SA - THE BAD BOYS OF THE EU EPA NEGOTIATIONS?

C O N F I D E N T I A L SECTION 01 OF 02 PRETORIA 000328 SIPDIS SIPDIS DEPT PLEASE PASS TO USTR FOR P.COLEMAN DEPT OF COMMERCE FOR J.DIEMOND GENEVA FOR USTR E.O. 12958: DECL: 02/14/2018 TAGS: ECON ETRD SF SUBJECT: SA - THE BAD BOYS OF THE EU EPA NEGOTIATIONS? Classified By: Ambassador Bost for reasons 1.4(b) and (d) ¶1. (C) Summary. South Africa is refusing to enter into the European Union - Southern African Development Community's Economic Partnership Agreement (EPA),even though all four other Southern African Customs Union countries have initialed the interim EPA. While South Africa blames EU negotiating tactics and the EU's inclusion of "new generation" issues, local impression is that South Africa has shirked its obligations towards regional integration and taken a self-interested posture at odds with its SACU neighbors. The split over signing the EPA has created a regional rift that could precipitate the dissolution of the world's oldest customs union. South Africa's stance in the EPA negotiations highlights South Africa's trade agenda, namely, to avoid binding obligations on "new generation" issues and to allow itself the policy space to pursue its industrial policy. End Summary. -------------- DISAGREEMENT LEADS TO SPLIT -------------- ¶2. (C) South Africa has refused to join a European Union (EU) - Southern African Development Community (SADC) Economic Partnership Agreement (EPA),even though the other members of the Southern African Customs Union (SACU) initialed the document in December 2007. South Africa's go-it-alone posture has ruffled feathers in the region, annoyed the EU, and even called into question the viability of SACU. ¶3. (C) The EU's non-reciprocal preferential market access granted to Africa, Caribbean, and Pacific countries under the Cotonou Agreement was set to expire on December 31, 2007 per a WTO-mandated deadline. The EU and seven of the Southern African Development Community (SADC) countries launched negotiations of the EPA in 2004, with priorities to include market access, sanitary and phytosanitary issues, technical barriers to trade, and regional integration. Without an EPA, these SADC countries, including all the SACU countries except South Africa, faced GSP tariff lines that would be much higher in comparison to the zero tariff lines offered by the Cotonou Agreement. (Note: South Africa and the EU had entered into a Trade and Development Cooperation Agreement (TDCA) in 2000, which protects South Africa from the loss of reduced tariffs after the expiration of the Cotonou Agreement. End Note.) ¶4. (C) In the interest of regional integration, the EU agreed to include South Africa in the EPA negotiations in March ¶2007. However, differences between South Africa and its other SACU partners, as well as disagreements between the EU and SA, resulted in a split region. With the risk of losing trade benefits, Botswana, Namibia, Lesotho, and Swaziland (BNLS) broke rank with South Africa and signed an "interim EPA" in December 2007. The agreement will be concluded in two phases with the first phase to cover trade and the second phase to address services and investment. South Africa backed out of the negotiations and has to date refused to sign any agreement. (Note: Mozambique also signed the interim EPA.) -------------- WHAT WENT WRONG? -------------- ¶5. (C) Press reports were quick to criticize South Africa's failure to join the other SACU nations with headlines such as "Pullout calls into question SA's regional commitment" and "SA sinks EU trade deal." However, according to SAG officials, SA had no choice but to defend the customs union from the EU's negotiating tactics. Qfrom the EU's negotiating tactics. ¶6. (U) After the pullout, SA Department of Trade and Industry Minister Mandisi Mpahlwa provided a public statement listing several reasons for South Africa's position on the EPA. According to Mpahlwa, each of the SADC's central negotiating goals had been eroded by the EU, including reducing preferential treatment for Less Developed Countries, whittling down the number of BNLS sensitive products, and imposing obligations for "new generation" issues, such as services and investment. South Africa was also concerned about the inclusion of a Most Favored Nations (MFN) clause, which would extend the same trade concessions to the EU that were granted to SACU's other trade partners under FTAs. Mpahlwa further emphasized that South Africa was being "treated differently and less favorably in the EU market as compared to the others thus perpetuating the division in the PRETORIA 00000328 002 OF 002 region's RELATIONS with the EU." ¶7. (C) According to a SACU contract employee who spoke with Trade and Investment Officer, South Africa tried to renegotiate the tariff lines from its TDCA, hoping to better its bilateral position with the EU in disregard to other SACU member state interests. EU Trade Advisor Eva Bursvik told Trade and Investment Officer that South Africa also took an immediate hard-line stance against inclusion of services and an MFN clause, even after the EU offered to remove the services requirement and to handle the MFN clause on a consultative basis for South Africa. ¶8. (C) Bursvik conceded to Trade and Investment Officer that some of SA's concerns were legitimate. For example, an MFN clause could inhibit SA's trade policy by eroding SACU bargaining power in its FTA negotiations with Mercosur. Even if South Africa was granted immunity from the MFN clause, this could result in tariff line discrepancies between the SACU countries. Bruised egos may have also played a role in South Africa's posture. South Africa's negotiators were criticized for the outcome of the TDCA negotiations and were hoping to use the EPA forum to revisit the TDCA tariff lines. However, the EU refused to allow this or to treat the more developed South Africa the same as the other less developed countries in SACU, which created even more discord between the EU and South Africa. ¶9. (U) Even if South Africa had legitimate reasons for backing out of the EPA process, South Africa's perceived selfish posture has further strained RELATIONS with its neighbors and highlighted the differences among SACU member states. Local press and commentary paint South Africa as the bad boys of the negotiations, which has undermined confidence in SA's commitment to regional integration and could precipitate the dissolution of the world's oldest customs union. -------------- REGIONAL RIFT -------------- ¶10. (C) The division between the SACU nations had raised concerns about whether SACU can continue to operate as a coherent entity. DTI Deputy Director General Iqbal Sharma told Trade and Investment Officer that the "failure to harmonize the TDCA and EPA could mark the end of SACU." While he qualified this statement by noting that SACU had been a customs union in name only, the other SACU countries rely heavily on the SACU revenue sharing program. As a result, dissolution of the union would have a major impact on the BNLS government coffers. ¶11. (C) South African trade experts have also questioned whether the signed interim EPA breaches the SACU treaty. Article 31 of the SACU agreement prohibits member states from entering into new trade pacts, or amending existing agreements, without the consent of other member states. It remains to be seen whether South Africa will attempt to invoke this clause and, if it does, whether its participation in the EPA talks provided authority to the BNLS countries to enter the interim EPA. ¶12. (C) President Mbeki commented in his State of the Nation address on February 8 that the EPA was still on South Africa's agenda but only in the context of the African Union (which to date had been silent on these negotiations). Bursvik commented that DTI is waiting for any POLITICAL proclamation that would allow it to reinitiate negotiations. In the meantime, the EU and BNLS countries are moving forward with Phase 1 of the interim EPA. -------------- COMMENT -------------- ¶13. (C) South Africa's posture in the EPA negotiations Q13. (C) South Africa's posture in the EPA negotiations highlights South Africa's trade agenda, namely, to avoid binding obligations on "new generation" issues and to allow itself the policy space to pursue its industrial policy. However, in pressing hard for these issues in time-sensitive negotiations crucial to its neighbors, South Africa may have undermined its own regional integration program. Regardless, it is unlikely that South Africa would allow SACU to be disbanded given the financial dependency the region has on SACU revenues. This would only underscore the perception that South Africa disregards the interests of its neighbors. BOST