Examination of witness (Questions 270
- 289)
TUESDAY 27 JANUARY 1998 (AM)
MR HARM
ROZEMA
Chairman
270. I am so sorry to have kept you waiting
but we are fascinated as to how to make the European Development
Funds more effective through the Court of Auditors. We are a little
late and I apologise. I should like to thank you very much indeed
for coming. It must be very difficult to squeeze in a visit to
our Parliament on your occasional visits to our country and I
am very grateful to you, and I know the Committee is, for suggesting
that you should come to see us to talk about your experience in
South Africa of negotiating with Europe. This is an important
issue from our point of view because we are of course considering
the new relationship under a newly negotiated European Development
Fund, so all these questions are coming up for our attention.
We are very anxious to learn from you what experiences you have
had which do not seem to me to be very happy ones. You indicated
to our Clerk that you would like to make a short statement to
begin with and then we have a series of questions which we hope
will cover the ground between us. Perhaps you would like to start
with your own statement.
(Mr Davies) Thank you very much for this opportunity
to exchange views with colleagues from another parliament. It
is a very welcome but also daunting experience for me. Basically,
I have prepared a brief set of guide notes which try to reflect
on the broader debate on the future of ACP relations after Lomé,
taking into account the South African experience. In actual fact
the future of the Lomé Convention will not directly impact
on us in many respects because we are only very partial members
of the Lomé Convention. There is a little bit of irony
here because South Africa was excluded from the trade chapter
of the Lomé Convention because we were seen not to be a
typical ACP country. Now we find that the kind of model which
is being evolved with us, namely a free trade agreement, has now
been set up as the model for typical ACP countries. It does allow
us to make some observations from our experience. What I have
tried to do in this paper is make a general observation about
the underlying thrust proposed by the Commission to move from
non-reciprocal trade preferences to reciprocal trade agreements.
Basically what we are trying to suggest here is that the kind
of underlying view, which seems to be that reciprocal arrangements
are good for developing countries, that they are the only kind
of arrangement that is compatible with the current globalising
world and that this is the optimum way in which developing countries
can integrate themselves into the world economy, that this actually
needs to be questioned in a number of respects. In particular,
I suggest it detracts from a more precise evaluation of what it
is which has underlain the relatively poor performance of ACP
countries in terms of improving their access into the European
market. Basically I am saying that the fact that ACP exports to
the European Union have declined, even though they had Lomé
preferences, does not mean that the main reason for this is because
the preferences were non-reciprocal. There is quite a bit of research—and
I mention some which was done in South Africa—which is suggesting
that in fact preferences are not as generous as they may seem
at first sight in terms of access, particularly for products where
ACP countries are competitive and that includes temperate agricultural
products, textiles and others. This is indeed something which
we are discovering in our own trade negotiations. The Common Agricultural
Policy and the impact this has on Europe's willingness or otherwise
to grant access for competitive products is a major issue.
271. It seems to me that if you exclude
all those products from the ACP which are likely to be competitive
with European products you should not be surprised if ACP exports
do not grow.
(Mr Davies) Absolutely; that is the point I am
making. The second point I am trying to make here is that the
major problems which ACP countries have had in moving into non-traditional
exports are very often related to supply capacity constraints.
These too are what some of the research that has emerged in South
Africa and southern Africa show are main problems which we think
are underlying this situation of ACP countries and these are not
specifically addressed in the Commission's proposal. Then I make
a number of specific comments. One of them is to the effect that
the Commission is proposing the negotiation of free trade agreements
with ACP sub-regions which are shaped both by WTO rules and the
Common Agricultural Policy. I am saying that no specific commitment
is made significantly to enlarge access to the European Union
market. I am pointing out that South Africa is finding in its
own negotiations that—precisely the point I made just now—in
temperate agricultural products there are significant barriers
to entry into the European Union market and these are very important
sectors for developing countries, also very important for employment
creation. Then with regard to the reciprocity proposal. There
seems to me to be a world of difference between a reciprocity
proposal, which is a voluntary arrangement in which countries
or regions which want to go further and want to seek some additional
significant access beyond the current acquis can negotiate
if they want to, and an approach in which basically you are more
or less compelled to do this because this is the only option which
is realistically available. In this respect the proposal that,
if after three years there is no successful negotiation of FTAs,
non-Least Developed Countries should then be incorporated into
the GSP is something which needs a lot of interrogation. If they
were to be incorporated into the GSP, as it currently operates,
the paper by Chris Stevens and Jane Canon[2]
indicated that such a move would mean that non-Least Developed
ACP Countries would be paying something like 40 per cent of their
current aid disbursement in additional customs duties to the European
Union. I make a few other points, notably that one of the issues
in the South African negotiation has been that of asymmetry and
differentiation in which we are saying that the obligations which
ought to be undertaken in a reciprocal arrangement ought to take
account of the fact that you are talking about an agreement between
countries or regions of very different levels of development and
that they ought to be skewed so that they are less onerous on
the least developed partner. This has been accepted in the South
African negotiation; I do not see this point emerging prominently
in the current debate on the future of Lomé. If you want
to talk about the kinds of regional organisations which would
be involved in the discussion, a number of examples were given,
including the Southern African Development Community. In fact
none of the ACP sub-regions are at the level of customs unions
where they have a common external tariff, therefore none of the
organisations has any mandate to negotiate on behalf of a region
a common external tariff arrangement with a third party, nor do
they have at this point in time the competence to engage in such
negotiations. That leads into another point which I make which
is that I do not think that the capacity which is required to
negotiate FTAs has been adequately taken into account. This is
something which we have been discussing ourselves in our own negotiations.
It is extremely costly in terms of human resource capacity. There
is a feeling in South Africa that too much negotiating effort
has already been expended in negotiating with the EU compared
to what we are likely to get out of it and compared to a whole
series of other commitments and negotiations which we ought to
be entering into. This would probably be magnified in the case
of other countries. I make a number of other points and also a
number of more specific reflections on the southern African situation,
just trying to sketch out what this would mean for SADC if this
were to happen, but perhaps I should stop at this point and respond
to questions from your side.
Chairman:Thank you very much indeed. You have actually
answered our first question very comprehensively. We thank you
for preparing this paper which we will study in greater detail
as we have only just received it. What you have said is very important
indeed.
Mr Grant
272. As an alternative to the Generalised
System of Preferences the Commission has put forward the option
of negotiating Free Trade Areas with ACP regions which would in
theory mean greater access to the EU market but with a requirement
that ACP countries open up their own markets to EU imports. Do
you accept that it will be to the advantage of ACP countries to
open up their economies and reduce their tariff and non-tariff
barriers or not?
(Mr Davies) If we are talking about a reciprocal
arrangement, which we are, it very much depends on what you get
in return for that opening up. It is here where the proposal is
so vague. An agreement which is basically constrained by WTO rules
means that it has to cover substantially all trade; that does
not mean literally all trade, there can be exceptions. An agreement
which is confined by the Common Agricultural Policy would be likely
to limit access for a range of competitive products unless the
Common Agricultural Policy changes. A point which I was making
in the paper was that there is no specific commitment to see this
arrangement result in enlarged access into the European market.
If there were to be reciprocal obligations without a rather significant
commensurate benefit, then you would be forcing ACP countries
to go through major adjustment, rather significant pain for rather
limited gain. At the moment that possibility could not be precluded
from the proposals as they currently stand. There is no indication
nor any evidence that simply liberalising your economy without
a number of other factors in place is a recipe for promoting growth
and development in developing countries. If you have liberalisation
without capacity development, it can very often be a recipe for
de-industrialisation.
Mr Rowe
273. Glancing through your excellent paper
I see that South Africa is thinking of creating a skewed tariff
liberalisation, giving more access to South African markets than
South Africa would expect in return from its partners in southern
Africa. Is that really a gloss on the answer you have just given
to Mr Grant? Would you see that it might be possible to define
more generously or to confine the reciprocity so that some areas
were still excluded for the ACP countries which were not excluded
for the EU?
(Mr Davies) This has been a major theme in our
own negotiation and it has been accepted in principle by the EU
that a free trade agreement between South Africa and the EU should
be both asymmetrical, which basically means the weaker partner,
in this case South Africa, should have longer to implement its
obligations than the stronger, and differentiated, which means
the obligations themselves should be less onerous for the weaker
partner. That is also the principle which we ourselves have sought
to apply in the ongoing discussions with SADC, that is we would
open up our market to SADC faster and more extensively than we
would expect SADC countries to do to us. That would be the only
basis on which you could conceive of any sort of reciprocal arrangement
and that is the issue to which we are trying to draw attention,
yes.
Mr Grant
274. Possibly you will be wanting a waiver
for a number of areas.
(Mr Davies) There are several problems with ACP
regions. First of all, it has taken us more than three years,
so the proposal that this should be completed in three years is
a very difficult one to envisage. Then there is the question I
raised of capacity to negotiate and also the question of who is
going to be competent. If it is going to be by regions, a third
point, which I have mentioned in the paper but have not taken
up so far which is extremely relevant, is if you are talking about
a sub-regional negotiation, is this going to be based on the trade
strengths of the stronger or the trade weaknesses of the weaker?
If there were to be an FTA with the non-Least Developed SADC Countries
excluding South Africa, any proposal simply to incorporate them
into the South African one would be hugely problematic because
we cannot envisage that the South African negotiation is likely
to result in anything paralleling the beef protocol or the sugar
protocol. Yet the beef protocol and the sugar protocol are absolutely
critical for a range of other SADC non-Least Developed Countries.
If it were to be based on the trade strength of us, it would be
problematic for the other countries. If it were to be based on
the trade weaknesses of the weaker, would the EU be willing to
extend terms of access accorded to weaker parties to the stronger
partners? There are several very serious difficulties which I
can envisage in trying to negotiate this in three years.
Chairman
275. Do you not find that it is monstrously
arrogant for the European Union to demand that under its trade
arrangements with ACP countries you enter into a free trade agreement
with a number of neighbours unspecified in a region where you
may not even have begun to negotiate between yourselves? Is this
not just monstrous arrogance on their part?
(Mr Davies) I would tend to agree with that. We
come from a region which is generally seen to be one of the most
advanced in terms of promoting regional integration, certainly
in Africa. There would be huge problems in either the SADC secretariat
trying to negotiate on behalf of southern Africa or trying to
conceive of a negotiation involving individual countries. Yes,
it would be demanding a form of negotiation which is not practical
at this time given the level of integration.
276. One of the other lessons, is it not,
is that you have tried to negotiate unsatisfactorily with the
European Union, is it for three years now?
(Mr Davies) I guess the negotiation proper started
in June 1994.
277. So the implications for a Lomé
based on free trade areas are, it seems to me, that we can multiply
that by some considerable amount of time before we are ever likely
to get to any agreement with the European Union can we not?
(Mr Davies) Exactly. Three years is a completely
unrealistic timetable.
278. In terms of aid, which also comes under
Lomé, do you not think it right that the countries who
are trying to develop from a state where they have many poor people
in their countries, as sovereign states should be saying what
they want rather than the European Union saying this is what we
will give you?
(Mr Davies) Yes. There are a lot of principles
which were outlined in the Commission's guidelines which are unexceptional
and they argue they ought to be part of a political dialogue.
The problem is whether it is actually a political dialogue which
is envisaged or political conditionality and an enlarged list
of political conditionality. None of the mechanisms for how you
promote a political dialogue in which in fact the views of the
ACP countries themselves can be increasingly articulated in a
much more even-handed way has been thought through. If the intention
is to promote development and growth and all of that, then there
needs to be much more serious listening by Europe as to what is
needed and wanted in the ACP rather than Europe deciding what
is good for the ACP.
Chairman:Some of us in this country have the same
feeling about the demands of the European Union. It is not actually
a reaction which is purely directed at less developed countries.
Ann Clwyd
279. I was once a member of the European
Parliament and I know that in 1994 they made a pledge to you,
after the first democratic elections in South Africa, which I
had the great privilege to monitor. Where do you see the blockage
in the European Union, that they seem to have fallen down on the
pledge they gave you then?
(Mr Davies) It has often been mentioned that there
is a need to promote greater consistency between the developmental
objectives of the EU and the rest of the policies of the EU and
we have basically come up against that. Lots of principles are
enunciated and lots of support is pledged and then when it comes
to the devil and the detail we often come up against a whole set
of vested interests. That is basically what we have been finding.
We are in the situation now where we signed on as qualified members
of Lomé. We were supposed to get benefits of access to
the cumulation provisions, which was supposed to mean that ACP
products that used South African inputs can access the EU market
under Lomé terms and our firms are supposed to be able
to tender for European Development Fund projects in ACP countries.
In fact the revised Lomé Convention has not yet been ratified
by the parliaments of a number of European countries and we find
ourselves at this stage even unable to access those benefits.
Our own negotiation is at the point where we have put forward,
a comprehensive offer which would take us into quite a considerable
liberalisation. We are suggesting that there is something less
than 10 per cent of our total trade which we would suggest would
be subject to special protocols. Tomorrow we are waiting for an
offer from the European Union indicating the extent to which it
is prepared to liberalise. It remains to be seen whether the current
mandate which has a large list of excluded agricultural products,
is going to permit a satisfactory offer to be made or whether
it is going to constrain the offer in an unacceptable way.
280. As Britain is in the Presidency for
the next six months, has any British Minister given you an indication
that they are promoting South Africa?
(Mr Davies) There is a lot of discussion going
on with the British Government and our hopes are that the British
Presidency will be able to play an important leading role in processes
which are likely to follow from the current round and particularly,
if there is a need, as I suspect many of us feel there will be,
to re-visit the mandate that the Commission has.
Mr Khabra
281. What in your opinion would be the effect
of having Least Developed Countries and non-Least Developed Countries
in the same free trade area?
(Mr Davies) It is important that there should
be special provisions for Least Developed Countries. It is very
unclear as to how the provisions which relate to Least Developed
Countries under the enhanced facilities for access are going to
square with those countries also being members of regions. Our
own experience around cumulation is relevant here. One of the
reasons why we have not yet got cumulation is because there is
some debate as to how it should operate. It is only going to operate
on an ad hoc basis on rules which are yet to be defined.
What has become clear to us is that there are concerns that we
will use Least Developed Countries as a back door to smuggle products
in. If those sorts of concerns were to come into play and there
were to be overly restrictive regulations around rules of origin
and things like that, then that would be a major problem. It depends
on whether Europe is willing to take a significant leap and open
up its markets and not think that there is going to be widespread
abuse through other arrangements for Least Developed Countries
in a regional context.
Chairman
282. Do you get the impression that Europe
is a protectionist club of rich nations?
(Mr Davies) To be perfectly frank, in many respects,
and particularly in agriculture, yes. Let me give you an example.
I do constituency work in the rural areas in the Western Cape,
in areas where the deciduous fruit canning industry is important.
Last year, the largest firm in the industry announced that it
was cutting back production by one third and that it was laying
off 2,000 workers in a province where unemployment rates are already
unacceptably high. The fundamental reason was that the products
faced 21 per cent tariffs in the European Union market and when
it comes to third country markets they face export and production
subsidies which are paid to EU competitors. At the same time our
Agriculture Minister raised the issue last year of subsidised
cheap beef imports into South African markets which are not only
damaging South African producers but also those from Namibia.
In sectors where we are most competitive, developing countries,
yes, we face significant barriers into entry into the European
Union and also the subsidies which are paid for agricultural products
are a major problem to our sectors in third country markets.
Ms Follett
283. You and I have met before, especially
in that particular section of the Western Cape where the fruit
is grown. Could you tell me how much longer you think the negotiations
are going to go on, if you would care to predict it? It has now
taken three and a half years, can you see an end in sight?
(Mr Davies) It is possible that the negotiations
are completed, at least in the overall substance, during the British
Presidency. That depends on a will within the whole of the European
Community to re-visit the question of the mandate and the agricultural
exclusions. If that momentum is there, then those negotiations
can be completed within a six-month period; I see no reason why
not. We are at the level of detailed offers at this point.
284. Do you think that will is there?
(Mr Davies) From what I know of Britain and the
British Presidency, it probably is. There are vested interests
in many other countries in Europe and I am sure there are going
to be many tough nuts and a lot of diplomacy is going to be needed.
285. You have been very tactful in the way
you put it and I am going to be slightly less tactful. Do you
think that in attempting to reform or change Lomé we are
putting the cart before the horse because in fact we need to have
a look at Europe's own internal problems, for example the Common
Agricultural Policy which is possibly the stumbling point?
(Mr Davies) Any attempt to try to restructure
the Lomé relations in a significant way without addressing
the question of broadening the access into the European market
is not going to yield benefits to the ACP countries. Yes, there
has to be a significant improvement in access into the EU market
for developing countries, us included.
Mr Grant
286. We heard some evidence last week on
the question of Least Developed Countries and non-Least Developed
Countries. Do you think one way of maintaining the preferences
would be for them to change the whole categorisation of countries
as Least or non-Least Developed Countries and perhaps have a vulnerable
countries category? Do you think that this would be helpful?
(Mr Davies) I had not really thought about changing
the nomenclature and I am not quite sure what the implication
of "vulnerable" rather than "least developed"
is. I do think that there is a group of countries for whom any
of the WTO obligations which are emerging are actually imposing
very difficult adjustments without any serious possibility of
the emergence in the short term of competitive industries. They
do need time and special consideration. There is certainly a group
of countries for whom liberalisation does not mean efficiency
but means loss of capacity; they do not have the basic capacity
and do need some special tolerance when it comes to the rules
based system. Whatever they are called—I do not know why
"vulnerable" rather than "least developed"—there
is a group of countries which does merit some special treatment,
yes.
287. South Africa would not be one of them.
(Mr Davies) No, South Africa would not be one
of them. What we are struggling with is to be recognised as a
developing country. In WTO we are recognised for many purposes
as a developed country and this is a complete misunderstanding
of the nature of our economy and society. For us to be seen as
a developing country is essentially our challenge.
Chairman
288. During the apartheid period many industries
in South Africa effectively enjoyed a high tariff barrier and
monopoly—if not monopoly then duopoly—situation with
the South African economy. Are you planning to reduce the protectionism
within your own country so as to encourage further investment
in your country and therefore to produce a product which should
get access to international and particularly European markets?
(Mr Davies) Since 1994 there has been quite an
extensive reform of tariffs in South Africa. It has only very
partly been driven by our WTO obligations. Our average tariff
level is already below the WTO requirements for 1999. The offer
which we made to the European Union would envisage quite a significant
additional tariff reduction. We are going through a process of
tariff reform. One of the things is that tariff reform on its
own is not sufficient and one of the big challenges which is facing
us is to develop an appropriate industrial policy so that we are
able to put in place a series of other measures which can lead
to the kind of industrial restructuring which is necessary. An
important part of that is to gain access into marketplaces so
that we can actually improve our exports. That is partly what
the negotiation with the EU is about. It is not the only marketplace
where we are trying to improve our access, but it is an important
market for us. Without that, i.e., in circumstances of a tariff
reform without significant additional market access, no-one is
going to invest in South Africa to produce for the European market
in sectors where access is blocked, even if we are undergoing
tariff reform.
289. What type of trade agreements would
you like to see in Lomé V?
(Mr Davies) For a start, the question needs to
be defined of what it means precisely to incorporate those countries
which are non-Least Developed Countries and do not succeed in
negotiating FTAs within the GSP. It ought to mean at the very
least that the current level of access under Lomé should
be incorporated into the GSP and preferably even that there are
accorded an improved level of access and that is available to
everybody. If the element of reciprocity is to be introduced,
that should be a purely voluntary arrangement driven by the ACP
group concerned that wants to go further for some reason and is
willing to pay the price of a reciprocal arrangement to do so.
It may be that the GSP option is necessary to avoid having to
go for a WTO waiver again, although that would not be an overwhelming
barrier either. The EU and ACP are an important group and there
could well be dynamics within the WTO to go for a waiver for another
period of time as well.
Chairman:You have given us a fascinating insight
into what must be a frustrating and very difficult process negotiating
a sensible and fair agreement with the European Union both on
trade and aid. This Committee is about to make a report which
we hope will influence the European negotiating position, particularly
during the British Presidency. You have helped us hugely and forewarned
is forearmed. I have no doubt that your views will be very much
in the forefront of the Committee's mind when making our report.
May I thank you very much indeed for spending the time with us
this morning and indeed making available to us a very comprehensive
written report? We will endeavour to do it justice. Thank you
very much.
2 "From Lomé to the GSP: Implications
for the ACP of Losing Lomé Trade Preferences"
by Jane Kennan and Christopher Stevens, Institute of Development
Studies. Back
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