Regional integration and institutions: Reflections on experience from eastern and southern Africa

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1 DRAFT PAPER Regional integration and institutions: Reflections on experience from eastern and southern Africa Abstract African countries have embraced an ambitious linear regional integration model as a key component of their development strategy. This model is predicated upon a particular institutional architecture, plotting progress from a free trade area to a customs union to a common market and eventually to political union. The rulesbased governance consequences of this particular regional integration model are contested in the growing debate on sovereignty and policy space. This paper reviews select aspects of the regional integration arrangements in eastern and southern Africa. The aim of this reflective exercise is to consider the extent to which regional integration institutions facilitate a process of inclusive growth; recognising that indeed all African regional integration arrangements are anchored on broad development objectives of promoting inclusive development, competitiveness and poverty alleviation. Specific examples of regional institutions such as the Southern African Development Community (SADC) Tribunal are examined. The current negotiations to establish a Tripartite Free Trade Area are reviewed to assess whether there are shifting patterns in the approach to regional institutions for integration. In brief, the fundamental question, in the paper, is whether African governments are prepared to embrace rules-based governance and the requisite institutional architecture of their integration pursuits to achieve the developmental outcome of inclusive growth. 1

2 1. Introduction The fragmented nature of the African continent, featuring small markets, small economies and small countries, fragile and weak states, a large number of landlocked countries, provides a strong motivation for regional integration. African countries have indeed, post independence, embraced regional integration as an integral component of their development strategies, and recent focus has been on a deeper regional integration agenda 1. The founding treaties of all regional economic communities articulate clear developmental objectives for their integration endeavours; supporting inclusive growth to eradicate poverty. The positive growth performance of the past decade makes this an opportune time to reflect on the quality of growth 2 and its sustainability, issues that enjoy specific focus in the fundamental rationale for regional integration in Africa. The specific approach to integration, both at regional economic community (REC) level and at a continental level, is premised on the a linear integration model 3 with consecutive steps from a free trade area to a customs union, common market, economic union and eventually political union. This model features a very specific institutional architecture for rules-based governance that requires the establishment of supra-national institutions and the concomitant cession of sovereignty and policy space. Herein lies a particular set of challenges that are encountered in African RECs, as they attempt to integrate member states that are diverse in terms of economic size and levels of industrial and broader development. Regional integration in Africa remains a state-centric endeavour, with a top-down approach which contrasts markedly with that of, for example Asia, where the private sector in fact leads engages the integration debate and strongly influences the integration agenda. In Africa non-state actors do not yet play a prominent role in regional integration, and it is the exception rather than the rule, to find, for example, private sector representation in such negotiations. 1 UNCTAD, (2007), Global and Regional Approaches to Trade and Finance. United Nations. 2 A very recent Departmental Paper published by the International Monetary Fund (Lundgren C.J. et al (2013), Boom, Bust, or Prosperity? Managing Sub-Saharan Africa s Natural Resource Wealth available at notes the importance of governance to ensure that the current African resources boom results in inclusive growth. 3 McCarthy, C (2007), Is African integration in need of a paradigm change? Thinking out of the box on African integration, in Monitoring Regional Integration Yearbook 2007, Bosl, A et al, Trade Law Centre for Southern Africa, Konrad Adenauer Foundation, Namibian Economic Policy Research Unit, Cape Town. 2

3 Despite strong political statements to support regional integration, the track record of Africa s RECs remains unimpressive, especially as regards the implementation of commitments undertaken by member states. 4 It is the implementation of these international agreements that provides the true litmus test of political commitment. The reluctance of African governments to cede sovereignty and policy space to regional institutions also raises the question as to the appropriateness of the linear model of regional integration for Africa. An appraisal of select experiences, predominantly from eastern and southern Africa, provides an opportunity to trace the relationship between institutions and integration, and also to situate the African integration experience in a broader global context. Since the specific focus of the paper falls on institutions and regional integration, it is appropriate to clarify the term institutions. We refer to institutions in the Northian sense 5 as the formal rules and laws, as well as the organisations, such as regional secretariats and regional courts and tribunals, that are established in terms of these formal rules and laws. Our fundamental contention is that rules-based governance is essential for inclusive growth, or developmental outcomes. The question is whether the pathway adopted by the RECs, is conducive to achieving their fundamental objectives. 2. Contextualising African Regional Integration In recent years regional trade arrangements have become globally an important vehicle for promoting competitiveness, industrialization, economic growth and development. They reflect important developments in the global economy and respond to the challenges of prospering in an increasingly competitive and integrated environment, as well as the associated governance developments. An important feature of global industrial organisation is the increasing preponderance, complexity and sophistication of global value chains. Associated with this form of industrial organisation is the increasing importance of developing countries in production, trade and investment. These developments have prompted 4 This paper focuses specifically on Africa s economic integration agenda. 5 North, D, (1991), Institutions, Journal of Economic Perspectives, vol 5, no 2, pp

4 the development of modern free trade areas (FTAs), whose scope is concentrated on issues such as services, regulation, standards, recognition of qualifications, competition, intellectual property rights, movement of people and capital, rather than the traditional agenda focused on border issues such as the import tariff. Customs unions have indeed become rare; the predominant form of regional integration is now the comprehensive FTA which includes the new generation trade issues, referred to above. 6 Among the members of the World Trade Organisation (WTO), as at July 2013, only 10% of all regional trade agreements notified to the WTO are customs unions, the rest are FTAs. It is increasingly clear that the FTA is a flexible model for regional integration, providing a platform for competitiveness development both for intra-regional integration and global integration. These developments and their implications for inclusive growth and development strategies, have not yet permeated the discourse on regional integration in Africa, which still reflects a the step-wise linear agenda which has become frought with political and governance challenges. African integration retains an inward orientation, essentially seeking to develop a platform for large import-substitution industrialisation initiatives. 7 Global developments underscore the fact that successful integration requires that trade agreements should go beyond tariff arrangements and include services, integration of domestic policies and regulations about intellectual property rights, product standards, competition and investment. 8 This requires emphasis on institutional building blocks. At a continental level; an important question is to what extent large economies, the regional hegemons, provide political leadership and chart new pathways for regional integration. The strongest sub-saharan economy, South Africa, was excluded from the original, post-independence RECs. South Africa s integration into the Southern African Development Community (SADC) and its acceptance as a member of the African Union after the demise of apartheid in 1994 introduced a specific institutional 6 According to the WTO, customs unions only account for 10% of regional trade agreements as at 31 st July World Trade Report: The WTO and Preferential Trade Agreements: From co-existence to coherence. 8 Ibid at p

5 challenge. Both SADC and SACU 9 amended their existing agreements but it has been difficult to accommodate the South African demands and interests. The role of South Africa 10 in the RECs to which it is party as well as in the current negotiations to establish the Tripartite FTA, provides an interesting case study of the role of hegemons in Africa s integration endeavours. There are a number of other RECs that also feature hegemons; Kenya and Nigeria are good examples. 3. A Multilateral Context of Regional Trade Arrangements The adoption of the linear integration model brings particular institutional requirements. The objective to establish an FTA or a customs union, brings these regional integration initiatives into the purview of the multilateral rules of the World Trade Organisation. The establishment of Regional Trade Arrangements (RTAs) such as FTAs or customs unions is an exception to the non-discrimination rule. 11 Practically all African states are WTO members and they have to respect the applicable rules when forming RTAs. The formation of new RTAs must also be notified to the WTO. 12 The relevant multilateral rules are contained in Article XXIV in the General Agreement on Tariffs and Trade (GATT), and the Enabling Clause 13 if the particular arrangement comprises only developing countries and has been notified under this Clause and Article V in the General Agreement on Trade in Services (GATS). In addition, the WTO has to be notified when RTAs are launched. Other 9 It is important to note that SACU predates the post-independence wave of regional integration; SACU is the oldest functioning customs union in the world, having been established in South Africa s trade and regional integration policy stance reflects a complex domestic political economy dynamic; focusing strongly on the protection of domestic industry and specifically on employment retention. South Africa is not currently embracing an ambitious integration agenda to enhance intra-regional or global integration. 11 The most favoured nation (MFN) principle requires that member states do not discriminate amongst WTO members; however subject to the rules for regional trade agreements, member states may enter into preferential trade arrangements such as FTAs or customs unions. 12 The SADC FTA was notified to the WTO under GATT Article XXIV, on 2 August 2004; available at citm8. 13 The Enabling Clause The Decision of the GATT Contracting Parties of 28 November 1979 on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries provides in the relevant part for less strict rules that are available to developing nations when forming RTAs. Eventually, however, the spirit behind the exception to the most-favoured-nation clause has to be respected. The member states are also required to inform the WTO about their particular RTA and its internal arrangements. 5

6 WTO members may invoke the WTO s dispute settlement procedure in order to ensure compliance with the applicable rules. 14 In customs unions and free trade areas substantially all trade among the members has to be liberalised, and generally no new restrictions on trade with other WTO members are to be introduced. A customs union is also obliged to have a common external tariff (CET) and a single customs territory. The administration of the CET requires specific institutions such as joint policies and rules to manage the affairs of the customs union members. They must act jointly in trade negotiations with third parties and they are not free to unilaterally changes tariffs, resort to safeguard measures or trade remedies to protect their domestic industries. Their policy space for independent action in these areas is, as a consequence, circumscribed. Similar considerations apply with regard to the single customs territory aspect of a customs union. Trade between the members has to be tariff free with respect to substantially all trade between them. It means there are no customs controls at the internal borders with respect to such goods. Successful and deeper integration, as well as effective trade facilitation will come about when internal regulation of sanitary and phytosanitary matters, standards and customs procedures are harmonised. The members of a customs union are under a duty to eliminate substantially all other restrictive regulations of commerce between them. 15 In terms of general international law states have a duty to bring their domestic law into conformity with their international obligations. Failure to do so may result in a breach of an international obligation if domestic law precludes compliance with specific international obligations. 16 The SADC Treaty for example provides: Member States shall take all necessary steps to accord this Treaty the force of national law. 17 Their national constitutions will dictate how that will happen (e.g. via the adoption of the necessary legislation) but the Member states cannot escape responsibility to comply with their Treaty obligations by invoking national law or policy space consideration to fail to implement such provisions. 14 See e.g. Turkey Textiles, Appellate Body Report, WT/DS34//AB/R, adopted 19 November GATT Article XXIV (8) 16 Matsushita, Schoenbaum & Mavroidis The World Trade Organization Law, Practice, and Policy, Oxford University Press, second edition, 2006 at 90, citing Oppenheim s International Law, 9 th edition, 1992 at pp Article 6(5), SADC Treaty 6

7 This leads to a basic question: What is rules-based trade? It starts with the fact that trade arrangements between states are governed by binding legal instruments. They contain specific obligations regarding outcomes and practices. For the private sector it must be possible to know what is required and allowed and it should be possible to rely on the agreed arrangements. Traders should further be able to invoke the rules before fora with the necessary jurisdiction to enforce them or to provide effective remedies. The state parties have to respect their obligations and transparency is a prerequisite. The legal instruments of the RECs are not always cast in perfectly lucid terms. 18 Lack of legal clarity makes such arrangements less effective. Uncertainty, unpredictability, non-compliance, non-transparency and a lack of remedies will undermine the benefits to be gained. Private firms, traders and investors require predictable, transparent institutions; including a framework to enforce their rights. Without such a rules-based governance framework, investment, production and trade will be adversely affected, eroding inclusive growth opportunities. 4. Rules-based Governance, Sovereignty and Regional Integration What is good governance and how effectively do African administrations perform their governance tasks in the context of regional integration? The typical meaning ascribed to governance holds that it concerns the procedures and institutions (legal instruments) by which authority is exercised. The essential feature of governmental action is that it concerns the exercise of state power. The key to the assessment of the quality of governance is to evaluate how this power is exercised, for what purpose and with what results. The regional integration context introduces an important consideration for understanding the requirements of good governance. The RECs are governed by binding legal instruments; the member states are not free to pursue domestic objectives as if unaffected by the outside world. The more comprehensive the regional arrangement and the more advanced the integration process, the stronger the need for appropriate institutions. 18 See the discussion below of SADC and SACU practices. 7

8 What are the consequences of bad governance? It leaves societies poor, vulnerable to exploitation, without safety and technical standards and the absence of remedies. They are unable to reap the benefits associated with market access opportunities. Part of the governance problem is often that the legal instruments of the RECs are not always cast in perfectly clear terms. 19 Respect for international legal obligations introduces the sovereignty issue. A substantial part of the public debate about deeper integration in Africa focuses on the loss of sovereignty by the member states. Arguments about loss of sovereignty contain an unintended admission; the real concerns might be about the loss of control and about interference with the powers of national governments. The distinction between state and government is frequently glosses over. Although sovereignty is technically a feature of states and not of governments, the fact remains that governments act on behalf of their states. Fears about threats to national sovereignty may be well founded in instances where supra-national bodies act in an ultra vires manner or when they usurp powers over areas best left to legitimate national structures. This has been a long standing debate in e.g. the European Union (EU) where the European Commission enjoys extensive powers over areas which used to fall under national institutions. However, African regional institutions 20 do not enjoy similar powers. Their local dilemma is often the opposite; the RECs have weak institutions, ill defined mandates, and vague powers. The monitoring of compliance with community norms and laws is mostly very weak and the collective voice is silent. Regional organisations do not enjoy inherent powers; they are the creatures of international agreements concluded and ratified by the very states which have come together in the belief that such bodies will improve trade, development and effective cooperation between them. They establish specific regional structures and grant them the powers necessary to fulfil their mandates. The sensitivity about sovereignty may be inspired by the fact that economic and financial policies involve sensitive national policy choices. The traditional view has 19 See the discussion below of SADC and SACU practices. 20 Reference here is to, for example, regional secretariats. 8

9 been that the state exercises full control over all matters within its jurisdiction; including the movement of goods, capital and people across its borders. In a modern and interdependent world where no state can prosper in isolation this cannot be an absolute truth; if it ever was. No government, not even of the strongest nations, can ignore the effects of global economic and related developments. Sovereignty is best understood as a legal concept which protects territorial integrity under prevailing global realities. It is important to recall that it is an act of sovereignty to conclude an international agreement; which will not bind a particular state unless it has formally become a party. Once international legal obligations have been accepted (typically through the ratification of or accession to treaties 21 ) they have to be respected. A state cannot invoke its national law or its constitution as a justification for not complying with its international legal obligations. If that were true, there can be no international law; and none of the benefits associated with legal certainty, predictability and remedies in case of the violation of obligations. 5. Rules-based governance in SADC SADC 22 comprises several areas of inter-state cooperation; its legal arrangements extend beyond trade in goods and consist of a large number of Protocols. 23 The SADC Treaty provides for an international organisation with legal personality and the capacity and power to enter into contract, acquire, own or dispose of immovable property and to sue and be sued A state is not bound by an international agreement unless it has given its consent thereto. Such consent is typically given through ratification or accession. 22 SADC s predecessor, the Southern African Development Coordination Conference (SADCC) was a regional cooperation arrangement; focusing on cooperation in key areas such as energy and transport. 23 The SADC website lists Protocols Combating Illicit Drugs; Control of Firearms; Culture, Information and Sport; Gender and Development; Education and Training; Energy; Extradition; the Facilitation of Movement of Persons; Fisheries; Forestry; Health; Immunities and Privileges; Legal Affairs; Mining; Mutual Legal Assistance in Criminal Matters; Politics, Defence and Security Cooperation; Shared Watercourses; Tourism; Trade; Transport, Communications and Meteorology; Tribunal and its Rules (now suspended);wildlife Conservation and Law Enforcement; Finance and Investment; and Trade in Services. 24 Article 3, SADC Treaty. Information about the entry into force of SADC instruments and the identity of the State parties comes from documentation prepared by the legal division in the SADC Secretariat. Other data has been gathered from the SADC website ( 9

10 With the launch of SADC and the adoption of the Protocol on Trade 25 the objectives of the Members were extended to include the pursuit of economic integration through the legal and trade policy disciplines associated with a Free Trade Area (FTA). 26 This decision introduced important legal consequences and transformed the organization into one which has to be WTO compatible, at least with respect to its FTA dimension. The Protocol on Trade is the most important legal instrument insofar as regional integration is concerned. It provides for the typical objectives of improved market access and non-discrimination, and aims to enhance cross-border investment by liberalising intra-regional trade. The objective is to establish a SADC FTA; however Angola and the DRC are not members of the FTA, and there has been focus on recent unilateral actions by member states such as Zimbabwe which implemented a surtax on goods imported from other SADC member states in 2012, and other countries which have applied for derogations from their tariff reduction commitments. 27 Some of the other SADC Protocols have a direct bearing on regional integration. This applies to e.g. the new Protocol on Finance and Investment, the Protocol on Trade in Services and several others. Regional integration will lack a vital component if the liberalization of financial services is not addressed as part of the trade arrangements between the states involved. This objective requires a proper understanding of the roles of governments as well as the private sector. Without inter-state arrangements to facilitate payments and the many related aspects involved in financing transactions, cross-border trade in goods will be cumbersome, uncertain and often not practical. The benefits to be gained from regional integration, including inclusive growth, will be limited. These considerations explain the importance of the SADC Finance and Investment Protocol (FIP) and its potential role in furthering deeper integration in the region. However, the domestic regulation and liberalization of trade in financial and related services are equally important. Compliance with legal obligations is not properly monitored in SADC and sanctions against perpetrators of violations are not imposed. The SADC Treaty does provide for the possibility of sanctions against members that persistently fail, without good 25 The Protocol on Trade was signed on 24 August It entered into force on 25 January Article 2(5) of the Protocol on Trade confirms that one of its objectives is to establish a Free Trade Area in the SADC Region. 27 Article 3 of the Trade Protocol provides for derogations form scheduled obligations. Conditionalities should accompany such derogations but they have not yet been adopted. 10

11 reason, to fulfil obligations assumed under this Treaty, or when they implement policies which undermine the principles and objectives of SADC. 28 The real systemic problem is that decisions by the Summit (consisting of the Heads of State or Government of the members) are taken on the basis of consensus, unless provided otherwise in the Treaty. 29 Article 19 of the SADC Treaty in fact provides that decisions of all SADC institutions shall be taken in this manner. The same applies in the other African RECs. This rule on decision making has apparently been interpreted to mean that a particular member in effect enjoys a veto right, including on the implementation of rulings of the Tribunal. The latter is a major flaw and undermines the ideal to have a proper rules-based regime in SADC. The SADC Summit suspended the Tribunal in 2010 after a ruling that Zimbabwe was in breach of its Treaty obligations. The applications were brought by Zimbabwean nationals and involved human rights violations. Zimbabwe participated in the Summit deliberations and the decision to suspend the Tribunal. 30 As a result, since 2010 no disputes about the application or interpretation of any SADC legal instrument could be settled in a binding and final manner. At the recent SADC Summit for Heads of State and Government in Lilongwe, Malawi, which took place from 17 to 18 August 2013, a decision was taken to adopt a new protocol for the SADC Tribunal, which should be confined to the interpretation of the SADC Treaty and Protocols relating to disputes between Member States. 31 All existing legal instruments, including the SADC Treaty and Protocols will have to be reviewed to propose consequential amendments. New Rules of Procedure for the Tribunal will also be required. The Summit decision states that the new Protocol will have to be ratified by two thirds of the Member States in order to enter into force. Since national constitutional procedures will then enter the picture, it may be quite some time before SADC will see its new Tribunal. The Summit will have a say about the content of whatever will be negotiated. In terms of Article 22(2) of the SADC Treaty each Protocol shall be Article 33(1), SADC Treaty. Article 10(9), SADC Treaty. 30 Summit decisions are taken on the basis of consensus. 31 SADC/SM/1/2013/1A. 11

12 approved by the Summit on the recommendation of the Council. It must, however, be noted that Article 16 of the Treaty applies with respect to the adoption of the Tribunal s Protocol; which is in force once adopted by the Summit. 32 The manner in which the Tribunal saga has been handled does not bode well for rules-based governance in SADC. The existing Protocol on the Tribunal is still a legally binding instrument. Changes to an existing and binding international agreement have to be made in terms of its own amendment procedures. The Summit, despite being the highest decision making body in SADC, cannot simply dispense with existing and binding Protocols on the basis of a routine decision. Article 22(10) of the SADC Treaty reads: Decisions concerning any Protocol that has entered into force shall be taken by the parties to the protocol in question. SADC members (some of them) are parties to the Protocols but entirely different procedures are involved compared with Summit meetings. An amendment to any Protocol that has entered into force shall be adopted by a decision of three quarters of the Member States that are parties to a Protocol. 33 These provisions in Article 22 of the Treaty are lex specialis. The adoption of the original Tribunal Protocol gave rise to legal uncertainties (which were subsequently raised before the Tribunal as well as in disputes before the South African courts) about the question whether it had properly entered into force. The special procedure of the amended Article 16 was adopted when it was realized that the standard requirement of Article 22 of the Treaty (ratification by two thirds of the SADC members) was unsuitable for the sui generis Protocol of the Tribunal with the power to ensure adherence to and the proper interpretation of the provisions of this Treaty and subsidiary instruments and to adjudicate upon such disputes as may be referred to it. This amendment was meant to prevent dissimilar configurations of contesting parties in disputes where some member states would be bound by a Protocol and others not. That is why Article 16(2) now provides: The composition, powers, functions, procedures and other related matters governing the Tribunal shall be prescribed in a Protocol, which shall, notwithstanding the provisions of Article 22 of this Treaty, form an integral part of this Treaty, adopted by the Summit. 32 Article 16(2) SADC Treaty. 33 Article 22(11) SADC Treaty. 12

13 Far-reaching changes to the powers of the Tribunal are being contemplated. Its jurisdiction will be drastically circumscribed and only inter-state disputes will in future be heard. It is well known that African members of RECs never litigate against each other. There may, as a result, never be any such disputes before this new Tribunal. That would be very unfortunate for the development of rules-based governance in SADC. The region s expanding trans-boundary commerce, the nature of supply chain production involving private firms, and investment, demand certainty and predictability. The right of individual standing will be abolished, and unless a special arrangement is adopted, private parties will not be able to bring claims against governments which infringe their rights. The Trade Protocol and its Annexes for example deal with many individual rights. Staff 34 disputes; of which several were heard by the Tribunal during the five years of its existence, will also become impossible. It is well known that the rulings of the Tribunal about Zimbabwean human rights violations triggered the political process which has now resulted in the emasculation of the rule of law in SADC. Several other member states eventually supported Zimbabwe. This is unfortunate but shows that the adjudication of human rights is a matter where governments easily invoke their sovereignty. That is why special and concerted efforts to protect human rights are so important; which will happen most optimally when national courts enjoy the power of judicial review. When an enforceable national bill of rights is absent such states are unlikely to allow human rights powers to be exercised by regional or international fora. There is no indication that the adjudication of trade and regional integration disputes has been considered as part of the Summit decision to re-negotiate the Tribunal s Protocol. It is not too late to do so. The task of the Committee of Ministers of Justice/Attorneys-General is inter alia to review the existing legal instruments of SADC. They have an opportunity to ensure that these other areas of dispute settlement; which are vital for good governance and the rule of law, will be catered for. Deeper integration without respect for rights will remain a futile exercise. 34 Staff of for example the SADC Secretariat in Gaborone, Botswana, had previously brought employement matters to the Tribunal. 13

14 Adjudication is a crucial aspect of rules-based governance; which in SADC is unfortunately in its infancy. There is, ironically, an opportunity now to look at the bigger picture regarding dispute settlement in SADC and to add vitally important institutional building blocks to the SADC architecture. 6. SACU a sui generis arrangement SACU has, from its inception, been a sui generis arrangement with its own historical context. South Africa is the dominant economy in SACU. Its interests and policy needs are very specific and they tend to dictate the policies adopted via SACU structures. South Africa s hegemonic role is also reflected in the practices of SACU, which has not become a democratic organisation, as the 2002 Agreement promises. The smaller member states 35 are, as a consequence, confronted with particular trade and foreign policy challenges and constraints. At the same time membership of SACU does bring important benefits, the most obvious of which is the revenue from the Common Revenue Pool; collected as part of the common external tariff. The bulk of SACU s imports are generated by South Africa. 36 SACU members, with the exception of Botswana, also belong to a common monetary arrangement which does not form part of SACU. The Common Monetary Area (CMA) was enacted in July 1986; it originated from the Rand Monetary Area (RMA). The latter was established in 1974 and the signatories were South Africa, Lesotho, and Swaziland. The CMA has since been replaced by the present Multilateral Monetary Area (MMA) as of February 1992, when Namibia formally joined the arrangement. The importance for Botswana, Lesotho, Namibia and Swaziland, or BLNS countries, of revenue from SACU s revenue-sharing arrangement, the strength of the South African economy, and the dominant position of South Africa in economic policy matters constitute essential features of the relationship between the member states. These factors impact directly on the foreign policy space of the smaller countries in particular. 35 Botswana, Lesotho, Namibia and Swaziland (often referred to as the BLNS) 36 SACU is also an excise union. 14

15 SACU dates back to the formation of the Union of South Africa in The 1910 SACU Agreement provided the first formal framework for the operation of this customs union, which then included the former British Protectorates of Basutoland, Bechuanaland and Swaziland. When they became independent in the 1960s, a reassessment of the SACU Agreement was required. This resulted in the adoption of the 1969 SACU Agreement, concluded on 11 December 1969 and becoming operational on 1 March Revenue-sharing was, from the outset, the focal point. Botswana, Lesotho and Swaziland were concerned that they were not getting a fair share of customs union revenue, basing their views on the argument that the fixed percentage shares in revenue which came their way under the 1910 Agreement did not compensate for the effects of trade diversion that arose from the protective tariff designed to serve South African industrial interests. The 1969 Agreement provided for free trade among the members, while administering a common external tariff for trade with third parties. However, it was envisaged that free trade within the common customs territory would, in terms of the preamble to this Agreement, be managed in a way that would 37 ensure the continued economic development of the customs area as a whole, and to ensure in particular that these arrangements encourage the development of the less advanced members of the customs union and the diversification of their economies, and afford to all parties equitable benefits arising from trade among themselves and with other countries. Significant asymmetry has always characterised SACU, with industrial development concentrated in the high-growth metropolitan areas of South Africa, with very little industrial development in the smaller member states. In addition South Africa, as the regional hegemon simply made trade policy decisions to support its industrial policy objectives. Schiff and Winters 38 describe SACU as the most hegemonic of customs unions. 37 Republic of South Africa (1969:9). Customs Union Agreement between the Governments of South Africa, Botswana, Lesotho and Swaziland. Government Gazette, No. 1212, 12 December 1969, p Maurice Schiff and L. Alan Winters, (2003) Regional Integration and Development, The World Bank. Washington, D.C. p

16 The 1969 Agreement was premised on an understanding that the BLNS countries would sacrifice important elements of their control over fiscal and trade policy. South Africa managed these affairs as if they were all part of the South African economy. In exchange, and as compensation for the polarisation effect inherent in being part of a single customs territory dominated by a much larger member, BLNS countries received the payments according to the revenue sharing formula. This system of customs union management had evolved historically and was embedded in the colonial experience of the region. South Africa s domestic political order of apartheid meant additional tensions and international isolation. All of this came to an end in 1994 with the election of a new government under a democratic dispensation. The newly elected African National Congress Government soon announced its preparedness to renegotiate the SACU Agreement. The adoption of the 2002 SACU Agreement was a response to the organisation s historical legacy and regional political and economic changes during the 1990s. Namibia became independent in 1990 and joined SACU as a full member. The announcement, in the same year, that apartheid would be abolished, heralded the end of South Africa s international isolation. The outcome of the GATT s Uruguay Round of multilateral trade negotiations took effect in 1995, and on 1 January that year, the WTO came into existence. All the SACU states belong to the WTO. Certain changes and some degree of innovation within SACU followed, but essential features of the previous regime such as the strong focus on tariff revenue-sharing were retained. The Common Revenue Pool and the transfer of revenue to the BLNS states remained the essential raison d être of SACU. The new Agreement still covers only trade in goods; it does not mention trade in services. SACU did not evolve into a true regional integration mechanism or an instrument for promoting trade beyond the exchange of goods. A number of new building blocks and institutions 39 are mentioned in the 2002 Agreement and when they become operational there might be a new impetus towards deeper integration. This has not yet happened. 39 The SACU Tariff Board, the ad hoc Tribunal and the Common Negotiating Mechanism are the most important ones. 16

17 The new SACU Agreement does alter the structure and some of the operational aspects of SACU. It now provides for an international organisation with legal personality, 40 specific institutions, rules on decision-making, the development of common policies, as well as and the possibility of formal dispute resolution. 41 The 1969 Agreement noted that differences between the members had to be resolved through consultation. There was no provision for a regional court or tribunal. The new Agreement, on the other hand, purports to create a typical international organisation, while maintaining and, in some instances, repeating provisions in the 1969 Agreement. 42 The Preamble and Article 2 are both new in the sense that they spell out the inadequacies of the former arrangement, especially measured against the need to integrate the member states economies into the global economy and in dealing with the different levels of the economic development of the member states. The importance of tariffs as instruments for the implementation of industrial development is emphasised, 43 as is the need now for a dispute settlement mechanism [to] provide a mutually acceptable solution to problems that may rise (sic) between Member States. 44 Article 2 of the new Agreement deals with the union s objectives and emphasises the need for a technically sound customs union and to integrate the national economies into the global economy through enhanced trade and investment. Equitable sharing from the Common Revenue Pool is stressed, and there is a call to develop common policies and strategies. The same provision emphasises conditions of fair competition in the Common Customs Area, and the need to create effective, transparent and democratic institutions which will ensure equitable trade benefits to Member States. This particular aspect is significant: the members wanted to establish a dynamic and properly empowered SACU and to move away from the dominance of South Africa s national institutions which characterised the functioning of SACU under the 1969 agreement. They have not really succeeded in this 40 SACU Agreement Article The settlement of disputes will require an operational Tribunal but this has not yet happened. The right of members to impose import and export restrictions is e.g. retained in Article 25 of the new Agreement. Preamble, paragraph 4, SACU Agreement Ibid. Final paragraph 17

18 endeavour; although they have benefitted substantially from the sharing of customs revenue. The second part of the 2002 Agreement formalises SACU s status as one based in the legal personality of the organisation. It provides for a permanent Secretariat to deal with the day-to-day administration of the whole organisation, and permanent headquarters in Windhoek, Namibia. Article 7 provides for the establishment of a Council of Ministers, a Customs Union Commission, the Secretariat, a Tariff Board, Technical Liaison Committees, and an ad hoc Tribunal. The member states are represented by the Council of Ministers and the Commission, both on ministerial and senior official level. The Technical Liaison Committees bring together officials from the various member states to deal with agriculture, customs, trade and industry, and transport. Exactly how this will happen will depend on the common policies to be adopted under Part Eight, the interaction with third parties, and agreements concluded with them. At the SACU centenary celebrations of 2010 a decision was made to establish a Summit of Heads of State and Government as a new and permanent institution of SACU. This will require amendments to the SACU Agreement and a demarcation of powers so that the roles of the Council and Summit are clear. The present indications are that the Summit will provide political guidance to the Organisation. Whether this will lead to a new kind of Summit diplomacy in SACU is to be awaited. If it does happen the BLNS states may start to enjoy fresh scope for foreign and regional policy initiatives. The real test will come when individual member governments have to decide whether they will put vital issues on the Summit agenda and whether Summit decisions will be binding. Will national officials be under an obligation to implement them? Who will monitor implementation and compliance? Part Eight of the Agreement lists industrial development, agriculture, competition, and unfair trade practices as areas of future cooperation but does not provide for any essential guidelines. The members will have to take deliberate steps to activate a process for developing and adopting the common policies listed in Part Eight. These challenges remain on the SACU agenda. Part of the reason why no new policies have been adopted has to do with the vague language in the Agreement. The four areas industrial development, agriculture, competition, and unfair trade 18

19 practices aim at outcomes which require specific negotiations and outcomes for each area. In the case of industrial policy member states agree to develop common policies and strategies with respect to industrial development, 45 but nothing is said about the content or enforcement of such common policies. In the case of agriculture the Agreement requires only that member states must cooperate on agricultural policies in order to ensure the coordinated development of the agricultural sector within the common customs area. 46 The five member states often follow different domestic approaches with regard to agriculture. In the case of South Africa agriculture is a deregulated sector while the opposite is true in the other member states. With respect to competition policy, the members shall cooperate with each other with respect to the enforcement of competition laws and regulations. 47 It is not entirely clear how competition policy, unfair trade practices and trade remedies will be coordinated. SACU s competition policy will be a loose arrangement about national powers and national laws, while in the case of unfair practices there should ideally be a single legal instrument; in the form of an annex. The Tariff Board should have jurisdiction over trade remedies, while the national bodies will initially vet applications for trade remedies, tariff changes, duty drawbacks or rebates. 48 The operations of the Tariff Board will require a new institutional framework consisting of a detailed arrangement: national bodies in the member states, the Tariff Board as a SACU institution, and the SACU Council. Up till now, the International Trade Administration Commission of South Africa (ITAC) has been responsible for all decisions with respect to trade remedies, rebates, refunds or duty drawbacks. It functions in terms of the South African Trade Administration Act, 49 which provides for the necessary powers and procedures. The Act also incorporates the respective WTO disciplines on trade remedies as part of South Africa s domestic legislation, and implements decisions with respect to the common customs territory. 45 SACU Agreement Article 38(2) 46 Ibid. Article 39(2) 47 Ibid. Article 40(2) 48 SACU Agreement Article Act 71 of

20 The BLNS states do not decide over and implement trade remedies. They are nevertheless duty-bound to give effect to ITAC decisions and to protect the existence of the CET. Article 22 of the Agreement provides that member states shall apply similar legislation with regard to customs and excise duties. Article 23 stipulates that member states shall take appropriate measures, including arrangements regarding customs cooperation, to ensure that provisions of this Agreement are effectively and harmoniously applied. A SACU Tribunal could deal with some of the challenges faced by SACU by developing a binding jurisprudence, but does not yet exist. A fundamental challenge for the Tribunal will be to interpret the SACU Agreement in a coherent manner and in order to ensure that a rules-based regime comes about. These missing institutional building blocks in the SACU architecture mean that the original plan adopted as part of the 2002 Agreement remains incomplete. As long as this state of affairs prevails SACU will, in many important aspects, not function as a coherent customs union. South Africa will retain essential powers which will impact on the operations and policies of the Customs Union and, by implication, on all the member states. The member states have to manage a complicated regional relationship where one specific member, South Africa, plays a dominant role. Regional integration is never easy when the needs of a single hegemon often deviate from those of the smaller members. 7. The Tripartite Free Trade Agreement a new integration paradigm? The blending of the various African RECs into a more inclusive (and eventually continental) arrangement has been a long stated objective. The members of the Common Market for East and Southern Africa (COMESA), the East African Community (EAC) and SADC were the first to start work on the implementation of this ideal. In October 2008 they convened for their first Summit of Tripartite FTA (T- FTA) States in Kampala and decided to launch the process to establish the new and comprehensive regional arrangement. The objective at the time was to establish an inclusive FTA, which would, amongst other objectives, address the challenges of 20

21 overlapping member of RECs. The T-FTA was envisaged to have the typical legal and institutional features of a comprehensive free trade area. 50 To achieve this objective, member states would undertake negotiations in two phases; with the first phase devoted to trade in goods and the movement of business persons. Negotiations on services and trade related issues will be conducted during the second phase. This provided for the conclusion of a comprehensive, modern FTA, which would serve as a blueprint for the continental FTA. Indeed the ambition was to go well beyond a comprehensive FTA; in addition to the market integration pillar of the FTA, two additional pillars, infrastructure and industrial development complete the ambitious integration programme of the SADC-EAC- COMESA member states. The second and third pillars are noteworthy as they stand to address some of the practical integration challenges that this region faces. Many member states in this region lack the productive capacity to produce tradeables competitively; addressing the challenges related to industrial development and diversification are therefore integral to the achievement of an integrated, prospering region. From a national perspective, this is integral to the promotion of inclusive growth; addressing the fundamental challenges of unemployment and poverty. The infrastructure deficit has long been recognised as a key contributor to the high costs of doing business and high transaction costs of trade in Africa. Development of infrastructure in transport, energy and telecommunications would also address many of the trade facilitation challenges that traders face in the region. It is of course essential that the focus be not only on the physical infrastructure but also on the soft or regulatory infrastructure, which can ensure cost effective, quality services to support industrial development and trade. A trade in services agenda is envisaged as part of the second negotiations phase, providing an important connection between the infrastructure development pillar and the market integration pillar. The T-FTA looked as if it could pave the way for a new regional integration paradigm; one which looked much more like the international benchmark agreements that characterise the Asian model. 50 See the Terms of Reference for the Study on the Establishment of the COMESA- EAC-SADC Free Trade Area (FTA), as well as Articles 3, 4 and 8 of the Draft TFTA Agreement. 21