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28 May 2008

Chairperson
Honourable Members

I would like to use this occasion to reflect on the work which we have been carrying out in the main areas of responsibility assigned to me since my appointment nearly three years ago. The first of these areas is international trade, covering trade negotiations as well as trade and investment promotion, and my second focus area has been industrial policy.

Many years of involvement in international trade negotiations both as a Deputy Minister, and earlier as a Member of Parliament monitoring these processes, has taught me one important lesson: International trade negotiations at the end of the day are about hard bargaining with parties that have, and will pursue, vested commercial interests. Whenever somebody tells you that they are asking you to make commitments towards them as a means of benefiting you by locking in policy reforms, or merely to provide a legal mechanism to enhance benefits to you, be deeply suspicious. Behind such pretensions is invariably some offensive interest. Another important lesson is that all too often in trade negotiations, we have seen developing countries winning the battles over the broad declaratory frameworks, only to find that in the detailed negotiating processes, these broad principles have surprisingly little impact on positions actually taken. It is a case Chairperson, of the angels being found in the generalities, and the devils in the detail.

This is the experience that has confronted us both in the World Trade Organisation Doha Development Round negotiations, and in the Economic Partnership Agreement negotiations with the European Union. The Doha Round was supposed to be, as the declaration adopted at the World Trade Organisation (WTO) Ministerial in Doha in 2001 put it, a process where "the needs and interests of developing countries would be placed at the heart of the work programme". Indeed, developing countries only agreed at Doha to another round of trade negotiations, on condition that developmental concerns would prioritise and shape the process.

The reason why the Doha round negotiations has been so protracted is fundamentally that the advanced industrialised countries have found themselves unable to come to the party with sufficiently ambitious proposals for reform in areas that have so evidently impeded the ability of developing countries to participate in the global trading system, while combining this with ultra ambitious demands directed at developing countries in other areas. Agricultural trade remains the most heavily distorted area in the global trading system.

During the Uruguay Round, while substantial industrial tariff and other commitments involving considerable adjustment costs were imposed on developing countries, agriculture was largely left out of the process. This is an area where without subsidies, high tariffs and other forms of support, very small groups of producers in the advanced industrialised countries would be unable to compete against more efficient producers in the developing world. The Doha declaration prioritised reform in this particular area. It called for the removal of export subsidies, the substantial reduction of subsidies on production that were trade distorting, and a significant improvement in market access.

What we have seen over many years of protracted negotiations, was unwillingness by the major subsidisers and protectors of small and inefficient agricultural sectors, defenders of measures which have been repeatedly identified as significant impediments to developing countries realising their competitive and comparative advantages, to come to the party with significant enough reform proposals. Even the proposals for modalities on agriculture, which are currently on the table at the WTO, which we welcome as steps in the right direction, will still leave in place a significantly distorted agricultural global trading system, which will continue to impact to the disadvantage of developing countries.

At the same time, we have seen the very same players directing ultra ambitious demands for market opening in the industrial sectors of so called "advanced developing countries". South Africa found itself particularly vulnerable in this process. During the apartheid period, our country was classified in the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO, as a developed country. This historical injustice meant that during the Uruguay Round, we took commitments required of developed countries. The net effect of this is that our average bound industrial tariffs are much lower than those of other so-called "advanced developed countries". Moreover, those bindings apply to all members of a Customs Union, which includes one least developed country, and three small vulnerable economies, which would otherwise not be required to make formula cuts in the Non Agricultural Market Access (NAMA) negotiations.

The low binding rates mean that the application of the Swiss Formula proposals, would cut deeply into our applied industrial tariffs on a scale significantly larger than that of the developed world, and indeed, of many others in the developing world. We have fought hard in the WTO process to secure an understanding that an outcome where a country like South Africa would have to make significant cuts in industrial tariffs in return for only modest benefits in agriculture cannot be regarded as a developmental outcome. At the Hong Kong Ministerial, we fought long and hard and were partly instrumental in securing the adoption of Paragraph 24 of the Hong Kong declaration, which said that the level of ambition in agriculture and in Non Agricultural Market Access (NAMA) must be comparable.

We also launched in the Hong Kong Ministerial in 2005, the NAMA 11, which is a grouping of a number of developing countries vulnerable to ambitious formula cuts. Through the NAMA 11, we have been able to build recognition of our case to the point where no one can now fail to acknowledge that South Africa would be required to pay disproportionately according to proposals which have been put forward by the majors.

Chairperson, we meet at a time when there is a significant effort to conclude the Round. There is talk of a Mini-Ministerial next month to try to conclude modalities on the main subject areas. Ahead of this, chairpersons of the subject negotiating groups have been drafting negotiating text. The current paper on NAMA does for the first time provide some specific recognition of the need to provide additional flexibilities for South Africa. That is a concession that we have won through hard work and a refusal to be part of some "made in the US and European Union (EU)" consensus. Considerable work and hard negotiating lie ahead if we are to come out of the Doha Round with a deal that will be of net benefit to South Africa and the developing world. Our commitment is to continue working towards such an outcome together with our constituencies and key stakeholders, as well as our allies in the negotiating groups to which we belong.

In the Economic Partnership Agreements with the European Union, we have had to confront a situation in which in order for African, Caribbean and Pacific (ACP) countries to secure improved access for their products to the European Union market, they have had to make substantial commitments to the European Union in areas where the European Union has manifested strategic ambitions. In the case of South Africa, which had no legal obligation to participate in the Economic Agreement Partnership (EPA) negotiations, but which took a decision to do so in the interests of harmonising our trading relationship with other members of the region, we have found a number of these obligations such a serious impediment to fundamental policy, that we have at this point been unable to initial the interim EPA agreement.

The fundamental issues of contention have not been in the area of trade in goods. In the Southern African Community Development (SADC) EPA configuration, by building on the Trade Development and Co-operation Agreement which South Africa signed with the European Union in 1999, and which, through the mechanism of the Southern Africa Custom Union (SACU), was extended to Botswana, Lesotho, Namibia and Swaziland, as far as the entry of EU goods was concerned, we reached an agreement in which all other members of SACU obtained duty-free, quota-free access into the European Union market, while South Africa would have obtained some improvements in terms of access of some fruit and fish products.

The problems which we faced had to do mostly with matters of trade rules. The European Union indicated that it was not willing to agree to enhance market access, unless there were simultaneously negotiations resulting in agreements on so called new generation or Singapore issues, such as investment, competition policy and transparency in government procurement. The argument put forward was that rules about such matters were essential to enhance the attractiveness of ACP regions as investment destinations. The problem which we had with that proposition is firstly, that we do not as the SADC EPA configuration, consisting of SACU members plus Mozambique and Angola, have in place common rules or common procedures on any of those matters, and indeed the European Union only developed common positions at an advanced stage of its own integration process when it became an economic union.

Secondly, we became aware that these matters have been identified in strategic papers of the European Union, as matters which they would want to address as so called "beyond the border" matters judged necessary to make market access for European companies across the world, real and valuable. The specific demands in each of these areas have accordingly been to insist that regulatory authorities act to defend European interests against preferences for domestic producers, and also to act on their behalf against so-called domestic monopolies. In the interim EPA arrangement as well, we encountered a series of demands, which in our view would have allowed the European Union to exert significant influence on our economic governance in a highly partisan and non-developmental manner.

The EPA councils would have emerged as powerful new bodies, potentially trumping either SADC or SACU. Apparently, technical definitions of "parties" would in our judgment, create a situation where if any of us had any complaint against the European Union, we would have to get the concurrence of all of us, whereas the European Union would be able to act against all of us if it had a complaint against any of us. A so-called "More Favoured Nation" clause has also proved to be an important sticky point. This would require of us, that if on a line by line basis, we extend anything better to any other country or group of countries that has more than 1% of world trade, we must then extend the same to the European Union. This would amount to recognising the European Union as our prime point of reference, and would impede the important ability that we need to be able to diversify our trade and to construct relations with other important developing countries.

All of these issues remain outstanding, and the resolution of these is the basis on which we would be able to become part of the signatory of a full-on EPA. During a meeting of the SADC EPA configuration with the EU in March, we agreed with Commissioner Mandelson, that there would be a process to discuss and negotiate these matters further. That process has now begun and it is to be hoped that it leads to some resolution in the near future. If not, the unfortunate consequence would be that we will have different arrangements with the EU within the Southern African Customs Union, including a situation where Botswana, Lesotho, Namibia and Swaziland members of the SACU, have agreed to enhance access for the European Union on around 500 tariff lines. If we are not part of the process, then this in itself will create enormous problems for customs administration in the Southern African Customs Union.

This brings me to the third important area which a new administration will have to grapple with, that is the issue of promoting regional integration. The EPA process has already divided members of the Southern African Development Community into five different negotiating configurations, each with somewhat different obligations towards the European Union. This is in a context in which SADC, which has set itself the ambition of launching a fully fledged Free Trade Area (FTA) at the summit in August 2008, and retains the ambition of moving towards a customs union by the date of 2010.

We have engaged quite energetically on the issue in part through the mechanism of an Inter-Departmental Group operating at Deputy Ministers' level, which has put forward a number of conceptual proposals on the way forward in this regard. Let me just say Chairperson, that the date of establishing a customs union by 2010, looks at this juncture, to be highly over ambitious. A consultancy study which was commissioned by the SADC secretariat, pointed out that there are very few fully functioning customs unions in the developing world, and that the European Union took some 11 years to negotiate the Common External Tariff, which gave rise to the emergence of a Customs Union at an earlier stage of the European integration process.

We have indicated and have drawn broad support from a national consultation involving major stakeholders, that we are very wary of proposals emerging from consultants for a quick fix, big bang reform that would allow a simplistic formula to replace complicated and detailed negotiations on a Common External Tariff at an appropriate time. The specific proposals emerging from the DNA consultancy group, which have suggested that we should have a simple two band model with zero tariffs on capital goods and intermediate goods, and a flat revenue based tariff of between five and 10% on all consumer goods, would not be appropriate, either from a South African national point of view, nor we believe, from a broader developmental perspective in the region as a whole.

For us in South Africa, such a proposal would amount to us abandoning a very important principle that tariff policy is an instrument of industrial policy, and would require us to move towards a notion of tariff policy as a revenue instrument alone. A flat tariff of five to 10%, would mean that we could no longer provide the policy space that will be necessary to defend our sensitive sectors, and to promote industrial policy priorities, while at the same time in a context where over 50% of our tariffs are zero, would require a raising of tariffs and hence, a raising of prices on a range of goods which will impact negatively on consumers.

More fundamentally, we believe that it is necessary for us to recover a more developmental approach to regional integration. The literature on developmental integration has been highly critical of mechanistic schemes, prematurely imposed in developing regions. It argued that the major impediments to increasing inter-regional trade are more often located in issues of under developed production structures and inadequate infrastructure, than they are in tariff and regulatory barriers. This I believe has also been our own experience in the SADC region. Since 1995, we have already removed duties of more than 90% of products from other SADC countries in accordance with an asymmetrical and differentiated obligation which we took on in the SADC FTA processes. Yet, the trading balance between us and our neighbours remains broadly what it has been and where there have been exceptions; they have been because neighbouring countries have taken steps to ensure the development of productive sectors that are able to meet the requirements to become active in the South African market, in terms of price and quality.

We believe therefore, that what we need to do is revisit our regional integration programmes with a view to accelerating our co-operation and co-ordination agendas, in real economy areas such as infrastructure, industrial policy and the like, and that this should be the basis upon which we eventually, and at an appropriate time, move towards a properly negotiated and constituted Customs Union.

We have said in our National Industrial Policy Framework and it was repeated, even more strongly in the resolution of the ruling party adopted at Polokwane, that trade policy should be subordinated to our industrial policy. We are able to leave as a legacy to our successors, a National Industrial Policy Framework, adopted after much debate and discussion within government and with key stakeholders. This has identified the need for us to move progressively to bigger and bolder industrial policy interventions. We have agreed that those developing countries which have made any headway in breaking out of their historically defined roles in the global economy as mere producers of raw materials, those few countries which have become significant exporters of manufactured goods on the world market and succeeded in achieving a level of industrialisation, have all had in common, an active industrial policy.

We have signalled that we need to be moving in our industrial policy towards more successful and inclusive processes of self discovery, whereby key economic actors with support from the state, identify Key Action Plans that are necessary to drive those sectors forward. We have indicated that the state must be willing to respond with appropriate support measures including regulatory benefits and incentives, and address issues of industrial financing. We have furthermore indicated, that the state must move into a position where it is able to act on a strategic scale large enough to actually make a difference to our growth trajectory, and have said that we would expect greater reciprocity from beneficiaries of our support measures and a greater willingness by the state to withdraw support if that reciprocity is not forthcoming.

Our first year Industrial Policy Action Plan identified four lead sectors:

* capital goods and transport equipment
* the motor industry
* the chemical industry
* and forestry and furniture making

In addition to this, we said there was a need for further progress on the Accelerated and Shared Growth Initiative of South Africa (AsgiSA) priority sectors, as well as to address the urgent matter of stabilisation in the clothing and textile industry. We have broadly speaking, met most of the indicators that were identified for the first Industrial Policy Action Plan, but we chose the easiest to implement measures in each regard. One area where considerable work still needs to be done, but which is absolutely fundamental, is in the area of capital goods and transport equipment. Here work is underway with the Department of Public Enterprises and the State Owned Enterprises involved in large procurement decisions, to identify areas where South African enterprises can potentially produce inputs for the major infrastructure investment programmes which are so critical to taking this country forward. Our objective is to reduce the import leakage from the infrastructure investment programmes, from the current estimated 40% of the cost for those programmes, to around 30%. In the light of current global trends and in particular the vulnerability which the South African economy has through the balance of trade deficit, it is absolutely essential that we achieve that particular target.

In future, we anticipate Industrial Policy Action Plans being three year rolling programmes aligned to the Medium Term Expenditure Framework (MTEF) process. The first such rolling three year Industrial Policy Action Plan (IPAP) is under preparation, and we anticipate that it will be completed ahead of this year's Medium Term Budget Policy Statement. This will take forward the work that has been done in the lead sectors, and to identify new targets and new milestones to ratchet up the work to another stage. At the same time, we anticipate new priority sectors emerging, including some parts of agro processing, mari-culture and craft industries. Simultaneously with this, we will be addressing important cross cutting issues of which the most important is probably the issue of industrial financing, as well as capital upgrading programmes in targeted sectors.

Overall, I believe that in industrial policy, we have laid the foundation and perhaps started some of the early construction, but clearly there is still a long way to go before we have in place an industrial policy on a scale, and with the capacity to fundamentally propel our economy forward, along a growth path which is both at a sustainable higher level than the current one, and which is also more labour absorbing.

A critical challenge, which we have only begun to address, is that of the cadreship necessary to drive industrial policy further forward. We made an important institutional change when we took those who are involved in sector work, who were previously located in The Investment Promotion Agency, TISA, and brought them over into the Enterprise and Industrial Development Division (EIDD). We still have to complete the work of restructuring the Enterprise and Industrial Development Division which is now too large, and also are filling a number of key vacancies which continue to exist in our sectoral divisions, as well as the overriding industrial policy group. We have been holding regular monthly meetings, which I have personally been chairing, to try to identify all the various issues that we need to propel the programme further forward, and I would recommend that this practice should continue into the new administration formed after next year’s election.

Further challenges I believe, are for us to further insert our industrial policy work into the totality of government, through the cluster system but also more centrally as government moves into the development of a planning process. What I believe we need, is a more focused across government planning process, which will set priorities, such as the current Apex priorities, and that this priorities setting, through a planning process, will also find expression in decisions in the budgetary process. We have in short I believe in industrial policy, laid a foundation and begun to do some of the work, but many challenges remain which will now fall to the new administration.

Chairperson, let me just conclude by expressing my thanks to Minister Mandisi Mpahlwa for the leadership which he has been able to provide to us in the Ministry and for creating the space that has enabled us to make our contribution, to my colleague, Deputy Minister Elizabeth Thabethe, for the way in which we have been able to develop a working relationship and division of labour, that I believe has enabled us as Deputy Ministers, to add some value to the work of the Department, to the Director-General of the Department of Trade and Industry, Tshediso Matona who has always been available for interactions and discussions, and to the Heads of the Division that I have worked most closely with, Xavier Carim from International Trade and Economic Development Division (ITED), Iqbal Sharma from TISA, Lionel October, the former Deputy Director General of EIDD, and now Sipho Zikode, the acting Deputy Director General of EIDD, and Nimrod Zalk, Chief Director of Industrial policy, as well as all the different participants in the sector work.

Thank you very much.

Issued by: Department of Trade and Industry
28 May 2008
Source: Department of Trade and Industry (http://www.dti.gov.za/)