Global Trade Analysis Project
Analysis of Free Trade Areas (FTAs)
in Southern Africa
Global Trade Analysis Project
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
Global Trade Analysis Project
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
Global Trade Analysis Project
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
Global Trade Analysis Project
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.
Global Trade Analysis Project
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
Global Trade Analysis Project
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’
Global Trade Analysis Project
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
Global Trade Analysis Project
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
Global Trade Analysis Project
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
Global Trade Analysis Project
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
Global Trade Analysis Project
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
Global Trade Analysis Project
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.
Global Trade Analysis Project
SA-RSA FTA for all products, import tariffs and exports subsidies
Nash Eq.
RSA
EU, SA, RSA Remove Don’t remove
Remove (-135, 165, 160) (-93, -136, 236)SA
Don’t remove (-43, 282, -73) (0, 0, 0)
Global Trade Analysis Project
EU-SA&RSA FTA for all products, import tariffs and exports subsidies
Nash Eq.
EU
EU, SA, RSA Remove Don’t remove
Remove (690, 463, 688) (1267, -465, -70)SA&RSA
Don’t remove (-869, 1166, 876) (0, 0, 0)
Global Trade Analysis Project
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)
Global Trade Analysis Project
EU-SA&RSA FTA for all products, import tariffs and exports subsidies
EU
EU, SA, RSA Remove Don’t remove
Remove (690, 463, 688) (1267, -465, -70)SA&RSA
Don’t remove (-869, 1166, 876) (0, 0, 0)
Side payments
Global Trade Analysis Project
Partial Vs Total Elimination
of Tariffs in the FTA: SA - EU
(Hiroaki, Stephen, and Sylvain)
Global Trade Analysis Project
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
Global Trade Analysis Project
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
Global Trade Analysis Project
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
Global Trade Analysis Project
Change in Total Welfare Effects , Allocative Efficiency
Region Immediate Stage 1 Stage 2
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
Global Trade Analysis Project
Change in Terms of Trade
Region Immediate Stage 1 Stage 2
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
Global Trade Analysis Project
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
Global Trade Analysis Project
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.