SOUTH AFRICANS LOOK BACK ON THE FTA AND WONDER

UNCLAS SECTION 01 OF 02 PRETORIA 004553 SIPDIS SENSITIVE SIPDIS DEPARTMENT PASS TO USTR P. COLEMAN E.O. 12958: N/A TAGS: ETRD PREL SF SUBJECT: SOUTH AFRICANS LOOK BACK ON THE FTA AND WONDER ABOUT THE FUTURE PRETORIA 00004553 001.2 OF 002 ¶1. (U) Summary. A recent conference organized by South Africa's leading business group produced a variety of views on what caused the collapse of free trade talks with the U.S. earlier this year. Some speakers blamed a failure of vision in the South African government. Others blamed an inflexible U.S. negotiating position that did not heed South African concerns. The FTA was not a top priority for South African business and the business community's failure to embrace the FTA deprived it of crucial political support. The private sector supports the idea of resuming a trade dialogue with the U.S. through the vehicle of a Trade and Investment Cooperation Agreement, but there is little if any sense of what this dialogue should include. End Summary. -------------- Looking Back on the FTA -------------- ¶2. (U) Talks to establish a U.S./SACU free trade agreement (FTA) failed earlier this year because of short-sightedness in Pretoria, inflexbility in Washington, and the indifference of the South African business community, according to South African trade experts and private sector reps. Their comments were made at an October 30-31 conference at the Wits Business School organized to analyze what went wrong with the FTA and to mobilize business support for a renewed trade dialogue with the U.S. The conference was organized by Business Unity South Africa (BUSA, the country's premier business chamber) and the South African Institute for International Affairs (SAIIA, the country's leading international affairs think-tank),with a financial contribution from the American Chamber of Commerce, and the support of post's Public Affairs section (which paid for U.S. trade expert Jeffrey Schott to address the gathering). Some 30-40 private sector reps, researchers, and SAG officials attended the event, which was opened by AngloGoldAshanti CEO (and BUSA Chairman) Bobby Godsell. -------------- Who Killed the FTA? Two Views -------------- ¶3. (U) According to SAIIA trade expert Peter Draper, the SAG never saw the FTA as anything more than a market access deal, and this cramped vision defeated any chance of negotiating the kind of comprehensive deal desired by the U.S. Pretoria's negotiators, he said, knew that 95 percent of South African goods already entered the U.S. duty-free, and they did not believe that South Africa would ever be a major services exporter to the U.S. With market access already in hand, they saw little reason to negotiate "new issues" such as IPR or investment, or to trade away protection in sectors such as autos. The results were fatal for the talks -- the space for trade-offs became small and the perception developed within the SAG that an FTA would be a "one-sided" deal for the U.S. Draper was sharply critical of Pretoria's cautious approach to trade, which he derided as "sectoral" rather than visionary. In his view, the FTA should have been conceived -- and sold to the public -- as a means to lock in and deepen economic reform, heighten investor confidence, integrate South Africa into global production networks, and subject local firms to competition. As he put it, "Once you get bogged down in sector specificity, you go nowhere. You have to look at the entire economy, not just exporting 100 BMW's to the U.S." ¶4. (U) In contrast, several speakers said the FTA was killed by an "inflexible" U.S. insistence on a pact that reached far beyond market access and did not deviate from the core terms and structures of previous FTAs. According to these critics, Washington's attempt to force a "template" on South Africa gave the impression that the FTA was being presented on a take-it-or-leave-it basis irrespective of South African concerns. The evidence cited for this conclusion included Washington's "refusal" to discuss anti-dumping issues, its "failure" to appreciate that government procurement disciplines could undermine Black Economic Empowerment, and its "deafness" to public sensitivity that investor-state dispute resolution mechanisms would take investment disputes out of the South African court system. Whatever the merits or accuracy of these complaints, it was clear that the U.S. approach struck some South Africans as high-handed and still rankled. As one steel industry rep said, "This country exists because of negotiation. Negotiation is never a one-way street. But the U.S. never budged from its original position. It just wanted us to sign on the dotted line." PRETORIA 00004553 002.2 OF 002 -------------- Business Ambivalence -------------- ¶5. (U) Some speakers also pointed a finger at the South African business community for not embracing a comprehensive FTA or giving it crucial political support. Reg Rumney of BusinessMap discussed the results of a recent survey of CEOs that revealed deep ambivalence about an FTA. While most CEOs paid "lip service" to the idea of an FTA, Rumney reported that only a handful were well-versed in trade issues or regarded an FTA as a top priority for their firms. Mining companies, in particular, could not see how they would be affected by an FTA. Rumney also found open opposition to an FTA in heavily protected industries such as autos and in heavily regulated sectors such as fuels, where an FTA could limit firms' ability to set prices high enough to offset regulatory costs. ¶6. (U) In response, one auto industry rep claimed that tariff talks in the auto sector were impossible because of the huge disparity between U.S. and South African auto tariffs (2 percent and 32 percent, respectively). "The starting positions were just too far apart," he said, adding, "U.S. negotiators wanted a zero for zero tariff deal in the long run. This would have posed huge challenges for South Africa. Our industrial sectors would be severely undermined by a true FTA with the U.S." The fears of the auto rep were echoed by his steel industry counterpart, who told the group, "The comprehensive U.S. approach was unacceptable. South African business doesn't want an FTA under just any circumstances." -------------- TICA: The Way Forward -------------- ¶7. (U) All participants agreed that South Africa needs friendly trade relations with the U.S.; the ongoing GSP review, the collapse of the Doha Round, potential conflicts in the UNSC, and the possibility of a new protectionist Congress were all cited as reasons to resume dialogue with Washington. Although a full-blown FTA was rejected as unrealistic for now, there was a near consensus that the proposed Trade and Investment Cooperation Agreement (TICA) could be a useful vehicle for addressing bilateral trade issues. As one speaker put it, the TICA could "fill in the potholes" left over from the FTA negotiations. At the same time, no one had a TICA agenda to propose and several speakers noted that South Africa had to do some serious homework before it could negotiate a TICA. Business input was seen as essential -- but business, too, was seen as poorly informed about the impact of trade deals. -------------- Comment -------------- ¶8. (SBU) The conference produced many views on the FTA but almost no ideas about what to do next. In hindsight, it seems clear that corporate South Africa's ambivalence about a comprehensive trade pact left the FTA bereft of support from a key domestic constituency and wide open to attacks from unions and other groups. Once orphaned, the FTA was doomed. Fortunately, there are signs that South African business may now regret the non-role it played during the FTA talks. In a recent meeting with post, a senior BUSA officer admitted that BUSA had done a poor job of supporting the FTA; she pledged to do a better job of coordinating business support for TICA. It was encouraging to hear that BUSA, having missed the main event, does want to be more engaged in the future. A suitably modest TICA might draw support in South Africa and serve as a platform for bigger trade deals in the future. BOST