Order Code RS21387
Updated January 3, 2005
CRS Report for Congress
Received through the CRS Web
United States-Southern African Customs
Union (SACU) Free Trade Agreement
Negotiations: Background
and Potential Issues
Danielle Langton
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
Negotiations to launch a free trade agreement (FTA) between the United States and
the five members of the Southern African Customs Union (SACU) (Botswana, Lesotho,
Namibia, South Africa, and Swaziland) began on June 3, 2003. A potential agreement
would eliminate tariffs over time, reduce or eliminate non-tariff barriers, liberalize
service trade, protect intellectual property rights, and provide technical assistance to help
SACU nations achieve the goals of the agreement. This potential agreement would be
subject to congressional approval. This report will be updated as negotiations progress.
On November 4, 2002, United States Trade Representative (USTR) Robert B.
Zoellick notified Congress of the Administration’s intention to launch negotiations for a
free trade agreement (FTA) with the Southern African Customs Union (SACU),
comprised of Botswana, Namibia, Lesotho, South Africa, and Swaziland. The U.S.-
SACU initiative continues in the context of several concluded FTA negotiations: the
President has signed the implementing legislation for FTAs with Chile, Singapore,
Australia, and Morocco; and negotiators have reached agreement in the FTA with the
Dominican Republic and five Central American nations, but Congress has yet to ratify the
FTA.
The first round of negotiations for the SACU FTA began on June 3, 2003, in
Johannesburg, South Africa, and there have been five more negotiating rounds, in
addition to a meeting in Paris in July 2004 between representatives from the SACU
countries and the United States. The negotiations were scheduled to conclude by
December 2004, but talks have stalled. U.S. administration officials and SACU country
trade ministers have agreed to a mechanism where deputy trade ministers will guide the
negotiations, and to impose no deadline for concluding the negotiations. Renewal of trade
promotion authority (TPA) by Congress in 2005 may affect prospects for a completed
agreement.
Congressional Research Service ˜ The Library of Congress

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Several possible rationales exist for the negotiation of an FTA with SACU. One
impetus derives from Sec. 116 of the African Growth and Opportunity Act (AGOA) (Title
I, P.L. 106-200), in which Congress declared its sense that FTAs should be negotiated
with sub-Saharan African countries to serve as a catalyst for trade and for U.S. private
sector investment in the region. Such trade and investment could fuel economic growth
in Southern Africa, by creating new jobs and wealth. SACU member countries have
achieved the most robust export growth under AGOA, and an FTA may be seen as a way
of expanding their access to the U.S. market. An FTA may also encourage the continued
economic liberalization of the SACU members, and it could move SACU beyond one-
way preferential access to full trade partnership with the United States.
A potential U.S.-SACU FTA is of interest to Congress because: (1) Congress will
need to consider ratifying any agreement signed by the parties; (2) provisions of an FTA
may adversely affect U.S. business, especially in import-competing industries, and may
affect employment in those industries; and (3) an FTA may bolster the effectiveness of
AGOA and bolster its implementation. On January 9, 2003, a bipartisan group of 41
Representatives wrote to Ambassador Zoellick to support the beginning of FTA
negotiations with SACU.
A U.S.- SACU FTA has also received interest from the U.S. business community.
The U.S.-South African Business Council, an affiliate of the National Foreign Trade
Council, announced the creation of an FTA advocacy coalition in December 2002. The
Corporate Council on Africa, a U.S. organization dedicated to enhancing trade and
investment ties with Africa, also supports the negotiations. For these business groups, a
primary benefit of an FTA with SACU would be to counteract the free trade agreement
between the European Union and South Africa, which has given a price advantage to
European firms. Some U.S. businesses have reportedly expressed skepticism about an
FTA with SACU, citing concerns over corruption and inadequate transparency in
government procurement, particularly in South Africa.1
On December 16, 2002, the interagency Trade Policy Staff Committee, which is
chaired by the USTR, held a hearing to receive public comment on negotiating positions
for the proposed agreement. Several groups representing retailers, food distributors, and
metal importers supported the reduction of U.S. tariffs on SACU goods that an FTA
would bring. Others representing service industries and recycled clothing favored
negotiations to remove tariff and non-tariff barriers in the SACU market. Yet other groups
opposed the additional opening of U.S. markets to SACU goods or sought exemptions for
their products. They included the growers and processors of California peaches and
apricots, the American Sugar Alliance, rubber footwear manufacturers, and producers of
silicon metal and manganese aluminum bricks.
Some U.S. civil society organizations have expressed concern that a SACU FTA
could have negative consequences for poor Southern Africans, citing potential adjustment
costs for import-competing farmers, poor enforcement of labor rights, privatization of
utilities, and increased restrictions on importing generic drugs to treat HIV/AIDS.
1 “South Africa Trade Pact Meets Business Skepticism,” Inside U.S. Trade, January 17, 2003.

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Background
The South African Customs Union consists of Botswana, Lesotho, Namibia, South
Africa, and Swaziland: five contiguous states with a population of 51.9 million people
encompassing 1.7 million square miles on the southern tip of the African continent.
Although this figure represents less than 1% of the population of sub-Saharan Africa,
SACU accounts for one-half of the subcontinent’s gross domestic product (GDP). Wide
differences exist among the economies of SACU. While South Africa has developed a
significant manufacturing and industrial capacity, the other countries remain dependent
on agriculture and mineral extraction. The grouping is dominated by South Africa, which
accounts for 87% of the population, and 93% of the GDP of the customs area. SACU
member states had combined real GDP of $201 billion in 2003.2
SACU is the United States’ second largest trading partner in Africa behind Nigeria-
whose exports are almost exclusively petroleum products. In 2003, SACU was the 32rd
largest trading partner of the United States with two-way trade equivalent to $7.3 billion.3
Merchandise imports from SACU totaled $5.6 billion in 2003, a 17.3% increase from
2002 and a 126% increase from 1996. They were composed of minerals such as platinum,
diamonds, and titanium, textiles and apparel, vehicles, and automotive parts. U.S. exports
have been relatively steady since 1996, however, the 2003 total of $2.8 billion represented
an 8.6% increase from 2002. Major U.S. exports to the region include aircraft, vehicles,
computers, and construction and agricultural equipment. The 2003 merchandise trade
deficit widened to $2.8 billion from $2.2 billion in 2002.
The United States ran a services trade surplus with South Africa (the only member
of SACU for which service data are available) with exports of $1.19 billion and imports
of $977 million in 2003.4 Services trade between the United States and South Africa has
increased dramatically for both countries, with U.S. exports increasing 154% since 1992,
and service imports from South Africa increasing by 383% during the same period. The
stock of U.S. foreign direct investment in South Africa totaled $3.9 billion in 2003 and
was centered around manufacturing, chemicals and services. The stock of South African
investment in the U.S. stood at $376 million in 2003.5
FTA negotiations with SACU may result in the first U.S. trade agreement with an
existing customs union. SACU is the world’s oldest customs union; it originated as a
customs agreement between the territories of South Africa in 1889. The arrangement was
formalized through the Customs Agreement of 1910 and was renegotiated in 1969. In
1994, the member states agreed to renegotiate the treaty in light of the political and
economic changes implicit from the end of the apartheid regime. The renegotiated
agreement was signed on October 21, 2002 in Gaborone, Botswana, and it is now being
implemented.
2 The World Bank, World Development Indicators. In constant 1995 U.S. dollars.
3 Goods data compiled by U.S. International Trade Commission. U.S. imports for consumption
calculated as customs value; U.S. domestic exports as FAS (free alongside ship) value.
4 Survey of Current Business, October 2004. Services figures are calculated from current account
data and thus are not directly comparable to goods data above.
5 Survey of Current Business, September 2004. Figures are historical-cost basis.

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The 2002 Agreement. The 2002 Agreement provides for greater institutional
equality of the member states. Its three key policy provisions are: the free movement of
goods within SACU; a common external tariff; and a common revenue pool. It also
provides more institutional clout to Botswana, Lesotho, Namibia, and Swaziland (BLNS)
in decision-making by creating a policymaking Council of Ministers. The agreement
enhances the existing Customs Union Commission, and it creates a permanent Secretariat
to be based in Windhoek, Namibia. The Agreement also renegotiated the terms for
disbursement of the common revenue pool, which accounts for a large portion of
government revenue in the BLNS countries. There is concern that certain countries may
receive less revenue as a result of the renegotiated agreement, and are improving their tax
collection to make up the lost revenue. Recent estimates indicate SACU payments
accounted for 62% of government revenue in Lesotho, 53% in Swaziland, 33% in
Namibia, and 16% in Botswana in 2000.6
SACU Tariff Structure. The 2002 Agreement expands BLNS policy influence
by the creation of a Tariff Board to recommend changes on customs levels and policy,
using the current SACU tariff schedule as a starting point. A 2003 WTO Trade Policy
Review7 of SACU member states examined the tariff structure and trade posture of the
customs union. It noted that the South African tariff structure, which was still the basis
of the SACU tariff, was relatively complex, consisting of specific, ad valorem, mixed
compound and formula duties. However, the South African government has embarked
on a tariff rationalization process to simplify the tariff schedule, to convert tariff lines to
ad valorem rates, and to remove tariffs on items not produced in the SACU. According
to the USTR, the complexity of the tariff regime has made it necessary for some U.S.
firms to employ facilitators to export to South Africa.8 The WTO found applied MFN
tariffs averaged 11.8% in manufacturing, 5.5% in agriculture, and 0.7% in mining and
quarrying. These average tariffs represent a reduction from the previous WTO review in
1998, when MFN tariffs averaged 16%, 5.6%, and 1.4%, respectively. However, tariffs
are often bound9 much higher, with some bindings as high as 400%.
Progress of the Negotiations
The negotiations have not progressed at the expected pace, and are currently in a
deadlock. There are several possible reasons for this deadlock. First, the United States
and SACU may be focused on different negotiating interests. Per their mandate to pursue
comprehensive FTAs, U.S. negotiators have attempted to proceed with negotiations on
intellectual property rights, government procurement, investment, and services. However,
SACU officials have reportedly argued for these issues to be excluded from the
negotiations. They have been more focused on locking in AGOA benefits and achieving
6 Africa South of the Sahara, 2003 Edition (London: Europa Publications, 2002), pp. 83, 532,
704, 1020.
7 World Trade Organization, “Trade Policy Review: Southern African Customs Union, Report
by the Secretariat,” (WT/TPR/S/114), March 24, 2003, pp. ix-xi.
8 U.S. Trade Representative, 2002 Foreign Trade Barriers, p. 381.
9 A bound tariff rate is a rate which a country agrees not to exceed because of trade
commitments, such as those made in the WTO. An applied tariff rate is a rate that is actually
imposed on goods.

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deeper market access. Now that Congress has extended the AGOA benefits to 2015
through the AGOA Acceleration Act of 2004 (P.L. 108-274), there may be less incentive
for SACU countries to complete an FTA with the United States. Also, the United States
and SACU have different views on the inclusion of certain industrial sectors in the
negotiations. The United States prefers what is called a negative list, where all industries
are negotiable unless specifically excluded. Meanwhile, SACU prefers a positive list,
where the industries to be included in the negotiations are specified in advance, and
additional industries may be included in the agreement over time. Finally, the United
States and SACU have differed on issues concerning labor rights and environmental
regulations.
The Black Economic Empowerment (BEE) program of South Africa may be another
significant hurdle to the negotiations. The BEE program involves criteria for companies
to increase opportunities for non-white business partners through equity ownership and
executive board positions.10 The BEE program may constitute a trade barrier; U.S.
businesses have indicated that they may have difficulty meeting the BEE criteria, and
alternate ways of addressing BEE goals have been proposed by U.S. negotiators.
USTR Robert Zoellick has stated that the United States recognizes that SACU is still
an emerging entity. It has not developed coordinated policies on many of the issues that
would be included in an FTA, which may add to the challenges of negotiating an FTA.11
Despite these challenges, there is reportedly a renewed political will among SACU
countries for the FTA.12 The United States may seek to build on this new political will
and address the negotiating difficulties, including contentious issues, through further trade
capacity building support.
10 “Slow Pace of SACU FTA Negotiations Raises Doubts Among Supporters,”Inside U.S. Trade,
May 7, 2004.
11 “U.S.-SACU Free Trade Negotiations Put on Hold; New Mechanism Being Created,”
International Trade Reporter, December 16, 2004.
12 “Administration, Business Pressure SACU for Comprehensive FTA,” Inside U.S. Trade,
December 10, 2004.

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Appendix 1:
U.S. Merchandise Trade with SACU Countries, 2003
U.S. Imports
U.S. Exports
2 digit HTS Category
Imports
2-digit HTS Category
Exports
Precious Metals, of
$1,999 million
Machinery and
$568 million
which,

Mechanical Appliances
-Platinum
-$1,272 million
(includes construction
-Diamonds
-$640 million
equipment and computers)
Vehicles and parts
$776 million
Vehicles and Parts
$369 million
Knitted Apparel and
$381 million
Aircraft and Parts
$339 million
Clothing
Iron and Steel
$323 million
Electrical Machinery,
$173 million
Equipment, and Parts
(includes
telecommunications
equipment.)
Apparel and Clothing, not
$327 million
Optical, photographic,
$158 million
knitted
cinematographic,
measuring, precision,
medical, and surgical
instruments and parts
Ores Slag and Ash
$229 million
Organic Chemicals
$143 million
Machinery and
$195 million
Special Classification/
$137 million
Mechanical Appliances
Low value
(primarily catalytic
converters)
Organic Chemicals
$136 million
Mineral Fuels and Oils
$87 million
Inorganic Chemicals
$130 million
Plastics
$83 million
Special Classification/
$102 million
Miscellaneous Chemicals
$74 million
low value exports
Aluminum Products
$99 million
Cereal (primarily rice,
wheat, corn)
$74 million
Edible Fruits and Nuts
$62 million
Pharmaceutical Products
$49 million
Articles of Iron and Steel
$45 million
Paper and Paperboard
$44 million
Fish and Aquaculture
$39 million
Toiletries and Cosmetics
$31 million
Beverages, Spirits, and
$29 million
Toys, Games, and Sports
$31 million
Vinegar
Equipment
All Other
$591 million
All Other
$403 million
Total*
$5,580 million
Total
$2,763 million
Source: U.S. International Trade Commission.
* Figures do not add precisely due to rounding.

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