Implications for South African businesses: Brexit and the Economic Partnership Agreement between the EU and the Southern African Development Community EPA States

Just over a year ago, the European Union (“EU”) signed an Economic Partnership Agreement (“EU-SADC EPA”) with the Southern African Development Community EPA States: Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland (“SADC EPA States”).

Pending ratification by all twenty eight EU Members States, the EU-SADC EPA provisionally entered into force between the EU and the SADC EPA States (excluding Mozambique)ⁱ on 10 October 2016. The provisional application of the EU-SADC EPA means that only those provisions that concern areas for which the EU has exclusive competence (such as international trade) apply currently.

1. Key benefits for South African exporters under the EU-SADC EPA

2. Brexit will likely result in the United Kingdom no longer being a party to the EU-SADC EPA

3. Possible solution to maintain preferential market access to the UK

4. South African businesses should take action

1. Key benefits for South African exporters under the EU-SADC EPA

Asymmetric trade opening: the EU fully removed customs duties on 96.2 per cent of products imported from South Africa, and partially removed customs duties for 2.5 per cent of imported products. South Africa has likewise removed customs duties for approximately 86.2 per cent of products imported from the EU (fully for 74.1 per cent of products and partially for 12.1 per cent of products). According to the EU, by entering into the EU-SADC EPA, it has agreed to an unprecedented degree of asymmetry.

Export duties: the EU-SADC EPA prohibits the introduction of new export duties as well as increases to existing export duties in the trade between the parties. In “exceptional circumstances” and where “industrial development needs” so require, each SADC EPA State may introduce temporary export duties for up to eight “products”. These duties are capped at 10 per cent, and may only be levied for a maximum period of twelve years. The EU-SADC EPA also provides that a certain volume of exports to the EU will be exempted from these duties.ⁱⁱ These exceptions may well be aimed at encouraging domestic beneficiation in the SADC EPA States, particularly in the mining industry.

Tariff quotas: the EU-SADC EPA provides for new and increased tariff rate quotas for South African exports to the EU relating to the import of, amongst others, wine, sugar, certain fruits, butter, yeast, and ethanol.

Geographical Indications: the EU-SADC EPA includes a bilateral protocol between the EU and South Africa under which the EU commits to protect more than 100 South African Geographical Indications and South Africa commits to protect more than 250 EU Geographical Indications. The Indications relate to goods such as agricultural products, foodstuffs and wines.

2. Brexit will likely result in the United Kingdom no longer being a party to the EU-SADC EPA

While the United Kingdom (“UK”) is currently a party to the EU-SADC EPA, it is unlikely to remain one once it withdraws from the EU in March 2019. In our view, the two main reasons for this would be that the EU-SADC EPA (in relation to EU member states):

only applies to “the territories in which the [EU Treaties] are applied and under the conditions laid down in those Treaties.” Once the UK leaves the EU, the EU Treaties will cease to apply to it and so will the EU-SADC EPA; and

will be administered by a dedicated institutional body composed of “the relevant members of the Council of the EU and relevant members of the European Commission.” Following Brexit, the UK will no longer have a seat in the Council of the EU and will presumably not wish to be bound by decisions taken by institutional bodies in which it does not participate.

As a result, South African exporters may no longer benefit from preferential market access to the UK once the UK leaves the EU (and vice versa).

3. Possible solution to maintain preferential market access to the UK

The EU-SADC EPA does not include provisions which regulate Brexit or the consequences which may result from its implementation. As such, after Brexit the UK could either apply to accede to the terms of the EU-SADC EPA as a separate party (which will result in negotiations on the terms of its accession) or conclude its own free trade agreement with South Africa. In our view the latter may result in the renegotiation of the EU-SADC EPA as the EU’s concessions would no longer extend to the UK.

An obvious transitional solution that could minimise disruptions on all sides – and one which the UK and South Africa “in principle” agreed to earlier this yearⁱⁱⁱ – would be for the UK to conclude a new free trade agreement with South Africa along lines similar to the EU-SADC EPA. This should be done at the same time as the UK’s withdrawal from the EU.

This may potentially be an attractive solution to both the UK and the EU. It could buy the UK time to negotiate its own agreement with South Africa and allow the EU to avoid a situation where South Africa could request that the EU-SADC EPA be renegotiated following the UK’s departure.

While many of the EU-SADC EPA’s provisions could potentially be replicated in a new UK-South Africa free trade agreement, some provisions may be difficult to replicate. Examples of such provisions include:

Tariff rate quotas: in principle, tariff rate quotas would need to be recalculated to reflect the changed situation. UK quotas could be established, for instance, on the basis of the existing distribution of quotas, or the average distribution over the operation of the EU-SADC EPA. An alternative basis could be the relative volumes of total trade over a defined period of time. However, there are practical difficulties attached to both these approaches. As the EU is a customs union, it is often difficult to identify where imports from South Africa are actually consumed. For that reason, and to avoid having to renegotiate the EU-SADC EPA, the EU could end up agreeing to the continued application of the existing level of quotas and let the UK decide whether it wishes to grant additional quotas. This is the option currently favoured by South Africa.

Financial obligations: the EU-SADC EPA provides for various financing programmes (such as development cooperation) between the SADC EPA States and the EU. The exact share of the UK’s contribution to these programmes (if any) will have to be reassessed and agreed to between the UK and the SADC States.

Cooperation in trade-related programmes: the EU-SADC EPA provides for further cooperation between the EU and, amongst others, South Africa in the areas of fiscal adjustment, protection of intellectual property rights, public procurement, competition, and tax governance. It is not clear whether the UK will adopt similar policies and if, as a result, it would like to take part in similar cooperation programmes. The UK could potentially omit such cooperation from its new agreement with South Africa. This could in turn lead South Africa to request further concessions on other aspects of their trading relationship.

4. South African businesses should take action

South African importers from and exporters to the UK should ensure that their interests are properly protected. This would necessarily require:

Undertaking an audit of their transactions with EU/UK-based companies and identifying those that are most likely to be affected by the UK’s withdrawal from the EU-SDC EPA;

Identifying which of the provisions of the EU-SADC EPA should be included in a new UK-South Africa free trade agreement; and

Engaging the Department of Trade and Industry before it commences negotiations with the UK.

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i. On 28 April 2017 Mozambique ratified the EU-SADC EPA, and on the same day the EU-SADC EPA provisionally entered into force for Mozambique.

ii. The EU-SADC EPA provides that “the SADC EPA State shall for the first six (6) years from the date of introduction of an export tax or duty exempt from the application of that tax or duty exports to the EU of an annual amount equal to the average volume of exports to the EU of such product over the three (3) years preceding the date of introduction of the tax or duty. The SADC EPA State shall from the seventh year following the introduction of the said tax or duty until its expiry pursuant to paragraph 3, exempt from the application of the duty or tax, exports to the EU on an annual amount equal to 50 per cent of the average volume of exports to the EU of such product over the three (3) years preceding the date of introduction of the tax or duty”.

iii. See by way of example Business Day SA and UK start making plans for post-Brexit trade available online at https://www.businesslive.co.za/bd/business-and-economy/2017-05-18-sa-and-uk-start-making-plans-for-post-brexit-trade/ ; Engineering News Brexit set to change SA’s bilateral economic relationship with the UK available online at http://www.engineeringnews.co.za/article/brexit-set-to-change-sas-bilateral-economic-relationship-with-the-uk-2017-03-03.