potential. The envisaged FTA
arrangement with the US is expected to have several
advantages for SACU.
The major
advantage is that it will provide a more stable
framework under which long-term commercial relations
between SACU and the US would flourish. The final
agreement on these talks may bolster confidence in the
SACU economies and investors would be able to make
commitments over a longer horizon. Second, it would
enable members of a FTA to expand market access for
wider variety of products and encourage greater
foreign direct investment. Third, a FTA would also
promote regional economic integration and growth and
cement trade as one of the leading economic
development strategies for SACU countries. Lastly, the
success of a FTA would be permanent unlike AGOA, and
would, as a result, help to stem the unacceptable use
of domestic industries, as a launch pad for
speculative investors who want easy access into
lucrative markets, such as the US.
The main
benefit for the US is that, this envisaged FTA would
ensure a move from one-way trade preferences as under
AGOA, to full partnership through a reciprocal free
trade agreement. SACU as a block presents good
opportunities for the US as it is the oldest customs
union in Africa (tried and tested). Currently SACU is
the largest market for US machinery, vehicles,
aircraft, medical instruments, plastics, chemicals,
cereals, pharmaceuticals, wood and paper products, in
Sub-Saharan Africa. The total US exports into SACU
were estimated at US$2.5 billion in 2002. Secondly, a
FTA would further level out the playing field in areas
where US exporters are disadvantaged by the European
Union’s free trade agreement with South Africa.
Finally, the SACU-US FTA would be a major step for the
US in an effort to facilitate SACU integration into
the global market.
There are
also several disadvantages of a FTA; for example, a
FTA may erode the already dwindling SACU revenues
because as the US imports enter the SACU markets
duty-free the revenue of the Union will surely
decline. The current contribution of this revenue
source is about 45 percent to the government budget in
Lesotho. Hence customs revenue losses arising from the
FTA with SACU may have severe effects on the Lesotho’
budget. Second, a FTA can open domestic economies to
international giants that have the potential to
swallow the infant industries within SACU. Third,
there may be an “innocent-bystander” problem, which
results when the members of a FTA discriminate against
non-member countries. For instance, FTA may lead to
trade diversion, which means that a FTA may encourage
SACU to buy supplies from the US even if there are
low-cost producing countries outside the area. In the
SACU case these countries may include other SADC
members, and hence the FTA would be in conceptual
conflict with the African Union’s integration agenda.
Finally, the adjustment costs of FTA would be
disproportionately allocated towards SACU. That is,
SACU would have to eliminate tariffs on a number of US
goods whereas for US, most of the tariffs have already
been phased-out on SACU exports.
The Content of the negotiations
SACU-US
FTA negotiations have been ongoing since June 2003 in
an effort to address the above-mentioned concerns. A
conference in Lesotho, was held on the 4th-07th of May
2004, and to complete a fifth round of talks following
that hosted by Namibia on the 2nd -26th of February.
The negotiations are expected to be wrapped up
sometime in December 2004.
The negotiation agenda covers a substantial range of
issues. For instance, both the SACU and the US
identified capacity building on trade process as
central to the success of a FTA, as well as the fact
that the differences in economic structures of SACU
members in terms of size, development levels,
institutional, financial and human resource
endowments, call for the flexibility in the programme.
Since, the menu of negotiations on a FTA, does not
only deal with tariffs, but also seeks to establish
new disciplines on trade related issues, including
services, investment, government procurement,
electronic commerce, labour and environment, it should
help SACU to acquire technical assistance and
technological transfer.
Both negotiating parties are aware that a FTA would
enhance the competitiveness of SACU economies by
granting greater market access for both agricultural
and manufactured exports, and thus facilitate a
meaningful integration of SACU within the global
economy. This would ensure that destructive
consequences of opening up of SACU economies for US
products, on SACU infant industries, may not ensue. In
addition, the parties are trying to ensure that deeper
cooperation process would take into account the fact
that the FTA should be compatible with and support the
integration process in SADC. Moreover, SACU seeks US
commitment towards a programme to provide assistance
to the BLNS for adjustment of their economies from the
revenue loss effects. Furthermore, in view of the
variability of each country characteristics, both
parties agree to implement an asymmetric approach
favouring SACU in relation to the tariff phase-down
process. A period of 10 – 12 years is being planned
for SACU economies’ adjustment.
Conclusions and Recommendations
From the preceding discussion, it is evident that
Lesotho has so far greatly benefited from AGOA in
areas of employment, foreign exchange earnings, and
export expansion and economic growth. It has also been
shown that agreeing a FTA with the US would further
boost the economy as it would attract investment,
improve market access for most of local producers and
hence continue to safeguard the gains from trade
achieved under AGOA. However, the ongoing FTA
negotiations should strive to address the negative
externalities identified.
In the
long-run, in order to accrue optimal benefits from the
envisaged SACU-US FTA, more emphasis should be placed
on addressing the following major challenges to the
country:
- The
diversification of the export product base; the
current export base covers mainly textile and
Clothing and this is risky;
The need to strengthen the linkages between the
various sectors of the economy such that the booming
manufacturing sector, may also contribute in the
development of other sectors in the economy;
- The
involvement of local entrepreneurs in the
manufacturing sector; for instance, in joint
ventures between local and foreign investors would
tend to transfer the technological know-how; and
- To
remain attractive to investors, the Government
should continue to increase its capital stock,
improve the human resources capacity, and uphold the
enabling environment for investment as under AGOA.
Notwithstanding the expected benefits from the FTA,
the Government has the responsibility to ensure:
- The
diversification of the markets in an effort to
spread the risk away from the US; currently the
country’s trade is concentrated on textiles and
apparel destined to the United States (US) instead
of being diversified to take advantage of SACU
market, SADC trade protocol, EU and other trade
initiatives with Canada and Scandinavian countries;
- and
Reduction of dependency on SACU revenue. To achieve
this there is a need to broaden the tax base or
continue to improve the efficiency in tax
collection.
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