SA is on notice – Peter Leon

The South African government’s increasingly protectionist stance risks damaging the country’s international trade and investment relationships, say experts.

According to Peter Leon, partner and Africa co-chair at Herbert Smith Freehills, President Jacob Zuma’s administration has, in its second term, become “more protectionist, inward looking and economically nationalistic” than that of his predecessors Nelson Mandela and Thabo Mbeki.

He explained that the Mandela and Mbeki administrations saw the negotiation and implementation of a Trade Development and Co-operation Agreement with the European Union (EU) and other states. The agreement, which was signed in 1999, liberalised around 86% of South Africa’s trade with the EU over a 12-year period.

Under the former presidents, South Africa also offered foreign investors protection through a series of bilateral investment treaties. Such measures included protection from expropriation without full market value compensation, access to arbitration through an investor state settlement dispute system, fair and equitable treatment of investments coming into South Africa and full protection and security for investments.

He said the Mbeki regime also promoted the harmonisation of the Southern African Development Community (Sadc) investment regime. This was marked by the 2006 negotiation of a Sadc protocol on finance and investment, which offered investors similar protections.

“In August 2012 – bear in mind that the [Zuma] administration is now three years old – South Africa unilaterally started terminating all its bilateral investment treaties with the EU and Switzerland, in fact terminating 13 of them,” he said.

He added that the Zuma administration’s promulgation of a 2015 Protection of Investment Act, which sought to treat foreign investors as equivalent to domestic investors, effectively stripped key protection measures away from foreign investors.

The Act was in conflict with the Sadc protocol and so in a move akin to “the tail wagging the dog” saw South Africa persuade the other Sadc members to amend the treaty last year, Leon said. It has not come into effect yet.

Zuma’s terms in office coincide with the fallout from the global financial crisis, which saw a global backlash against liberalised trade and investment and spurred protectionist measures across several jurisdictions.

Still, there are concerns that South Africa’s duty-free access to the United States (US) under the Africa Growth and Opportunity Act (AGOA) is stake. South Africa’s inclusion in an extension of the deal to 2025 came despite a long drawn out dispute with the US, which it accused of dumping bone-in chicken pieces in the country. However, the Obama administration said the country would be subject to out of cycle reviews to determine its eligibility at any point within the 10-year period.

“I think South Africa is on notice,” Leon said, adding that the Private Security Industry Regulation Amendment Bill could trigger a review.

The bill, which requires private security companies to be 51% local owned, was passed by parliament in 2014 but has not been signed into law by Zuma.

Minister of state security David Mahlobo, called for the bill during his budget vote before parliament this week. “The continued provision of security services at National Key Points and Strategic Installation by private security companies which are foreign owned remains a problem. It is essential that these strategic installations are protected by South Africans, as means to secure our sovereignty. It is our conviction that the Private Security Industry Regulation Amendment Bill will assist in resolving some of these challenges including the transformation imperatives,” he said.

Leon said the passage of the bill would likely be viewed as a “red rag to a bull” by Washington, given the interests of US private security firms in South Africa.

Should South Africa be disqualified from AGOA, it is unlikely to renegotiate as favourable a trade agreement with the Trump administration, said Peter Draper, managing director of Tutwa Consulting.

In response to a question about whether the country is being proactive in planning for a future without AGOA, he said the Department of Trade and Industry is but warned the new US administration’s negotiating template is likely to be more ambitious than previously.

“South Africa doesn’t have the market power to continue to impose obligations and costs on investors and think we’re going to get away with it,” he said, adding that the country has reached a tipping point.

The country is also due to negotiate its trade agreements with the United Kingdom, following Brexit. Local authorities are said to be considering a two-pronged approach, in which the current rules will be rolled over and renegotiated at a later stage.

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