Will the Southern African Customs Union Last?

11.28.14
World News /28 Nov 2014
11.28.14

Will the Southern African Customs Union Last?

By Kevin Amirehsani for Global Risk Insights

For most people, customs unions (CUs) rarely make for exhilarating news. However, these multi-country zones of economic integration enable goods to be transported across borders with low duties, and they allow all imports to the region to be afforded the same external tariff, greatly streamlining international merchandise trade.

However, for South Africans, the CU to which they belongs has recently become a bit controversial. And this spells trouble for its neighbors, whose government coffers rely to a large extent on the unions revenue.

At 125 years old, the Southern African Customs Union (SACU) is the oldest such arrangement in the world, which is a bit surprising as Africa is hardly known as a hotspot of intra-continental free trade. Indeed, only 11% of the continent’s trade volumes are between its constituent states, compared to 50% in Asia and 70% in the European Union.

Accordingly, the SACU, which is also an excise union and hosts a common currency for four of the five members, is a welcome anomaly. Customs clearance at the border between two member countries can take as little as 30 minutes, while that figure is often anywhere from 35 hours to one week elsewhere on the continent.

But for the other four SACU members, Botswana, Lesotho, Namibia and Swaziland – the so-called “BLNS” nations – the CU is more than just a driver of trade. It is a lifeline.

The tariffs and duties collected at SACU borders are centrally pooled and then distributed to the member states according to a complex revenue sharing formula (RSF) based in part on the destination principle – each state receives what it would have received from goods destined to it.

However, the BLNS countries receive enhanced allowances because the RSF’s customs component distributes revenue based on the proportional share of intra-SACU imports, and not total imports (Pretoria imports very little from the BLNS). They also benefit in relative terms due to a “development” portion of the formula, which doles out funds according to the inverse of each state’s GDP, resulting in a significant net payment every year from South Africa.

According to Roman Grynberg of the Botswana Institute for Development Policy Analysis, these two effective fiscal transfers amount to between 15-18 million rand per year ($1.4-1.6 billion). If this sum might not sound like much, take a look at the share of BLNS government budgets: 32% in Botswana, over 70% in Lesotho, 39% in Namibia and 56% in Swaziland are made up of SACU revenues.

Not surprisingly, Pretoria has come under internal pressure to end this nominal subsidy, and even to axe the SACU itself. This has been particularly true during the recent global economic slowdown, which has seen South Africa suffer reduced international demand for its goods and internal economic tension.

While “SACU’s day of reckoning” has not yet arrived, South African lawmakers were apparently discussing the CU’s demise if they were unsuccessful in altering the RSF’s disbursements. This was most likely given added impetus by the leading South African trade union openly criticizing public sector funds being diverted to less-than-transparent governments next door.

What might look like a winning strategy for Pretoria, however, would certainly have a host of consequences, especially in a region with fairly porous borders and in a country still reeling from previous bouts of xenophobic violence.

“SACU will last as long as [South African] President [Jacob] Zuma does not want to deal with two more ‘Zimbabwes’ (economic basket cases) on his border, i.e. Swaziland and Lesotho,” said Grynberg.

“Pulling the plug on SACU would cause economic collapse and mass illegal migration. Is the economic ruination of Zuma’s neighbors with all the political consequences worth the savings that the treasury boys would get? I doubt it.”

What the SACU naysayers also omit are the benefits accrued by Pretoria that are not reflected in the RSF numbers. For example, the CU gives exporters from South Africa, sub-Saharan Africa’s economic behemoth, near duty-free, quota-free access to BLNS consumers. This is not to mention that the institution serves as a magnet for investors, most of whom choose to locate in the more developed state.

In addition, as BLNS trade ministers can attest, Pretoria possesses the lion’s share of influence when it comes to setting the bloc’s industrial policy. Its “sector-based” economic strategy which “[incorporates] potential tariff increases” and “a renewed emphasis on state-owned enterprises” in certain areas has trumped that of the BLNS on many occasions.

It is little wonder that the SACU is once again under review. At stake is an agreement with region-wide political, economic and social consequences.

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