South Africa and the African Growth and Opportunity Act

I – Much ado about chicken

The US presidential notification

On 5 November 2015, President Obama wrote to Congress that he was giving a 60-day advance notification of his intent to suspend the application of duty-free treatment to all AGOA-eligible goods in the agricultural sector from South Africa.  He wrote:

I am taking this step because South Africa continues to impose several longstanding barriers to U.S. trade, including barriers affecting certain U.S. agricultural export, and thus I have determined that South Africa is not making continual progress to the elimination of barriers to United States trade and investment as required by section 104 of AGOA.

US ambassador to South Africa, Patrick Gaspard, warned shortly afterward that they would consider no later than 1 March 2016, extending suspension of duty-free treatment on additional AGOA-eligible goods beyond those in the agricultural sector, should unsatisfactory progress have been made toward removing the barriers to US trade.

This threat – and it is a threat – is not one to be taken lightly.  Consider that in 2013, the US domestic market amounted to 26.7% of the World’s total consumer market. [1] Consider further that China, the second largest, followed at 7.72%. [2] Given that South African exports to the US under AGOA amounted to $1.75 billion last year [3] – around 35% of the total $5 billion or so worth of goods exported in 2014 – the ramifications of non-compliance could derail many crucial sectors of the South African economy.

It has produced results.  On the 13 November, South Africa and the United States signed the Protocol for Poultry Meat and Day-Old Chicks.  This Protocol sees South Africa lift the avian flu ban on US poultry and marked the first, and most significant, step toward meeting the eligibility criteria required of us for continued preferential access to the US market under AGOA.  Trade and Industry Minister Rob Davies appears confident that all outstanding issues will soon be resolved: “we are well on track to conclude all the regulatory issues within the deadline”. [4]

Obama’s 60-day ultimatum is the result of an ‘out-of-cycle’ review of South Africa’s eligibility for AGOA special treatment initiated on 21 July 2015 and mandated by Congress in the context of the Trade and Preferences Extension Act passed in January of this year. 

This was included in the Act at the behest, principally, of Senator Johnny Isakson (Georgia) and Senator Chris Coons (Delaware) lobbying on behalf of the poultry industry, which is substantially represented in both states.  South Africa’s inclusion in AGOA has, however, been the source of running controversy in Washington – not only among those with a vested interest in the beef, pork and poultry industries, but also among those who consider us simply too developed to receive such preferential treatment. 

African Growth Opportunities Act (AGOA)

AGOA is a non-reciprocal trade agreement, enacted in 2000 as part of the US Trade and Development Act, that gives – in conjunction with the trade preferences under the Generalised System of Preferences (GSP) – qualifying Sub-Saharan Africa (SSA) countries duty free treatment on over 7,000 marketable goods – of which about 800 are agricultural. [5]

Designed to help SSA countries open their economies, build free markets, stimulate growth, and facilitate the region’s integration into the global economy, AGOA gives eligible nations incentivised access to the world’s largest consumer market.  

To be eligible for AGOA-beneficiary status, a country must have established or be working toward establishing a market-based economy, the rule of law and political pluralism. It must demonstrate a commitment to eliminating poverty and providing healthcare and education for its citizens. It must have structures in place that function to undermine corruption and bribery. It must have ethical labour laws and standards – i.e. a minimum wage and minimum age for employment. It must not commit gross human rights abuses. [6] And there is a ceiling on its per capita income. Seychelles has recently gone through the ceiling. South Africa remains well below.

All of these criteria are in the best interests of any country in any case. They are common sense benchmarks of a free, fair and functional democracy and there should thus be the political will to comply with them regardless of the AGOA trade benefits. 

Unfortunately, in Sub-Saharan Africa, narrow interests and authoritarian ambitions have frequently taken precedence over economic security and national welfare: think Zimbabwe, Sudan and, most recently, Swaziland. AGOA-beneficiary status therefore provides an economically compelling incentive to enact political reform where needed.

It should be fairly clear that an economically secure and politically stable SSA region is in line with wider US-interests. However, the following two criteria must also be met that directly affect the US. Firstly, a country must not be engaged in activities that work to undermine US national security or foreign policy interests. Secondly, a country must work towards eliminating barriers to US trade and investment. [7] This second requirement is reasonable enough, in light of the massive potential trade benefits that they are offering in return.

The origins of United State exasperation

In 2000, the same year that AGOA came into force, South Africa introduced an extremely stringent anti-dumping duty on US bone-in chicken cuts. At R9.80/kg, this duty rendered US cuts twice as expensive as other foreign exporters, [8] and effectively blocked US chicken exporters for fifteen years from the SA market by totally precluding any potential profitability.

In 2003, following the detection of a Bovine Spongiform Encephalopathy (BSE) positive cow in Washington State, South Africa enacted a ban on all ruminant products of US origin.  This extended as far as ruminant meat-based pet food.  It has completely blocked all US beef exporters from the SA market for 12 years. 

In June 2013, South Africa blocked US pork exports on the grounds of a restriction concerning Porcine Reproductive and Respiratory Syndrome (PRRS) introduced the year before.  Prior to this, and despite US concessionary efforts, South Africa allowed only a restricted number of approved cuts – but excluding the shoulder cut, widely known to be the “priority for the US [pork] industry”. [9]

Finally, late in 2014, our Department of Agriculture passed a complete ban on all US poultry products in response to sporadic outbreaks of avian influenza in US flocks.   The US pushed continuously for the ban to be regionalised so that poultry producers located in unaffected areas could continue to export to the SA market.  These requests fell on deaf ears, despite the blanket ban being inconsistent with World Organisation for Animal Health standards and the US avian flu being brought under control. [10]

On 4 – 5 June of this year, government officials and industry delegates from both sides met in Paris to resolve the trade dispute, facilitate the resumption of US exports of bone-in chicken cuts to the South African market and thus ensure South Africa was included in the extension of AGOA under the Trade Preferences Extension Act 2015. An annual quota of 65,000 metric tonnes – of bone-in chicken imports to the SA market, free of anti-dumping tariffs – was agreed to, which ensured South Africa was not excluded from AGOA.  Minister Davies framed it as “a commendable effort by the poultry industry in the interest of the South African economy”. [11]

Yet three months later, despite the success of the Paris agreement being widely touted by our government, no significant progress had been made towards implementing the necessary legal framework required for the 65,000 tonne quota.  Nor had any steps been taken toward a total or partial rescission of the avian flu ban.  Coons and Isakson wrote an open letter to President Zuma on 11 September, clearly exasperated at the continued feet dragging.  They implored him to ensure that the relevant processes were set in motion, ending it by reminding him that “a review of South Africa’s eligibility under [AGOA] is presently underway”. [12] 

There are wider trade and investment disagreements between South Africa and the United States.  These will be discussed in a second part of this article.  But it has been the anti-dumping duties surrounding US poultry that precipitated this impasse. 

The South African government felt that anti-dumping measures were necessary to prevent the domestic market from being flooded by what it saw as an unfairly priced product that the local poultry industry could not compete with.  US exporters viewed them as deliberately and unjustly discriminatory, and the US government became increasingly frustrated at South Africa’s reluctance to remove them, given the latter’s continued – and controversial – inclusion in AGOA and the preferential access to the US market that this entails.

South Africa vs. US justifications

There were legitimate concerns underlying the actions of our government and poultry industry.  Consumer preferences in the US and EU markets, underwritten by their relative wealth and the conception of white meat as a health food, have meant that breast meat can be priced at a premium.  In many cases the price of the breast meat is sufficient to cover its production cost, and the cost of the entire carcass, and still turn over a profit. [13]

Bone-in chicken cuts, thus, are almost considered by the US and EU poultry industry as waste products.  Moreover, poultry farmers in both the US and EU are heavily subsidized.  These two factors have meant that US bone-in chicken cuts can be exported at very low prices.  In fact, a 2014 industry report to Congress remarked that US chicken exporters are able to give SA consumers “an option to purchase U.S. poultry that is one-third the cost of South African chicken”. [14]

On the other hand, consumer preferences for chicken in South Africa are radically different.  One of the most popular dishes in South African townships is known as ‘Walkie-Talkies’ – spiced chicken heads and feet grilled over hot coals.  Differing cultural attitudes toward chicken and domestic economic realities mean that the local poultry industry is not given the same ability to charge a premium on any one cut of the chicken.

This is why the US bone-in cuts have been considered anti-competitive.  US exporters are privileged by consumer preferences in their own market and the financial security afforded by government subsidies, and our local industry is subsequently unable to compete. 

However, the US poultry industry had equal reason to feel hard done by.  The anti-dumping duties imposed on US exporters were punitive in that they were uniquely heavy.  The South African Poultry Association, SAPA, had successfully lobbied for anti-dumping duties to be effected in July 2014 on German, Dutch and British bone-in cuts.  Yet, in the case of the Netherlands and the UK, this duty was set only at 22.8 % and 22% respectively (less than the standard 37% import duty US exporters face before the special R9.80/kg duty), and moreover, the duties were set to expire at the beginning of January 2015 – just six months later. 

In trade negotiations, there must always be give and take.  A quota of 65 000 metric tonnes for bone-in chicken will have consequences for South Africa’s chicken industry.  It will be the price we pay for much more valuable benefits, now that the avian health Protocol off has been completed. 

Wider issues

It would be incorrect to suppose that resolving the chicken, pork and beef issues removes all the conflict between South Africa and AGOA.  The investigative report that led to President Obama’s letter to Congress reveals other issues at stake.  These will be discussed in the second part of this article.

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II - The game of ‘chicken’ and calling our bluff

US concerns over South Africa’s future commitment to meeting eligibility criteria are not limited to trade.  The protection of existing investment through the legal recognition of property rights, as well as the creation and conservation of an environment conducive to foreign investors, are at least as important to the US government. 

As part of the out of cycle review of South Africa’s eligibility under AGOA, a call for comments was included.  The American Chamber of Commerce in South Africa (AmCham), the organisation that represents 250 US companies operating in SA, responded by detailing which issues were of concern to its members.  In what follows, I consider at length the two most pressing issues raised by AmCham. I suggest that the poultry dispute has set a new and strong-armed precedent to economic relations between the two countries, and that our future under AGOA is far from certain.

Intellectual Property Rights

The first issue revolves around the yet to be completed reform of our intellectual property law under the proposed National Policy on Intellectual Property Bill.  Included in this is an overhaul of pharmaceutical patent legislation, which would both limit the ability of multinationals to hold multiple patents on similar medicines and free up access to cheap, generic medicines to the SA market.

The National Foreign Trade Council – an American trade association that represents, amongst others, US pharmaceutical interests – claims that, whilst a strong intellectual property regime is important for an innovation-conducive environment and contributes to socio-economic empowerment, these reforms are retrograde and damaging to US interests in that their “overall intent appears to weaken current standards that are important to investors and innovators”. [1] 

US pharmaceutical companies are clearly unhappy with proposals that threaten existing business and undermine future profitability.  ‘Ever-greening’, the practice by which multinationals renew expiring patents through slight recipe alterations, for example, in order to prolong market dominance, would be limited under the new reforms.  And competition with affordably priced generics would be promoted.    

The proposed South African reforms are, however, widely and staunchly supported by national and international civil society groups and NGOs – including Section 27 and Médecins Sans Frontières – who argue that the proposals will significantly improve the availability, affordability and accessibility of life-saving medicines. [2] They contend, correctly, that the proposals are both harmonised with South Africa’s WTO obligations and constitutionally directed, in that they work toward ensuring the right of access to health care services. [3]

It is currently unclear whether this will threaten South Africa’s status under AGOA.  The US promised under Clinton not to “seek the revocation or revision of an intellectual property law or policy of a beneficiary sub-Saharan country…that regulates HIV/AIDS pharmaceuticals or medical technologies”. [4] 

However, the pharmaceutical industry – colloquially known, or rather branded, as ‘Big Pharma’ – is influential in Washington.  A threat to profitability will be responded to, and South Africa’s beneficiary status in AGOA will become an issue.  The expected line of argument will be that the reforms would undermine protection of intellectual property – allowing for the possibility of expropriation.  This is an eligibility criterion.

In August, AmCham formally requested that South Africa’s AGOA eligibility be made contingent on abandoning the reforms. [5] South Africa has proven unwilling to surrender the AGOA trade benefits for the security of the domestic poultry industry.  We will have to wait and see whether Washington considers the intellectual property reforms to be in breach of AGOA’s eligibility requirements, and if so, what response Pretoria will make.

Private Security Industry Regulation Amendment Bill

The second, and more prominent, issue is the proposed Private Security Industry Regulation Amendment Bill, which includes the requirement that all employees of private security companies are South African citizens, and puts a 49% cap on foreign ownership of private security companies operating in South Africa. 

Foreign ownership is dominated by four transnational security corporations: ADT, G4S, Chubb and Securitas.  Over the past eight years, investments by the big four through acquisition of local private security subsidiaries have amounted to R4.5 billion. [6] Of these, ADT is an American company and Chubb is US-owned.  ADT employs just over 10 000 people, whilst Chubb has a smaller presence at marginally fewer than 2 500. 

AmCham argues that these companies have “contributed substantial capital investment and infrastructure development as well as introducing international best practice in skills training and development which has uplifted the entire sector”. [7] This is true.  Costa Diavastos, the executive director of the Security Industry Alliance, stated in an interview with Business Day TV that the state that the industry is in today owes much to “foreign flows of capital, the introduction of new technology, [and] the proliferation of systems within the security industry that weren’t here before”. [8] Worryingly, Diavastos predicts that the reaction by foreign companies will be one of total market withdrawal. [9] 

South Africa is currently committed under the WTOs General Agreement on Trade in Services (GATS) to full market access and national treatment for foreign investment with respect to security services.  In this, it guarantees that foreign investors in the South African private security sector will not be restricted to terms, limitations or conditions that are not applied to domestic investors.  The proposed Amendment Bill is therefore entirely contrary to our current WTO commitments, which are legally binding under international law.

The Amendment Bill provides that companies would be given a five-year grace period to meet the demands – either through divestment or ownership dilution – or face expropriation, with no offer of compensation included.  This is possibly unconstitutional. What’s more, included in the clause restricting foreign ownership is the provision of sole and complete discretionary power to the Minister of Police in deciding the percentage of expropriation (i.e. up to 100%).  This is understandably worrying to US investors.  But it should also be deeply disturbing to conscientious South African citizens: the potential for cronyism and graft is massive. 

Apart from alienating the United States, the Amendment Bill will have two damaging domestic effects.  In such a climate of uncertainty characterised by a scramble to sell, share prices will collapse, dislocating the industry.  As a result, tens of thousands of jobs will be directly lost and indirectly put at risk, and at a time when unemployment stands at 25%.

If the Amendment Bill becomes law, South Africa will be thrown out of AGOA.  It directly calls into question South Africa’s commitment to the protection of private property rights through the threat of expropriation, and suggests a government that is hostile to foreign investment.  Both of these aspects fundamentally conflict with eligibility criteria required of AGOA-beneficiary nations.    

That it has languished on the President’s desk for so long suggests that the Executive is both aware of the effects that the Bill will have on foreign investment and wary of the implications.  Rightfully so: private security is a very large employer in South Africa.  It functions to protect our lives and property in the absence of a reliable and effective police force. 

Endangering the possible efficacy of the private security sector and hindering its ability to operate by using anti-competitive practices would be politically, socially and economically calamitous. 

Conclusion

AGOA is a non-reciprocal trade benefit scheme.  However, to view it as an act of pure altruism on the part of the US is simply incorrect.  Every trade agreement involves exchange.  Through AGOA and its trade benefits, the US is able to effectively encourage soft-power objectives such as safeguarding the rule of law, combatting corruption and promoting peace and security in the region.  This is in everyone’s best interests.

The real exchange, however, lies in securing trade-barrier free access to SSA markets for US exporters, and in ensuring that those markets are favourable to US investors.  The eligibility criteria laid out in the AGOA document makes this overwhelmingly apparent. 

South Africa tested US patience and resolve over the dispute surrounding market access for US bone-in chicken portions to the point that Obama issued us an ultimatum.  Our government’s actions were deeply misguided.  We treated the US in a discriminatory and mercantilist manner whilst expecting to retain unbridled tariff free access to their market.  Jy kan nie jou brood aan albei kante botter nie.

Moreover, doing so to prop up the local poultry industry was, though understandable, arguably short sighted.  While domestic industries must, to some extent, be protected from foreign competitors with whom one cannot compete, this should have been limited to the MFN tariff.  Aside from being unfair on US exporters, the anti-dumping duty was an excessive example of import substitution – this leads to inefficient and uncompetitive production and drives up domestic prices.

Our inclusion in AGOA is, and will now remain, at risk.  The private security amendment bill and the overhaul of our intellectual property regulations are most prominent at the moment, but many more potential threats to our eligibility loom in the future.  Among them, are issues surrounding BEE ownership initiatives, proposed land reform and the recently revised Promotion and Protection of Investment Bill.  Each of these threatens US investment.

If we again act in a way that irks or even undermines an aspect of US trade and investment, it is unlikely that Washington will demonstrate the same fifteen-year patience that they did over the poultry dispute.  What’s more, there’s no reason for them to.  They have called our bluff and we have proven quick in our response to their threat of suspension from AGOA.  We are, no doubt, something of the proverbial donkey: caught between our desire for the carrot and the promise of a sharp thwack to the flanks from Washington’s long reaching stick.  

Andrew Barlow is a Researcher at the Helen Suzman Foundation.

This article first appeared as two HSF Briefs.