Jacob Twala Economic Advisor at KZN Provincial Treasury.

April 28, 2020April 28, 2020 admin 0 Comments

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Jacob Twala is currently employed as the Economic Advisor at KZN Provincial Treasury. His core duties include conducting economic research. He is also responsible for the writing of speeches, forewords, introductory remarks, comments etc. for the current KZN Provincial MEC for Finance, Mr L Pillay and the former MEC, Ms B Scott. Jacob is the co-author of the KZN Provincial Treasury’s annual publications, namely Socio-economic Review and Outlook (SERO) and Provincial Economic Review and Outlook (PERO).

Before joining KZN Provincial Treasury, Jacob was an Economic Analyst for the Eastern Cape Provincial Treasury (2007 to 2011). He had served almost three years as a Credit Analyst Trainee at FNB (1997 to 1999), before joining Durban University of Technology (DUT) as the economics lecturer (1999 to 2007).

Jacob holds a Masters of Commerce degree in Economics, obtained from the University of KwaZulu-Natal (UKZN). Mr Twala is an active member of the KZN Researchers Forum and the Public Sector Economist Forum (PSEF) and was the chairperson of the PSEF in 2017.

Jacob was also an Independent, non-executive Director of the South African Supplier Diversity Council (SASDC) for five years, from 2013 to 2018. He chaired the Audit and Risk Committee of the SASDC for more than three years.

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THE UK REFERENDUM VOTE AGAINST THE EUROPEAN UNION (BREXIT), WHY DOES IT MATTER FOR SOUTH AFRICA?

The term “Brexit” emanates from the success of Britain’s referendum, whereby 51.9% of 30 million people in the United Kingdom (UK) voted to leave the European Union (EU) on the 23 June 2016. Soon after the startling Brexit vote, the financial market plunged and Britain’s Prime Minister David Cameron, who led the campaign to stay in the EU, announced his resignation.

Subsequently, the negotiations for Brexit commenced and were supposed to end on March 2019. However, UK members of parliament rejected the withdrawal agreement reached between the EU and UK on several occasions, such that an extension was granted for negotiations to last until 12 April 2019.

The primary argument for having an agreement between the UK and the EU is to ensure a smooth

exit from the EU for businesses and individuals. This will also allow time for the two sides to seal a permanent trading relationship.

Eventually, the EU leaders have extended the talks for an additional six months, ending 31 October 2019. However, the agreement lobbied by Prime Minister Theresa May was rejected, and she eventually resigned on 07 June 2019, being replaced by Boris Johnson on 23 July 2019.

Despite the extension of negotiations, there will be a Brexit transition period until 31 December 2020 or possibly later to get everything in place. The extension will also help businesses and others to prepare for the moment when the new post-Brexit rules between the UK and the EU begin. Mr Johnson has, however, vowed to deliver Brexit with or without a deal on 31 October 2019.

Argument in favour of Brexit

The primary argument in favour of Brexit relates to economic considerations. Under EU laws, the UK would be forced to adopt the Euro, which is the common currency to be used by all EU member nations, post-2020. Thus, the UK would have to abandon its stronger British Pound (Sterling) currency, which is of great concern since UK argues that Euro is not an unstable currency against Pound Sterling.

The proponents of Brexit further allege that EU has failed to address the economic problems that had been developing since 2008 and eventually resulted in the global financial crisis in 2009. For example, unemployment is currently estimated at 20% in southern Europe, while Europe, as a whole, has stagnated economically. Also, workers from EU countries are migrating to the UK in search of better job opportunities. It is therefore believed that immigrants are replacing UK’s citizens in their jobs, and officials are concern about the immigration crisis in Europe.

Trade relationship between EU and UK

Taken as a bloc, the EU is the UK’s largest trading partner. In 2017 the EU accounted for 44% of UK exports and 53% of imports. The economic integration between the EU and the UK will be reduced by the outcome of Brexit, with the UK likely to suffer high costs in terms of economic activity and trade. Also, the UK’s exports to the EU comprise the most substantial proportion of 12% of the UK’s GDP, whereas UK’s imports from the EU account for only 3% of EU’s GDP (Sampson, 2017).

Trade relationship between SA and the UK

South Africa’s (SA’s) trade relationship with the UK is regulated by a separate South Africa-European Union (SA-EU) agreement, which strengthened significantly after the official signing of Trade Development and Cooperation Agreement (TDCA) that was promulgated in 1999. The TDCA led to the establishment of a free trade area that covers 90% of bilateral trade. However, the EU has since signed the Economic Partnership Agreement (EPA) with the South African Development Community (SADC) leading to the SADC-EPA group.

Under the EPA, SA was granted additional tariff liberalisation on certain products (fish, sweet oranges and fresh flowers) and tariff-rate quotas (TRQs). SA’s exports to the EU of goods with improved tariff liberalisation accounted for 2.2% of the country’s exports to the EU for 2017; mainly to the Netherlands, the UK, Portugal and Italy (Gibb, 2016)

. Therefore, the South Africa-United Kingdom (SA-UK) trade ties might be affected when the UK leaves the EU because the level of preferential access afforded to South African merchandise trade to enter the UK market, through European agreements, will be removed after Brexit. As a result, a new SA-UK trade and development agreement will need to be negotiated, signed and ratified.

Trade patterns

As correctly indicated by the South African market Insights (2019) , the value of imports and exports per quarter equates to approximately 60% of SA’s gross domestic product (GDP). Thus, trade is an extremely significant part of the South African economy. Moreover, UK is the second-largest trading partner of SA within the EU, with exports estimated at 16.6% of the country’s exports to the EU while imports comprise 10.3% of the national imports to the EU.

In the first half of 2019 South African merchandise trade, both imports and exports, to the 28 EU amounted collectively to R214.8 billion. While in 2018, South African exports to the EU were driven mainly by cars, aircraft and vessels at 38.67%, precious metals (12.94%), and mineral products (11.55%). The EU was also the largest importer of SA’s made vehicles over this period. Meanwhile, the South African imports to EU are dominated by machinery at 21.17%, chemicals (15.61%), and equipment components (15.49%).

Global foreign direct investment to SA

The economic interrelations between SA and UK extend beyond merchandise trade; it includes, among others, foreign direct investment (FDI), which by no doubt plays a critical role in the domestic economy. According to SARB (2018), SA attracted FDI amounting to R1.9 trillion during this period. The most massive FDI flows to SA emanated from the UK, which remains as the leading investor among the EU28 with R519.4 billion. This was further confirmed by Moody’s (2016) , which indicated that SA was the largest recipient of British foreign direct investment in Africa, with a particular focus on mining and financial services.

Possible implications for Brexit

The likely consequences of Brexit on the EU and the UK’s economy depend vastly on the withdrawal agreement. SA’s primary concern with Brexit is the long-term effects of Brexit on the UK’s economy, which also depend on the nature of the agreement designed to govern UK-EU trade relations after Brexit. With the negotiations happening between EU and UK, a great deal of attention is afforded to the EU-UK relations after Brexit, which carries more weight in terms of economic implications.

The implications of Brexit, depending on the outcome of the negotiated deal, will be far-reaching, but it is clear, the export of goods will be one of the areas tangibly affected. If there is a no-deal Brexit in October 2019, the Most Favoured Nation (MFN) agreement will immediately revert to the WTO rules. Therefore, if the UK leaves the EU customs union, imports to the UK from all countries that do not have a preferential trade agreement (PTA) or arrangement with the UK will face tariffs on an MFN basis. Similarly, UK exports will face those countries’ MFN tariffs.

For a country like SA that has historically enjoyed preferential access to the UK market, suddenly having to pay duties on exports to the UK will have a substantially detrimental effect in case there is a no-deal Brexit, and if SA does not have a rollover agreement in place at the time. Therefore, should Brexit takes place on October 2019, Bosman (2019) anticipate four possible scenarios.

Scenario one: deal

The UK leaves the EU with the Prime Minister’s withdrawal deal; the UK remains part of the EU customs union and single market for a two-year

transition period and nothing changes in the short term. In this case, SA will continue to trade with the UK under the EU-EPA, and there will be no immediate disruption at the UK border. However, if the UK leaves the EU customs union after the transition period, then the SACU and Mozambique (SACU+M) rollover agreement kicks in, and South African goods continue to enjoy preferential access to the UK market.

Scenario two: no deal (hard Brexit)

The no-deal situation implies that the UK would cut all ties with the EU with immediate effect, with no transition period and no guarantees on citizens’ rights of residence. The government fears this would cause significant disruption to businesses in the short-term, with lengthy tailbacks of trucks at the channel ports, as drivers face new checks on their cargos. Food retailers have warned of shortages of fresh produce, and the National Health Services would be stockpiling medicines, in case of supplies from EU countries are interrupted.

Therefore if the UK leaves the EU without a deal in place, then trade between the UK and EU, and between the UK and all countries with which it does not have a roll-over agreement, reverts to WTO rules. This is likely to result in significant and widespread disruptions in the short-term, for example, customs and border checks will have to be introduced, and regulatory standards will no longer be automatically accepted between the EU and UK.

There will also be disruption to South African goods manufactured using inputs from the EU and exported to the UK or vice versa. Thus, if SA does not have a rollover agreement in place with the UK on the date of a no-deal Brexit, SA goods will face UK’s MFN tariffs. However, if the rollover agreement is in place, then SA goods will continue to qualify for preferential access. In the first quarter of 2019, the UK government published details of its temporary tariff regime for a “no-deal” scenario. This is a tariff schedule that will apply to general trade with the world. It provides for most favoured nation duties that would be applicable for a transitional period of 12 months should the UK exit the EU without a formal withdrawal agreement. According to this list, a total of 469 tariff lines will remain dutiable, with varying levels and types of duties, including ad valorem, specific, mixed duties and in-quota based duties. These will affect the following sectors: automotive vehicles, clothing and textiles, lamb, beef, pork, poultry, rice, fish, fertiliser, fats and oils, sugar and molasses, ceramics and related products, cheese, tyres and wheels, butter, rum, bananas, fresh beans, bioethanol and spirits, cocoa, polyethylene, clove and vanilla.

Therefore, the majority of SA’s exports will enter the UK market duty-free. Of the 469 tariff lines that are dutiable, SA trades on 118, with the sector to be most significantly impacted being the auto sector. Should the UK exit the EU without a deal, and should the talks between SACU+M and the UK not be concluded, trade among them will be on the terms of the UK government notice.

Scenario three: diﬀerent deal

In case the UK leaves with a different deal. Leaving with a withdrawal deal means an orderly and managed Brexit. Changing the deal currently agreed to would however require convincing the EU to reopen negotiations, which would likely require a substantial extension of the Brexit deadline. This scenario will further extend the uncertainty of what Brexit will look like. For South African goods exports, if the UK remains in the EU customs union, then trade continues under the EU-EPA.

Scenario four: Second referendum

If a second referendum was held and the UK decided to remain in the EU (no Brexit), then nothing changes, SA will continue to trade with the UK under the EU EPA. However, if the UK leaves the EU customs union, the possible effects will depend on the future structure of the trade relationship between the UK and EU.

Therefore the biggest threat to SA will be reduced export demand if the Brexit negotiations damage the UK economy. However, predicting the impact of Brexit on SA is further complicated by the need, by 2019, to negotiate a new SA-UK trade agreement to replace the existing SA-EU agreements, which will no longer apply to SA-UK bilateral trade after Britain leaves the EU.

Parsons (2019) argues that a “hard” Brexit in October 2019 might lead to UK’s crashing out of the EU without a withdrawal agreement. He maintains that for SA, there are both risks and opportunities in the event of a “hard” Brexit. He further argues that SA needs to take a long-term view on Brexit and craft a relationship with the UK that will promote mutually beneficial trade and support SACU member states and Mozambique’s industrial development aspirations. The priority for SA is to avoid this default position, and negotiate, even temporarily, a UK trade deal that is close to, or better than, the existing EU arrangement.

Gibb (2016) asserts that secondary priority would be to focus on identifying and supporting, both domestically and through trade agreements, trade interests, which stand to gain from the Brexit change. Therefore a no-deal Brexit will mean that SA’s trade with the UK will no longer be covered under the SA-EU TDCA of 1999. A most immediate and devastating impact of a no-deal scenario in which the UK defaults to the WTO would be the imposition of 10% tariffs on SA car exports to the UK. For selected agricultural goods, the taxes could be even higher, rising to an average of more than 35% for dairy products.

Conclusion

Brexit will indeed result in detrimental effects in the case of SA; the outcome is by no means guaranteed. From the analysis presented here, Brexit is likely to have a significant impact on the South African economy as a whole. Even under a worst-case scenario of a “Hard” Brexit, and the imposition of WTO MFN tariffs, UK GDP could fall by a substantial percentage. This is likely to damage SA’s exports to the UK seriously. Nonetheless, if a considerable reduction of UK imports does take place, it could have a significant negative impact on certain South African industries, especially automobile and agriculture.

However, the UK will almost certainly prioritise negotiating its post-Brexit-EU trading agreement, alongside renegotiating its membership of the WTO. With the UK’s current trade negotiating capacity being severely limited and it proposes a deal rejected by the UK’s parliament, it will be a challenge for the UK to accept “Hard” Brexit. However, a threat to SA is that, by default, Brexit could lead to a worsening of its access to the UK market until a new SA/SACU/ SADC-UK trade agreement is negotiated.

The priority for SA is, therefore, to avoid this default position and negotiate, even temporarily, a UK trade deal that is close to, or better than, the existing EU arrangement. A secondary priority would be to focus on identifying and supporting, both domestically and through trade agreements, offensive trade interests, which stand to gain from the Brexit change.

Also, many South African companies have their European headquarters in the UK, and they use these as a base to serve the rest of Europe. Depending on which way the Brexit negotiations move, these companies may be forced to set up a base somewhere else to continue to do business in Europe. The author further argues that this could create the risk of high additional cost to companies resulting from a move of this sort, as well as significant impacts from a human resources perspective.