Global Trade Analysis Project Analysis of Free Trade Areas (FTAs) in Southern Africa

Global Trade Analysis Project

Analysis of Free Trade Areas (FTAs)

in Southern Africa


Overview of Basic Application

• Analysis of FTAs for South Africa

• Non-Reciprocal Tariff Removal - Non Agricultural and Food Imports- All Imports

• Reciprocal Tariff Removal

- Non Agricultural and Food Imports

- All Imports

• Regional FTA


Summary of Basic Application Results

• Simulation of Non-Reciprocal Tariff Removal - Non Ag./Food Imports- All sectors affected- Importance of trade diversion

• Simulation of Non-Reciprocal Tariff Removal - All Imports - Extent of welfare gain for South Africa- Strength of trade creation effect

• Simulation of Reciprocal Tariff Removal - Non Ag./Food Imports - Importance of trade diversion cost on SA- Importance of trade creating benefit to EU


Summary of Basic Application Results

• Simulation of Reciprocal Tariff Removal - All Imports Effect on Rest of Southern Africa- Importance of trade diversion

• Simulation of Southern African FTA- Gain to both partners- Little trade diversion


Extensions to the Basic Model

• Wage Indexation - Shows effects of wage rigidity on trade liberalisation impacts - Price unskilled labour indexed to consumer price index

• Unilateral Liberalisation by SA-What kind of trade policy should South Africa be pursuing?- Examination of a range of alternatives

• Partial vs. Total Elimination of Tariffs in FTA between SA and EU - Unrealistic to consider total elimination of tariffs in one step. - Two-step approach to elimination of tariffs used.


Background to wage indexation extension

• Developments in the labour market constitute some of the most striking results of all trade liberalisation simulations between the EU and South Africa

• Increase in labour cost may be overestimated in both regions due to high levels of unemployment and subsequent wage rigidities

• Examination of the impact of wage indexation on the allocation of inputs between sectors and the development in output and changes in welfare


Q

P

S’

S

Closure definition & labour market

D

• Shock: indexation of wages to inflation, maintaining the ratio (wage/inflation constant)

• The variable wage/inflation (pfactreal in the model) becomes exogenous in the EU, South Africa and Rest of Southern Africa

• Labour supply becomes endogenous• Any increase in labour demand is assumed to be

covered by unemployed• Other endowments become exogenous in these 3

regions + all endowments in other regions

D’


Reference simulation: non-reciprocal removal of all import duties on imports from South Africa into the European Union

Changes in: SAFRICA EUNION RSTSAF RSTWLD

Output (%) Agriculture 5.83 -0.15 0.23 -0.00

Food 7.87 -0.14 0.37 -0.01

Services 0.16 0.00 -0.23 -0.00

EU Import (%) Agriculture 52.81 -0.35 -0.98 -0.66

Food 319.52 -0.54 -1.60 -0.77

Services -9.79 0.03 0.10 -0.03

Price (%) Agriculture 5.66 -0.09 0.07 -0.01

Food 3.25 -0.06 0.19 -0.01

Services 2.74 -0.02 -0.04 -0.01

Unsklab 3.18 -0.03 -0.27 -0.01

Welfare Al. Effic. 133 167 -4 -62

TOT 708 -459 -55 -187


Change in welfare under trade liberalisation with wage indexation, relative to the reference case$US million

-100

0

100

200

300

400

500

600

700

800

900

South Africa Rest of South Africa European Union

Terms of tradeEndowmentAllocation efficiency


Change in regional employment values under trade liberalisation with wage indexation, $USmillion

-100

0

100

200

300

400

500

600

700

800

South Africa Rest of South Africa EU


Change in sectoral output in the European Union under trade liberalisation

-0.2

-0.15

-0.1

-0.05

0

0.05

% Reference caseWage indexation


Sectoral labour intensity of output in the EU, 1995

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

labo

ur a

s %

of t

otal

cos

ts


SA-EU FTA for all products, import tariffs and exports subsidies

EU

EU, SA, RSA Remove Don’t remove

Remove (662, 281, -31) (877, -574, 26)SA

Don’t remove (-339, 885, -56) (0, 0, 0)

Nash Eq.


SA-RSA FTA for all products, import tariffs and exports subsidies

Nash Eq.

RSA


Remove (-135, 165, 160) (-93, -136, 236)SA

Don’t remove (-43, 282, -73) (0, 0, 0)


EU-SA&RSA FTA for all products, import tariffs and exports subsidies

Nash Eq.

EU


Remove (690, 463, 688) (1267, -465, -70)SA&RSA

Don’t remove (-869, 1166, 876) (0, 0, 0)


SA harmonizes import tariffs and/or export subsidies for each product

across all regions

Lowest import tariffs and lowest export subsidies

(-553, 21, 105)

Lowest import tariffs only (-233, 43, 54)

Lowest export subsidies only (-304, -46, 51)


EU-SA&RSA FTA for all products, import tariffs and exports subsidies

EU


Remove (690, 463, 688) (1267, -465, -70)SA&RSA

Don’t remove (-869, 1166, 876) (0, 0, 0)

Side payments


Partial Vs Total Elimination

of Tariffs in the FTA: SA - EU

(Hiroaki, Stephen, and Sylvain)


Changes in output (qo), SA

Sector Immediate E First Stage Second Stage

AGRIC 6.07 2.36 3.62

EXTRACT -0.99 -0.31 -0.68

FOOD 7.11 1.90 5.12

LITMNFC -4.60 -1.38 -3.27

TECHMNFC -4.29 -1.83 -2.51

HVYMNFC -2.32 -0.96 -1.37

SVCES 0.36 0.19 0.16

CGDS 7.52 3.27 4.12


Changes in output (qo) , EU

Sector Immediate First Stage Second Stage

AGRIC -0.17 -0.07 -0.09

EXTRACT -0.02 -0.01 -0.01

FOOD -0.11 -0.03 -0.08

LITMNFC 0.17 0.05 0.12

TECHMNFC 0.06 0.02 0.03

HVYMNFC 0.01 0.00 0.01

SVCES -0.00 -0.00 -0.00

CGDS -0.02 -0.01 -0.01


Change in Total Welfare Effects (3 scenarios)

Region Immediate Stage 1 Stage 2

1 SAFRICA 337.0 213.0 125.0

2 RESTSAF -46.0 -19.0 -27.0

3 RESTSSH -21.0 -8.0 -12.0

4 EUNION 701.0 412.3 288.0

5 RESTWLD -954.0 -431.0 -523.0

Total 16.0 165.0 -148.0


Change in Total Welfare Effects , Allocative Efficiency


1 SAFRICA -63.7 65.4 -129.9

2 RESTSAF -5.1 -2.2 -2.9

3 RESTSSH -2.3 -0.7 -1.5

4 EUNION 221.1 160.5 59.8

5 RESTWLD -131.0 -57.7 -73.4

Total 19.0 165.2 -0.4


Change in Terms of Trade


1 SAFRICA 401.3 147.66 254.98

2 RESTSAF -41.8 -17.19 -24.55

3 RESTSSH -19.5 -8.58 -10.20

4 EUNION 480.7 251.82 228.75

5 RESTWLD -823.3 -373.69 -449.61

Total -2.6 -0.38 -1


Allocative efficiency by sector, SA

Sector Immediate Stage 1 Stage 2 AGRIC 5.877 2.336 3.560EXTRACT 9.997 4.209 5.818FOOD -44.789 8.113 -53.230LITMNFC -34.856 22.538 -57.841TECHMNF -17.734 16.871 -34.757HVYMNFC 16.602 10.941 5.689SVCES 1.175 0.38 0.799Total -63.729 65.389 -129.963


Conclusion

• A partial free trade agreement between South Africa and the EU will be more beneficial to South Africa than immediate and absolute free trade agreement. Why?

• Total allocative efficiency is greater in Stage 1 (65.4) than in both the Immediate Stage (-63.7) and Stage 2 (-129.9). This could be the result of trade diversion.

Documents

Global Trade Analysis Project Analysis of Free Trade Areas (FTAs) in Southern Africa