SACU Single Origin Study Preliminary ResearchLuke Foster 8/1/12

The Southern African Customs Union (SACU) is the world’s oldest customs union,

consisting of Botswana, Lesotho, Namibia, South Africa and Swaziland. The most recent

SACU Agreement concluded between all parties to define the customs union dates from

2002. On that occasion, the signatories defined many key protocols and established an

institutional framework for regional integration, but implementation and institutional

capacity building has been slow and fragile. In 2006, after concluding a preferential trade

agreement with the European Free Trade Area, SACU recognized a need to define exported

goods as SACU products, and therefore agreed upon an annex to the 2002 protocol to

define a single origin for their goods and established ground rules for suppliers to obtain

customs certificates for products. However, the rules have never been put into effect.

The concept of “single origin” as used by SACU is essentially an application of the

general concept of rules of origin to the specific case of exporting as a single economic unit

through horizontal cumulation. Rules of origin are used in international trade to define the

country of origin of a good. This is necessary for non-preferential purposes such as

statistics, labeling and the prevention of abuses of trade such as dumping, and also for the

authentication purpose of determining whether a traded good meets a preferential trading

agreement’s origin criteria in order to prevent tariff jumping. This preferential use can also

render RoO a powerful instrument of trade policy. Depending on the severity of the rules of

origin, however, they can also have protectionist implications with the potential to

seriously curtail trade. RoO have also been used in an attempt to implement non-trade-

related policy, including environmental regulations.

All five member states within SACU are also encompassed within the Southern

African Development Community (SADC), leading to substantial overlap in trade policy.

The SADC rules of origin date from the 2002 SADC Trade Protocol, which initially opted for

fairly liberal RoO. These were based on the value added percentages of products, and were

modeled after the existing rules used by COMESA. Before these rules were ever

implemented, however, SADC adopted much stricter RoO with exacting, sector-specific

standards for origin, patterned after the EU system. SADC rules have been described as

protectionist, “complex and restrictive,” and burdened “with responsibility for a variety of

goals that could best be achieved through other means,” including environmental targets

and economic diversification objectives.1 The same report alleges that the RoO scheme

reflects a “fortress vision” of SADC as a zone protected from international markets and that

it threatens to undermine the progress achieved in trade liberalisation. Other problems

with the existing SADC scheme include the fragmented nature of SADC EPA negotiations

with the EU and the precedence that the EU-SA preferential trade agreement takes. Lack of

clarity on the SADC RoO and SACU’s stance toward them has been blamed for damaging

trade.23

The most damning consideration against the existing SADC RoO is that they are

product-specific, requiring different and exacting standards even for various products

within the same sector. Before exports can take place, RoO must be agreed for each

product. For example, wheat flour and textile exports receive no SADC preferences because

no RoO have yet been established for them. Until now, these complicated and protectionist

1 “SADC Rules of Origin: Undermining Regional Free Trade,” TSG, 2002.2 “Analysis of the Implications of the Proposed Establishment of a Tripartite FTA Between COMESA, SADC and the EAC on SACU,” Imani and SAIIA, 2011, p. 72.3 “SADC Rules of Origin Undermining Regional Free Trade,” TSG, 2002.

rules of origin have been applicable to SACU. However, the proposed Tripartite FTA would

streamline and simplify all RoO across the EAC-COMESA-SADC region, establishing a 30%

value added criterion for most exports.4 It is possible that SACU’s move to implement its

own RoO for the first time is a response to concerns about the impact of more liberal RoO,

together with lowering tariff barriers throughout the TFTA, on the South African economy.

Analysts have observed that the current SADC RoO closely mirrors those of the EU-SA

Trade, Development and Cooperation agreement. Another key issue in SACU-SADC

considerations is that SACU countries have adopted higher Sanitary and Phyto-sanitary

Standards than most SADC countries, leading to incompatibilities in trade agreements.

Global and International Rules of Origin

The World Trade Organisation sets the common global standards for rules of origin

in preferential trade agreements. These are couched in fairly general terms, largely based

on the “last, substantial transformation” of the goods in question. “Last, substantial

transformation,” however, has many possible interpretations, ranging from a relatively

simple value added requirement for origin to a rigorous “wholly obtained” provision to the

calibrated and precise sector-specific requirements used within the European Union. WTO

members’ RoO must not have “restricting, distorting or disruptive effects on international

trade;” they must be “administered in a consistent, uniform, impartial and reasonable

manner” and be “based on a positive standard,” stating what does confer origin rather than

what does not. WTO members have agreed that globally harmonised and congruent RoO

are in the interests of wealth creation in all member states, and that RoO are not intended

4 “Analysis of the Implications of the Proposed Establishment of a Tripartite FTA Between COMESA, SADC and the EAC on SACU,” Imani and SAIIA.

to be used as “a trade policy instrument per se” but “as a device to support a trade policy

instrument.”

Within these parameters, RoO can vary extremely widely. The “wholly obtained”

criterion usually only applies for primary products such as agricultural goods. The “last,

substantial transformation” criterion can be applied very differently by preferential trading

agreements. Change of tariff classification (i.e., from one class of product to another), value

added (typically varying from 30% to 60%) and performance of some particular

manufacturing or refining process—usually a process that gratifies a certain labour

interest—are the primary qualifications used for meeting this criterion. Another key

distinction is between double-transformation and single-transformation rules of origin for

manufactured goods. The former hold that both raw materials and final product must be

originating, whereas more liberal single-transformation rules require only that the final

product meet origin criteria.

Summary of existing Rules of Origin schemes:

Organisation Title Year agreed Summary

WTO Rules of Origin Agreement of Marrakesh

1994 Provides for transparent, consistent, and non-discriminatory RoO. Allows much room for interpretation in “last, substantial transformation” rules. Enshrines a general goal of world RoO harmonization.

EU Pan-Euro-Mediterranean Partnership

1994-2010 Diagonal cumulation in Pan-Euro-Med zone; wholly obtained or “sufficiently worked” (often 60% value added) for imports, more clearly defined for imports.

NAFTA North American Free Trade Agreement, Chapter 4

1994 Wholly obtained or produced goods; 60% regional value added criterion; change in tariff classification.

COMESA Protocol on Rules of Origin

1994 Wholly obtained for agriculture; otherwise, change in tariff classification or 35% value added.

Tripartite (EAC, COMESA, SADC)

Tripartite Free Trade Agreement

2010 (negotiations

Wholly obtained for primary products; 30% value added for manufactures. Only applies to goods, no protocol as yet on services.5

5 A valuable summary and comparison of COMESA, SADC, EAC and TFTA Rules of Origin can be found on pages 42 to 47 of “Analysis of the Implications of the Proposed Establishment of a Tripartite FTA Between

ongoing)

SACU’s own existing rules of origin on imports grant a good originating status if “at

least 25% of its production cost is represented by materials produced and labour

performed in that territory, and if the last process in its production or manufacture has

taken place in that territory.”6 This definition has stood since 1964, with minimal revisions.

SACU’s framework for establishing a single origin certification for exporters is geared

towards meeting the export destination country’s requirements. It will only be immediately

applicable in cases where SACU has a standing preferential trade agreement (such as those

with the EFTA and MERCOSUR). It establishes legal mechanisms by which customs officials

in each member state can require suppliers and exporters of goods to certify origin.

Normally, a certificate is to be provided for each consignment of goods, but large-scale

exporters who consistently export similar goods can obtain a “long-term” (one year)

certificate.

Title Trading partner Year agreement concluded

Summary

SACU-MERCOSUR PTA

MERCOSUR 2008 Selected tariff reductions, enters into force in 2012.

SACU-EFTA Free Trade Agreement

European Free Trade Area (EFTA)

2006 Tariff reductions on industrial goods (including fish and other marine products) and processed agricultural products.

SACU-India PTA India Negotiations ongoing

Tariff reductions on selected goods; specific rates still under discussion.

SACU-USA Trade, Investment and Cooperation Agreement

United States 2008 Cooperative framework agreement; preface to future negotiations.

Summary of SACU trade agreements:

COMESA, SADC and the EAC on SACU,” Imani and SAIIA.6 “Trade Policy Review. Report by the Secretariat. Southern African Customs Union.” World Trade Organization, p. 17.

Summary of South African trade agreements:

Title Trading partner Year agreement concluded

Summary

Trade, Development and Cooperation Agreement

EU 1999 EU to relax tariffs on 95% of imports from SA over 10 years; SA to relax tariffs on 86% of imports from the EU over 12 years.

Trade Agreement

Zimbabwe 1964 Sector-specific; subjects manufactured goods to strict RoO.

Industrial Breakdown by SACU country

Strategically sensitive industries for SACU include clothing, sugar, automotive

products, electronics, textiles and tobacco. These industries are primarily South African,

and negotiations that affect them are influenced by the powerful South African trade union

lobby. It is worth noting that the majority of SACU exports, particularly to the developed

world, are mineral and petroleum products (e.g. raw and semi-raw mineral products

account for nearly 40% and $41.2 billion of SACU exports). Agricultural products are also

significant. These, of course, automatically qualify for preferential origin status because

they are wholly obtained. Therefore, the question of a single origin cumulation scheme only

applies to the limited proportion of SACU exports that is manufactured goods.

Botswana

Sensitive sectors in trade negotiations for Botswana include small stock, beef,

poultry, pigs and horticulture. Botswana generally favours liberal RoO due to the

opportunity for industrial development that they offer, and the need for South African

inputs to its manufacturing processes. In 2011 Botswana exported goods with a total value

of $5.8b. This made Botswana the second largest exporter in the region after South Africa

accounting for 6% of exports in the region for 2011. The main exports included precious

stones, nickel, apparel and vehicles. Botswana’s imports in 2011 ($7.27b) exceeded their

exports, netting a trade deficit of $1.39b. The main imported goods included fuels,

machinery, electrical equipment and vehicles.

Lesotho

Lesotho mainly exports directly to the US and the EU and imports from South Africa.

The private sector is heavily dependent on textile exports to the US under AGOA. $755m of

Lesotho’s total $787m exports was minerals (diamonds) and textiles. Some potential

benefits could result from single origin due to the potential for value addition on South

African imports.

Namibia

Infant manufacturing industries are growing in Namibia. Priority sectors include:

agro-processing (dairy and milling of imported grain are infant industries), livestock

(especially beef), cement and steel. Imports are mainly finished goods from South Africa.

Namibia has ongoing concerns about the prospects for development in conjunction with

South Africa in the SACU framework and points to difficulties in cross-border trade,

especially imports of key capital inputs, largely due to a lack of VAT coordination within

SACU. Namibia’s annual exports ($3.37b) are $1.8b more than imports ($1.57b), primarily

exporting mineral resources (i.e., uranium, diamonds, and copper), while importing

consumer goods (vehicles, machinery, electronics) and fuels. Namibia imports copper ore,

smelts it, and exports $455m of copper as well.

South Africa

Agriculture is a particularly significant sector for South Africa’s position on RoO.

Sugar (also an important export for Swaziland) and wheat are the sensitive sub-sectors.

South Africa imports animal feeds for its livestock industry. Textiles and clothing are also

sensitive to a lesser extent. In all other sectors, due to its developed services,

manufacturing, and commercial agriculture productive bases, South Africa has comparative

advantages vis-à-vis regional economies. A serious challenge, however, is that the South

African agricultural sector is the least protected in the developing world and therefore

faces stiff competition from European and North American agriculture. South Africa led

SACU in reducing tariffs to implement the SADC FTA but has since been frustrated at the

poor implementation of the SADC agreements. It has recently felt an increased need for

protectionism as Chinese manufacturers have installed plants in Southern African that are

capable of undercutting South African producers’ prices. South African support for SACU

Single Origin may partly stem from fears of the agricultural competition that the Tripartite

FTA would unleash, especially if foreign products are sourced (e.g. from Turkey and China)

through TFTA countries to jump tariffs. However, more effective and consistent SACU

integration could also be a vital preliminary step to TFTA integration. South Africa has been

particularly frustrated with fellow SACU members’ liberal stance on used car imports,

which undermine South African new car exports. Another issue is the relocation of South

African textile plants to the other SACU countries. Of South Africa’s $93b exports, minerals

(i.e., precious stones, metals, and ores) make up $35b.

Swaziland

Swaziland, although it remains a SACU Member State, has non-reciprocated

preferential access to the Comesa market. This unusual arrangement has benefited

producers. Sugar, poultry and beef are sensitive product sectors—of particular note is the

current Rules of Origin scheme governing Swazi cattle exports to the EU—cattle must be

born and bred in Swaziland to qualify for preferences. Swaziland could presumably benefit

from single origin cumulation with SACU. Swaziland is also concerned for its apparel and

refrigerator manufactures and queries inefficient border crossings within SACU. With

exports for 2011 totaling $640m, Swazi imports were $217m. In keeping with the regional

trend, Swaziland’s primary export was raw sugar ($176m) and its most significant import

was electronic goods.