US embassy cable - 04PRETORIA5313

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