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Low intra-regional trade is a red herring

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Picture: GCIS – President Cyril Ramaphosa, left, attended the Southern African Customs Union (Sacu) Heads of State and Government Summit in the Kingdom of eSwatini, last month. Sacu parties have to invest more effort in addressing non-tariff barriers to trade such as poor infrastructure, administrative inefficiency and lack of regulatory harmonisation, says the writer.

By Sizo Nkala

The Southern African Customs Union (Sacu) Heads of State and Government held its 8th Summit on June 23, in eSwatini. Among other things, the summit deliberated on key initiatives of the organisation including trade facilitation, investment attraction, industrial development, resource mobilisation and the implementation of the African Continental Free Trade Area (AfCFTA).

Having been established in 1910, Sacu is the world’s oldest customs union. It comprises Botswana, eSwatini, Lesotho and South Africa. Namibia joined the group as the fifth member when it attained of its political independence in 1990.

Sacu was formed to facilitate trade in goods and co-ordinate policy between the five countries through the liberalisation of trade within the common customs area and adoption of uniform tariffs on goods imported from countries outside the union. Other major objectives of the union include enhancing economic development, promoting industrialisation and diversification, encouraging healthy competition and creating a conducive environment for investment.

Sacu member states occupy a total land area of 2.6 million square kilometres and boast a combined population of 69 million people – South Africa is home to 87 percent of that population. At the end of 2021, the combined gross domestic product (GDP) stood at R6.8 trillion, with South Africa accounting for more than 91 percent of that. As such, Sacu is underpinned by an acute asymmetry in terms of population and economic size between South Africa and the other four member states. This effectively makes Sacu South Africa’s sphere of influence.

The Southern African Customs Union became a permanent organisation after a 2002 agreement which established a permanent secretariat based in the organisation’s headquarters in Windhoek, the Namibian capital. The agreement created new institutions such as the Council of Ministers, the Customs Union Commission, the Tariff Board and various technical committees charged with implementing the decisions of the leaders.

The agreement also broadened the scope of co-operation among Sacu members to include common industrial, agricultural and competition policies to make the union more equitable. The parties further committed to harmonising and standardising their customs procedures, product regulations and standards to improve the ease of doing business and reduce the costs of international trade.

The five countries also created a common revenue pool into which customs, excise and all other duties collected within the union are paid. Thus, all the proceeds of all the duties charged on goods imported into member states from a third party are transferred to the revenue pool. The customs revenue is shared among the countries through a specific formula, using the customs, excise, and development components.

The customs component is determined by the share of a country’s intra-Sacu imports, while the excise component is calculated based on a country’s share of the total intra-Sacu GDP. The development component, which is 15 percent of the excise duties collected, is distributed in favour of the least-developed countries, as indicated by the GDP per capita.

When the union collected R120 billion in customs and excise revenue in 2019, South Africa got the lion’s share of 48 percent of revenue by virtue of the size of its economy. Botswana got 19.7 percent and Namibia 18.5 percent, while Lesotho and eSwatini each secured 7 percent. The proceeds from the revenue made up 21 percent of the GDP for Lesotho, 12 percent for Namibia and eSwatini, 9 percent for Botswana and 2 percent or so for South Africa.

As such, the funds from the common revenue pool are economically significant for the smaller countries. Without them, the countries would struggle to provide important public services for their populations. However, some have argued that South Africa, which collects an overwhelming 97 percent of the import duties coming into the Sacu is being shortchanged by the revenue-sharing formula. Perhaps this is the price South Africa is willing to pay for its industries’ duty-free access to the markets of the other four countries.

In terms of trade, intra-Sacu imports increased from R185bn in 2017 to R207bn in 2021 while exports increased from R192bn in 2017 to R202bn. However, intra-regional trade is only a small fraction of Sacu’s trade with the rest of the world, with intra-Sacu imports being only 12 percent of its imports from the rest of the world in 2021. The intra-Sacu exports were just above 10 percent of its exports to the rest of the world.

The level of intra-Sacu trade is disappointingly low by any standard and demonstrates that Sacu has not lived up to its potential. Sacu region’s tariff-free status has not yielded the expected levels of trade. This shows that regional integration should not only be about trade liberalisation. Sacu parties have to invest more effort in addressing non-tariff barriers to trade such as poor infrastructure, administrative inefficiency and lack of regulatory harmonisation.

One could also argue that the Sacu mechanism exacerbates the dependency of Botswana, eSwatini, Lesotho and Namibia on South Africa as the industrial powerhouse, thus disincentivising industrialisation in their territories. Hence, Sacu need to co-ordinate its industrial policy and forge regional value chains that will improve the welfare of Sacu citizens all round.

Dr Sizo Nkala is a Research Fellow at the University of Johannesburg’s Centre for Africa-China Studies