Afro-Asian Trade Pact in the Making

South Africa and its custom’s union partners in SACU are potentially headed for an Afro-Asian free trade agreement (“FTA”) by the end of the fist decade of the millennium. This is due to a potentially unforeseen eventuality, now a reality, that while SACU has undertaken what is in itself a mammoth task of negotiating free trade agreements with both China and India, these two Asian giants are themselves contemplating negotiating a bilateral free trade agreement. In the process, reciprocal trade liberalization between any of the parties would potentially spill over into the others, with the net effect of forging a triangle of trade across the African and Asian continents.

Given the size of these Asian markets SACU is no doubt anxiously hoping for a market access feast in the East. Indeed, a Sino-Indian agreement would itself probably form the biggest free trade area in the world. A liberal dose caution in the condiments is however called for.

In considering either of the trade pacts, China is the key pin in each instance. China’s strength, at a 5% share in world trade volume (India compares with 0.8% and SACU with .01%), is attributed largely to the fact that China has some way to go before being a stand alone market economy. China is certainly not competitive due to embracing competition, but rather due to its interventions in the form of subsidies extended to its manufacturing industries (like steel and textiles) and to its policy of keeping its currency, the Yuan, deliberately undervalued. The United States has been fiercely critical of the Chinese currency manipulation, and relations have been heated over this issue. The United States is also applying the special WTO China-textile safeguards on about 12 clothing product lines; an action envied by SACU clothing manufacturers who have themselves faced the red heat of the Chinese industry of late.

With this picture clearly in perspective the Indian Commerce Minister warned recently that while India was certainly in the lead when it came to services, China outclassed India substantially in the manufacturing sector. An FTA with China would likely tilt the playing field against India and end up hurting its domestic industries, with a potential political backlash by the domestic industry. This has led India to deciding on a cautious approach to its Chinese neighbour, with India wisely deciding on a period of impact analysis on an inter-ministerial level. Back in Southern Africa, SACU seems somewhat serene in its approach. The SACU governments agreed to negotiate the FTAs with China and India without first doing the trade modelling to ascertain the impacts. This is currently being rectified using international expertise in-tow, largely at the initiative of the South African agriculture ministry. This initiative must be supported, but it remains a pity that SACU gets the sequencing in a muddle – do the analysis first!

Countries involved in the WTO working party on China’s accession to the multilateral trade body recall that the squad from Beijing was tough and wily in their trade diplomacy. This is evidenced by the fact that the process took almost a decade to complete. Things are likely to be even more spirited for SACU, where unlike in the WTO context, SACU will be unable to rely on a little help from its friends. Also, the complexity of negotiating as a 5-country band has its own challenges to the extent that one is at times aghast that a customs union exists at all, save for the attraction of revenue transfers from South Africa to the other states.

SACU would do well to take a carefully cautious approach in its free trade agreement negotiations with both China and India, and certainly not proceed seriously in advance of pre-empting the WTO trade talks at the Hong Kong Ministerial in December 2005. SACU would do well to read the recipe book before experimenting with the spices.