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India - SACU Preferential Trade Agreement: Who will be the true beneficiaries?

22nd March 2011

By: In On Africa IOA

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In January 2011, Indian Minister of Commerce and Industry Anand Sharma announced that the long-discussed Preferential Trade Agreement (PTA) between India and the Southern African Customs Union (SACU) was expected to be concluded towards the middle of 2011.(2) This agreement is proposed to cut tariffs on a limited number of products between the two regions, and is thereafter expected to eventually expand to a fully-fledged free trade agreement.(3) In view that similar announcements have been made on numerous occasions since negotiations were initiated in 2002,(4) it is not likely that an agreement will be reached in the very near future.

However, this discussion is not aimed at determining whether or not this agreement will be decided upon, but rather to determine, should it be implemented, if the proposed India-SACU PTA will achieve increased trade and economic growth and who the main beneficiaries will be. The first section of this discussion gives insight into the use and importance of PTAs, followed by an assessment of the relationship between India and the SACU members (South Africa, Botswana, Namibia, Lesotho and Swaziland), as well as the likely repercussions of this agreement should it ever be signed.

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‘Preferential’ liberalisation

The World Trade Organisation (WTO) has long attempted to decrease the tariffs and other trade restrictions placed on goods from developing states through multilateral negotiations.(5) These attempts have until now been unsuccessful, causing states to turn to PTAs as alternative methods of ensuring that south-south cooperation diverts trade away from the developed north.(6) According to the WTO, there were in excess of 200 PTAs in force by the year 2009, of which nearly all states are party to at least one.(7) The question is asked though, what is a PTA? Simply defined, it is an agreement between a regional group of states to reduce protectionist trade policies, allowing preferential access to the markets within their circle, while not offering these same benefits to states external to the agreement.(8)

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At first glance, it may seem that PTAs are in contravention of the WTO’s most favoured nation (MFN) clause.(9) They are seen, instead, as a loophole within the MFN clause used to encourage trade in the developing world and are limited in that the agreement must include almost all trade between the members to the PTA, restrictions and tariffs must be fully eliminated between the members, and members are not permitted to raise tariffs or restrictions for non-members.(10)

Why SACU?

India has maintained a close relationship with Africa since its independence, and in 2008, the Indian Government created a new design for this involvement in the form of the India-Africa Summit, guided by principles of equality, mutual respect and benefit, and the respect for the sovereignty of the state, and intended to enhance cooperation between Africa and India.(11) This cooperation, however, is seen most prominently in the relationship between India and Southern Africa, with a primary focus on South Africa in particular.

Both India and South Africa are considered states of influence with regard to south-south cooperation schemes(12) and so a trade agreement between the two states seems only inevitable. South Africa is responsible for almost 95% of SACU’s annual GDP,(13) and from an Indian perspective, a PTA with SACU would not only grant greater access to the South African market at a lesser expense, but also open up the rest of southern Africa, including its natural resources, in a much more accessible way.(14) Similarly, India’s rapidly expanding economy and population has highlighted a gap in the consumer market.(15) This, combined with steadily falling trade barriers, presents an opportunity for South African multinationals to expand into a virtually untapped market, while at the same time developing sound economic relations with other developing states and rearranging South Africa’s position on the global stage by decreasing its reliance on the developed north.(16)

Likely outcomes

A study was conducted in early 2009 as to what the implications for Botswana, Swaziland, Namibia and Lesotho would be if a free trade agreement was established between SACU and India.(17) The study essentially revealed that while Swaziland, Namibia and Lesotho would be likely to experience only slight changes,(18) South Africa would be likely to achieve significant economic gain out of such an agreement, especially in the agriculture and natural resources sectors. Botswana, on the other hand, would most likely experience a small decline in economic growth in sectors such as apparel, parts and vehicles, manufacturing and services.(19) Although these declines are likely to be minor, collectively they would reflect a noticeable reduction in overall economic performance.

The reason for these decreases is explained by the concept of trade diversion, which holds that if, through the introduction of a trade agreement, a state is automatically forced to import certain goods from its new trading partner, regardless if these new goods are more expensive than the original exporter.(20) According to this study, South Africa would most likely choose to import its apparel from India, who would most likely offer a superior product to Botswana, and given that any previous tariffs would no longer apply, South Africa is likely to prefer the Indian product. This leaves a huge gap in the Botswana market, which would no longer able to sell apparel, thus causing a significant loss in revenue and GDP.

Concluding remarks

It is a fact that PTAs facilitate both trade creation and trade diversion. The extent to which a state is affected by either of these phenomena is dependent on the circumstances surrounding the state in question. With regards to the above-mentioned study, Botswana would not likely have been so ill-affected had it been a more powerful member of SACU, and South Africa’s gains might not have been quite so obvious had it not been responsible for so much of SACU’s annual GDP.

Another key point to consider given the study discussed above is that SACU is a customs union, which, by definition, requires that member states agree not only to allow the free trade of goods between their markets, but also that the states maintain common tariffs and non-tariff barriers against non-member states. This implies that less influential states might actually be forced to alter their trade policies in order to align with the negotiated policies of the union.(21)

Should the India-SACU PTA eventually come into force, it is thus highly likely that the only parties who will receive significant benefits would be the parties that are only using the agreement to enrich their own individual positions on the international stage, namely South Africa and India, and who would thus be undermining the attempts by the ‘lesser’ SACU states of entering the international market.

NOTES:

(1) Contact Megan Erasmus through Consultancy Africa Intelligence's Africa Watch Unit (africa.watch@consultancyafrica.com).
(2) ‘India, SACU to sign preferential trade agreement: Sharma’, Business Standard, 12 January 2011,
http://www.business-standard.com.
(3) ‘South Africa to move ambitiously on India PTA’, The Economic Times, 7 June 2010, http://www.tralac.org.
(4) Soko, M., 2006, ‘SACU and India: Towards a PTA’, South Africa Institute of International Relations Trade Policy Briefing No 11, p1.
(5) Cancun Ministerial Meeting and the Doha Development Round of trade negotiations.
(6) Nath, H. K. and Yildiz, H. M., 2010, ‘The Implications of a South-South Customs Union on Tariffs, Welfare and the Prospect of Global Free Trade’, SHSU Economics and international Business Working Paper No. 10-01, pp1-2.
(7) Ibid.
(8) Mansfield, E. and Milner, H., 1999, ‘The new wave of Regionalism’, International Organisation, Vol. 53 (3), p 529.
(9) Article I of the General Agreement on Tariffs and Trade points to the rule that states may not discriminate between trading partners, and that ‘special favour’ rates and tariffs should be extended to all members of the World Trade Organisation.
(10) Nath, H. K. and Yildiz, H. M., 2010, ‘The Implications of a South-South Customs Union on Tariffs, Welfare and the Prospect of Global Free Trade’, SHSU Economics and international Business Working Paper No. 10-01, p2.
(11) Economic Development in Africa Report, 2010, South-South Cooperation: Africa and the new forms of Development Partnership, United Nations Conference on Trade and Development: Geneva, pp16-17.
(12) Nath, H. K. and Yildiz, H. M., 2010, ‘The Implications of a South-South Customs Union on Tariffs, Welfare and the Prospect of Global Free Trade’, SHSU Economics and international Business Working Paper No. 10-01, p2.
(13) Mandigora, G., ‘The proposed SACU-India PTA: Where do the opportunities lie?’ Trade Law Centre for Southern Africa, 10 October 2006, http://www.tralac.org.
(14) Soko, M., 2006, ‘SACU and India: Towards a PTA’, South Africa Institute of International Relations Trade Policy Briefing No 11,
(15) Ibid.
(16) Ibid.
(17) Sandrey, R. and Jensen, H. G., 2009, ‘SACU, China and India: The implication of FTAs for Botswana, Lesotho, Namibia and Swaziland’, Tralac Working Paper No1/2009.
(18) Ibid.
(19) Ibid.
(20) Ravenhill, J., 2008, ‘Regionalism’, Global Political Economy, 2nd edition, Oxford University Press, Oxford, p177.
(21) Van Den Berg, H., 2004, International Economics, McGraw Hill, Boston, p299.


Written by Megan Erasmus (1)

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