Trade and industrial policy in a Customs Union Colin McCarthy SACU Workshop Parliament

1. Trade and industrial policy in a Customs Union Colin McCarthy SACU Workshop Parliament 16 March 2011

2. Topics covered • Customs Unions defined • Trade and industrial policy defined • Import tariffs • SACU, the tariff and industrial/trade policy • Policy implications and challenges • Conclusion

3. Customs Unions defined • A CU is a free trade area with a common external tariff (CET), the second step in the linear model of regional integration • By definition and in accordance with Article 24 of GATT a CU is associated with trade in goods • SACU (BLNS & SA) dates back to 1910 and currently operates in terms of the 2002 SACU Agreement • Important to note that SACU is not only a CU but also an excise union

4. Trade and industrial policy defined • Applied microeconomic economics: selective intervention by government to allocate resources to more productive use in an effort to address market failures • Trade policy covers all interventions at the border that impacts on relative prices of goods while measures applied within the border to influence relative factor and product prices are usually referred to as industrial policy • Convention to regard trade policy as an element of industrial policy

5. Import tariffs • Customs duties (import tariffs) • Instrument of industrial policy, providing protection against imported competing goods • For some countries an important source of revenue • SA has always viewed the tariff primarily as an instrument of industrial policy • The NIPF and IPAP2 commit Government to a refinement of the tariff structure, lowering tariffs ‘up-stream’ and a more careful, ‘strategic’ treatment of down-stream industries in implementing a developmental trade policy • SA committed to the conclusion of PTAs involving trade and the tariff

6. SACU, the tariff and industrial/trade policy • The tariff SA uses as policy instrument is the SACU tariff • In the past and currently the tariff in all its manifestations (trade remedies and various rebates) managed by SA agencies, which is to change with full implementation of 2002 SACUA and the establishment of the SACU Tariff Board that will take decisions on the basis of consensus • Also Article 38 of SACUA commits member states to the development of common industrial policies to i.a. address economic inequalities between members • SACU is a single legal entity with Article 31 requiring a common mechanism in negotiations with third parties

7. Policy implications and challenges • Member states committed to develop common industrial policies....how does one reconcile the diverse development needs of disparate economies with SA producing roughly 94% of SACU GDP? • How does one reconcile SA’s need to use the SACU tariff and derivatives as instruments of industrial policy with the BLNS emphasis on the tariff as a source of revenue, and this within the context of consensus decision-making by the Tariff Board and Council? • In the new dispensation of an independent Tariff Board responding to submissions of member state national bodies: • Should the Minister of Economic development be the choice to represent SA in the SACU Council? • And in trade negotiations? • Where does this leave the dti and its Minister?

8. Conclusion • SACUA is a constraint on South African industrial policy space • Do we have a workable SACUA in place, and I’m not only thinking of the revenue distribution mechanism? • Insufficient attention given to SACU and implications of membership for development of regional economic development; SACU can within SADC serve as a building block of deeper regional integration • Expanding SACU’s trade in goods to include services, bearing in mind the role of monetary integration through the CMA