Trade Agreements

 What is a trade agreement?

A trade agreement is a contract/agreement/pact between two or more nations that outlines how they will work together to ensure mutual benefit in the field of trade and investment. Such trade agreements may involve co-operation in the field of R&D, the lowering of import duties to be levied on the other partners’ exports, guaranteeing any investments made by the partner(s) in the home market, co-operation on the tax front, etc.

Bilateral and multilateral agreements

Trade agreements (also sometimes referred to as ‘trade pacts’) are usually bilateral or multilateral. Bilateral trade agreements – as the name suggests – is an agreement between two nations, while a multilateral trade agreement involves more than two nations.

Bilateral

A bilateral agreement is made between two and only two states. The agreement can be political, military or economic. The major reason states might pursue bilateral agreements is because it is easier to negotiate with just one country rather than with several.

Multilateral

Multilateral agreements include more than two countries. States get involved in multilateral agreements because the responsibilities and risks are distributed among the group and thus the situation is more advantageous for individual states.

What is "Multilateral trade"?Definition: Multilateral trade agreements are between many nations at one time. For this reason, they are very complicated to negotiate, but are very powerful once all parties sign the agreement. The primary benefit of multilateral agreements is that all nations get treated equally, and so it levels the playing field, especially for poorer nations that are less competitive by nature.

Examples: The Doha round of trade agreements is a multilateral trade agreement

between all 149 members of the World Trade Organization.

Bilateralism consists of the political, economic, or cultural relations between two sovereign states. For example, free trade agreements signed by two states are examples of bilateral treaties. It is in contrast to unilateralism or multilateralism, which refers to the conduct of diplomacy by a single state or multiple states, respectively. Typically when states recognise one another as sovereign states and agree to develop diplomatic relations, they exchange diplomatic agents such as ambassadors to facilitate dialogues and cooperation in various fields mentioned above.

Examples

1. Australia and Canada have a bilateral relationship. Both have similar governments and share similar values (though these are not requirements of a bilateral relationship). In 1895 the Government of Canada sent John Larke to Sydney to establish a trade commission and in 1935 Canada sent Charles Burchell (Australia's first Canadian High Commissioner) to formalise ties between the two countries.[1] Both nations have fought alongside each other a number of times since WWII and trade and economic relations are strong.

2. India and Nepal have a bilateral relationship since ancient times even before the birth of Buddha in 544 BC. In modern times, this traditional relationship has been confirmed by written treaties. The latest India-Nepal treaty of friendship was signed in July 1950. Citizens of both countries can move across the border freely without passport or visa, live and work in either country and own property and business in either country. Gurkhas form a part of the Indian Army. Millions of Nepalis have been living in India for long periods.

History

There has been a long debate on the merits of bilateralism versus multilateralism. The first rejection of bilateralism came after the First World War when many politicians concluded that the complex pre-war system of bilateral treaties had made war inevitable. This led to the creation of the multilateral League of Nations.

A similar reaction against bilateral trade agreements occurred after the Great Depression, when it was argued that such agreements helped to produce a cycle of rising tariffs that deepened the economic downturn. Thus, after the Second World War, the West turned to multilateral agreements such as the General Agreement on Tariffs and Trade (GATT).

Despite the high profile of modern multilateral systems such as the United Nations and the World Trade Organization, most diplomacy is still done at the bilateral level. Bilateralism has a flexibility and ease that is lacking in most compromise-dependent

multilateral systems. In addition, disparities in power, resources, money, armament, or technology are more easily exploitable by the stronger side in bilateral diplomacy, which powerful states might consider a positive aspect of it, compared to the more consensus-driven multilateral form of diplomacy, where the one state-one vote rule applies.

Trade agreements and trading blocs

These two concepts are close related. A trade agreement general leads to a trading bloc being formed. A trading bloc is generally defined as “two or more countries bound by a specific agreement which determines some or all of their international trade practices and which usually provides for common import tariffs on certain, if not all, imported products.” Some economists argue that although trading blocs are see as a means of reducing trade restrictions (between the countries involved), they themselves represent a form of trade barrier as they exclude non-members. Click here to learn more about trading blocs.Different types of trade agreements/trading blocs

Trade agreements/trading blocs also come in different forms, involving increasing levels of co-operation. Examples include:

Free Trade Areas (FTA) – This is the simplest kind of trading bloc and incorporates a two or more countries that have agreed to eliminate tariffs and other barriers to trade amongst members, but individually each country retains its own tariffs on imports from other non-member countries. Perhaps the best example of a FTA is the North American Free trade Area (NAFTA). Click here to read more about NAFTA.

Common Monetary Area (CMA) – A Common Monetary Area is when countries usually geographically closely located to each other agree to accept one dominant currency as legal tender. South Africa has had such an agreement in place with Swaziland and Lesotho. We discuss the SA Common Monetary Area in more detail below.

Customs Union – A Customs Union goes one step further than an FTA in that it abolishes all tariffs amongst member countries, while members agree to a single, external tariff on goods imported from outside the Customs Union. Revenue generated by the Customs Union is shared amongst members based on a specific formula. The South African Customs Union (SACU) is one of the oldest Customs Unions still in place. We discuss the SACU in more detail below.

Common Market – In a Common Market, like with a Customs Union, a common

tariff is placed on imports from other non-member countries, while no tariffs are exist on goods produced by one member country and sold in the other member country’s. The main additional difference between a Customs Union and a Common Market is that with the latter, the free movement of labour and is capital is also permitted. In other words, any restrictions on immigration, emigration and cross-border investment (amongst member countries) are abolished. The current European Union developed from the European Economic Community, a form of Common Market. The Common Market for Eastern and Southern Africa (COMESA) and the Caribbean Community – formerly the Caribbean Community and Common Market (CARICOM) are perhaps the two best examples of Common Markets.

Monetary Union – In the case of a Monetary Union, member countries agree to use a single currency or to fix their rates of exchange for the respective currencies. Essentially, a Monetary Union includes a Common Market Area (discussed above), the difference being, that a Monetary Union involves far greater integration and co-operation amongst member countries. The best example of a monetary union is European Union in which member countries have agreed to use a new, single currency – the euro! There are many other Monetary Unions in place – click here to learn more.

Economic Union – Beyond the free movement of labour and capital, an economic union incorporates the harmonization of economic policies amongst member states, including the integration of monetary policies, economic policies, taxation and other regulatory requirements. European Union is perhaps the only true Economic Union in place today.

Trade agreements and marketing

The purpose of trade agreements is to reduce the barriers to trade between countries and to make it easier to do business (i.e. to trade) between the countries concerned. Clearly, any agreement that reduces the barriers to trade is likely to have a positive effect on the exports of goods to the partner country(ies). It is essential that you keep tabs on such negotiations by reading the newspaper and keeping track through websites such as ExportHelp.

If you know about a trade agreement that is being negotiated, you should inform yourself as to the possible benefits you may get as a result of the agreement. In some instances, there may be little benefit because there are already no duties levied on your products. On the other hand, if your product is subject to high duties, an agreement may prove very beneficial to your product and you would want to be ready to act as soon as any agreement came into effect.

Furthermore, if you are aware of any negotiations regarding a trade agreement with country that you have earmarked as a potential target market and that imposes quite high duties on the imports of the products that you manufacture, then you should not hesitate to contact the Department of Trade and Industry and urge them to negotiate lower duties

for your product category. The responsible division within the DTI is ITED.

In this next section we discuss some of the trade agreements that South Africa is already party to.

South African trade agreements

The South African Government, through the Department of Trade and Industry, has aggressively pursued the negotiation of agreements with other countries that will benefit the local business community and our country as a whole. The International Trade and Economic Development Division (ITED) within DTI is the responsible section responsible for such trade negotiations. The ITED's purpose is to develop trade and investment links with key economies, globally, and promote economic development, through negotiating preferential trade agreements, supporting a strong, equitable multi trading system and fostering economic integration with the continent within the NEPAD framework. Click here to learn more about the ITED.

These agreements take different forms. In the section below, we identify and briefly introduce the various trade agreements that South Africa is party to:

The South African Customs Union

This is a long-standing agreement between South African and Botswana, Lesotho, Namibia and Swaziland, which came into effect in 1969 and is the oldest Customs Union in the world. The agreement was renegotiated after the end of Apartheid and a new agreement finalised in 2002. According to the customs union, each country agrees to remove all barriers to trade (in particular, tariffs) for the other member countries, as well as adopting common external tariffs amongst all five countries. Trade between members is thus relatively free and unimpeded. The countries have also worked closely together to formulate a fairly clear and comprehensive policy on trade-related matters and practices.

The aim of the SACU is to maintain the free interchange of goods between member countries. It provides for a common external tariff and a common excise tariff to this common customs area. All customs and excise collected in the common customs area are paid into South Africa’ national Revenue Fund. The Revenue is shared among members according to a revenue-sharing formula as described in the agreement. South Africa is the custodian of this pool. Only the BLNS Member States' shares are calculated with South Africa receiving the residual. SACU revenue constitutes a substantial share of the state revenue of the BLNS countries.

To visit the SACU official website, click here Click here to visit the Wikipedia website on the SACU Click here to learn more about the SACU from the Department of Foreign Affairs

The South African Common Monetary Area (CMA)

The Common Monetary Area (CMA) links South Africa, Lesotho and Swaziland into a currency union, in which the South Africa rand is the common currency. It is allied to the Southern African Customs Union (SACU) – see above. Namibia automatically became a member upon independence, but withdrew with the introduction of the Namibian dollar in 1993. However, Namibia has chosen not to pursue its own flexible exchange rate policy, and the Namibian dollar is at par with the South African rand and there is no immediate prospect of change. The same is true with the lilangeni of Swaziland and the loti of Lesotho. The rand continues to circulate freely in these countries, although it is strictly speaking not legal tender. Foreign exchange regulations and monetary policy throughout the CMA continue to reflect the influence of the South African Reserve Bank. Source: Wikipedia

Note that Botswana – a member of the SACU – is not a member of the CMA. For the exporter this means that sales to Botswana and Nambia are considered as exports, but sales to Swaziland and Lesotho are not.

The European Union

In 1994, South Africa applied for full membership of Lomé (minus certain privileges--such as use of price stabilisation mechanisms and preferential access to European markets for beef and cane sugar exports--that might have damaged other ACP countries), but the EU rejected the request. It argued that, as a relatively developed nation, South Africa was not eligible for Lomé preferences under WTO rules. Instead, it offered South Africa a bilateral Free Trade Agreement. South Africa made a counter proposal: a Trade, Development and Cooperation Agreement (TDCA) that would address the country's development needs while promoting regional integration. Talks began in earnest in early 1997 and continued for two years as negotiators battled over the details of roughly 8000 tariff arrangements associated with specific agricultural products. Finally, in January 1999, the two teams agreed on a common text for ratification by their respective governmentsIn terms of the final deal, the EU is to give 95% of South African exports improved access to its markets over a ten year period, while South Africa pledged to relax restrictions on 86% of EU exports over twelve years. About 28% of South Africa's agricultural exports were placed on a "reserve list" of items not eligible for tariff reduction (although this list is subject to periodic review). Vulnerable commodities continue to be protected by special protocols, while agricultural production and exports are subsidised by the EU to make them more competitive with South African commodities. The agreement provides improved access for South African fish products, though a number of details require further negotiation. Meanwhile, 76% of all EU goods will gain greater access to South African markets.

Click here to read the full source of the above excerpt from an article prepared by World House Bielefeld/KOSA.

Click here to read and article by Holden and McMillan regarding the benefits of

this EU-SA trade agreement for South Africa.        Click here to read an analysis of the trade between EU and SA with reference to

the FTA between the two regions.

The United States

African Growth and Opportunity Act (AGOA)

AGOA was signed into law on 18 May 2000 as Title 1 of The Trade and Development Act of 2000 in the US. The Act offers tangible incentives for African countries – including South Africa – to continue their efforts to open their economies and build free markets.

Click here to visit the official US AGOA websiteClick here to visit the Trade Law Centre for Southern Africa’s AGOA portal

Preferential tariff treatment of textile and apparel articles imported directly into the territory of the United States of America from the Republic as contemplated in the African Growth and Opportunity Act.

SACU/US trade agreement

During a recent visit to South Africa by the US Trade Representative (USTR), Ambassador Robert Zoellick, the USTR initiated discussions with South Africa and the Southern African Customs Union (SACU) on the possibility of negotiating a SACU - US Free Trade Agreement (FTA). The Southern African Customs Union (SACU) has agreed to negotiate such a Free Trade Agreement with the United States, and formal negotiations to this end are expected to begin in the first quarter of 2003. Source: DFA

US Official Development Assistance

Annual development assistance to South Africa currently totals some US$ 60 million, and amounts to more than US$ 650 million since 1994. The US programmes are implemented through the US Agency for International Development (USAID). A high level of consultation takes place between the South African Government, coordinated by the Department of Finance, and USAID on the alignment of the USAID programmes with the domestic developmental priorities of South Africa. The USAID programmes of assistance focus on promoting democracy and good governance in South Africa; strengthening the capacity of provincial and local education institutions; improving primary health care; technical assistance and scholarships to improve the economic capacity in the country; and improving the quality and access to housing, urban and environmental services in South Africa. Source: DFA

Generalized System of Preferences (GSPs)

What are GSPs?

The Generalized System of Preferences, or GSP, is a formal, non-reciprocal system of exemption from the more general rules of the World Trade Organization (WTO). Specifically, it's a system of exemption from the Most Favored Nation principle (MFN) that obligates WTO member countries to treat the imports of all other WTO member countries no worse than they treat the imports of their "most favored" trading partner. In essence, MFN requires WTO member countries to treat imports coming from all other WTO member countries equally, that is, by imposing equal tariffs on them, etc.

GSP, however, exempts WTO member countries from MFN for the purpose of lowering tariffs for developing countries (without also doing so for rich countries). The idea of tariff preferences for developing countries was the subject of considerable discussion within UNCTAD in the 1960s. Among other concerns, developing countries claimed that MFN was creating a disincentive for richer countries to reduce and eliminate tariffs and other trade restrictions with enough speed to benefit developing countries. Source: Wikipedia

GSP applied to SA exports

The following countries apply GSP to South Africa:

EU Norway Hungary Switzerland Russia Turkey US (under AGOA) - During a recent visit to South Africa by the US Trade

Representative (USTR), Ambassador Robert Zoellick, the USTR initiated discussions with South Africa and the Southern African Customs Union (SACU) on the possibility of negotiating a SACU - US Free Trade Agreement (FTA). The Southern African Customs Union (SACU) has agreed to negotiate such a Free Trade Agreement with the United States, and formal negotiations to this end are expected to begin in the first quarter of 2003.

Southern African Development Community (SADC)

This treaty of the Southern African Development Community (SADC) was implemented on 1 September 2000. The aim of SADC is to create a Community providing for regional peace and security, and an integrated regional economy. As a regional institution it has laid the basis on which regional planning and development in southern Africa could be pursued. It also provides the desired instrument by means of which member states should move along the path towards eventual economic integration. Furthermore, SADC forms

one of the building blocks of the African Economic Community (AEC).

During a recent visit to South Africa by the US Trade Representative (USTR), Ambassador Robert Zoellick, the USTR initiated discussions with South Africa and the Southern African Customs Union (SACU) on the possibility of negotiating a SACU - US Free Trade Agreement (FTA). The Southern African Customs Union (SACU) has agreed to negotiate such a Free Trade Agreement with the United States, and formal negotiations to this end are expected to begin in the first quarter of 2003.

Click here to learn more about the SADC agreement for the Department of Foreign Affairs website.

Bilateral agreements

In addition to the above, South Africa has negotiated bilateral agreements with the following countries: Source: MBendi

PeoplesRepublic of China/SA bilateral trade agreement: On 2 May 1996, South Africa and the People's Republic of China signed a note of understanding which provides for the mutual extension of most-favoured-nation status.

India/SA bilateral trade agreement: The 1994 trade agreement with India makes provision for the promotion of two -way trade between the two countries and the establishment of a joint inter-governmental committee to review trade relations and facilitate the effective implementation of the agreement.

Malawi/SA trade agreement: was reached in 1967 and provided for preferential rates of duty, rebates and regulations on certain goods traded between the two countries. The agreement has been amended and all goods of Malawian origin enter South Africa duty-free. South African goods entering Malawi receive the most-favoured-nation rate of duty afforded to all World Trade Organisation members.

Mozambique preferential access agreement: This agreement is a wide-ranging preferential arrangement regulating mine labour, railway and port matters and trade. A limited number of Mozambican goods receive tariff preference from South Africa.

Republic of China (Taiwan)/SA bilateral trade agreement: There are a number of co-operation agreements between South Africa and Taiwan, one of these being the mutual extension of most-favoured-nation status. As yet, it is unknown how the decision by South Africa to cut diplomatic ties with Taiwan in favour of the People's Republic of China, will affect these agreements.

Zimbabwe/SA bilateral trade agreement: An initial agreement between South Africa and Zimbabwe in 1964 provided for preferential rates of duty, rebates and quotas on certain goods traded between the two countries. Consensus on a new trade agreement was reached in August 1996. In terms of the new agreement, tariff and quota levels on textile imports into South Africa will be lowered. There is a possibility that the agreement will be extended to other sectors such as

agriculture