WORLD TRADE

ORGANIZATIONWT/TPR/M/11411 June 2003(03-3032)

Trade Policy Review Body23 & 25 April 2003

TRADE POLICY REVIEW

Southern African Customs Union

Minutes of Meeting

Chairperson: H.E. Mrs. Mary Whelan (Ireland)

Page

I. INTRODUCTORY REMARKS BY THE CHAIRPERSON 3

II. OPENING STATEMENT BY THE REPRESENTATIVE OF SACU 4

III. STATEMENT BY THE DISCUSSANT 6

IV. STATEMENTS BY MEMBERS OF THE TRADE POLICY REVIEW BODY 8

V. REPLIES BY THE REPRESENTATIVES OF SACU AND ADDITIONAL COMMENTS 13

VI. CONCLUDING REMARKS BY THE CHAIRPERSON 17

Note: Advance written questions by WTO Members and replies provided by the Governments of SACU are reproduced in document WT/TPR/M/114/Add.1 and will be available onlineat: http://www.wto.org/english/tratop_e/tpr_e/tp_rep_e.htm.

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I. INTRODUCTORY REMARKS BY THE CHAIRPERSON

1. The Chairperson welcomed members of the Trade Policy Review Body to the second Review of the Southern African Customs Union (SACU) and greeted the ministers and representatives of the five delegations of SACU. She recalled the purpose of the Trade Policy Reviews and the main procedural elements of the meeting. The basic documentation for the Review had already been circulated; the report by the Governments of Botswana, the Kingdom of Lesotho, Namibia, South Africa, and the Kingdom of Swaziland was contained in document WT/TPR/G/114 and that of the WTO Secretariat in document WT/TPR/S/114. She was pleased that H.E. Ms Amina Chawahir Mohamed (Kenya) had kindly agreed to act as the discussant, and emphasized that, as usual, the discussant would speak in her personal capacity and not as a representative of her government. $An outline of the main issues she intended to raise had been made available in advance (WT/TPR/D/93). Copies of advance written questions submitted by Norway, the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu; Canada; Colombia; Hong Kong, China; Japan; Switzerland; New Zealand; the European Union; Korea; Brazil; India; Kenya; Mexico; and the United States had been transmitted to all SACU delegations. These questions, and the replies provided by the SACU delegations, are reproduced in WT/TPR/M/114/Add.1.

2. The Chair underlined the progress achieved by the five SACU countries in economic reforms since their last Trade Policy Review in 1998. Trade and investment liberalization, driven by their commitments in the WTO and their participation in bilateral and regional trade agreements, had been a major feature in this process. However, SACU's trade regime, the tariff structure in particular, remained complex, and applied customs tariffs, excise duties, customs valuation, rules of origin, and contingency trade remedies were still the only domains of trade policy formally harmonized throughout SACU. It was hoped that, once in force, the 2002 SACU Agreement, combined with multilateral liberalization and outward-orientation, would foster the integration of SACU into the world economy and help SACU countries to take up the common challenges they faced despite their different levels of development.

3. The Chair passed the floor to the Minister of Trade and Marketing of Lesotho, to give the opening statement for SACU.

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II. OPENING STATEMENT BY THE REPRESENTATIVE OF SACU

4. The representative of Lesotho, on behalf of SACU, welcomed the opportunity to interact with Members of the WTO in SACU's first Trade Policy Review as a customs union, and thanked the Chairperson, the discussant, the WTO Secretariat and all delegations for their participation. While there were some areas of the Secretariat Reports where SACU might hold different views, he welcomed the transparency of the TPR process and affirmed SACU's commitment to opening up its trading regime to scrutiny within the context of its WTO obligations. These showed SACU's continued support for and belief in the multilateral process, through which issues of common concern could be addressed. Uncertainty with regard to the future of the multilateral trading system and the WTO itself proved the need to strengthen cooperation in the WTO and affirm Members' commitment to multilateralism as a proper vehicle for responding to common challenges.

5. In 1998, when the SACU members were reviewed as individual countries, the process of negotiating the new SACU agreement was ongoing. He was pleased to report that the new Agreement had been signed in October 2002; the Agreement would be notified to the WTO once domestic constitutional ratification procedures in all member States were satisfied. The new Agreement was the basis for strengthening cooperation towards SACU's common goals and objectives, including economic development of the region, reduction of poverty and inequalities within and amongst the member States, and issues relating to HIV/AIDS. All these efforts were aimed at contributing to the economic revival of the region and the African continent as a whole. The conclusion of the SACU Agreement showed the members' desire and commitment to consolidate regional trade relations, with the objective of fostering development of the region and its peoples. SACU was proud of the steps it had taken and was pleased to see that efforts were beginning to bear fruit. Recent indicators showed demonstrable, albeit modest, economic growth in the customs union; this indicated that a solid basis for growth of the regional economy had been laid, as a result of carefully considered plans and policies.

6. To sustain growth in their economies, individual SACU Members had adopted macroeconomic policies aimed, inter alia, at attracting investment, promoting industrialization, improving competitiveness of industries, and creating conditions for development. The encouraging outcome of these efforts could be seen in the growth of exports; over the last five years, manufactured exports, in constant Rands, had increased by 11% per year, with particularly strong growth in vehicles, auto components, chemicals and, more recently, clothing. All SACU economies were looking to diversify their industrial bases and exporting, particularly to fast-growing countries of the South. Current negotiations with United States and MERCOSUR were aimed at reinforcing this trend, establishing beneficial trade links with trading partners, and accessing new markets. He hoped that the consolidation of SACU would strengthen and reinforce these efforts. SACU invited its trading partners to support its efforts, and in particular, the strengthening of SACU and country-level institutions.

7. Like other regional trading arrangements, SACU considered the customs union as a building block for deeper regional and continental integration, which would serve as the basis for attaining the goals and objectives of the New Partnership for Africa’s Development (NEPAD) and for greater integration into the global economy. The achievement of the goals and objectives of the new SACU Agreement would require a collective effort to move forward as a region. As a start, SACU had agreed to develop and harmonize policies in the areas of, inter alia, industrial development, agriculture, competition policy, and unfair trade practices.

8. The representative noted that SACU Member States interacted with each other from varying levels of development. However, this factor had not hindered the pursuit of its common interest, showing that when political will was mobilized constructively, it was possible for countries at varying levels of development to work together to achieve balanced outcomes. However, he stressed that, in the context of the Doha negotiations, the developed countries should demonstrate the leadership that

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could propel the negotiating process forward. Concluding the Doha Round negotiations was crucial to supporting continued growth in the world economy, without which there would be no development for the majority of the world’s people. To ensure that the Doha Development Agenda lived up to its name, SACU economies and those of other developing and least developed countries had to gain meaningful market access and current market access arrangements needed to be maintained. It was only through meaningful market access that the multilateral trading system could help development. Market access allowed developing countries fully to use the strength of their comparative advantage to expand and diversify their export base. Technical assistance and capacity building should not be a substitute for concerted and meaningful market access, but should complement it. SACU believed that the WTO could play a key role in opening markets and removing barriers, particularly on products of export interest to their economies; the WTO could also play a key role in ensuring that multilateral rules support development. This was important if SACU's economies were to integrate into the global economy. To this end, and as developing countries, SACU had interest in ensuring that issues such as special and differential treatment, public health and access to medicines, and agriculture were addressed urgently.

9. The conclusion of the new SACU Agreement was not the end of the search for a consolidated customs union, but the beginning. There was still a lot of work to do to achieve the objective of a fully integrated customs union; however, the representative emphasized SACU's collective desire to achieve harmonization and consolidation of its policies. It was SACU's wish that the outcomes of the Doha negotiations would strengthen and support its efforts and help the region achieve economic growth and development. He reaffirmed SACU's commitment to the principle of transparency, upheld by the multilateral trading system as espoused by the WTO.

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III. STATEMENT BY THE DISCUSSANT

10. The discussant, H.E. Mrs Mohamed, said that the two reports together painted an interesting picture of economic development and performance since SACU's last Trade Policy Review. The evolution of SACU reflected that of African statehood and nationhood; from a historical union among three British protectorates and the Union of South Africa, it had come to reflect new historical realities emerging from independence of the three territories Namibia joining in 1990, and then the monumental changes that took place in South Africa in 1994.

11. The renegotiation of the SACU Agreement in 2002 was intended to make it more responsive to new challenges and expectations of the peoples and governments of the region. Despite very different levels of economic scale, structure, and development, the five SACU members faced common challenges, including the promotion of sustainable development, reduction of acute poverty exacerbated by distorted and unequal income distribution, severe unemployment, and health problems including the high prevalence of HIV/AIDS. At the same time, the five members were seeking to diversify their economies and become more integrated into the world economy. For SACU members, regional integration could contribute to significant growth and poverty alleviation, create economies of scale, rationalize allocation of resources and develop competitive advantages. SACU had continued on a path of economic reform and adjustment during the review period; liberalization of trade and investment were the hallmarks of the process and all the SACU economies had become increasingly trade-dependent. Despite low levels of investment, high production costs, depreciation of local currencies and bad weather conditions, real GDP had shown signs of positive movement across the area.

12. Monetary and exchange rate policies in SACU remained highly influenced by South Africa; this effective harmonization had maintained inflation at around 7% during the review period. She asked how the recent strengthening of the rand would affect the competitiveness of exports from the weaker economies of the Union, why the relative harmonization of monetary and exchange rate policies had not led to the formal harmonization of fiscal policies, and whether lack of such harmonization had had a negative effect on public deficits.

13. SACU countries had all shown their commitment to the multilateral trading system through their active participation in the WTO and the Doha Development Agenda, which they saw as their best opportunity to correct imbalances in the international trading regime. Slow progress on the Doha agenda was a matter of great concern. It was critical to SACU members, as it was to other countries in Africa, that the few products of export interest to them should have unrestricted market access, and that support and technical assistance should address supply-side constraints as well as special and differential treatment under the WTO Agreements. South Africa had aligned its intellectual property law with the TRIPS Agreement through new legislation, she asked what support South Africa sought in this regard and what difficulties it foresaw with implementation, and queried how, in the light of the impact of HIV/AIDS on their economies, public opinion in SACU Members perceived the present stalemate on the stand-alone declaration on TRIPS and Public Health. She noted the complex web of trading arrangements to which SACU members were parties and the difficulties facing smaller and weaker members in dealing with this, and asked whether the SACU Secretariat, to be formed, would take over the negotiation of all future multilateral and regional agreements and whether this would limit members' ability to enter into bilateral agreements.

14. Despite efforts to rationalize the tariff structure, it remained complex, with each Member maintaining different binding commitments within the single customs union, and a host of different types of duties, including applied duties that were different in nature from bound duties. She asked how this related to WTO commitments on customs valuation. Lack of internal harmonization of VAT and sales taxes encouraged illicit activities: she asked whether SACU members intended to rationalize such taxes to reduce the costs of doing business. The entry into force of the 2002 SACU Agreement would no doubt increase coherence of policy formulation, hopefully increase regional

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trade and address SACU members' desire for fuller integration into the global market: in this connection, she asked whether SACU members could indicate when ratification would be completed and the treaty enter into force. Noting that the other SACU members were required to implement the large number of anti-dumping, countervailing, and safeguard measures introduced by South Africa, she queried whether this put pressure on them to undertake commitments beyond their national capacities. In regard to import procedures maintained for monitoring or statistical reasons, despite some simplification, there were still some measures that seemed to inhibit imports from other developing countries including LDCs, and some SPS measures applied by South Africa appeared unduly restrictive. Given the importance of export promotion for SACU members, it was understandable that some SACU members, including the smaller ones, had revived export finance and insurance schemes to address growing unemployment in labour intensive sectors. Clearly, it was also important to have some national or regional level regulation on competition and unfair business practices. Noting that South Africa was currently the only member with a competition law, she asked how SACU members in general dealt with anti-competitive practices within the region. She wondered how SACU members intended to address the challenges of attracting FDI in the future.

15. On sectoral issues, the discussant called attention to the high dependence of SACU members on a limited number of products and an unfavourable internal and external market climate. The share of agriculture in GDP had continued to decline; nevertheless its value to the economy, and especially to food security, poverty alleviation, and rural development, could not be overestimated. The recent drought, making food aid necessary in some areas, had underscored the fragility of the agriculture sector. Although tariffs under SACU were becoming a main agricultural trade policy instrument, each SACU member had its own "home-grown" farm policy. SACU members had agreed to cooperate on agricultural policies, yet the new SACU Agreement maintained the status quo on SPS measures: she asked about the rationale for that position. Preferential access for particular agricultural products had been critical for development in some SACU members, by ensuring stable and predictable resource flows and assisting development in other areas; in her view it was crucial to maintain unrestricted market access for agriculture-dependent countries like Lesotho and Swaziland. She asked for information on the operation of the futures market for commodities in South Africa. Concerning the importance of mining as a revenue and foreign exchange earner for the region, she asked whether South Africa, Botswana, and Namibia held a regional vision of integration in this area and sought information on the outlook for future development following De Beers' withdrawal in 2002. In respect of manufacturing, she noted the positive results of AGOA for the textiles and clothing sectors, especially in Lesotho, and asked for information on the outlook for this and for the preferential agreement with the EU. As regards services, she remarked on the low level of trade, high costs linked to developmental challenges, and the need to address difficulties associated with technology transfer. Liberalization in this area would no doubt improve efficiency and competitiveness, but should be undertaken gradually with adequate support and flexibility.

16. The discussant stated her deliberate avoidance of certain issues, which she believed were not yet ripe for negotiation in the WTO. SACU members had been in the forefront of WTO discussions on existing commitments, special and differential treatment, and implementation issues and concerns. She would leave for others the question of how to address possible new commitments, given the already overflowing dish of negotiations.

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IV. STATEMENTS BY MEMBERS OF THE TRADE POLICY REVIEW BODY

17. Members welcomed the renegotiation of the 2002 SACU Agreement since the last Trade Policy Review of its members in 1998 and efforts by SACU countries to further liberalize trade and investment based on their WTO commitments and enhanced regional integration. They appreciated their commitment to the WTO and the multilateral trading system, and their strong support for the Doha Development Agenda. Members noted the wide economic diversity among SACU countries and their common severe challenges, including promoting sustained economic development, product diversification and poverty alleviation, combating HIV/AIDS, and fully integrating into the global economy. They appreciated the SACU states' active WTO participation and strongly supported technical assistance and capacity building initiatives to help them participate effectively in the multilateral trading system.

18. The representative of Norway appreciated the objectives of the 2002 SACU Agreement to create transparent and democratic institutions, promote fair competition and increase investment, which should advance SACU's global integration. EFTA and SACU members intended to commence negotiations on a free-trade agreement in May to complement WTO negotiations and improve trade opportunities. Areas of special interest to SACU states and other developing countries, such as pharmaceuticals under TRIPS, needed to be addressed urgently. Norway was concerned that SACU countries had become major users of anti-dumping measures. Increased anti-dumping actions by SACU and other countries demonstrated the weakness of WTO disciplines, and stricter rules were needed. Norway requested details on the type of technical assistance needed by SACU states.

19. The representative of India referred to the commitment by SACU states to trade and economic reforms. They participated in a number of regional and bilateral trade integration initiatives, such as the Southern African Development Community (SADC); Namibia and Swaziland were also members of the Regional Integration Facilitation Reform (RIFF); and South Africa had a bilateral trade agreement with the EU. SACU states were also negotiating trade agreements with MERCOSUR and the United States. These overlapping regional trade agreements resulted in complex rules of origin, discriminatory trading conditions for non-preferential partners, and imposed a heavy administrative burden. India hoped that all current and future SACU preferential trade agreements would be in accord with WTO rules. Despite critical constraints, SACU states had liberalized trade to achieve closer integration. India shared SACU concerns that broadening the scope of the Doha negotiations to include the so-called new issues would severely constrain the human and institutional capacity of developing countries.

20. The representative of the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu welcomed the continued economic and trade reforms that should eventually update the SACU members' trade regimes, provide greater conformity with WTO rules, and attract greater private investment for economic development. While progress was slower than hoped, the region faced severe problems. Chinese Taipei was concerned with SACU's use of contingency trade remedies; South Africa was the world's fifth largest user of anti-dumping actions, after the United States, the EU, India, and Argentina. While these actions generally served South Africa's purpose, they might neglect the specific circumstances of other SACU states. Contingency trade legislation needed to be developed at the SACU level. South Africa had undertaken to amend its anti-dumping regulations and practices to ensure WTO compliance. Its competent authority, the Board on Tariffs and Trade (BTT), had also investigated restructuring the anti-dumping system; recommendations were due later this year. The representative requested an explanation from the authorities of South Africa of the rationale for adding a uniform 10% freight component to the f.o.b. duty-paid value of imports to arrive at the c.i.f. base for levying the 14% value-added tax (VAT), and how its system of customs valuation complied with WTO rules.

21. The representative of Canada commented favourably on the continued economic reforms by SACU governments, characterized by further trade and investment liberalization, driven by WTO

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commitments and participation in bilateral and regional trade agreements. Canada encouraged further trade and investment liberalization in services to improve efficiency and the competitiveness of SACU's exports, in particular by reducing telecommunications, transport, and energy costs. Further trade liberalization would likely reduce SACU's customs and excise revenues, and fiscal reforms, including new sources of income, might be required to cover government expenditures. Structural reforms, including privatization, would also be needed to attract more investment. Canada recognized that membership of SACU states in other trade agreements, each with different provisions, goals, coverage, and agendas, made their trade regimes complex. While Canada appreciated the rationale behind such trade agreements, managing these with limited resources was a major challenge that could also divert resources away from multilateral efforts. SACU members' various trade regimes needed to be WTO consistent. Canada supported the need to address developing-country concerns, including in the areas of technical assistance and special and differential treatment. Special and differential treatment for developing countries was necessary but should not weaken the trading system's integrity.

22. The representative of Colombia commented that renegotiation of the 2002 SACU Agreement reflected "open regionalism" and strong political will by partners to strengthen SACU as a broad economic and trading area. The new agreement would facilitate greater harmonization of economic policies for the benefit of SACU states. Colombia encouraged them to further remove trade barriers, including in services, using multilateral disciplines to facilitate this process. SACU states had lowered the average applied MFN tariff rate from 15% in 1997 to 11.4% in 2002. However, the tariff structure was complex due to specific and compound duties, and Colombia encouraged SACU states to simplify their rates.

23. The representative of Hong Kong, China commended SACU members' for reducing the simple average MFN applied rate to 11.4%. While the tariff structure had been simplified, it remained complex, comprising ad valorem, specific, mixed, compound, and formula duties. Internal tax differences among SACU members also undermined the utility of a common external tariff. Hong Kong, China encouraged SACU to simplify and reduce its tariff structure to enhance transparency and facilitate trade, and to reduce the gap between applied and bound rates to increase the predictability of its tariff regime. The representative noted that specific excise duties on certain imported beverages, such as mineral water, lemonade, and flavoured mineral water, were higher than on similar locally produced goods, and urged SACU to eliminate such discrimination. One SACU member also imposed seasonal import bans on several agricultural products to ensure that the domestic crop was used first. Such discrimination against imports needed to be rectified to reflect the basic WTO principle of national treatment. Further liberalization and investment in services should improve the efficiency of other economic activities and SACU export competitiveness.

24. The representative of Japan appreciated the efforts by SACU countries to promote economic development and diversification. It welcomed the new 2002 SACU Agreement, which would introduce democratic decision making. Japan hoped that it would also accelerate further policy harmonization, thereby increasing regional trade and fostering SACU's integration into the world economy, if combined with multilateral liberalization and outward orientation. Broadening the scope of WTO negotiations to include new issues would severely test the human and institutional capacity of SACU countries.

25. Japan welcomed the announcement by the South African Minister of Trade and Industry of the intention to extend the Motor Industry Development Programme (MIDP) for light commercial vehicles from 2008 to 2012, and hoped it would be extended to medium, and heavy vehicles. South Africa's Telkom had a monopoly on basic public switched services, and it was hoped a second network operator (SNO) would be allowed to increase competition. The representative requested an update on when Botswana would ratify the WIPO Copyright Treaty and the WIPO Performance and Phonograms Treaty, and an explanation for the fall in registrations og intellectual property rights in

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Swaziland since 1995. Japan believed that improved multilateral commitments by SACU countries should contribute to their overall economic development.

26. The representative of New Zealand acknowledged the participation of SACU countries in the multilateral trading system, and welcomed their call for initiatives to further liberalize trade, as well as South Africa's recent statement advocating the necessity for agricultural reforms for the Doha Round to achieve a genuine development outcome. New Zealand sought elaboration on what they saw as necessary steps to achieve their WTO priorities of eliminating all trade and non-trade barriers, especially in products of interest to developing countries, meaningful special and differential treatment and capacity building technical assistance. Trade liberalization, including in agriculture, was one of the best ways for developing countries to meet their development goals. Although developing countries needed special and differential provisions, avoiding or winding back liberalization in either developed or developing markets would not help developing countries in the long term.

27. The representative of the European Union encouraged SACU countries to continue their trade liberalization both regionally and multilaterally to help their further integration into the global economy. The EU recognized the benefits of regional agreements as a platform for integration into the multilateral trading system, and the challenges posed in designing regional integration arrangements for a heterogeneous membership. The trade regimes of the different regional initiatives (eg SACU, SADC, COMESA) overlapped, and it was not always clear how conflicts were resolved. The EU supported efforts to harmonize and simplify these different integration initiatives, which would also help business, both domestic and foreign, and encourage trade creation and investment. The EU regretted that partners had not been more ambitious in extending the scope and depth of the customs union in renegotiating the 2002 SACU Agreement. It remained limited to a relatively narrow range of matters; for example, quantitative restrictions, customs procedures, import and export licensing, trade defence instruments, technical regulations and standards, and SPS measures were not harmonized. The EU sought details on SACU plans to develop regional approaches in these areas, and to pursue integration in services and investment. SACU's tariff structure remained complex, comprising formula-based duties that were potentially in conflict with the Customs Valuation Agreement. SACU countries were linked to the EU by the ACP-EU Cotonou partnership agreement, and South Africa by a separate Trade, Development and Co-operation Agreement.

28. The representative of the Republic of Korea noted that South Africa was the world's fifth largest user of anti-dumping measures between 1995 and 2002, when it initiated 157 anti-dumping investigations and applied 106 measures. He hoped that SACU states would be more cautious in initiating anti-dumping measures. Differences also remained among SACU partners in key trade policies, such as customs procedures, standards and technical regulations, and these could undermine market access. The representative sought the views of SACU partners on this issue. He suggested that SACU should be developed in a manner beneficial to other WTO Members and so as not to obstruct global free trade.

29. The representative of Brazil said that his country was acutely aware of the challenges developing countries faced to achieve greater integration into the world economy and the multilateral trading system. These included balancing the potential benefits of greater global trade liberalization through the WTO - still strongly skewed against the products of export competitiveness of developing countries - and the advantages of promoting greater competitiveness by gradually exposing domestic industries to international competition through regional trading arrangements. While this approach might lead to a complex trade regime through overlapping preferential arrangements, it seemed unavoidable in a global situation characterized by immense disparities in countries' ability to benefit from, and to influence, multilateral trade rules. Brazil was particularly interested in hearing how to promote enhanced regional integration through a customs union without adversely affecting third-party trade.

30. The representative of Kenya commented that trade and investment had been the cornerstone of SACU's liberalization, and that this had reinforced both regional and multilateral cooperation and helped secure enhanced export markets and international cooperation. Kenya welcomed the 2002 SACU

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Agreement aimed at democratizing SACU and creating new institutions to enable partners to participate fully in decision-making. It would enhance integration among SACU countries, reduce economic distortions, and ensure an equitable distribution of the benefits. SACU economies are largely dependent on agriculture and mining which, with declining terms of trade, was not in the long-term interest of SACU countries. Kenya encouraged them to embrace policies aimed at product diversification, and commended South Africa for establishing a futures market to hedge against risks in agricultural products.

31. The representative of Mexico referred to the challenges confronted by SACU states and developing countries in meeting WTO commitments. The multilateral trading system needed to be transparent and the best way to examine the conformity of Members' policies with its WTO commitments was through the TPR mechanism. Mexico was particularly interested in knowing more about SACU policies and measures in the areas of technical barriers to trade, sanitary and phytosanitary arrangements, and intellectual property.

32. The representative of the United States referred to impressive trade-opening domestic economic reforms by SACU countries to advance the objectives of the multilateral trading system and to further regional integration. Simple average MFN duty rates had declined from 15% to 11.4% between 1997 and 2002, while the ratio of regional imports and exports to GDP had grown from 52.4% to 62%. SACU governments had privatized state enterprises, promoted public sector reform, maintained firm fiscal discipline, and advanced intra-regional trade throughout the Southern African Development Community. The 2002 SACU Agreement would build on these achievements by democratizing trade policy formulation and promoting common rules for agriculture, industry, competition, customs, and standards. SACU countries were among the leading beneficiaries of the African Growth and Opportunity Act (AGOA) - accounting for more than a quarter of total U.S. non-fuel imports under this programme. AGOA II would offer additional benefits for textile and apparel producers in Botswana and Namibia. U.S./SACU negotiations for a free-trade agreement (FTA) were scheduled to begin in late May and would build on AGOA's success, reinforcing ongoing regional economic reforms and lowering the perceived risk of doing business in southern Africa. The United States believed that developing countries in southern Africa and elsewhere could only achieve sustainable growth through more open trade and integration into the global economy.

33. The representative of Nigeria noted that the new 2002 SACU Agreement had been negotiated in an environment of regional political stability, and, as well as democratizing decision-making, it had broadened the Union's future direction beyond revenue aspects. Nigeria hoped the agreement would facilitate SACU's development aspirations and help it take advantage of the opportunities available in the WTO. Trading regimes of SACU countries were highly complex due to membership of several trade agreements with different provisions, goals, geographical and product coverage, and trade liberalization agenda. While the common revenue pool and sharing formula in the new SACU agreement were meant to ensure more stable funding for partners, customs and excise revenue might fall with further tariff liberalization. SACU's economic reforms, including trade and investment liberalization, had been driven both by WTO commitments and their participation in bilateral and regional trade agreements. Some SACU states were planning competition policies and instruments to address unfair trade practices. SACU tariffs remained complex, but it was noteworthy that the tariff structure had been simplified and the simple average MFN applied rate reduced from 15% in 1997 to 11.4°% in 2002. Further tariff rationalization, through simplification, should improve transparency. SACU countries, except South Africa, depended on a few primary products for foreign exchange, and were thereby vulnerable to volatile world prices. SACU prospects depended heavily on the economic outlook of the European Union and the United States; trading opportunities were provided by AGOA, the Cotonou Agreement and the EU-South Africa Trade, Development and Co-operation (TDC) Agreement. South Africa dominated many areas, such as intra-SACU trade, the tariff regime, monetary policy, standards setting, anti-dumping and countervailing measures. Broadening the scope of WTO negotiations would stretch SACU's human and institutional capacities.

34. The representative of Morocco noted the encouraging reforms in several areas, including in industrial development, agriculture, competition policy, and foreign investment, despite difficult

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challenges. Efforts to diversify exports and improve the supply of services, such as telecommunications, reflected the willingness of SACU countries to modernize their economies. SACU governments were determined to meet WTO commitments.

35. The representative of Malaysia commended SACU countries for their increased trade performance, despite modest economic growth and a difficult international environment. Except South Africa, they depended on a few products, such as diamonds and beef for Botswana; diamonds, fish and meat for Namibia; water, clothing and textiles for Lesotho; and sugar and food chemicals for Swaziland. SACU was an open trading area, with average applied MFN tariff rates of 11.4% in 2002. However, there was room to simplify the complex tariff structure, which comprised a wide variety of ad valorem, specific, mixed, compound, and formula duties. Removal of formula duties based on reference prices would bring SACU into conformity with the WTO customs valuation provisions. South Africa had used contingency measures, including many anti-dumping investigations and ten countervailing investigations. Malaysia hoped that restructuring of the anti-dumping and countervailing system in SACU would conform with WTO rules and reduce the large number of investigations.

36. The representative of Australia referred to the ongoing commitment of SACU states to economic reform and continued trade and investment liberalization. Australia shared SACU's interests in securing comprehensive agricultural trade reform in the Doha round to end distortions that were discriminating against efficient agricultural producers and denying developing countries the full benefits of participating in the international trading system.

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V. REPLIES BY THE REPRESENTATIVES OF SACU AND ADDITIONAL COMMENTS

37. The representatives of the different SACU countries spoke on behalf of SACU as follows: the representative of Swaziland on macroeconomic policies and trends, of South Africa on trade policies by measure, of Namibia on trade policies by sector, and the representative of Botswana made the closing remarks. In their replies, the representatives emphasized that the new SACU Agreement introduced significant changes to the decision-making process and created new SACU institutions. These would enhance democracy and greater cooperation within the union. The present meeting was a milestone, as the first review of the SACU as a customs union.

38. Since their last Trade Policy Review in 1998, SACU member states had continued their economic reform programmes. Further liberalization of trade and investment, driven both by commitments in the WTO and by participation in bilateral and regional trade agreements, were major features in this process. SACU countries had individually experienced modest but consistent economic growth since 1997; currently, average GDP growth exceeded 3%. Exports and the balance on trade account had grown steadily; in 2002, SACU’s exports amounted to R314 billion and imports to R274 billion, a positive trade balance of R40 billion. Although SACU countries were at different levels of economic development, they faced common challenges such as eradicating poverty and cushioning the poor against natural disasters such as droughts and floods; combating HIV/AIDS; promoting sustainable growth and development; and reducing high unemployment.

39. Over the recent past, all SACU countries, except Lesotho, had experienced a decline in foreign direct investment (FDI). Within SACU, there was need to harmonize FDI incentives, improve competitiveness, and mobilize local savings to create employment. Membership of the Common Monetary Area promoted convergence in monetary and exchange rate policies, contributing to greater macroeconomic stability. However, harmonization of SACU members' monetary and fiscal policies needed to take account of their differing levels of development.

40. The representative stressed the importance of trade in SACU’s economic development, noting that its members were eligible for non-reciprocal preferential treatment under the Generalized System of Preferences (GSP); the Cotonou Agreement with the European Union (except South Africa); and the U.S. African Growth and Opportunity Act (AGOA), while as an LDC, Lesotho was eligible for the "Everything but Arms" initiative of the EU and participated in the Integrated Framework for Trade-related Technical Assistance. Trade preferences by developed countries would continue to play a pivotal role in the integration of SACU economies into the multilateral trading system, but effective market access had to be accompanied by measures to address supply side constraints. SACU countries gave high priority to micro-economic reforms designed to ensure efficient provision of inputs and services and ease supply-side constraints.

41. SACU had achieved some success in the diversification of its economies and remained committed to broadening its industrial base. Mineral exploitation and beneficiation were a key anchor for growth and development, particularly in Botswana, Namibia, and South Africa. Certain labour-intensive manufacturing activities, particularly textiles and clothing, had expanded strongly in recent years throughout SACU, largely as a result of new incentives under preferential arrangements. SACU would also strive to exploit the benefits of services trade, for example in tourism, where the area's attractions were among the best in the world. Constraints such as inadequate infrastructure, finance and marketing/promotion needed to be addressed promptly. Further liberalization and investment in services should improve the efficiency of other economic activities by reducing costs related to, inter alia, telecommunications, transport, and energy.

42. Greater integration within the customs union and into the global economy would require bold advances by SACU's multilateral trading partners. SACU would thus continue to participate proactively in the Doha Development Agenda negotiations.

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43. On trade policy measures, the representative noted that SACU was unique in including countries at different levels of development, economic complexity, and variation in market size. The intention was to continue its integration without compromising the interests of any of the member states; this deepening process should continue in tandem with further liberalization of SACU’s external trade. While enormous efforts had been made to deepen the customs union, areas where work remained to be done on harmonization included standards, customs procedures, trade remedies, and competition policies. This harmonization was provided for in the new SACU Agreement, which established institutional arrangements to continue efforts towards a more cohesive regional market. Policies to be developed at a national level would be complemented by increased regional harmonization.

44. The representative welcomed the recognition by delegations of SACU's steps to liberalize tariffs. A comprehensive and sophisticated tariff rebate system to reduce input costs for exporters also ensured that applied tariffs were substantially lower than nominal rates would suggest. Steps were currently under-way to simplify the tariff structure. SACU members noted the observation that the trading regime in the region was complicated by the existence of various agreements with different rules and geographical coverage. They would seek to rationalize their trading regimes to facilitate intra-SACU and external trade. SACU was firmly committed to increasing multilateral trade liberalization; however, bilateral agreements were concluded for pragmatic reasons related to the existing complexity of global trading arrangements. SACU was also undertaking initiatives to diversify export markets and industries and, in this context, was conducting further bilateral negotiations as a group with countries both in the North and South.

45. The representative emphasized that South Africa was in full compliance with its WTO intellectual property commitments, including in respect of existing geographical indications. Other SACU members were working actively to bring their laws into compliance. All sought to ensure that the TRIPS Agreement took into account the protection of indigenous knowledge. Enforcement of intellectual property protection was a challenge for SACU members; they acknowledged the support for capacity enhancement offered by a number of WTO Members.

46. Each SACU member had national strategies and programmes to counter the HIV/AIDS pandemic, focusing on awareness, prevention, and treatment. All needed support from development partners in addressing the challenge. SACU attached great importance to the Doha Declaration on TRIPS and Public Health to strengthen their efforts against HIV/AIDS. They called for speedy resolution of the impasse on paragraph 6 of the Declaration in the overall efforts to advance the Doha Development Agenda.

47. Use of anti-dumping in SACU had always been in accordance with WTO rules. In undertaking investigations, the whole of the SACU industry was taken into consideration. The representative reaffirmed SACU's commitment under the Doha Development Agenda to further tightening disciplines on the use of anti-dumping. The new SACU Agreement provided for greater consultation on all matters of common concern, including anti-dumping. Putting such actions into context, the representative stated that, as a result of substantial liberalization of the external tariff under the Uruguay Round, a large number of foreign companies had started to explore the SACU market. In such circumstances, dumping was not unusual. Since 1999, the number of anti-dumping initiations had fallen significantly, from a peak of 21 to six in 2001 and four in 2002.

48. As a developing region, SACU attached great importance to technical assistance to support its economic growth and development policies, as well to building institutions necessary to enhance its participation in regional fora and the WTO. SACU was currently working on a strategy to promote capacity building and technical assistance at national and sub-regional levels.

49. In respect of sectoral developments, the representative stressed that the new SACU Agreement laid a firm basis for alignment of sectoral policies in key areas. Agriculture remained an important source of rural income and employment, and a major earner of foreign exchange in all SACU

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members, all of which had active policies to support sustainable agricultural and rural development. The need for such policies was underlined by the regular occurrence of natural calamities such as droughts and floods, exposing vulnerable populations, in particular, the rural communities. SACU would seek to promote policies that addressed food security while promoting liberalized agriculture. However, real structural change in the highly distorted agricultural policies of the North would be essential. The burden of adjustment by developed countries should not be borne by developing countries and the modalities of the Doha agricultural negotiations should incorporate measures that took into account the needs of preference receiving countries.

50. To promote further development of agriculture in the region, diversification of the sector was taking place. Increased supply capacity was essential; an important aspect was development of technical and institutional capacity to implement sanitary and phytosanitary requirements, which were becoming increasingly difficult to overcome in major markets. SACU countries also took account of the need to address land issues by instituting policies and programmes for sustainable land reform and management.

51. The representative said that SACU would address and simplify its tariff regime for manufacturing in a determined manner. The structure would be streamlined to respond to SACU members’ obligations under the WTO Agreements. The governments saw manufacturing and value-added activities as cornerstones in addressing the challenges of poverty, unemployment, economic growth and development. Industrial and microeconomic strategies were aimed at improving the productivity and efficiency of key sectors of manufacturing in the sub-region through supply side measures. These strategies had contributed to robust growth in a number of non-traditional manufactured products, most notably in vehicles and components. Another area of particular interest to SACU was agro-processing, to add value to agricultural and fishery products for export. SACU as a group was exploring opportunities for improved market access within multilateral and bilateral frameworks. There had also been considerable growth recently in clothing and textiles, particularly in the BLNS countries, largely stimulated by increased access to key markets, notably the United States under AGOA. This underlined the importance of increased market access for labour-intensive manufactures, in which SACU had most comparative advantage. To position SACU in the global economy, the group was in the process of negotiating a free-trade agreement (FTA) with the United States, and exploratory work for FTAs with MERCOSUR, the European Free Trade Area (EFTA), India, China, and Nigeria was under way.

52. SACU countries were determined to intensify value-added activities in the mining sector. All members had incentive policies for beneficiation of mineral products. The success of these policies was circumscribed by limited market access for such products in developed country markets. Improving market access would be an important objective in this area.

53. SACU members also recognized the important contribution services could make to growth, development, and successful integration of the region into the global economy. SACU recognized the symbiotic relationship between services and manufacturing. The region was potentially poised for tremendous growth in service activities. An efficient services sector, particularly in infrastructural services such as telecommunications, transport, energy, and finance, had an economy-wide impact that could be enhanced through appropriate multilateral and regional liberalization strategies. Although services was not explicitly part of the new SACU Agreement, a high level of services integration already existed for historical reasons. Through spatial development initiatives, SACU had enhanced regional integration by encouraging integrated development, including in manufacturing, transport and tourism. All SACU Members were engaged in restructuring state assets in main service sectors and in developing strategic partnerships for acquisition of foreign technology through direct investment. SACU members had also built significant capacities to manage the process of services reform in a manner that balanced increased efficiency and members’ socio-economic goals. Continuing reform in services would provide conditions for the realization of joint economic

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objectives in agriculture, mining, and manufacturing, and intensification of value-added and small and medium enterprise-based activity within the region.

54. The representative of SACU thanked the Chairperson, the Discussant and the Secretariat for their valuable contributions to the review process. The Secretariat reports would focus SACU's thinking on critical areas for follow-up. The review process had been educational and enriching, had played a significant role in bringing the SACU countries together and provided a platform to work together as a collective. SACU had endeavoured to respond to most of the questions raised, although some comments would be taken home for further reflection. The strengthened institutional framework of the new SACU Agreement would assist the group in reaching common positions that would advance its goal of deeper economic integration. SACU appreciated the expressions of support and encouragement from WTO Members; the WTO was a very important organization and could assist in deepening SACU's regional integration efforts and helping it to integrate with the rest of the multilateral trading system to achieve its development objectives.

55. The Discussant stated that the trade policies of SACU reflected its Governments’ economic circumstances and challenges, including the differing development and resource levels of its members. SACU's objectives of promoting sustainable development, alleviating poverty, combating disease, and integrating into the global trading system were certainly achievable. However, the speed and level of harmonization and integration would depend mainly on SACU members themselves but also on circumstances beyond their control. Hence the importance of the WTO negotiations. SACU had affirmed the expectations of many on the outcome of the Doha round and the difficulties posed by the work programme. However, unless certain issues began to move off the negotiating table, the work programme would become much more difficult, given existing institutional and human capacities. The level of technical assistance and capacity building provided would also have to improve dramatically. She was encouraged by the responses by SACU regarding harmonization of FDI initiatives, the need to improve competitiveness, mobilization of local savings, and the priority given to macroeconomic reform. She welcomed the commitment to simplify and liberalize tariffs and the encouragement of investment in the services sector.

56. The discussant stressed SACU’s need for effective market access, particularly in labour-intensive manufactures and value-added mineral products. She emphasized the importance of developing more explicit SACU-based agreements in the services sector. She looked forward to an outcome from the Doha Ministerial Declaration that would correct glaring imbalances, would be economically meaningful, and would keep development at its core. She believed that a temporary lull in the Doha work programme would precede rapid progress, including on TRIPS and access to medicines.

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VI. CONCLUDING REMARKS BY THE CHAIRPERSON

57. This Trade Policy Review of the Southern African Customs Union (SACU) has allowed us all a far better understanding of the "new" SACU, of its trade policies, and of the policies and aspirations of its members. Our dialogue has been thorough and comprehensive, stimulated by the full and open engagement of the high-level delegations of Botswana, Lesotho, Namibia, South Africa, and Swaziland, as well as the insightful comments made by the discussant.

58. Members commended the SACU countries for the progress achieved in their economic reform programmes since the previous time their trade policies were reviewed in 1998, and noted that trade and investment liberalization had played a key role in these programmes.

59. Members acknowledged efforts made by SACU in trying to simplify its tariff structure. However, they noted that SACU's trade regime remains complex; the tariff structure still comprises ad valorem, specific, mixed, compound, and formula duties. The imposition of formula duties raised concerns about compliance by SACU countries with their tariff bindings and with their obligations under the Customs Valuation Agreement. Concerns were also expressed about differences in tariff bindings among SACU countries, and about the large use of anti-dumping and other contingency trade remedies by South Africa on behalf of the customs union.

60. Some Members emphasized that lack of harmonization within SACU in certain key non-tariff measures, such as quantitative restrictions, customs procedures, standards and technical regulations, sanitary and phytosanitary measures, competition policy, and internal taxes, distorts trade flows, and undermines the utility of having a common external tariff. In this regard, Members welcomed the 2002 SACU Agreement, which provides for a more democratic institutional structure, a dispute settlement mechanism, a new system regarding the common revenue pool and sharing formula, and further harmonization of policies throughout the customs union. Members expressed hope that, once in force, the Agreement would contribute to the further integration of SACU into the global economy.

61. Members praised SACU members for their commitment to the multilateral trading system, and for their strong support for the Doha Development Agenda. Several Members called attention to the complications of trade policy making stemming from SACU states' membership in overlapping preferential arrangements. This was not only difficult to manage, given the limited resources of the countries, but could also detract from multilateral efforts.

62. In the light of their recent macroeconomic performance, SACU countries were encouraged to move ahead in implementing structural reforms, including privatization, and market and product diversification. Fiscal reforms and new sources of government revenue would be necessary to address the expected negative effects of further tariff liberalization and increases in health-related budgetary expenditures, notably on HIV/AIDS and poverty alleviation.

63. Members also sought further clarification on:

export and investment incentives; standards, technical regulations, and SPS measures; public procurement regimes; protection of intellectual property rights; agriculture, including food security; mining; manufacturing, particularly motor, textiles and clothing industries; and services (telecommunications, tourism, transportation, financial services, energy).

64. Members appreciated the replies provided by the delegations of SACU, and looked forward to further responses.

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65. In conclusion, I believe that through this Review we have gained a better understanding of the progress made by SACU since 1998, and of the challenges that lie ahead. The very strong participation by SACU in this meeting, the large number of questions posed, and the active discussion, indicate the importance Members attach to this Review. I encourage SACU countries to improve their multilateral commitments, both in goods and services, and to pursue the implementation of their reform programmes, with a view to enhancing the transparency, predictability, and credibility of their trade regimes, and adherence to the WTO principles. Trading partners can help by ensuring that their markets are fully open, and by providing appropriate technical assistance to SACU.

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