Zwelinzima Vavi's address to the South African Institute of International Relations - October 9, 2007

Is South Africa risking its industrial policy space in the WTO and NAMA negotiations?

The Doha round of WTO talks started with a solid promise that this would be a "development round". The Doha mandate provided the framework and possible basis for such a developmental outcome.

One key element of the Doha mandate was the implementation issues and special and differential treatment for developing countries.

However, both issues have been put to the bottom of the list of issues to be dealt with and the main focus is on the issues of Agriculture, NAMA and Services with a particular focus on market access.

The course of the negotiations has clearly gone in the opposite direction to a development outcome. Instead of addressing existing inequalities, what we see is a strengthening of the interests of developed countries.

We are absolutely convinced that a number of governments, particularly from the European Union, together with the United States, are paying lip service to a development commitment.

Instead, a terrible trade-off is being offered to developing countries: increased access to the markets of developed countries for agricultural products in return for significant market liberalisation, particularly in industrial products.

What this means for a country like South Africa is that we will be seriously de-industrialised, lose a significant part of our manufacturing sector, and become simply a producer of primary products and a destination for tourism. The proposed tariff cuts will cut very heavily into our labour intensive sectors.

Developed countries have argued that developing countries should not be concerned about the tariff cuts as they will be allowed some flexibility, through excluding 5% of their tariff lines from tariff reduction or allowing 10% of tariff lines to take a smaller reduction than proposed by the formula.

The reality is that these flexibilities will not sufficiently protect workers and light industry in South Africa and many other developing countries.

To take a South African example, we will see a substantial decrease in 255 tariff lines affecting clothing. If we calculate how many of these we could protect through the provisions for exclusions, we find that they are already 4.63% of all tariff lines.

If you include the wider range of clothing, textiles footwear and leather, 15.3% of tariff lines are affected. This means that clothing, textiles, footwear and leather alone would not be protected by a 5% exclusion. There would be no space to even think of including automotive and components, plastics, furniture, downstream metals and a range of other labour intensive sectors.

Using the formula to reduce our tariffs will also not allow South Africa to industrialise in the future, as we will not be allowed to raise tariffs to a sufficient level to protect developing, or labour-intensive, sectors. This will condemn us to being providers of raw materials for exports.

In the area of agriculture, the developing countries are being asked to pay a high price for a reduction of agricultural domestic support and export subsidies in developed countries.

These subsidies are very harmful to developing country producers, and can only be addressed multilaterally, through the Doha round, as no developed country will reduce subsidies in a bilateral agreement or unilaterally.

However, a very high price is being asked for reduction of subsidies that are prohibited in the first place.

The proposals for reductions in domestic support that are on the table at this moment (draft agriculture modalities of July 2007), will only reduce the maximum spending levels, but will not reduce the actual spending. In other words, the US will be able to even increase its domestic support spending still further.

In Agriculture the tariff reductions by the developed countries might be much less in the end than proposals might assume. The negotiations include talks on sensitive products. The identification of sensitive products will enable developed countries to exclude them from the high tariff cuts that they are supposed to make.

Products that are going to be identified as sensitive are likely to be those that need protection and that are of interest to developing countries, including South Africa. So the gains from commitments in agriculture by developed countries for South Africa are questionable.

At the same time South Africa will also be obliged to open up its own market for agricultural products, although a number of special products might be identified that can be exempted from tariff cuts. This number is likely to be rather low though.

The Agriculture commitments by developed countries need to be compensated for in other areas of negotiations as well, namely NAMA and Services, where demands on developing countries including South Africa are disproportionate.

The demands in fact violate the Doha mandate and the principle of less than full reciprocity, and the NAMA draft modalities of July 2007 would require developing countries to make higher tariff reductions than developed countries.

Not only are these modalities unfair and against the Doha mandate; they will also have a devastating effect on employment in South Africa and will seriously restrict South Africa's capacity and policy space to be able to industrialise and move up the value chain.

Moreover, developed countries have used the very trade tools that they now wish to restrict developing countries from using.

Coefficients between 19 and 23 as included in the draft modalities, will bring the average bound level in South Africa from 18.6% down to 9.4%. This is a very low level for any serious industrial policy strategy to succeed. Reductions in the applied rates can be up to 66%, depending on the sector. (See table).

South Africa
Current applied
Current bound
New Bound SF 19
Reduction in applied SF 19
New Bound SF 23
Reduction in applied SF 23
Formal Employment (2003)

Textiles
22
25
10.8
50%
12.0
45%
55,846

Clothing
39
44
13.3
66%
15.1
61%
114,933

Leather
21
23
10.4
50%
11.5
45%
8,916

Footwear
30
30
11.6
61%
13.0
57%
17,785

Plastic
16
24
10.6
34%
11.7
27%
45,554

Rubber
21
26
11.0
48%
12.2
42%
22,398

Wood
14
17
9.0
36%
9.8
30%
46,812

Automobile
33
50
13.8
58%
15.8
52%
77,886

Chemicals
12
13
7.7
36%
8.3
31%
29,474

Machinery
16
23
10.4
35%
11.5
28%
90,278

Furniture
20
23
10.4
48%
11.5
42%
38,473

Fabricated metals
16
20
9.7
39%
10.7
33%
111,277

Furthermore a study by the Carnegie endowment[1] on the Winners and losers from Doha estimate that the liberalisation of manufactured goods for unskilled labour will further drive down wages of workers. It will lead to job losses in unskilled jobs in manufacturing in countries such as South Africa, with most significant changes in metals, motor vehicles, electronics and machinery.

And finally, a reduction of 24% in tariffs will lead to losses in labour intensive sectors, including in South Africa.

South Africa will be particularly affected by reductions in tariffs in NAMA, given the tariff structure, which is different from most other developing countries, which will lead to reductions in applied rates in many sectors with potential job losses in many sectors. Therefore, even the possibility to exempt some tariff lines from tariff reductions will not help South Africa to shield labour-intensive and strategic sectors.

With respect to services, the Doha negotiations require further market opening through revised offers. South Africa made a revised offer in July 2006, with partial or full commitments in sub sectors of computer and related services, telecom services, environmental services and financial services.

This came above the commitments it made a few months earlier in its initial offer of April 2006, which includes partial commitments on professional services, computer and related services, real estate services, rental/leasing services and other business services; courier services, telecom services, construction and related engineering services, distribution services, environmental services, insurance services, banking and financial services, tourism, transport services (mainly mode 2) and some other services.

Although South Africa specified that these offers are conditional on the outcome of negotiations on rule-making (domestic regulation, emergency safeguard measures and subsidies) care has to be taken, as commitments once taken can only be withdrawn if compensation is provided.

Once a particular service sector is committed, this commitment will bind all future governments, under threat of trade sanctions.

In particular South Africa's National Health Act (NHA), which aims to remedy past injustices by creating a more uniform and egalitarian national health care system is actually in conflict with commitments that the Apartheid regime negotiated under the GATS agreement. It threatens to undermine legislation and could make the provision of healthcare to the majority of the population more difficult.

Health-care services delivered outside of hospitals by doctors, dentists, nurses, midwives and other health professionals are all covered by the GATS commitments of 1994.

In particular, the NHA's "certificate of need" conflicts with the GATS Market Access rule. Furthermore, national treatment commitments puts at risk the community based control and decision making, local training and technology transfer options, directed health care subsidies and incentives, and black economic empowerment policies.

All in all the balance is quite unfavourable for South Africa. The losses are going to be substantial and serious, whereas the gains will be rather minimal and uncertain.