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Sadc rolls over customs union

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Leaders of the Southern African Development Community (Sadc) will Tuesday pass a resolution to postpone the launch of a customs union and announce a revised timeline for the trade arrangement, as technical work on four key issues lags behind schedule.

In terms of the regional economic community’s Regional Indicative Strategic Development Plan (RISDP), the customs union was due to come into force at the end of the groupings’ two-day annual summit, which opened yesterday in the Namibia’s capital, Windhoek.

The 15-member regional bloc launched a free trade area (FTA) last year and aimed to progress to a common market by 2016 and single currency and monetary union by 2018, a regional integration road-map now in disarray.

In February, Sadc’s ministerial taskforce on the customs union set up in 2006 recommended the deferment of the trade regime to buy time to finalise technical work on the common external tariff (CET), a revenue collection and sharing mechanism, policy harmonisation and administrative and legal-institutional arrangements.

The ministerial taskforce also directed the secretariat to engage member states seen as key to the REC’s projects and programmes in national consultations to facilitate a revision of the grouping’s integration programme.

The team was in Harare in June and has so far received input from Botswana, Malawi, Mauritius, Swaziland, Zambia and Zimbabwe.

“The customs union process is likely to be lengthy,” Lisebo Mostsi, Sadc’s regional trade programme officer, said. “The common external tariff is the most challenging issue. But there are other challenges related to the issue of customs revenue sensitivity and varied trade regimes, which must be harmonised.”

“None of the countries we have consulted so far has been able to come up with a timeline.”

In consultation with the ministerial taskforce, the Sadc secretariat in 2006 commissioned a study to determine an appropriate model for the customs union.

A year later, two technical working groups (TWGs) were established to commence technical work on the four technical issues forming the bedrock of any customs issues, but which now constitute the most eminent sticking issues holding up progression to a higher level of market integration.

However, preparations for the customs union commenced late as member states showed wavering attitudes towards deeper integration with many preferring a shallower approach than initially agreed and enshrined in the RISDP, according to Charles Chaitezvi, Sadc’s senior programme officer for the customs union.

“The Sadc summit will consider the recommendations of the ministerial taskforce and come up with a position,” Chaitezvi said.

The sharpest differences have emerged over the determination of the most optimum option for the CET and the most neutral mechanism for revenue pooling and sharing.

A CET harmonises tariff barriers with third parties and presumes all intra-regional trade had competely phased down to zero under the FTA regime.

While all member states are agreed the CET should be based on a four-band common tariff nomenclature (CTN), which broadly categorises tradable goods into raw materials, intermediate goods, capital goods and finished products, debate is still inconclusive on how to set the tariff rates for each of the four classes of goods.

Worse, there are also variations across member states on this broad definition of goods with some members states treating as raw materials goods others treat as intermediate or finished goods depending on whether the country is a net producer of net importer of the good.

Naturally, net producers would push for tariff protection, while net importers would want the particular good zero-rated.

This complicates the negotiation, design and implementation of the CET.

To overcome this technical hitch, the TWG on the CET has narrowed down to half four options for the CET structure, choosing those that best respond to the policy and development imperatives of member states as a basis for negotiation.

The streamlined options however propose a varied tariff structure for raw materials, intermediate goods, capital goods and finished products.

As a basis for negotiation, the TWG proposes to zero-rate raw materials and capital goods and impose an optimal tariff rate of 20% for finished goods.

The Sadc summit is expected to vote to give the technical committee more time to finalise the negotiations and produce its recommendations.

The least consensus has been achieved around the design and implementation of a Sadc revenue collection and distribution mechanism, an issue which has as much political consequences as fiscal sensitivities.

At present, each member state has the sovereign right to collect and manage its own revenue based on a “point of destination” model, in most cases using it as fiscal instrument.

But since a customs union creates a seamless customs territory, it technically follows that revenue should be collected at the point of entry and remitted to a regional customs management agency, which pools and distributes the revenue among member states based on an agreed set of criteria. Some of it would be retained to fund regional programmes.

The TWG responsible for revenue collection, management and distribution has proposed that Sadc maintains the “destination model” for the time being until member states agree on the legal and institutional arrangements necessary to adopt a “point of entry” model.

For the interim measure to work, Sadc would have to monitor and control the movement of goods throughout, particularly goods in transit, which is both arduous and expensive.

But the political question underling the issue relates less to the method of collecting the revenue, but more to the formula for sharing the revenue.

Fraught at it were with glaring disparities in the level or economic and industrial development, the sub-region also has different levels of customs revenue dependence.

A move to strip member states of control over customs revenue therefore affects the economies variably.

So far, the stiffest resistance is coming from members of the South African Customs Union (Sacu), particularly Botswana, Namibia, Lesotho and Swaziland (BNLS), which currently get 70% of their revenue from South Africa under a special regional revenue-sharing deal.

Through the deal, South Africa tried to reward BNLS countries for importing the bulk of their industrial and food products from the largest industrial economy in Africa.

As expected, BNLS countries will not endorse an arrangement that upsets this structure and leaves them worse off without a convincing compensatory mechanism.

The secretariat sees the establishment of a Sadc Development Fund akin to the one structured by the European Union at its inception, as the only conceivable way out of the dilemma.

Although SACU last month agreed to renegotiate this revenue-sharing mechanism with a view to adjust the administrative aspects of the regional purse, this did not make Sadc’s task any simpler.

On paper, it doesn’t look like the REC will ever reconcile these many sticking issues festering beneath the core technical work underpinning the customs union agenda.

More headaches await the regional grouping in terms of harmonising the trade policies of member states and bringing them in congruity with Cape-to-Cairo FTA initiative involving two other RECs – Comesa and the Eat African Community (EAC).

Nearly every member state has expressed a wish to retain control of national trade policy to address peculiar development and economic concerns, and is unwilling to let the intergovernmental organisation invade policy space.

The TWG responsible for the technical portfolio is currently imbued in the process of identifying policies that should be harmonised.

But progress on this front largely depends on the pace at which the regional bloc implements the CET around which many trade policies revolve.

Asked whether Sadc would drop its customs union programme to focus on the tripartite agenda, Willie Shumba – a senior programme officer for customs – said the interregional initiative is welcome, but only as a back-up programme.

“We can’t abandon our programme for the tripartite programmes. We have to continue with Sadc integration programme. Let the tripartite FTA programme be an add-on.”

Shumba said Sadc’s focus over the next year would be concerned with consolidating the FTA, continuing work on the customs union at sub-regional level and maintaining its biding in the tripartite process.

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