The SA economy has stagnated over the past decade. The outbreak of Covid-19 18 months ago in itself led to a 7% contraction in GDP in 2020. The government’s answer to this is its 2020 Economic Reconstruction & Recovery Plan (ERRP), which places emphasis on using trade policy — particularly tariffs — to expand domestic production, improve the competitiveness of exports, generate greater investment and ultimately stimulate the productive base of the economy to achieve “equitable and inclusive growth”.
The ERRP seeks to achieve sustainable economic recovery through the use of tax incentives, industrial funding, licensing and, importantly, tariffs. Such measures will be employed to promote greater local procurement in the public sector and localisation in the manufacturing sector. To give effect to this “industrialisation through localisation”, the ERRP looks to reduce the proportion of imported intermediate and finished goods and develop export-competitive sectors. Particular emphasis is placed on working with the private sector to enhance the localisation of supply chains. To this end, the department of trade, industry & competition is devising localisation policies in combination with sector-specific “master plans”.
Despite the ERRP’s laudable objectives, by introducing measures aimed at restricting the use of imported inputs and finalised products, both the localisation policies and master plans might contravene SA’s international trade law obligations, to which it signed up when the World Trade Organization (WTO) was established in 1995. The department has proposed that SA manufacturers substitute 20% of their nonpetroleum imports for domestic products over the next five years, ostensibly on a voluntary basis. A number of products in the construction, agroprocessing, health care, consumer goods, capital goods and transport sectors have been identified for strategic localisation.
There is a risk that such policies contravene SA’s international trade law obligations under the WTO’s General Agreement on Tariffs & Trade (GATT) and the General Agreement on Trade in Services (GATS). In particular, measures that seek to impose domestic content requirements or alter market conditions in favour of domestic goods or services might contravene the general prohibition against quantitative restrictions in article XI of the GATT, or the national treatment principle in article III of the GATT and article XVII of the GATS.
Article XI of the GATT imposes a prohibition on quantitative import restrictions (other than duties, taxes or charges) that are given effect to by quotas, licences or other measures. The inclusion of reference to other measures significantly expands the article’s scope of application. In “Japan — Trade in Semi-Conductors”, the WTO panel held that owing to the inclusion of this language, article XI applies to any measures instituted or maintained that restrict the exportation or importation of goods, even if such measures are not legally binding or mandatory.
Various types of government involvement in the private sector may therefore be subject to the prohibition of quantitative restrictions, irrespective of their legal status. The panel noted that what is of significance when considering the application of article XI to nonmandatory government conduct is whether there are reasonable grounds to believe there are sufficient incentives or disincentives to make it effective. As such, should SA’s localisation policies take the form of voluntary industry commitments to refrain from obtaining and incorporating imported inputs, such measures may still fall within the scope of article XI.
To the extent that the department’s localisation policies seek to discriminate between imported and domestic goods, there is also a risk they may contravene article III of the GATT, which in effect prescribes that products imported into the territory of another member state be accorded treatment no less favourable than that accorded to like products of national origin. This includes not imposing internal taxes or charges on imported products that exceed those applied to similar domestic products. In addition, member states may not maintain internal quantitative regulations that prescribe that specific amounts or proportions of domestic inputs be used for the mixture, processing or use of certain products.
In “Japan — Taxes on Alcoholic Beverages”, the WTO appellate body held that article III should ensure equality of competitive conditions for imported products in relation to domestic products. Similarly, article XVII of the GATS, which obliges member states to afford foreign service providers treatment no less favourable than that afforded to domestic suppliers, should ensure conditions of competition are not altered in favour of the member state’s own service industry. Should the department’s proposed localisation policies alter the competitive relationship between imported and domestic products or services, this may well contravene the national treatment principle under the GATT and GATS.
Article III of the GATT should be read with article XI and article 2.1 of the Agreement on Trade-Related Investment Measures (TRIMs), which extends the application of both the national treatment principle and prohibition of quantitative restrictions to trade-related investment measures. Article 2.1 provides that no member state shall apply any TRIMs that are inconsistent with either article III or article XI. To this end, an illustrative list of noncompliant TRIMs is attached to the agreement. These include those that require particular levels of local procurement (domestic content requirements) or restrict the volume or value of imports an enterprise may purchase or use to an amount related to the level of products it exports (trade balancing measures). Should the department’s localisation policies be inconsistent with article 2.1 of the TRIMs agreement, there is additional scope for member states that have suffered injury to seek recourse under the WTO’s dispute settlement mechanism.
Insofar as SA is unable to rely upon the exceptions under article XX of the GATT and article XIV of the GATS, none of which appear to be immediately applicable, it may therefore become vulnerable to other member states initiating dispute settlement proceedings that in turn lead to them nullifying or impairing SA’s benefits under the WTO system.
In addition to the international trade law issues above, similar non-discrimination obligations are included in both the agreement establishing the African Continental Free Trade Area (AfCFTA) and the economic partnership agreement (EPA) between the EU and the Southern African Development Community (Sadc) EPA states. Article 5 of the AfCFTA agreement and article 40 of the Sadc-EU EPA each mirror the national treatment principle described in article III of the GATT. As such, there is a greater ambit for SA’s trading partners to seek recourse for the implementation of measures that discriminate between imported and domestic products using the respective dispute resolution mechanisms available under the AfCFTA agreement and the Sadc-EU EPA.
Not only do the local content requirements of the ERRP risk SA contravening its international trade law obligations, such policies might increase the cost of doing business, reduce product market competition, weaken incentives for productivity and innovation and undermine regional economic integration efforts. It is therefore imperative, if SA is to revitalise its economy, that the department only implement measures that will actually stimulate domestic production. Axiomatically, these measures should be formulated to ensure SA continues to comply with what it has signed up to.
• Leon is partner and Africa chair at Herbert Smith Freehills.
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