Trade talks could hurt South African industry
22-07-08
COSATU statement on WTO negotiations, 22 July 2008
Press release – Trade talks could hurt South African industry
The proposed trade package currently under discussion could seriously damage South Africa’s capacity to grow its industrial sectors, says Ebrahim Patel, a delegate from the Congress of South African Trade Union (COSATU) at the World Trade Organisation talks in Geneva, Switzerland.
The trade talks are taking place in order to bring a conclusion to the Doha-Round of trade liberalisation.
“South Africa is offered very little on agriculture but we are asked to sacrifice our manufacturing sector,” Patel said.
He noted that the discussions involved liberalisation in three sectors: industrial products, agriculture and services. The industrial product liberalisation talks are described as Non-Agricultural Market Access (NAMA) and this has been the main focus for South Africa.
“The proposals we are expected to consider will result in a massive tariff reduction on most industrial products, from automobiles to clothing and plastic goods. Tariffs are expected to go down from a bound rate of 45% in some instances to about 16% and this will result in thousands of job losses and the closure of many factories over the decade ahead,” he said.
“In the previous round of trade talks, South Africa was classified as a developed country and was asked to make big cuts to industrial protection. This has cost us hundreds of thousands of jobs and has sharpened the problems of poverty and unemployment.
“We are still paying the price as a country through this historic injustice. Our electronics sector has been decimated, clothing and textiles has lost 150 000 jobs and imports are pouring in on a range of manufactured products, from sweets to furniture. We cannot afford another damaging round of tariff cuts with the further painful costs to employment and social stability,” he said.
“To compound the problem, these cuts will impact on Lesotho, Swaziland, Namibia and Botswana too, and we can expect serious damage to neighbouring economies, with more pressure on the South African economy as a result.”
“Developed countries have now placed further proposals on the table that will hurt our interests, such as a provision that any flexibility that is granted must only apply to a portion of any product category. This is known as the anti-concentration clause and it will mean we cannot exempt the auto or clothing & textile sector from the most damaging tariff cuts,” he said.
“What is at stake is the very future of manufacturing on the African continent. If passed in their current form, we will lose our industrial base and become simply a supplier of raw materials to the factories of Asia and Europe and a destination for tourism,” he said.
“Our domestic debates on policy choices will be rendered irrelevant if we are trapped in commitments that are poorly designed and damaging to the interest of our country. With the highest unemployment rate in the world of any medium sized country (those with a population in excess of 40 million), we have no space to make concessions that will destroy jobs,” he said.
Patel called on the South African government to make the country’s case strongly in the trade talks and said that the labour movement would back government in pursuing a trade policy outcome that would protect jobs and the policy space to have an active industrial strategy aimed at growing the economy and absorbing millions of unemployed South Africans.
Ebrahim Patel is part of a delegation representing South Africa in the WTO talks in Geneva. Zwelinzima Vavi, COSATU General Secretary, will join the talks on Thursday, 24 July.
Patrick Craven (National Spokesperson)
Congress of South African Trade Unions
1-5 Leyds Cnr Biccard Streets
Braamfontein, 2017
P.O. Box 1019
Johannesburg, 2000
SOUTH AFRICA
Tel: +27 11 339-4911/24
Fax: +27 11 339-5080/6940/ 086 603 9667
Cell: 0828217456
E-Mail: patrick@cosatu.org.za
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Background information
NON-AGRICULTURAL MARKET ACCESS (NAMA)
A recent report from the World Bank estimates that projected welfare gains from concluding the Doha Round would be less than $16 billion (0.2% of developing countries’ national income). This means the estimated global gains in 2015 would be $96bn, with only $16bn going towards the developing world, mainly benefitting a few developing countries such as Brazil and China.
In contrast industrial tariff losses as a result of NAMA are expected to be at least $63bn, including real declines in the relative value of exports.
Is it really in our best interest to rush into concluding the round when there are so few gains to be made?
The new Agricultural and NAMA text released on 10th July 2008 continues to show a level of imbalance in what is being proposed in the trade negotiations. It is unlikely that an agreement in both Agriculture and NAMA can be reached, since both are overtly biased in supporting developed countries. The inequality between Agriculture and NAMA as well as developed and developing remain.
The NAMA text, and figures on most of the major parameters, remain unchanged from the earlier 20 May position, including the controversial coefficient ranges for developed and developing countries for cutting tariffs. For developing countries these are:
1. A 19-21 coefficient range, with a less-than-formula cut of 12 to 14% of tariff lines flexibility
2. A 21-23 coefficient range, with a less-than-formula cut of 10% of tariff lines flexibility
3. A 23-26 coefficient range, with no flexibilities
As for developed countries this remains at a 7-9 coefficient range. So in essence the sliding scale remains; the lower the coefficient the greater the flexibilities for developed countries. In contrast if developing countries want the highest coefficient range there is no option of flexibilities for sensitive tariff lines.
All this implies that the major developed countries would have to reduce their tariffs by an average of less than 30%, while major developing countries that have to apply the formula would have to cut their tariffs on average by around 60%, before counting the effects of the flexibilities (which are limited).
An example of this is illustrated in the table below, which shows the level of threat to our labour-intensive sectors such as clothing, textile, leather, footwear, motor, rubber, chemicals and fabricated metals facing the highest cut in tariffs. On average South Africa’s industry face an average tariff cut on sensitive tariff lines of 41%.
On the other hand, developing countries’ sensitivities and development concerns have been brushed aside, and the already meagre flexibilities given to them have been offset and eroded further by piling on more conditions on the scope and use of the flexibilities; it will further erode our policy space and ability to implement our industrial policy initiatives.
With no substantial difference between the previous text and that of 10 July 2008, trade unions continue to highlight a number of problems.
Firstly, the level of ambition for developing countries subject to the formula remains too onerous. The continued trend of negotiations has centred on accommodating the sensitivities and defensive interests of the developed countries while also helping them to be aggressive in pushing for market access to developing countries' markets.
Secondly the text fails dismally in its mandate to meet the requirement for less than full reciprocity in reduction commitments.
The NAMA 11 trade union group, in response to the NAMA draft modality text of 10 July 2008, reiterates its longstanding position regarding the NAMA modalities and our support for the NAMA 11 group of countries, as follows:
The unions continue to reject the broader range of options for developing countries, as they still fall far short of the NAMA 11 position and trade union demands made on earlier occasions. The draft modalities are an attempt to give in to some of the NAMA 11 demands, but the proposed coefficients remain far too low to avoid the loss of employment in many sectors, and will still hamper the future development of industries in our countries.
Although some flexibilities have been increased, these are traded-off against a lower coefficient and are therefore not acceptable. If we opt for a higher coefficient this would mean no or less flexibilities. The proposed modalities still do not respect the principle of less than full reciprocity as required by the Doha mandate.
The NAMA 11 group continue to stay strong on its current position of a 25-point difference between the coefficient for developed and developing countries and on respecting the principle of less than full reciprocity. The spread of the coefficients between developed and developing countries should be widened. The current spread is still too narrow.
The burden of adjustment – the loss of jobs and production – will thus be borne mainly by the developing countries. This means that in what is supposed to a ‘Development Round’ of negotiations, developing countries are being asked to bear a greater burden of adjustment than developed countries. This cannot be acceptable.
While the new text provides a special dispensation for South Africa, the proposal is an attempt to divide the NAMA 11 group, by offering separate provisions for individual countries that are part of the NAMA 11 group. Though we cautiously welcome additional flexibilities these should be further increased and available for all developing countries (or to all NAMA 11 countries) subject to the formula.
For many developing countries, slashing tariffs will not only restrict their ability to foster new industries and create the own “developmental space”, it will also limit government funds to support such infant industries and to maintain social programmes for the poor. A majority of developing countries rely on tariffs for more than a quarter of their tax revenue. For smaller nations with little diversification in their economies, tariff revenues provide the core of government budgets.
Confronting major economic and social challenges such as high unemployment and increasing poverty will become limited through tariff reductions. Tariff policies could be used to allow diversification of industries such as in the case of US, EU, China and many East Asian countries that diversified away from primary commodities by developing policy options to protect their major exporting industries in order to nurture them to compete in world markets. This allowed for independent policy space development.
Further cuts in manufacturing tariffs in developing countries, which are being considered in the current Doha proposals, will make it harder for developing countries to replicate these efforts. This loss of "policy space" is why many developing countries see current rich-country proposals as tantamount to saying: "do as we say, not as we do."
Regardless of any pressures over the next few weeks, we call upon the NAMA 11 to defend its position and to maintain unity within the group. We also reiterate our demand not to make any trade-offs between NAMA and agriculture. Both sectors are important for the development of our economies and should not be traded-off one against the other.
AGRICULTURE IN THE CONTEXT OF HIGH FOOD PRICESRich nations - the EU, US and Japan - continue to use the loophole in the WTO's agriculture agreement that allows them to continue subsidising domestic agriculture, while other countries are obliged to reduce their bound levels of domestic support. Recent studies have shown, however, that many of the Green Box subsidies, such as those used by the US and EU are trade-distorting.
It is unlikely that an agreement could be reached between developing and industrial nations if trade-distorting subsidies and the level of farm subsidies are not dealt with. On the other hand, developing countries are being asked to reduce their agricultural tariffs further. The Chair's proposal at the Doha talks is for a maximum 36% tariff cut for developing countries, and 24% for small vulnerable economies. This is sizable comparative with the 24% cut in the Uruguay Round.
Developing countries are advocating that the instruments of Special Products (SP) and Special Safeguard Mechanisms (SSM) be set up as part of the WTO talks to promote food security, farmers’ livelihoods and rural development. SPs would exempt important food products from tariff cuts or at least allow for more lenient cuts. SSMs would enable a developing country to impose an additional duty on top of the bound rates in situations of reduced import prices or increased import volumes, in order to protect the local farmers. However, there is considerable opposition from some developed countries to having these instruments that can work in an effective way.
With the continued pressure of high food prices and the need for greater food security, the G33 group of countries has now argued that the case for SP and SSM is even stronger, since the food crisis is caused by inadequate production in many developing countries, forcing them to increase their dependence on imports which has now proven so costly in terms of security of supplies and the high prices.
Although in the immediate period, the importing countries may cut tariffs to reduce prices, in the longer run, they need to establish conditions in which local farmers will have the local market conditions and incentives that make it possible for local agriculture production to revive and then to thrive.
While many reasons, such as climate change and rising cost of energy, could be attributed to the crisis of high food prices and food security, we should also look at the structural adjustment policy decisions enforced through the IMF and World Bank. During the 80s and 90s, many countries were asked or advised to:
Dismantle marketing boards and guaranteed prices for farmers' products;
phase out or eliminate subsidies and support such as fertilizer, machines, agricultural infrastructure;
Reduce tariffs of food products to very low levels.
Many countries that were net exporters or self-sufficient in many food crops experienced a decline in local production and a rise in imports which had become cheaper because of the tariff reduction. Some of the imports are from developed countries which heavily subsidise their food products. The local farmers' produce was subjected to unfair competition, and in many cases, could not survive. This impacted severely on rural and farming communities.As developing countries we will continue to call for:
Developing countries to provide adequate support to their agriculture sector and to have a realistic tariff policy to advance their agriculture, especially since developed countries' subsidies are continuing at a high level. The developed countries should quickly reduce their actual levels of subsidy.
The agriculture policy paradigm in developing countries must be allowed to change. Countries should have the policy space to expand public expenditure on agriculture. Governments in developing countries must be allowed to provide and expand support to the agriculture sector.
Developing countries should place high priority on expanding local food production. Accompanying measures and policies should thus be put in place. Encourage policy development that promotes local products that can be competitive and the farmers' livelihoods and incomes are sustained, and national food security is assured.
The proposals of developing countries (led by the G33) on special products and special safeguard mechanism at the WTO should be supported
The policies of the World Bank, IMF and regional development banks should be reviewed and revised as soon as possible, so that they do not continue to be barriers to food security and agricultural development in developing countries.
The actual levels (and not just the bound levels) of agricultural domestic subsidies in developed countries should be effectively and substantially reduced. There should also be new and effective disciplines on the Green Box subsidies to ensure that this category does not remain an "escape clause" that allows distorting subsidies that are detrimental to developing countries.
SERVICESThere is a push to ensure that GATS is more prominent in the round. However many countries are opposed to this. Draft text has been released and a signalling conference on Services is planned for the 24th July 2008.
THE CASE OF GHANA
§ The policies of food self-sufficiency and government encouragement of the agriculture sector (through marketing, credit and subsidies for inputs) had facilitated an expansion of food production (for example, in rice, tomato, and poultry) in the 1960s to the early 1980s.
§ The policies were reversed, starting from the mid-1980s and especially in the1990s, under World Bank and IMF conditionalities. The fertilizer subsidy was eliminated, and its price rose very significantly. The marketing role of the state was phased out. The system of minimum guaranteed prices for rice and wheat was abolished, as were many state agricultural trading enterprises and the seed agency responsible for producing and distributing seeds to farmers, and subsidized credit was also ended.
§ Applied tariffs for most agricultural imports were reduced significantly to the present 20%. This, together with the dismantling of state support, led to local farmers being unable to compete with imports that are artificially cheapened by high subsidies, especially in rice, tomato and poultry.
RICE: Rice output in the 1970s could meet all the local needs, but by 2002, imports made up 64% of domestic supply. Rice output in the Northern region fell from an annual average of 56,000 tonnes in 1978-80 to only 27,000 tonnes for the whole country in 1983. In 2003, the US exported 111,000 tonnes of rice to Ghana. In the same year, the US government gave $1.3 billion in subsidies for rice. A government study found that 57% of US rice farms would not have covered their cost if they did not receive subsidies. In 2000-2003, the average costs of production and milling of US white rice was $415 per tonne, but it was exported for just $274 per tonne, a price 34% below its costs.
TOMATOES: As part of a privatization programme, tomato-canning factories were sold off and closed, while tariffs were reduced. This enabled the heavily subsidized EU tomato industry to penetrate Ghana, and this displaced the livelihoods of tomato farmers and industry employees.
Tomato paste imported in Ghana rose from 3,200 tonnes in 1994 to 24,077 tonnes in 2002. Local tomato production has stagnated since 1995. In 2004, EU aid for processed tomato products was 298 million euros, and there are many more millions of euros in indirect aid (export refunds, operational funds for producer organisations, etc).
POULTRY: Ghana's poultry sector started its growth in the late 1950s, reached its prime in the late 1980s and declined steeply in the 1990s. The decline was due to withdrawal of government support and the reduction of tariffs. Poultry imports rose by 144% between 1993 and 2003, and a significant share of this were heavily subsidized poultry from Europe. In 2002, 15 European countries exported 9,010 million tonnes of poultry meat for Euro 928 million, at an average of Euro 809 per tonne. It is estimated that the total subsidy on exported poultry (including export refunds, subsidies for cereals fed to the poultry, etc) was Euro 254 per tonne.
Between 1996 and 2002, EU frozen chicken exports to West Africa rose eight-fold, due mainly to import liberalization. In 1992, domestic farmers supplied 95% of Ghana's market, but this share fell to 11% in 2001, as imported poultry sells cheaper.
The case of Ghana and many other developing and least developed agricultural producing countries illustrates the distortion in agricultural trade with developed countries – distortions brought about by high subsidies to their local farmers. Doha negotiations at the WTO are mandated to substantially reduce domestic support in developed countries. However, to date, the offers of the US and EU indicate that their overall trade distorting support (OTDS) would be reduced at the bound level, but not at the applied level. This means that the proposals of the current 19 May 2008 text would not reduce the actual subsidy support of the US. The maximum or bound subsidy in the text for the US would be $13 to $16.4 billion, while the actual support in 2007 is reported to be around $7-8 billion!
SOME KEY FEATURES OF THE TEXT:
A developing country using the flexibilities (for example, that 10% of NAMA tariff lines will be subjected to only 50% of the formula's normal tariff cut, and that this is restricted to only 10% of the total value of the country's NAMA imports). This means that very sensitive lines cannot be excluded entirely from the cut.
Secondly, the current proposal does not allow for the exclusion of an entire sector in our tariff book. Again this would have severe implications in our case of Motor and Clothing for example. These are most sensitive and labour intensive sectors, and can result in massive job losses as this proposal would undermine the MIDP programme. In essence, if we use Motor as and example, we would have to decide which tariff line will have to take a full formulae cut and cannot be listed as sensitive. In terms of the “anti-concentration” proposal, informally suggestions have been that only 50% of the tariff lines in a sensitive sector can be protected by flexibilities
Thirdly, SA (SACU) has been given additional flexibilities, ranging from 1 – 6%. However the additional flexibilities are tide to a coefficient range of 21-23 and a less than formulae cut of 10% of tariff lines.
Another recent contentious issue that has now been dropped has been the linkage of participation of a developing country in "sectoral initiatives" (an agreement to have zero or very low tariffs in a particular sector) to its getting "credit" in being able to have a higher coefficient (and thus a lower rate of tariff reduction). This has been removed though reference to sectoral initiatives remain and are problematic without dealing with the key issues of coefficients and flexibilities.
In relation to a group of developing countries that have low tariff bindings and exempt from the formula, would now be required instead to increase their bindings and also to reduce their bound tariffs to an average of 28.5%, which is supposed to be the average tariff of developing countries. These countries have argued in recent weeks that the 28.5% rate is inaccurate as it does not include the tariffs of a category of developing countries and that 32.6% is the actual average rate of all developing countries. They have been advocating a change in the text to 32.6%. However, the new draft retains the 28.5% figure, in brackets.
Table showing level of threat to our labour-intensive sectors such as clothing, textile, leather, footwear, motor, rubber, chemicals and fabricated metals
South Africa
Current applied
Current bound
New Bound SF 19
Reduction in applied SF 19
New Bound SF 23
Reduction in applied SF 23
Formal Employment (2003)
Textiles
22
25
10.8
50%
12.0
45%
55,846
Clothing
39
44
13.3
66%
15.1
61%
114,933
Leather
21
23
10.4
50%
11.5
45%
8,916
Footwear
30
30
11.6
61%
13.0
57%
17,785
Plastic
16
24
10.6
34%
11.7
27%
45,554
Rubber
21
26
11.0
48%
12.2
42%
22,398
Wood
14
17
9.0
36%
9.8
30%
46,812
Automobile
33
50
13.8
58%
15.8
52%
77,886
Chemicals
12
13
7.7
36%
8.3
31%
29,474
machinery
16
23
10.4
35%
11.5
28%
90,278
furniture
20
23
10.4
48%
11.5
42%
38,473
Fabricated metals
16
20
9.7
39%
10.7
33%
111,277
ITUC 2007