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Trade Policy and Strategy Framework. International Trade and Economic Development Presentation to the Portfolio Committee on International Relations and Cooperation 02 September 2009 Dr. Mzukisi Qobo. Introduction.
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Trade Policy and Strategy Framework International Trade and Economic Development Presentation to the Portfolio Committee on International Relations and Cooperation 02 September 2009 Dr. Mzukisi Qobo
Introduction • Trade Policy and Strategy Framework emerges in the context of broad national development strategy. • Need to address key structural challenges in the domestic economy. • Dynamic changes in the regional and global economic context.
Cont…Introduction • Structural challenges: widespread poverty; severe inequalities; high levels of unemployment; and stunted growth. • Production and employment patterns - capital intensive and skills-bias. • Our export profile - highly resource-intensive and commodity-based. • The previous growth path placed emphasis on capital goods in its industrial policy.
Cont…Introduction • The TPSF complements the industrial policy which is a central component of the ASGI-SA. • The objective of SA’s development strategy: to promote & accelerated economic growth along a path that generates decent jobs. • A supportive trade policy and an appropriate tariff reform programme contributes to industrial development and upgrading, employment growth & export of sophisticated value-added products.
Linkages between trade and industrial policy • Tariff policy to be decided primarily on a sector-by-sector basis and dictated by the needs of sector strategies. • We have adopted a strategic trade policy: more calibrated and sequenced and assumes a developmental approach to tariff reform. • Tariff policy supports industrial policy and delineates our terms of engagement in international trade negotiations. • Carving a policy space in global economic relations to enable SA to pursue its developmental objectives.
Changes in Global Trade • The nature of global competition has changed. • Comparative advantage no longer determine success in international trade. A combination of factors, incl. processes of “self-discovery”, purposeful intervention and building of appropriate production capacities are at play. • Fastest growing exports in world trade are non-resource based manufacturers, with medium and high-tech predominating.
Changes in Global Trade • Structure of trade increasingly assumes intra-industry rather than inter-industry character. • As a group developing countries’ exports growing faster than the world average. The Asian countries have by and large predominated. • Emergence of global supply-chains for manufacturing & services as a result of production unbundling and growing trade in intermediate products.
Changes in Global Trade • With declining emphasis on comparative advantage, developing production capacities, investment in human capital, research and innovation & technology mastery become important. • Managing this requires strategic collaboration between government and business. • Strategic trade policies thus aim at shifting the structure of products & exports away from commodity dependence towards sophistic and value-added production (content of exports matter).
SA Trade Reform Experience • Trade liberalisation experience since the 1990s occasioned significant trade growth, with both imports & exports growing as a % of GDP. However, the pattern of trade has not changed significantly: • Manufacturing exports in capital and high skills intensive sectors and products have expanded through trade; labour intensive production has contracted in the face of import penetration especially leather, footwear & textiles. • Openness has led to contraction of certain labour-intensive sectors, with dire employment consequences.
SA Trade Reform Experience • Liberalisation episode in the 1990s deepened comparative advantage in capital intensive production based on the extraction of mineral wealth. • Accumulation of capital assets & technical knowledge in these sectors have made them more competitive than labour-intensive sectors (previous industrial policies). • Essentially SA faces competitive pressure both from developed and developing countries (largely Asia). • Liberalisation in SA reinforced a capital & high skill-intensive growth path exacerbating bias against low-skilled labour-intensive production.
SA Trade Reform Experience • Further tariff liberalisation is likely to intensify this trend. • SA is to a considerable extent outwardly oriented: the ratio of trade in goods & services to GDP has risen from below 40 % in 1993 to over 60% in 2006. • SA exports constitute around 0.5% of world merchandise exports: lagging behind China, Brazil and India. Ranked 24th among developing countries; and 47th overall in terms of presence in exports of dynamic products. • Commodity products continue to dominate SA’s exports: the top 25 export categories are dominated by mineral products. Precious metals; base metals; and other mineral products are dominant.
SA Trade Reform Experience • SA has undertaken significant tariff reforms since 1994. • During Uruguay Round, SA undertook tariff commitments as a developed country rather than a developing country. • Its simple average of the final bound rate is 20.9%, with tariffs on agric products bound at 43.5%, and on non-agric at ceiling rates aver 18.1%. • Simple averaged MFN applied rate declined from 15% in 1997 to 8.2 % in 2006. Aver tariff for inputs is 5.4%. • Considerable simplification: 1990, tariff schedule – 13609 lines; by 2006 – 6420. SA has 54% duty free tariff lines. • SA TDCA and SADC Protocol on Trade set further parameters. SA trade with EU accounts for 40% of total.
Future Directions for Tariff Policy • We have chosen a development path aimed at achieving accelerated and inclusive growth to address poverty & inequality. Facilitating industrial upgrading and diversification of industrial base will create economy-wide positive spill-over. • In this context, the role of tariff policy will be to support a growth path oriented towards labour-intensive industrialisation, and a long-term trajectory towards a knowledge-base economy. • Trade policy will be informed by sector strategies, with focus on reducing input costs for labour-intensive & value adding manufacturing sectors.
Future Directions of Trade Policy • Unlike in the past where much focus was on upstream capital intensive projects, the current focus on is on down-stream, more labour intensive, and employment creating activities. • Major initiatives in tariff policy since 2007 has been to lower tariffs on upstream, capital intensive industries as these produce inputs that are cost-items for downstream industries.
Future Directions of Trade Policy • Investigations are continuing. If evidence leads to the conclusion that it is necessary to reduce or remove duties where clear benefits would be gained by downstream sectors, this will be done. • Where processes of “self-discovery” recommend tariff increases that industry will be supported. • Industrial policy sets parameters for tariff policy.
Agricultural Trade Strategy • Over the past 15 years agriculture has undergone key reforms, paving a way for entry into global value chains. • Trade in the sector is highly distorted as a result of subsidies in OECD countries. • There are strong backward-and-forward linkages to other sectors of the economy: purchase of fertilisers, chemicals and implements; as well as supply of raw materials to industry in the food value chain. • About 70% of agricultural output is used as intermediates. • The sector accounts for 8% of formal employment.
Agriculture Trade Strategy • Tariffs are a tool to promote sectoral growth, employment creation, investment attraction, productivity growth, food security & rural development. • Tariff determination will be made on a case-by-case basis, paying particular attention to global distortions in agricultural trade. • Striking a balance between the profitability of farmers, including addressing supply-side constraints and competition; consumer prices, especially given the price-raising effects of tariffs for the vulnerable.
Agricultural Trade Strategy • The sector also carries significance for food security as well as to create basis for economic activity in rural communities. • Jobs created per unit of investment is higher than any other sector, evidence of the sector’s high potential for employment and poverty alleviation. • Share of agricultural exports in total exports – 7%; share of processed agricultural products within the country’s total exports has increased to more than 50%.
The Role of International Trade and Administration Commission (ITAC) • Mandate defined by the International Admin Act 2002. • Has developed a sophisticated and rigorous methodology that includes firm level investigations. • Sets tariffs on the basis of cost-and-benefit analysis, guided by evidence and responding to the imperatives of industrial policy: • Competitive position of the product; whether the product or substitute is manufactured in SACU; effective rate of protection; value chain implications; and macro-economic & social impact. • Deals with applications for tariff changes and trade remedies.
Strategic Integration into the Global Economy • There are other areas that are prioritised in SA’s trade policy and Strategy Framework: • African Agenda: mainly focused on building trade and investment relations across the continent; building effective regional markets; enhancing production capacities; sustaining regional integration; and cross-border infrastructure development through spatial development initiatives (SDIs).
Strategic Integration • Regional & Bilateral Relations: Intra-Africa trade remains important to SA. This remains low (10 %) and needs to be enhanced. More positively, this is worth 21 percent of total exports for African countries although the intra-Africa trade ratio is 10 percent. SA continues to pursue regional arrangements both in Southern Africa & beyond: SADC Trade Protocol & SACU; SACU-EFTA FTA; SACU-MECOSUR PTA. • (negotiating outcomes to deal with non-tariff barriers as well; as well as to forge sectoral agreements that could benefit SA).
Strategic Integration • SACU and SADC • SA remains committed to pursuing regional integration in the context of SACU & SADC. • The new SACU Agreement that entered into force in 2004 represents important departures: establish a democratic, consensus-based decision making mechanism; foresees new supranational institutions including a Tribunal to settle disputes, a SACU Tariff Board to determine changes to the CET, and a Secretariat; envisions deeper integration through development of common policies; and establish a revenue-sharing formula.
Strategic Integration • SACU & SADC • Future value of SACU will lie in its ability to be used as a vehicle for advance & deepening developmental integration in the region, and as an anchor for SADC regional project. • This requires SACU members to forge common trade & industrial policies, where production value chains in agriculture and industry are developed. • SACU can be an important nucleus for deeper SADC integration and a crucial platform to facilitate beneficial global integration.
Strategic Integration • SADC: aims to combine market integration through trade protocol with policy coordination & sectoral cooper in a broad development project. • Free trade negotiations concluded in 2000, and implementation of tariff reduction began that time. By 2008, 85% of goods – duty free; by 2012 this will be 99%. • Challenges remain: including with Rules of Origin, development of region-wide standard-setting capacity, and work on trade facilitation. • Promising signs in T&C and sugar sectors. But SADC production structures is still undeveloped. • Consolidating FTA and addressing real economy capacity constraints is a priority. • Need to align this to ongoing tripartite FTA: COMESA, EAC and SADC to build the region’s competitive advantage.
Strategic Integration • Economic Partnership Agreements: SA’s objective in entering negotiations – to preserve regional unity and advance regional integration on developmental basis. • SA has its own TDCA with the EU. • The Interim EPA is far from advancing regional integration and development but accentuates dependencies, and forecloses diversification of trade relations in future (MFN). • Under EPA, SADC has 5 separate trade relation and regimes with the EU and all are different. This complicates internal trade relations, makes it difficult to ensure policy harmonisation: services, investment, competition and procurement. • EPA also threaten to weaken SACU.
Opportunities for South-South • Need for enhanced trade & investment linkages among Southern economies. • Developing countries share of international trade continue to grow, acc for around 37 % of world trade in 2007; aver growth rates of 18% in goods, and 13 % in services – much higher than those recorded in OECD countries – 13% and 8% respectively. • Center of gravity is shifting towards emerging powers of the South. • South-South trade increase at an annual rate of 11 percent; with services trade on the rise.
Opportunities for South-South • These are also high growth economies with consumer needs diversifying. • Offer possibilities for export diversification for other developing countries. • Possibilities for cooperation and sharing of experiences, including attraction of FDI and technology sharing. • Constructing PTAs on the basis of our relative strengths and what we can benefit.
Relations with countries of the North • SA’s relations with key countries of the North remains vital. These are major sources of investment & technology. • TDCA offers the basic framework for trade & investment expansion. • In 2008 SACU-European Free Trade Association entered into force – offering SACU duty & quote free access on industrial products. • With the US, there is AGOA and the SACU-US Trade, Investment, Development & Cooperation Agreement (TIDCA).
World Trade Organisation & Doha • SA remain a strong proponent of multilateralism as an appropriate institutional response to manage globalisation. • There remain imbalances in the multilateral trade rules, prejudicing developing countries’ interests. • Global reform should ensure greater transparency & inclusiveness, with the interests of developing countries guaranteed. • SA’s support for the Round was premised on overcoming the imbalances and securing a developmental outcome for developing countries.
World Trade Organisation & Doha • SA will not take deeper cuts than it would benefit from the global trade negotiation. Developed countries’ higher ambition on industrial goods negotiations is not properly matched in Agriculture. This erodes the Round’s development content. • SA’s negotiating objectives aim to: • Enhance market access for products of export interests to developing countries; • Renegotiate rules that perpetuate imbalances in international trade regime; • Ensure appropriate policy space for developing countries to pursue development objectives through meaningful implementation of the principle of S&DT.
An Agenda for Future Trade Policy Work • SA trade policy also looks at starting a work-programme on Services and New Generation Issues: • Services • Other new generation issues: investment, competition, intellectual property, government procurement, labour and the environment. • Other behind-the-border protection measures that impede developing countries’ access to markets of advanced economies. SA will develop a proactive stance on these areas, and guided by its development objectives and the need to preserve policy space to regulate in the public interest; balance economic efficiency with socio-economic equity; and enhance economic competitiveness.
Accompanying Policies • Trade reform creates winners and losers. Thus a crucial area for the future will be in the area of “accompanying policies”. • Adjustment costs of previous liberalisation was disproportionately borne by the poorest sectors of the population who witnessed the rising tide of unemployment. • Accompanying policies will need to pay attention to appropriate measures to cushion vulnerable sectors. • Safety nets, retraining and a range of support will thus be explored.
Conclusion • Trade Policy complements industrial policy and seeks to contribute to growth, industrial upgrading, export diversification, and employment creation. • Apart from using tariff policy as an industrial policy support measure, there are other new frontiers of trade policy that we are devoting resources to, including services and other new generation issues. • Defining terms of integration in the global economy on beneficial basis is an important objective of trade policy. This includes the nature of relations at the regional, bilateral, and multilateral levels. • In the ultimate, trade policy has to make a meaningful and positive contribution towards achieving desired developmental outcomes.
