EU trade agreement enters into effect with five southern African countries

On 10 June 2016 the EU signed an Economic Partnership Agreement (EPA) with the Southern Africa Development Community EPA Group comprising Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland (the SADC EPA).

On 10 October 2016 that agreement entered into effect between the EU and five of those countries: with Mozambique in the process of ratifying the agreement and due to join immediately thereafter.

The SADC EPA represents the latest agreement in a scheme to create a free trade area between the EU and the African, Caribbean and Pacific Group of States (ACP).  Like previous EPAs, a key objective is to support the conditions for increasing investment and economic growth in the SADC EPA states. The EU is the SADC EPA Group's largest trading partner. Export products from the SADC region include, notably, diamonds (from South Africa, Botswana, Lesotho and Namibia) as well as agricultural products, oil and metals. Manufactured goods, wine and food products are exported from South Africa, the largest EU trading partner in the region. EU imports to the SADC EPA Group include vehicles, machinery, electrical equipment, pharmaceuticals and processed food.

The key provisions of the SADC EPA are discussed below.

Key terms

The SADC EPA grants "development oriented", asymmetric access to the EPA partners. Botswana, Lesotho, Mozambique, Namibia, and Swaziland are each granted full duty-free, quota-free access to the EU market (arms and munitions excluded), but can shield sensitive domestic markets from international competition and deploy protective measures should imports grow too quickly and disrupt "infant industries". Similarly, South Africa benefits from enhanced market access: the SADC EPA maintains and enhances the reciprocal market access regime under the existing Trade, Development and Cooperation Agreement (TDCA) between South Africa and the EU. In addition, a new bilateral EU-South Africa protocol (under the EPA) will protect traditional product names ("geographical indications" or GIs) and govern trade in wine and spirits. Moreover, under Article 28, the EU shall extend to the SADC EPA partners any more favourable treatment applicable as a result of the EU becoming party to a subsequent, preferential trade agreement with a third party: the SADC EPA Group grants similar rights to the EU, in respect of any more favourable treatment in any subsequent trade agreement with a "major trading economy".

Whether a product can be exported to the EU duty-free depends on so-called "rules of origin". Under the SADC EPA, such rules are formulated so as to support the development of regional value chains, maximising the number of goods that can benefit from duty-free access. Specifically, the agreement enables producers to make products with elements from various other countries, without losing free access to the EU. This aims to benefit, for instance, the textile industry, in which textile products can qualify for preferential tariffs if a stage in production, such as weaving, took place in a SADC country.

Whilst the SADC EPA contains a general prohibition on the introduction of new or increased customs duties on the export of goods in trade between the parties (Article 26), certain derogations from this rule exist in "exceptional circumstances".  Botswana, Lesotho, Namibia, Mozambique and Swaziland may introduce, after consultation with the EU, temporary customs duties or taxes where justified for specific revenue needs, by critical shortage of foodstuffs, or for protection of the environment and infant industries (Article 26.2). Moreover, at the behest of South Africa, any SADC EPA partner, where it can justify industrial development needs, may introduce temporary customs duties or taxes (up to 10 per cent of the ad valorem export value) on a total number of 8 products per state, for a period of up to 12 years (Article 26.3).

Sustainable development

The SADC EPA also contains various provisions committing to the application of the principles of sustainable development in its implementation, including social, labour and environmental matters (Articles 7, 8, 10 and 11). Though the Parties retain the right to establish their own levels of environmental and labour protection, their "right to regulate" is subject to the observance of relevant international standards and the parties explicitly recognise that it is impermissible to seek to encourage trade or investment through the relaxation of the level of domestic labour and environmental protection (Article 9).  To make sure that such rules are respected, each party will have the option to request consultations on questions of sustainable development, involving relevant authorities and stakeholders (Article 10).

The SADC EPA is also the first EU trade agreement eliminating the possibility for the EU to use agricultural export subsidies (Article 68).

State to state dispute settlement

Any disputes concerning the application of the SADC EPA are to be settled by consultation, failing which the parties may resort to mediation and ultimately arbitration. The rules of procedure and conduct applicable to any arbitration proceedings are to be agreed by the parties within a year of the agreement's coming into force (Article 89), and in reaching any decision the tribunal must interpret the agreement in accordance with the customary rules of interpretation of public international law, including the Vienna Convention on the Law of Treaties (Article 92).

Comment

EPAs are seen by the EU as essential in re-securing its trade ties with Africa, and this agreement represents a further, important step towards stronger economic partnership. Moreover, the SADC EPA is based on the Cotonou Agreement of 2000 (a framework treaty between the EU and 79 ACP countries) and incorporates its provisions on human rights, sustainable development, and on dialogue including parliaments and civil society. Accordingly, the SADC EPA offers some of the most complete protection of human rights and sustainable development available in EU agreements.

It is interesting to see that the final EPA contains very limited provisions in respect of trade in services. In 2009, four SADC member states (Botswana, Lesotho, Mozambique and Swaziland) committed to negotiate with the EU regarding the liberalisation of trade in services. That commitment remains, and is reflect in Article 73 of the SADC EPA, however Namibia and South Africa chose to opt out of such discussions, and have been resistant to EU proposals. Although recent years have seen growth in the region's services sectors and consequent opportunities in trade in services, this could be seen as indicative of a general reluctance to open service industries to international competition.

The EPA does not contain investor-state dispute settlement provisions (ISDS), which is consistent with the absence of a dedicated investment chapter containing specific investor protections. This may reflect the somewhat weak dispute resolution provisions under the EU-South Africa TDCA. It can also be seen as consistent with more recent regional trends, particularly South Africa's termination of BITs with the EU, and the domestication on international arbitration in the South African Protection of Investment Act, 2015.

Finally, investors (particularly in the mining industry) have already expressed concerns with regard to the ability of the SADC partners to impose temporary export tariffs under Article 26.3, which will effectively push up the cost of exporting to international markets. As set out above, this right is reserved for "exceptional circumstances" and is subject to consultation with the EU, however such provisions were not previously included in the TDCA, and represent a rare concession from the EU.

For further information, please contact Peter Leon, Partner, Andrew Cannon, Partner, Alex Francis, Associate or your usual Herbert Smith Freehills contact.