Analysis of Free Trade Areas (FTAs) in Southern Africa

1. Analysis of Free Trade Areas (FTAs) in Southern Africa

2. Overview of Basic Application • Analysis of FTAs for South Africa • Non-ReciprocalTariff Removal - Non Agricultural and Food Imports- All Imports • Reciprocal Tariff Removal - Non Agricultural and Food Imports- All Imports • Regional FTA

3. 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

4. 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

5. 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.

6. 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

7. Closure definition & labour market • 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 P S S’ D D’ Q

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

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

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

11. Change in sectoral output in the European Union under trade liberalisation

12. Sectoral labour intensity of output in the EU, 1995

13. SA-EU FTA for all products, import tariffs and exports subsidies Nash Eq.

14. SA-RSA FTA for all products, import tariffs and exports subsidies Nash Eq.

15. EU-SA&RSA FTA for all products, import tariffs and exports subsidies Nash Eq.

16. SA harmonizes import tariffs and/or export subsidies for each product across all regions

17. Side payments EU-SA&RSA FTA for all products, import tariffs and exports subsidies

18. Partial Vs Total Elimination of Tariffs in the FTA: SA - EU(Hiroaki, Stephen, and Sylvain)

19. Changes in output (qo), SA

20. Changes in output (qo) , EU

21. Change in Total Welfare Effects (3 scenarios)

22. Change in Total Welfare Effects , Allocative Efficiency

23. Change in Terms of Trade

24. Allocative efficiency by sector, SA

25. 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.