The Future of Botswana Exports to EU Markets Post BREXIT & Implications for Trade Relations

Ladies and Gentlemen,

Before entering into the debate on the future of the EU market, let me quickly explain the background to what is now generally referred to as Brexit. As you are aware, the United Kingdom held a referendum on the membership in the European Union last year in June. As a consequence of its outcome, the British Government under Prime Minister Theresa May triggered the procedure leading to the exit from the Union according to Art 50 of the Treaty establishing the European Union on 29^th March this year. Art 50 foresees that the withdrawal from the Union is to be negotiated and an (international) agreement is to be concluded setting out the arrangements for its withdrawal. The Treaty will then cease to apply to the withdrawing state when the exit agreement enters into force and at the latest two years after the Art 50 is triggered, i.e. on 29 March 2019. The approval, signature and ratification of that agreement follow essentially the same procedure as any other international agreement. The European Council of 27 has in the meantime approved its guidelines for the negotiations, but negotiations will start de facto only after the advanced national elections in the UK scheduled now for 8 June. As the period until March 2019 includes the ratification process, the actual timeframe for these extremely complex negotiations is actually about a year and a half. Until the final exit, the UK remains a full member of the EU with all rights and obligations.

The economic implications of the Brexit, for the UK, the EU and all third countries, are difficult to assess as long as the details of the exit agreement are not known. However, based on the preliminary statements made by the different parties it is clear that one of the key issues will be the access to the single market, which is also relevant for third parties trading with and investing in the EU. PM May has made it clear that the UK wishes to regain full sovereignty over its legal and regulatory framework while the EU-27 have made it clear that the four freedoms associated with the Single Market, the free flow of goods, services, capital and labour are indivisible and that there cannot be a picking and choosing. This would essentially mean that the UK will not have access to the single market (hard Brexit), but will obviously aim for a comprehensive Free Trade Agreement with the EU, which is by itself to be negotiated and can only be concluded after the exit agreement enters into force.

Technically, the UK will exit also from all Agreements the EU had concluded with third parties and which includes all trade agreements. Consequently exports to the EU via the UK will no longer be covered by those agreements and will no longer be able to enter the single market via the UK as is currently the case. However, the actual economic implications of that depend on the future trade relations between the UK and the EU. In turn, the UK will have to renegotiate its own trade agreements with all those third countries with which its trade relations were governed as part of the membership in the EU. How this will work is open at this stage. There is also a sequencing problem as the UK remains a full member of the EU until its final departure, it cannot negotiate and conclude trade deals on its own. In substance, it is also unlikely that third countries or blocs will give the UK the same concessions in the negotiations that they were willing to give the EU being the largest or second largest economy in the world. In sum, we are all guessing at the moment what the impact of Brexit on the UK and EU will be; the only aspect we can fairly safely predict is that the impact on the UK will be higher than on the EU.

The EU – without the UK – will contain 445 million consumers and a GDP of 16.6 trillion USD, which makes it still the second largest economy after the US. Even without the UK, the EU imports USD 6.7 trillion in goods and services, which makes it the largest export market for a large number of countries. And the EU will remain the largest destination and the greatest source of FDI flows in the world. FDI inflows into the EU 27 – without the UK – amount to USD 456 billion in 2015 compared to USD 353 billion into the US. FDI outflows from the EU excluding the UK were USD 585 billion in 2015 compared to USD 322 from the US. Similarly the EU including the 27 MS will remain the world's leading development partner with around USD 90 billion, about three times that of the US. In conclusion, these economic facts will not change whatever the outcome of the negotiations will be and the EU will therefore remain a leading market in the world even after Brexit.

Before looking a bit closer at the implications of the departure of the UK from the European Union for Botswana, let us have a brief look at Botswana's current exports to the European Union market. The trade statistic for Botswana and the EU is by itself not easy to read. Notably many products that come to Botswana through South Africa are not recorded as trade between the EU and Botswana. The current trade flows and notably the exports are also not diversified. Botswana imports from Europe mainly semi-manufactured and manufactured goods, transport equipment and machinery including electrical machinery and chemicals including pharmaceuticals; Botswana exports essentially diamonds, other mining products and beef.  Beef represents by itself only 1.7 percent of Botswana's exports in 2015 according to Bank of Botswana data and is exported to Europe mainly via the UK and Norway. As Norway is part of the single market, we might treat it as part of the EU for this purpose. Exports to the UK represent – according to BoB since 2014 less than 1 percent of total exports of Botswana. Some of the beef exported to the UK is sold on to a few other EU member states. It is effectively only this part of the beef exports that is affected by Brexit, a very negligible percentage of total Botswana exports that could also be sold directly to the EU-27 market if the current marketing approach was changed. On the other hand, whether this is necessary depends again on the future trade relations between the UK and the EU-27. In conclusion, I don’t see any reason to be concerned about the economic impact of Brexit on Botswana.

I would however recommend looking at exports to the EU market irrespective of the UK being a member of the EU or not. Trade relations between Botswana and the EU are now governed by the recently signed Economic Partnership Agreement. True, once the UK leaves the EU, its membership of the EPA would also cease and the UK would have to negotiate its own deal, which could have a lot of similarities with the current EPA. What matters however is what the EPA offers to Botswana; this is what determines the future exports to the EU as the EPA has not even started to be used by Botswana.

The principle under EPA is that Botswana has duty free – quota free access to the EU market. Currently, Botswana exports essentially diamonds and beef plus some other mining products (copper, nickel). Those exports entered the EU market also previously duty free, hence the EPA has not changed anything other than making this access now a contractual obligation rather than a unilateral "favour" by the EU. What provides new opportunities are the generous 'rules of origin', which allow for export of goods that are 'sufficiently worked or processed' in Botswana or where advantage is taken of the possibility to 'cumulate'. It is important that Botswana's private sector or foreign investors study and understand the opportunities offered by the EPA RoO to assess opportunities for investments. The opportunities offered by the EPA are in fact not so much linked to the current exports but to new products for new markets. Beef can now be exported to the EU market quota free; this is new and important but even under the previous trade regime, Botswana never exhausted its quota and hence the quantitative restrictions were never really relevant. In other words, the country must look to the future with ambition and an entrepreneurial spirit for new productive areas. 

Let me dwell on the RoO a little more to explain what I mean. The RoO allow manufacturers in Botswana to use materials from certain other countries, as if those materials were actually from Botswana. This possibility, known as cumulation, is not even restricted to materials that come from the other countries that are party to the agreement. Uniquely to EPAs, the rules of origin allow materials to be considered as originating even when they come from countries such as Zimbabwe or Kenya, even though those countries are not signatories of the SADC EPA.

Without getting too technical, the cumulation possibilities even allow for companies in Botswana to consider processing carried out in other SASC EPA States as if it was done in Botswana. All these possibilities answer the perennial question of how a country with limited sourcing possibilities can compete in the global market. Even leaving aside the many and somewhat complicated provisions on cumulation, the rules of origin has also been simplified in other areas to further ease the difficulties in obtaining Botswana origin for products manufactured here. Let us take the example of textiles. Previously, a manufacturer would have to first make the fabric here in Botswana from imported yarn, and then produce garments, or let's say "clothes with Botswana origin". Under the new, EPA rules, it is possible to produce garments straight from imported fabric, and they will have Botswana origin.

The processing rules apply to non-originating inputs and vary from product to product; they are contained in an extensive list in the agreement and have to balance the need to allow the use of non-originating content, with ensuring added value is created in Botswana. Otherwise the benefits of the Agreement would go elsewhere.

Though it is not possible to go into much detail here, I should like to draw attention to just a couple of examples to give you an idea of how they work. Take motor engines; the rules allow manufacturers to use up to 40% non-originating content. Factories in Botswana could import certain components but would have to add significant value - 60% of the ex-works price of the product for it to be considered to originate in Botswana. Starting to build motor engines might not be a realistic option straightaway, but already now, Botswana is engaged in building components for the car industry in South Africa and there is no reason why this would not increase in the future, with a view to supplying 'originating' components for vehicles that are exported to the EU.

Another example that demonstrates the different types of processing rules is furniture. The basic rule is that any non-originating materials used, must be classified in a different tariff heading to the final product. In other words, a furniture manufacturer could import all the basic materials required to make a table or chairs - plastic, wood, metal and as long as there is a genuine manufacturing operation being carried out, the final product will originate in Botswana. Simple assembly of pre-manufactured parts would be excluded, but as I explained already, the logic is to ensure there is real added value within Botswana.

In conclusion, the EU market is there to be conquered and opportunities are there with or without the UK. At least for Botswana and probably most of southern African economies – perhaps with the exception of South Africa, Brexit should not be a cause for concern. Cause for concern should be to increase investments in Botswana in non-mining production, to remain an open economy and an open minded economic policy, and work on those conditions that are conducive for competitive production – above all investments in human resources and openness to bring in the skills and talents that are not readily available in Botswana.

Thank you for your attention!