Developing Global Free Trade: The Eurasian Economic Union & The Southern African Customs Union

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Part 5 of a 5 Part BRICS Free Trade Series 

Opportunities for Russian Investors & Manufacturers In Southern Africa, and SACU Businesses In Eurasia   

Op/Ed by Chris Devonshire-Ellis

Russia’s President Putin  and South Africa’s President Cyril Ramaphosa have just returned from Brazil and the annual meeting of BRICS nations this time held in Brasilia. With the Presidents and Prime Ministers from China, and India also attending, the scene has been set for 2020’s stint as Russia as the BRICS Chair, which starts in just six weeks.

President Putin has already stated that he wishes to use Russia’s Chairmanship of the BRICS grouping to further enhance its status within the UN. Meanwhile, the Brasilia summit’s Declaration, agreed by all member countries states stated that the BRICS bloc had expressed common goals of “expanding trade and innovation.”

There are significant global trade issues to examine here: most notably exactly how such trade can be increased. At present, the BRICS countries represent over 3.1 billion people, or about 41% of the world population. As of 2018, these five nations have a combined nominal GDP of US$18.6 trillion, about 23.2% of the global total, a combined GDP (PPP) of around US$40.55 trillion (32% of World’s GDP PPP) and an estimated US$4.46 trillion in combined foreign reserves. The IMF has projected that the BRICS nations will account for over 50% of global GDP by 2030.

Achieving that growth will require some planning, and innovation on the part of the countries concerned. This can reasonably be expected to include advancing Free Trade Agreements. To this end, Brazil is a lead player in the South Americas, with its influence and membership of Mercosur, while Russia has a similar role in the development of the Eurasian Economic Union. India has a prominent role within the South Asia Free Trade Area (SAFTA) while South Africa is a major strategic partner in the Southern African Customs Union (SACU). China, although it alone isn’t a dominant player in a specific Free Trade grouping, does of course have the Belt & Road Initiative. What the BRICS grouping does do, is potentially provide a common bloc through which other Free Trade blocs can be added. Although BRICS itself is not a Free Trade grouping, its prominence and intended actions almost certainly mean it is a platform for instigating just that – and the BRICS 2019 Brasilia Declaration expressed exactly this scenario.

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In this article I will explore the potential for linking the Eurasian Economic Union with the Southern African Customs Union.

The Eurasian Economic Union is supported with Russia as the lead partner, and also includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan. It sits in the geographical space between the European Union and China, and has recently been very active in negotiating other Free Trade Agreements, with Iran, Singapore and Vietnam all signing off deals and several currently under negotiation. It is a common market of 183 million people and has a GDP of US$5 trillion. Of significance is that is also has an FTA with China although this is currently non-preferential. When that is agreed, it provides the potential for SACU nations to establish operations in the EAEU and export products, under rules of origin regulations, but which may include SACU products, into the mainland China market.

The Southern African Customs Union (SACU) consists of Botswana, Lesotho, Namibia, South Africa and ESwatini. The SACU Secretariat is located in Windhoek, Namibia. SACU was established in 1910, making it the world’s oldest Customs Union. It has reduced to zero all tariffs on goods and products traded between it, and negotiates with other Trade blocs as a combined entity.

In 2017, intra-SACU imports amounted to US$13.8 billion. Namibia was the leading importer of products from other SACU countries accounting for 30% of the intra-SACU imports, followed by Botswana (27%), South Africa (23%), Lesotho (11%) and Eswatini (9%). Top intra-SACU import products included petroleum oils, diamonds as well as motor vehicles and iron or steel articles.

Intra-SACU exports amounted to US$14 billion. South Africa dominated the intra-SACU exports, accounting for 71%, ahead of Namibia (13%), Eswatini (9%), Botswana (5%) and Lesotho (2%). Top intra-SACU export products included diamonds, petroleum oils and gold.

South Africa, along with Russia a member of the BRICS grouping, dominates SACU’s trade with the rest of the world. The country is source for 87% of SACU’s exports to the world and the destination for 84% SACU imports from the world.

Much of Botswana, Lesotho, Namibia and Eswatini’s trade is also with South Africa. These countries also export various products to the rest of the world. For example, Botswana exports diamonds to Belgium and India. Eswatini exports sugar to Spain, the UK and Portugal. Namibia’s exports copper and diamond products to Switzerland.

The SACU has also entered into a Free Trade Agreement with the African Continental Free Trade Area, which over the next five years, aims to reduce to zero 90% of all product tariffs on intra-African products. That is especially useful for Russian businesses who wish to source products from various African suppliers, consolidate them into one processing location, possibly mixing them with imported Russian components and then either sell back onto the African market, send back to the EAEU, or export globally.

The advantage of the SACU at present is that among its members, it is already possible to do this, whereas the AfCFTA deal still needs five years to be fully implemented – assuming there are no delaying factors.

Overall, Russia’s trade with Africa has been growing fast. The country needs to find new markets, as well as supplies. Africa offers a climate more conducive for year round production than is possible during the Russian winter months, and also offers a far lower worker salary base. However, infrastructure can be problematic and this impacts upon productivity levels. But these too are improving. Many African nations are recipients of China’s Belt & Road infrastructure spend, and Russian companies have been quick to take advantage of the new roads, rail, ports and other facilities the Chinese are putting into place.

Russia has been quietly developing access to new emerging markets in Africa, and while Russia is a far smaller player than China in terms of influencing global trade flows – with the exception of energy resources – like China, it has a need for some of its manufacturers to develop new export markets in the wake of sanctions.

Similar to Chinese initiatives, Russia has been investing in Economic Zones to service Russian businesses in Africa and Asia. These include Egypt, where a large facility is being built at Port Said and negotiations are underway for a similar investment in Morocco, while the Russian Foreign Minister has recently declared interest for Russian zones to be established in Mozambique and Namibia. The latter is a member of the SACU.

Russia’s multilateral trade with Africa as a continent has been growing at rates of 17% per annum and is now about US$20 billion a year. That can be expected to further increase, and Russia has been putting in the diplomatic and trade efforts to ensure this happens. Russia currently has preferential Double Tax Agreements with Algeria, Botswana, Egypt, Mali, Morocco, Namibia and South Africa. The latter is a member of the BRICS grouping along with Russia, China, India and Brazil, and is a 20% shareholder along with Russia of the BRICS New Development Bank.

the-eurasian-economic-union-the-southern-african-customs-union

A Free Trade Agreement Between The Eurasian Economic Union & The Southern African

Economic Union

Both the EAEU and the SACU are institutionalized with solid administrative and trade protocols. With the development of emerging trade patterns between Russia and Africa, the potential for a negotiated deal between the EAEU and SACU, on the sidelines of the BRICS network, looks a real possibility. Certainly, both sides will be discussing the issue. It should also be noted that China has also signed off an FTA with the EAEU, and while this is currently non-preferential, when product tariffs are agreed this adds a further incentive for SACU businesses to be closer to the EAEU itself. As can be seen in the map above, the EAEU also has a number of prospective other FTA currently under negotiation. These, as they start to come into effect over the next few years may also be an incentive for linking up with the EAEU.

To some extent, a EAEU-SACU FTA deal then rides on the following points:

  • Consideration that the EAEU may be less of a trade threat to SACU than the EU
  • Ability to link into China’s Belt & Road Initiative via the EAEU
  • Political relations with Moscow
  • Likelihood of additional Free Trade potential with other EAEU prospective FTA

These are quantifiable points, although partially dependent upon the political landscape.  Others revolve around trade issues (such as China agreeing tariff reductions with the EAEU) which will become more apparent over time. Nonetheless, in the longer term, and given the huge network of Chinese and Russian Free Trade and Economic Zones emerging along the Belt & Road Initiative – including the Eurasian Economic Union, closer study is warranted. Benefits for SACU based companies would be as follows:

  • Access to Eurasian Economic Union Free Trade and Special Economic Zones to process/manufacture SACU originated products & goods for further export to EAEU nations, in addition to China;
  • Access to sourcing Russian/Chinese products and goods for import back to SACU;
  • Mixing SACU/EAEU/Chinese products for final export to other global markets.

Clearly, product specific examination needs to be conducted concerning the viability of such an arrangement, as well as Rules of Origin and related Product Tariffs understood. Nonetheless, there is enough substance between both SACU and the Eurasian Economic Union to given credibility to the potential of such an alliance.

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About Us

Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Through our membership of the Leading Edge Alliance, we also have partner firms throughout Africa and have numerous Russian and African clients. For enquiries  please contact us at russia@dezshira.com or visit us at www.dezshira.com

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