South Africa Should Secure its own “Brexit deal”
Anna Ngarachu and Heinrich Krogman
Teressa May’s deadline to get a Brexit deal past the UK parliament is now less than eight weeks away and it is looking unlikely that a workable package will get approval from either side of the aisle. Depending on the generosity of EU negotiators, the UK might find itself in a position where multilateral rules, set out in the agreements of the World Trade Organisation (WTO), form the basis of their international commerce engagements at the time they leave the EU.
For countries not bordering the UK (to avoid getting bogged down in the nightmare of migration and border issues with Ireland), the terms of these agreements are not awful, but they are not as generous as the regional and bilateral arrangements currently in operation with the UK as part of the EU. The preferential movement of goods across borders afforded by the EU Economic Partnership Agreements (EPAs) is one critical aspect of EU/UK-Africa engagement. Fortunately, the UK has already signaled that they will be pushing for closer economic ties with Africa, regardless of the outcome of Brexit.
There were initial concerns about the impact of Brexit on South Africa, with the largest concern being an expected contraction of merchandise trade between the UK and South Africa. Putting the numbers in perspective, in 2018 the UK was South Africa’s fifth largest trading partner in terms of total trade (imports plus exports), the 4th largest destination for exports (worth R64 billion) and 7th largest source of imports (worth R43.5 billion).
The UK imports a significant amount of precious metals, vehicles aircraft & vessels, and vegetables from South Africa. A disruption in these value chains is likely to affect the domestic industries which could translate into job losses. However, there is also a significant amount of Outward Direct Investments (ODI) from South Africa to the UK. According to the IMF’s direct investment survey, South Africa has a reported $2.9 billion worth of ODI, which might require strategic adjustment should the Brexit deal impede their commercial interest in the EU.
To prevent trade repercussions from a no-deal Brexit, it became increasingly urgent that countries set up bilateral trade agreements with the UK. South African Trade Minister, Dr. Rob Davies, echoed these same sentiments, at a CNBC interview on 30 January 2019, where he emphasised the there should be no disruptions with trade, and that no different tariff arrangements should come into force post-Brexit.
On 31 January 2019, the UK Trade Policy Minister, George Hollingbery, signed the Eastern and Southern Africa trade continuity agreement in London with several representative governments. This agreement replicates the rules stipulated under the existing Economic Partnership Agreements with the EU and ensures continuity of tariff-free imports from Eastern and Southern Africa (ESA), while also removing several tariffs on British exports to these countries. Effectively the UK and South Africa (together with our SACU partners and Mozambique) will trade under a new arrangement that replicates or mirrors the SADC EU-EPA, as far as possible. In theory, it ensures no disruptions to trade or any ‘backstop’ disputes. From the UK perspective, these bilateral agreements are instrumental in supporting developing countries to reduce poverty through trade.
The new UK-ESA agreement comes into effect on 29 March 2019, if the UK leaves the EU without a deal, or once the implementation period ends in January 2021 should a deal be reached with the EU. There are still some technical issues to be resolved between the UK and the SADC-EPA countries. Discussions were continuing in Johannesburg last week on a draft text that seeks to deal with those matters where it is not possible to simply roll-over the EPA provisions.
For example, new levels need to be agreed for those products that benefit from tariff rate quotas, these are mainly agricultural products. The sticky issue of rules of origin is also important in the context of the post-Brexit trade arrangements, including for South Africa. Under the SADC-EU EPA it was possible to ‘cumulate’[i] value among EU members and parties to an EPA to take advantage of the preferential tariff rates. The UK has been pushing for this to be continued in its agreements with other trading partners, such as Chile. Yet, there remains uncertainty on the rules of origin between the UK and EU after the deadline of 29 March. There is definitely the shadow of the EU in the room whenever the UK meets with its trading partners, and this is difficult to ignore.
The continued uncertainty of the UK’s future relationship with the EU has, for instance, forced companies to reconsider their investments in the UK. Many have sought to pull out on production plans and shift operational headquarters to strategic EU positions instead. Examples include Nissan. The car giant reversed its 2016 decision to build the X-Trail SUV in the UK partly due to uncertainty about the application of rules of origin going forward.
The effects of slowbalisation, a new pattern of a slowdown in global commerce, have sent ripple effects across the world. This is the background against which UK delegations will be received at any negotiating table in the coming weeks. To compound this reality, many investors and traders are making plans to adjust their operations to account for the potential market loss of an EU exit. It is hoped that for South African exporters and investors will have the political will and show dexterity to manage the process as smoothly as possible.