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Cablegate: Sacu to Negotiate Free Trade Deal with India

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 PRETORIA 005313

SIPDIS

DEPT FOR AF/S; AF/EPS; EB/TPP/MTA
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
COMMERCE ALSO FOR HVINEYARD
TREASURY FOR BRESNICK
DEPT PASS USTR FOR PCOLEMAN

E.O. 12958: N/A
TAGS: ETRD KTEX ECON SF USTR
SUBJECT: SACU TO NEGOTIATE FREE TRADE DEAL WITH INDIA

1. Summary: The Southern African Customs Union (Sacu) and
India will start free trade negotiations in the middle of
2005. The free trade talks would evolve in two stages,
starting with the establishment of a preferential trade
agreement covering trade in goods, to be later upgraded into
a free trade agreement, to cover services, investment and
procurement. Free market access should boost trade between
SACU and India, as the two regions are currently not really
important trading partners. Sacu's textile, clothing and
electronics industries are expected to come under serious
threat from Indian imports if the trade barriers come down.
End Summary.

2. On November 26, 2004 Embassy's economic specialist
attended the launch of a publication on the proposed Sacu-
India Free Trade agreement, organized by the South African
Institute of International Affairs and the University of the
Witwatersrand's Business School. This cable reports on some
of the important points raised by the speakers at the
launch.

3. According to Willem van der Spuy, director of Asian
bilateral trade programmes at the Department of Trade and
Industry, Sacu and India will start free trade negotiations
in the middle of 2005, and hope to conclude the negotiations
by the end of 2005. South Africa and India have been in
talks on and off since 2001, and managed to sign a framework
agreement in 2002, but progress was halted by the
renegotiation of the Sacu agreement. Van der Spuy said that
in June 2004 SACU ministers formally agreed to re-open
negotiations with India, and in September 2004 a new
framework agreement was discussed according to which free
trade talks would evolve in two stages. The first phase
would focus on establishing a preferential trade agreement
(PTA) covering trade in goods. This would enable local
exporters to have free market access to India's $2.66
trillion economy with a population of over 1 billion. The
second phase envisages the upgrading of the PTA into a so-
called "new generation" free trade agreement, to cover
services, investment and procurement.

4. The discussions pointed out that South Africa and India
are not currently very important in either of each other's
import or export basket, as both countries compete for
consumers in bigger OECD markets. South Africa is India's
14th most important source of imports but only the 20th most
important export destination. According to Philip Alves, a
trade research intern at the South African Institute of
International Affairs, South African imports from India were
concentrated in textiles and clothing, raw hides and leather
and vegetable products, while Indian imports from South
Africa consists of minerals, chemicals, base metals,
textiles and pulp. The Indian economy is far more protected
than the Sacu economy, as Indian exports to Sacu currently
face an unweighted average tariff of 12%, while South
African exports to India face an unweighted average tariff
of 24%.

5. According to Philip Alves, India regards an agreement
with SACU as the best way to increase its commercial
presence in the sub-Saharan region. Suresh Goel, India's
Consul General in South Africa, said the free trade
agreement would promote privileged market access for Indian
and South African firms and increased trade between the two
countries. According to Goel, Indian manufacturers should
in future target the South African motor, pharmaceutical,
chemical and textiles industries. Already two of India's
prominent motor manufacturers, Tata and Mahindra, had
entered the South African domestic market and Indian drug
makers Cipla and Ranbaxy are also active in the domestic
market. Julius Sen, an academic at the London School of
economics, said India was unlikely to include agriculture in
the free trade agreement as the sector was one of the most
sensitive in India, with millions of small-scale farmers
heavily dependent on farming.

6. From the discussions it was evident that although market
access-related opportunities could exist for exporters in
both regions, Sacu's textile, clothing and electronics
industries would come under serious threat from Indian
imports if the trade barriers came down. The clothing and
textiles industry as well as trade unions have expressed
their concern about the proposed Free Trade Agreement with
India. Philip Alves felt that the potential for increased
intra-industry trade would be of considerable interest to
politicians, as it will provide evidence in support of the
argument that south-south integration can benefit all
involved.

FRAZER

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