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A possible SACU/China Free Trade
Agreement (FTA): Implications for the
South African manufacturing sector
by
Hans Grinsted Jensen and Ron Sandrey
tralac Working Paper
No 8/2006
July 2006
Note: For more background on the South Africa/China trading relationship the reader is
referred to tralac Working Paper No 3/2006, South African Merchandise Trade with China, at
www.tralac.org
Contents
Summary of the Trading Relationship
2
1
Introduction
6
Structure of the report
7
The Model
7
Modelling framework and scenarios used
7
FTA scenarios
10
The database
13
Results: the economic Implications of the FTA
14
The big picture
14
Bilateral trade – the big picture
17
The sectors in detail
18
The supply response
19
Sensitivity analysis – employment closure
20
The scenario analysis
22
The Doha outcome
23
2
3
Tables
1
Macroeconomic projections, annual growth rates, 2001–2015
9
2
Ad valorem equivalent tariff barriers to trade, pre-FTA, 2015 percent
13
3
Assumed quantification of China’s NTB
14
4
Percentage change in TOT, real GDP and factor income
15
5
Changes in national welfare
17
6
% change in the quantity of total imports/exports & trade balance, 2015
18
7
Change in bilateral trade China-South Africa, 2015
18
8
Impact of the FTA on RSA industrial sectors, percentage change
20
9
Percentage change in wages and employment in South Africa
21
10
Percentage change in TOT, real GDP, and factor income South Africa
21
11
Welfare from the 30% Doha outcome
23
Figures
1
Scenario Construction
12
1
Summary and key points
SACU and China are considering entering into a bilateral free trade agreement (FTA).
The objective of this paper is to analyse the possible implications of this FTA for
South Africa. The summary of the paper includes a short background to the trading
relationship between the respective parties and provides a scene-setting analysis. A
fuller account of that trading relationship is provided in the tralac Working Paper
No3/2006, South African Merchandise Trade with China at www.tralac.org. The
second part of this paper describes the computer model used and discusses the
results of simulating the FTA.
The trading background
This data analysis in the tralac Working paper above examines South African imports
into China and Chinese imports into South Africa. Data through to December 2005 is
sourced from the respective countries using the commercially obtainable World Trade
Atlas data.
During 2005 imports into China from South Africa totalled some US$3,444 million, a
figure that increased by 16.5 percent from 2004. In ‘real’ terms, this represented
0.52 percent of Chinese global imports, a figure that has been relatively stable over
the last ten years. By commodities, the main imports were iron ores ($967 million),
precious metals and stones ($957 million), a particular Chinese classification of ‘small
lines’ ($462 million) and iron and steel ($427 million). The average duty on these
imports was calculated to be 3.45 percent.
South African imports into China are highly concentrated, with the top ten lines at the
HS1 2 chapter level accounting for 92.5 percent of the total trade, and in several of the
main imports at the more detailed level (precious stones in particular) these imports
held a major share in the Chinese market.
Detailed analysis showed that both
Australia and Brazil, two countries of potential ‘FTA (Free Trade Agreement)
defensive interest’ into China, are major competitors in several important trade lines.
1
Where HS is the Harmonised System of merchandise trade classification that operates in a
sequentially more detailed level from internationally harmonised (hence the name) HS 2 to 4 and 6
levels, and often down to even HS 10 for individual countries.
2
South Africa is doing relatively well into China, with some 40 percent of the imports
(the ‘Stars’) gaining market share in Chinese imports sectors that are themselves
growing.
Chinese imports into South Africa have increased dramatically over the last ten
years, and by December 2005 they were $4,926 million or 9.0 percent of the total,
with the latter figure up from a 2.1 percent market share in 1996. These 2005 imports
were up 37 percent on the 2004 figure, much higher than the global increase into
South Africa of 15.5 percent.
Chinese imports are not as highly concentrated as South African imports into China,
with the top 10 HS chapters making up a lesser 72 percent of the imports. Although
45 percent of the trade enters duty-free, the average duty that would have been
assessed on these imports in the absence of any rebates was 12.52 percent. These
duties are mostly paid by the 30 percent of the imports that enter where the duties are
assessed
at
20 percent
or
more,
a
grouping
that
is
dominated
by
textile/clothing/footwear (TCF) products.
A look at revealed comparative advantage shows that apart from the spectacular
growth, a remarkable feature of Chinese imports is their domination of the market
where they do compete, with most of the TCF chapters holding a market share of at
least 50 percent. Associated with this are the equally remarkable growth rates to
achieve this dominance, as some 97 percent of the individual HS 4 import lines have
increased their market share over the last ten years.
Data reconciliation shows that, as expected with South African imports into China
valued at two and a half times the reported exports from South Africa to China, there
is little coherence in reconciling the trade flows to China. Some of this is accounted
for in the transport costs (iron ore) given that imports are valued at cost, insurance
and freight (cif) and exports at free on board (fob), while another large difference is
that there are almost no reported exports of platinum and diamonds from South
Africa, but these are major imports into China. Much remains unexplained.
‘Trade chilling’ suggests that there may be potential areas where South Africa could
export to China and where an FTA could help. By value, the main potential export
3
items from South Africa may be motorcars and aircraft (duties of 15 and 5%
respectively), as these are both massive imports into China.
Other lines include
apples, apricots, pineapples and avocados, chocolate products and processed fish
and meats in agricultural goods, titanium oxide and other ores, and some lines of iron
and steel and other manufactured products in general.
Finally, an analysis of the so-called intra-Industry trade between South Africa and
China shows that, as expected between two developing countries, these index values
are low at about the 6 (out of a 100) level. This index compares trade between
partners in like-products, and is a feature of trade between developed countries.
However, the more interesting feature is that these index values are steadily
increasing from very low levels over the last ten years, suggesting an increasing
sophistication in the trading relationship.
The model
Version 6 of the Global Trade Analysis Programme (GTAP) model has been used to
simulate the FTA. Key findings of the economic analysis are:
The FTA will lift economic growth and welfare in both South Africa and China, but the
impacts on economic growth and welfare in the BLNS countries (Botswana, Lesotho,
Namibia and Swaziland), while positive, are very small or negligible.
•
By 2015 South Africa’s national welfare, measured by the money metric value of
the Equivalent Variation (EV), will be US$121.6 million above what it would have
been in the absence of the FTA.
•
China’s National Welfare is estimated to be $181 million above baseline as a
result of the FTA.
•
Botswana’s National Welfare will be $4.1 million greater, while the Rest of SACU
will gain an almost insignificant $2.5 million.
Removal of China’s tariffs accounts for an increase in South Africa’s welfare of $112
million, while the removal of China’s non-tariff barriers account for an additional
$50 million.
The removal of South Africa’s own barriers against Chinese imports
4
results in a loss of $22 million (mostly through terms of trade loss). These same
terms of trade loss are also hurting Botswana.
Expressing the gains in terms of changes in Real Gross Domestic Product (GDP)
highlights the differences in the relative sizes of the economies involved.
For
South Africa, the change is an increase of 0.0399 percent; for Botswana it is an
increase of 0.0882 percent; for the rest of SACU it is 0.0536 percent; while for China it
is an insignificant 0.0009 percent. China gains more in absolute terms, as its
economy is considerably larger.
These findings are premised on the FTA that has the complete removal of tariffs on
bilateral trade and the removal of an estimate of China’s non-tariff barriers (NTBs) on
SACU imports at 2015. There has been no liberalisation of service trade, and as the
model used is the standard static GTAP model, there are no dynamic productivity
gains associated with the trade liberalisation carried out under the FTA. These results
represent a ‘snapshot’ of the changes at a disaggregated sectoral and regional level
when modelled using the standard GTAP model.
By definition, economic models are a simplification of reality and rely on assumptions
about economic parameters, behaviour and relationships. Some sensitivity analyses
have been undertaken by examining (a) the impacts of the FTA following a successful
WTO Doha outcome and (b) a less than comprehensive FTA as proxied by a
50 percent cut in tariff barriers only in all goods trade. The results of (a) are gains of
about 70 percent of the full pre-Doha FTA to both South Africa and China, while in the
results of (b) the comparable results are only 50 percent of the GDP gains to
South Africa.
Overall, with the full FTA, South African global exports increase by 1.0 percent while
global imports increase by 2.1 percent. The trade balance is reduced by (negative)
$257.4 million.
countries.
A similar slightly negative picture is observable for the BLNS
China has a positive increase in total exports over imports.
China
increases it bilateral total exports by $1,733 million compared to an increase in South
African exports to China by $889 million. This leads to deterioration in the South
African bilateral trade balance with China of $850 million.
As expected, trade
liberalisation carried out under the FTA has very limited impact on bilateral trade flows
5
in the agricultural sectors, although these agricultural products go some way towards
mitigating the overall negative forecast for the bilateral trade balance following an FTA
with China, with Chinese imports having a major impact upon the TCF sectors in
South Africa (with the output of the clothing sector declining by 20 percent).
The standard GTAP closure on employment is that the number of workers remains
constant and the adjustment is through wages. Sensitivity analysis examining the
alternative of keeping wages constant and adjusting employment (a more accurate
reflection of a developing country) results in an increase in welfare for South Africa
that is $278 million above the standard closure.
1. Introduction
Regional trade agreements are becoming an increasingly popular trade policy tool in
many countries, and SACU/South Africa is embracing this concept with a view to
furthering its bilateral trade. The stage became a more active place during 2005.
Pending the resolution of a few outstanding issues, the preferential trade deal with the
South American Mercosur countries signed in December 2004 seems to be on track,
and the free-trade agreement between SACU and EFTA (Switzerland, Norway,
Iceland and Liechtenstein), has virtually been concluded after a long wait. Talks with
the US are scheduled to resume after a yearlong time-out period, and SACU
members are in serious discussions with the European Union about EPAs.
Discussion about a trade deal with India is imminent, and SACU is considering
starting free-trade talks with China. Others on the horizon include an examination of
free-trade partners in Africa, and other countries such as Singapore, Thailand, Sri
Lanka and Turkey have expressed interest in discussions with SACU. Meanwhile, the
Sixth World Trade Organization (WTO) ministerial conference in Hong Kong in
December put limited new life into the Doha Development Round, and all countries
generally recognise that FTAs are a second-best option to global trade liberalisation.
The negotiating dynamics have become more complex following the introduction of
the new SACU Agreement, as South Africa can no longer negotiate in its own right,
as was the case with the EU TDCA, but only with the full cooperation and consent of
fellow SACU members. This means that the wider SACU perspective needs to be
considered in future FTA negotiations. The current study undertakes a close look at
6
the potential bilateral FTA with China, a nation that is itself also enthusiastically
embracing the ideas of bilateral FTAs although without actually consummating any;
New Zealand became the first country to begin bilateral talks with China late
2004/early 2005, and these talks are still in progress; and in recognition of the need to
be in conformity with the new SACU agreement the wider SACU perspective is
considered.
Structure of the report
Section 2 will outline the details on the model used and its associated database
before providing and then discussing the results of a full FTA whereby all bilateral
duties and some NTBs in China are abolished.
A limited analysis of alternative
scenarios is also considered: the partial FTA of a 50 percent cut in the FTA duties, but
with NTBs in China remaining unchanged; a 30 percent cut across the board globally
in all duties from Doha round outcome; and combinations of implementing both the
full and partial FTAs taking into account this Doha outcome.
2. The model
Modelling framework and scenarios used
The analysis undertaken in this paper is based upon the Global Trade Analysis
Project (GTAP) model (Hertel 1997) and database (Dimaranan et al. 2005). The
database is the most recent version 6, and this has been slightly modified to reflect
more recently available trade and tariff data. Also, the standard model has been
adjusted by introducing a new import tax to represent Chinese non-tariff barriers
(NTBs) to trade, and the initial ad valorem equivalents (AVEs) of these trade barriers
have been incorporated into the GTAP version 6 database2. These NTBs were shown
to be important in the case of the modelling work undertaken by New Zealand and
China in assessing their potential FTA: 'the Gains would, for instance, still be
significant and positive from a tariff only arrangement, but they would increase
substantially if key non-tariff measures were also covered by any agreement’3.
2
The Alter tax program (Malcolm 1998) has been used to adjust tax rates in the initial GTAP version 6
database.
3
Ministry of Commerce et al. 2004.
7
The GTAP model is a standard multi-regional, static computable general equilibrium
(CGE) model. Like any other applied economic model, this model is, of course, based
on assumptions, both in terms of theoretical structure as well as the specific
parameters and data used. In this model, regional production is produced according
to a constant return to scale technology in a perfectly competitive environment, and
the private demand system is represented by a non-homothetic demand system (a
Constant Difference Elasticity function)4. The foreign trade structure is characterised
by the Armington assumption implying imperfect substitutability between domestic
and foreign goods.
The latest GTAP model allows the option of 87 country/regional possibilities, and 57
sectors (with 42 of these productive sectors, and the remaining ones, services). For
the sectors we opted for the full range of productive sectors, aggregating only the
natural resource sectors as these sectors are seldom affected by an FTA since
constraints to their trade are limited. For the country/regional aggregation we opted
for the three SACU (the South African Customs Union) possibilities of (1)
South Africa, (2) Botswana and (3) the rest of SACU, i.e., with Namibia, Swaziland
and Lesotho combined. This latter aggregation is not ideal, as the three countries
have very differently structured economies and production sectors, but it is the only
possibility. We are also conscious that the nature of intra-SACU trade will distort the
databases for the BLNS, as most of their Chinese imports may not actually be
recorded as imports from China but rather imports from China into South Africa. The
other countries/aggregations are China, India, EU 25, Brazil, USA, rest of SADC (the
Southern African Development Community), rest of Africa, and the rest of the world
(ROW).
Before analysing this, a baseline for the period 2001– 2015 is constructed to provide
a benchmark against which the FTA is compared. It features projections of the world
economy (cf. Table 1 below), plus incorporation of the effects of China’s accession to
the WTO, the enlargement of the European Union’s customs union, Everything But
Arms (EBA) adopted by the EU, the abolishment of the MultiFibre Agreement (MFA),
and the completion of the Uruguay Rounds commitments for the developing
countries. In short, it represents the best estimate of what the bilateral trading
4
Hence, the present analysis abstracts from features such as imperfect competition and increasing
return to scale, which may, however, be important in certain sectors.
8
relationship would look like in 2015 based upon all known factors in the absence of an
FTA.
Table 1: Macroeconomic projections, annual growth rates, 2001 – 2015.
Real
Labour Force
GDP
Pop.
Total
Unskilled Skilled
Capital TFP*
South Africa
3.2
0.4
0.5
0.5
0.6
3.2
0.7
Botswana
4.7
0.6
0.7
0.7
2.1
4.7
0.9
Rest of SACU
3.8
1.0
1.1
1.1
1.5
3.8
0.7
China
7.2
0.7
0.8
0.8
3.2
7.2
1.3
Rest of SADC
4.3
2.6
2.5
2.5
3.1
4.3
0.6
Rest of Africa
4.0
2.4
2.7
2.7
3.1
4.0
0.4
India
5.8
1.4
1.9
1.8
4.9
5.8
1.1
EU25
2.1
0.0
0.0
0.0
0.0
2.1
0.6
USA
3.2
0.9
1.0
1.2
0.7
3.2
0.7
Brazil
3.3
1.2
1.2
1.0
3.7
3.3
0.4
Rest of World
3.0
1.2
1.8
1.6
2.6
3.0
0.3
Sources: World Bank forecasts, ILO (1997) and own assumptions. Note: * The annual
growth rate in Total Factor Productivity is determined endogenously – determined by the
exogenous variables (GDP, unskilled, skilled labour force, capital), the model and the
associated database.
The projection of the world economy using the exogenous assumptions listed in Table
1 is important in shaping the baseline scenario. The GTAP model determines changes
in output through both an expansionary and a substitution effect in each country/region
of the model. The expansionary effect represents the effects of growth in domestic and
foreign demand shaped by income and population growth and the assumed income
elasticities, while the substitution effect reflects the changes in competitiveness in each
country/region shaped by changes in relative total factor productivity, cost of production
as well as any policy changes. Therefore, the relative growth rates between each
country/region for GDP, population, labour, capital and total factor productivity play an
important role in determining the relative growth in output of the commodities when
projecting the world economy from 2001 to 2015.
9
FTA scenarios
These are outlined in detail in Figure 1. The FTA primary scenario (S2 in Figure 1)
considered in this paper entails the immediate and comprehensive removal of
merchandise trade barriers between China and the member countries of the SACU and
the outcome in the year 2015 in a world shaped by the baseline scenario. This implies
that all ad valorem tariffs and ad valorem equivalent of specific tariffs between China
and the SACU are abolished, as well as the abolishment of estimated NTBs faced by
SACU exports to the Chinese market. Differences between the so-called baseline
scenario and this so-called primary scenario are therefore the results of
implementation of the FTA.
In addition, it is always possible to do an almost endless number of ‘what if?’ scenarios.
For this study we have limited these to two basic assumptions/possible outcomes. One
is that there will be a successful conclusion to the Doha Development Round of the
WTO, and we have proxied that by assuming that the outcome will be a uniform cut in
all applied tariffs for all WTO parties across all products of 30 percent and the
abolishment of all export subsidies (S3 below – obviously this is a shotgun approach,
but it may well turn out to be a reasonable approximation if there is an optimistic
outcome). The second assumption is that the SACU/Chinese negotiators will fail to
negotiate a fully comprehensive FTA, and we have proxied this possibility by assuming
the outcome will be a 50 percent cut in bilateral tariff rates (S1 below). Although in
reality it is more likely that sensitive sectors for either party will be isolated from any
final agreement, we have opted for this blanket 50 percent option. To complete the
picture we have combined these latter two scenarios into a combined one of a
successful 30 percent WTO cut from Doha and a less than comprehensive bilateral as
represented by the 50 percent tariff cut (S4 below). Only in the post-Doha Full FTA
scenario do the benefits that accrue to SACU exporters from the reduction of NTB
measures in China remain; in the partial FTA scenarios (a) the tariff cuts for the FTA
are 50 percent across the board and (b) there are no NTB gains available to SACU as
there are from the full bilateral FTA.
Operationally, these are represented as follows:
10
•
Firstly, scenario S2 (the primary scenario) is run to simulate the effects of the
comprehensive FTA in a post-UR environment where all other known
international commitments are fully implemented.
•
Then Scenario S3 is run. This is a simple implementation of a much stylised
outcome of a possible DDA round of the WTO represented by a 30 percent
reduction in all applied AVE tariffs and a 100 percent reduction of all
agricultural export subsidies found in the GTAP version 6 database.
•
Next Scenarios S4 and S5 extend S3 by also including the post-Doha FTA
between SACU and China in the scenario with respectively a 100 and 50
percent removal of AVE tariffs between the FTA countries as well as the
removal of NTB in China faced by SACU counties in scenario S4 (but not in the
partial 50 percent FTA of S5).
In order to find the isolated effects of creating the FTA in a post-DDA round (-30
percent on all applied AVE tariffs and 100 percent removal of agricultural export
subsidies), scenario S3 is subtracted from scenario S4 and S5 respectively,
quantifying the effect of the FTA. Therefore the results shown later for the FTA (in an
environment where the DDA has been completed) are technically the results of
scenarios (S4 – S3) and (S5 – S3).
Not shown in Fig 1 is that we have also undertaken a scenario looking at the closure
of wages fixed and employment adjustments.
11
Figure 1: Scenario construction
GTAP Database
2001
EU Enlargement
EBA
MFA Quota Elimination
China’s WTO Accession
Implementation of final UR commitments
Macro Economic-Projections
2001 – 2015
Up Dated
GTAP database
2015
Partial FTA
SACU China Simulations 50% reduction of
S1 AVE tariff barriers (no change to NTB)
Full (and Comprehensive) FTA
S2 SACU China Simulations 100% removal of
trade barriers (AVE tariffs and NTB)
DDA –30% reduction of all applied AVE
S3 Tariffs & 100% removal of agricultural export
subsidies in all countries/regions
S3 & Full FTA)
SACU China Simulations 100% removal of
S4 trade barriers (AVE tariffs and NTB)
S3 & Partial FTA
S5 SACU China Simulations 50% reduction of
AVE tariff barriers (no change to NTB)
12
The database
Although this study examines the implications for the non-agricultural or
manufacturing sector, sometimes there is not a clear one-for-one mapping between
the GTAP model product groups and the WTO agricultural and non-agricultural
products. For example, although wool is a separate agricultural commodity in GTAP,
it is then used as an intermediate good into textiles, a manufacturing sector; another
is where fisheries products and agricultural products are both included in GTAP 'Food
Products'.
Therefore, some overlap between agricultural and non-agricultural
products is possible, but this is not a major issue.
As outlined above, we have used the most recent GTAP version 6 data, updated
where necessary. Tables 2 and 3 show the import tariff equivalents and NTB rates
assumed in this analysis respectively, with the data representing a percentage of
world market prices in 2015.
Table 2: Ad Valorem Equivalent tariff barriers to trade, pre-FTA, 2015, percent
Commodities
Natural Resources
Chinese tariff barriers on
imports from RSA
0.6
Tariff barriers faced by
Chinese exports to RSA
1.0
Textiles
18.1
23.2
Wearing apparel
17.2
37.8
Leather products
12.8
28.6
Wood products
2.9
18.7
Paper products, publishing
1.7
8.6
Petroleum, coal products
8.0
0.4
Chemical, rubber, plastic products
8.0
4.9
Mineral products n.e.c.
10.5
14.6
Ferrous metals
4.1
4.1
Metals n.e.c.
3.4
1.4
Metal products
8.5
10.3
Motor vehicles & parts
7.7
10.8
Transport equipment n.e.c.
4.6
1.4
Electronic equipment
6.6
3.1
Machinery & equipment n.e.c.
6.8
5.9
Manufactures n.e.c.
9.2
7.2
Services
0.0
0.0
Source: GTAP Version 6 database and tariff data constructed by CEPII from MacMap-HS6
tariff database (CEPII/ITC) and from bound tariffs from WTO Consolidated Tariff Schedules.
13
We note the high protection on many of these imports into South Africa, with the
textile, apparel and leather sector rates of up to 37.8 percent. The tariffs on vehicle
imports from China into South Africa seem low, but that is most likely a function of the
composition of the current (low) trade in this sector. Note also that while the barriers
to service trade are listed as zero, this does not reflect the reality of non-tariff barriers
in these sectors.
Table 3: Assumed quantification of China’s NTB
Sector
Tariff %
Non-agricultural
Natural Resources
0
Wearing apparel
3
Leather products
3
Wood products
5
Paper products, publishing
5
Petroleum, coal products
3
Chemical, rubber, plastic
3
Mineral products n.e.c.
3
Ferrous metals
3
Metals n.e.c.
3
Metal products
3
Motor vehicles and parts
3
Transport equipment n.e.c.
3
Electronic equipment
3
Machinery and equipment
3
Manufactures n.e.c.
3
Source: Own assumption.
3. Results: the economic implications of the FTA
The big picture
Table 4 shows the main changes in national welfare from the proposed FTA. These
changes, while not large, are generally positive in most cases. The table shows (1)
terms of trade (TOT), (2) change in real GDP measured in quantity terms, (3) total
factor income, and (4) the changes in the price of endowments. These results are
14
discussed in detail below, and refer to changes from a comprehensive FTA with
China.
Table 4: Percentage change in TOT, real GDP and factor income
Quantity Total
Land
Unskilled Skilled
labour
labour
Capital
Natural
resources
0.0399 0.31
2.45
0.17
0.25
0.25
0.32
Botswana
-0.0819 0.0882 0.12
0.90
0.07
0.10
0.11
0.08
RSACU
0.0236
0.0536 0.32
6.59
-0.06
0.03
0.08
0.33
China
0.0298
0.0009 0.05
0.08
0.05
0.05
0.05
-0.08
TOT
South Africa 0.1091
Of
GDP
Factor
income
Percentage price changes on endowments
If an economy experiences allocative efficiency (measured as a better allocation of
the resources that a country has) then the quantity of real GDP would increase (a
country produces a larger quantity of goods contributing positively to increased factor
prices in a country). This is the case in South Africa where the real GDP increases by
0.0399 percent due to the creation of the FTA, as shown in the 3rd column. The other
SACU partners of Botswana and RSACU show increases in excess of this as a
percentage of GDP, while China has a positive change, but this hardly registers in
percentage terms.
The FTA improves the TOT (terms of trade) for South Africa, as increased demand
from China generally increases export prices more than import prices in South Africa
through increases in the export price to both China and the ROW. In the latter case
the quantity of export declines but the price and hence the TOT increases.
China’s
gains come about from the better TOT as South Africa in particular removes its tariffs.
Again, the final outcomes, as shown in the right hand column, are positive for all, but
marginal for BLNS.
The welfare gains found in South Africa in the full FTA of $121.6 million originate
mainly from allocative efficiency and terms of trade changes. The allocative efficiency
increases by $62 million due to a better allocation of endowments in the South African
economy, and some $38 million of this gain stems from a better allocation of
resources in manufacturing excluding TCF products (with another $21.4 million
coming from a better allocation in these latter three sectors, with little from agriculture
and natural resources).
15
With regard to the gains in Terms of Trade improving welfare by $50.9 million, this
gain is mainly generated by raising South African export prices ($49 million) due to
the improved market access into the Chinese market. These increased export prices
improve the terms of trade for many products, but in particular for natural resource
exports and non-ferrous metal manufactures. The exceptions are the TCF sectors
(and to a very minor extent, lumber) where the export prices decline by between 3.4
and 4.7 percent in response to the increased competition from Chinese imports.
A summary decomposition of the changes by dollar value is shown in Table 5. This
breaks the welfare changes into those resulting from (a) allocative efficiency in the
different countries, (b) terms of trade in the different countries, and (c) the capital
goods or investment effect in the different countries to put it all in perspective.
Furthermore, the result of the removal/reduction of non-tariff barriers in China is also
displayed to put these in perspective. For South Africa, the latter provides about 40
percent of the total welfare gains, while for China this contribution is mildly negative
and the gains come mostly from terms of trade gains that result from South Africa
removing tariffs. Similarly, most of South Africa’s gains result from terms of trade
gains from China removing tariff barriers (note both lose in total from the removal of
their own tariffs, emphasising the value of bilateral negotiations). As the tariff barriers
are reduced in Botswana and the Rest of SACU, China gains marginally while South
Africa loses by a similar small amount.
16
Table 5: Change in national welfare, million US$
Allocative
Efficiency
Terms of
Trade
Capital
Goods
Total
South Africa
Removal of tariff
barriers by
South Africa
32.5
-81.0
26.9
-21.6
Botswana
-3.3
-7.4
1.6
-9.1
RSACU
-3.0
-8.9
1.8
-10.2
China
23.0
103.8
-14.6
112.2
China
12.8
44.5
-7.0
50.3
Total
62.0
50.9
8.7
121.6
Removal of tariff
barriers by
South Africa
35.3
243.1
-68.7
209.7
Botswana
1.3
10.5
-3.2
8.6
RSACU
3.5
18.1
-4.8
16.9
-12.1
-37.7
12.1
-37.7
China
-5.5
-15.8
4.7
-16.6
Total
22.5
218.3
-59.8
181.0
Removal of NTB by
China
China
Removal of NTB by
Bilateral trade – the big picture
The creation of the FTA between China and SACU increases the amount of trade
taking place in these countries (Table 6). In the case of South Africa the total
quantities of exports increase by 1.0 percent while the total quantities of imports
increase by 2.1 percent. The trade balance is reduced by (negative) $257 million. A
similar slightly negative picture is observable for the BLNS countries, while China has
a positive increase in exports over imports. Overall, China is exporting more to SACU
than SACU is exporting to China. China increases it value of total exports by $1,733
million compared to an increase in South African exports to China by $889 million.
This leads to deterioration in the South African trade balance of $850 million.
17
Table 6: % change in the quantity of total Imports\Exports & trade balance, 2015
South Africa China
Botswana
RSACU*
Exports
1.0
0.1
0.1
0.4
Imports
2.1
0.1
0.1
0.7
45
-4
-15
Trade balance mill US$ -257
* Where ‘RSACU’ is the rest of SACU (Namibia, Swaziland and Lesotho aggregation)
The sectors in detail
In manufactured goods China increased its trade balance by $1,010 million, notably in
TCF and electronic equipment.
Table 7 shows the sector breakdown of these
changes in manufacturing trade. The big increases in Chinese exports to South Africa
are coming in the TCF sectors, along with the catch-all machinery and equipment
n.e.c. (not elsewhere classified) sector. Conversely, South African export increases
are slightly less concentrated, with the natural resources and general manufacturing
sectors featuring prominently. Note that in both cases, but especially in the case of
South Africa’s exports, the large percentage figures are off a small base when the
percentage increase and the dollar value of that increase are compared.
Table 7: Change in bilateral trade China-South Africa, 2015
18
We must keep in mind that the implementation of the FTA leads to trade creation
(good) and trade diversion (questionable). There is technically trade diversion in the
South African market for manufactured goods, with TCF goods being the most
outstanding, but as China is almost certainly the world’s most efficient producer of
these commodities, this trade diversion should not be a concern. Where the big
changes are taking place in South Africa, they are mostly occurring in the TCF
sectors, where the exports from China to South Africa roughly triple. This has the
consequential effect of reducing clothing output by 20 percent and leather products by
14 percent. Consumers gain through price declines in the order of 2 percent, but
officials will need to carefully weigh losses in these sectors against gains elsewhere in
the economy.
The supply response
In table 8 the aggregate supply response of South Africa is shown together with
changes in the quantity of exports/imports and the changes in domestic market
prices. South Africa’s industrial sectors as defined by GTAP are shown. In particular,
the impacts upon the TCF products are dramatic. For the apparel sector imports
overall increase by 23.5 percent, and production declines by 20.3 percent, while for
the leather sector the comparable changes are 40.4 and 14 percent respectively.
These changes would have an important impact upon the local industry, although
there is some compensatory reduction in the market price for consumers. Another
sector to face the winds of Chinese competition is the electronic equipment sector,
while the big gainer is the ‘machinery and equipment n.e.c.’ sector. Note that there is
little impact upon the motor vehicles and parts sector, as the Chinese are not (yet)
internationally competitive in this sector.
19
Table 8: Impact of the FTA on RSA industrial sectors, % change
Change in
Production
Exports
Imports
Natural resources
0.0
-0.3
0.5
Textiles
-5.4
4,6
16.6
Wearing apparel
-20.3
-4.9
23.5
Leather products
-14.0
8.7
40.4
Wood products
-0.6
1.2
6.4
Paper products, publishing
0.1
0.7
0.5
Petroleum, coal products
0.1
0.1
0.4
Chemical, rubber plastic
0.1
1.6
0.7
Mineral products n.e.c.
-1.2
0.7
3.8
Ferrous metals
1.0
1.8
0.9
Metals n.e.c.
0.2
0.2
0.9
Metal products
-0.6
-0.4
6.3
Motor vehicles and parts
0.3
0.2
0.8
Transport equipment n.e.c.
0.0
-0.1
0.3
Electronic equipment
-4.2
-7.3
1.2
Machinery & equipt n.e.c.
1.1
4.3
1.4
Manufacturing n.e.c.
9.7
14.9
2.6
Services
0.1
-0.5
0.4
Market price
0.2
-0.9
-2.1
-1.4
-0.3
0.1
0.1
0.1
0.1
0.1
0.1
0.0
0.0
0.0
0.1
0.0
-0.1
0.1
Not surprisingly, the creation of the FTA has minimal effects on the Chinese market
prices and production structure. Very few sectors record significant changes,
emphasising of course that China is more important to South Africa than the
converse. Leather products show the largest increase in production (0.36%), exports
(0.64%) and imports (0.48). The largest price effects in China are a 0.04 percent
increase for wearing apparel, leather products and services as production patterns
move ever so slightly.
Sensitivity analysis – employment closure
The standard GTAP model gives the option of two possible labour force closures: a
long run or medium/short run closure. In the analysis presented in this paper, the
standard so-called 'long run' labour market closure has been used where the amount
of employment is fixed and the wage rate adjusts endogenously in the model. This is
the standard closure of the model, given the assumption that the labour market is
initially in a steady state of employment and in the long run wages will adjust, bringing
the economy back to the initial level of employment. In the alternative medium/short
run closure, wages are sticky (exogenous), and the amount of labour force employed
adjusts to changes in the economy. In reality, if the initial economy is not in a steady
20
state of employment and there is a large pool of unemployed labour force, one would
expect that both employment and wages would adjust so that the true effect of the
creation of the FTA on employment and wages would lie somewhere between the
long run and medium/short run labour market closure.
Therefore a sensitivity analysis has been made with regard to the labour market
closure in South Africa. In order to allow for unemployment in the labour force, the
standard GTAP closure for South Africa has been changed in such a way that the
wage rate for both skilled and unskilled labour is fixed and the quantity supplied is
allowed to adjust to changed market conditions post-liberalisation. This alteration
more accurately reflects labour market conditions in developing countries, where
typically an excess supply of unskilled labour is prevalent, labour which can be
employed by industry at the going wage rate in the event of an expansion of
production. Table 9 presents a comparison of the short run closure and the standard
long run closure used in this analysis, comparing results from the full FTA in the
absence of a Doha outcome.
Table 9: Percentage change in wages and employment in South Africa
Long run closure
Wage
Medium/short run closure
Employment
Wage
Employment
Unskilled labour
0.17
0.00
0.00
0.43
Skilled labour
0.25
0.00
0.00
0.56
Table 9 shows that fixing the wage rate exogenously in the model would result in an
increase of employment by roughly 0.5 percent in the South African economy, but by
definition, the wage rate remains constant this time.
Table 10: Percentage change in TOT, real GDP, and factor income South Africa
Percentage change in the price of endowments
Labour market
Quantity of Total Factor
Unskilled
Skilled
closure
Terms trade GDP
income
Land
labour
labour
Capital
Natural
resources
Long run
0.1091
0.0399
0.31
2.45
0.17
0.25
0.25
0.32
Short run 0.1055
0.2959
0.57
2.89
0.00
0.00
0.42
0.44
The increased amount of employed labour force due to the creation of the FTA
increases the total factor income in the South African economy by an additional
0.26 percent compared to the standard labour market closure (Table 10). This
21
increase in income then translates into an increased consumption in the economy and
therefore increasing South African welfare, measured by the money metric value of
the Equivalent Variation (EV), from $122 to $520 million. The increase in employed
labour force accounts for $278 million. Thus, an increase in the number of persons
employed should, according to these results, be a priority for South Africa over an
increase in the general wage rate. There is hardly any change in income in the other
countries due to the changed labour market closure in South Africa and therefore little
change in their demand for South African exports
This outcome from an alternative labour market closure seems to be a constant
feature of GTAP analysis in developing countries (Keck and Piermartin 2005) where
an abundance of unskilled labour is a feature of the economy.
The scenario analysis
A 50 percent cut in all SACU/China Bilateral Tariffs with no NTB changes
This scenario proxies an FTA that is not comprehensive by reducing all bilateral
applied tariffs by 50 percent rather than the full 100 percent and not addressing
Chinese NTBs. Brief summary results that place the 50 percent cuts in perspective
will be given rather than a full and comprehensive discussion – and this format will be
followed for all scenario analyses.
When the removal of Chinese NTBs is not simulated there is a reduction in the
benefits to South Africa; as we discussed in the main FTA report, these NTB impacts
were significant. While the real GDP gains for South Africa were almost as much as
in the full FTA, overall welfare shows just over 50 percent of the benefits to
South Africa and China that the full FTA gives, with the difference in South Africa’s
case being equivalent to (a) what the Republic gained in the full FTA from the removal
of Chinese NTBs and (b) the terms of trade changes. There are, therefore, some
compensatory factors at work here, and one is that South Africa’s gains from its own
tariff removal are higher with less adjustment. This is so because a 100 percent
removal of South African import tariffs increases the demand for Chinese
commodities increasing its export price slightly, contributing negatively to South
Africa’s TOT. With a 50 percent reduction in tariffs the negative contribution from the
22
TOT loss is reduced due to a lower demand for Chinese goods. The rest of SACU is
marginally worse off than with the full FTA, while Botswana is slightly better off in
welfare terms.
The Doha outcome
The manner in which the modelling has been undertaken enables us to present the
results from an outcome from the Doha Development Round as proxied by a
30 percent cut in applied tariff rates across all countries for all products and a
complete elimination of export subsidies. We present these results with some limited
discussions. We leave it to history to judge how realistic this particular WTO outcome
will prove to be.
Table 11: Welfare from the 30% Doha outcome, $million
Efficiency
TOT
Investment
Total
South Africa
230
116
48
394
Botswana
11
-1
8
18
Rest SACU
22
24
-1
45
2/015
850
-91
2,774
Rest SADC
264
-182
22
105
Rest Africa
2,997
-1,175
42
1,864
India
3,107
-677
135
2,565
EU
3,950
1,107
255
5,313
USA
69
-933
-894
-1,758
Brazil
666
295
5
966
Rest world
14,215
563
471
15,252
Total
27,551
-12
0
27,538
China
Table 11 shows the global gains from an overall across-the-board 30 percent cut in
global applied tariffs as representing a possible Doha Development Round outcome
to be in the order of $27.5 billion. It is interesting that the overall welfare gain for
South Africa of nearly $400 million from a modest Doha outcome is more than three
times the gains of $121.6 million as shown in Table 5 from a full FTA with China.
China, as expected, is a big gainer overall, as are the fellow developing nations of
both India and Brazil.
Interestingly, the rest of Africa is also shown as being a
23
substantial beneficiary of this outcome, with gains of almost $2 billion – a figure that is
reduced by around $1 billion from the efficiency gains of better domestic resource
allocation when the terms of trade go against the continent. This same pattern is also
shown by rest of SADC, as the efficiency gains are almost negated by terms of trade
losses.
An interesting feature of the 30 percent Doha is that the outcome for the
South African clothing and leather (footwear) sectors is very close to that of the full
FTA with China outcomes. Production declines by around 20 percent in both cases –
this is not surprising given the dominance of China in the unconstrained clothing
markets of the world. The production and price of motor vehicles also decline, but
only by one percent. The other manufacturing sectors face greater changes (some
positive, some negative) relative to the Chinese FTA, but these adjustments are not
large either way. Natural resources show no change, as this sector faces few barriers
to trade.
A full FTA following Doha, with NTB reductions
This scenario proxies a comprehensive FTA by reducing all bilateral applied tariffs by
100 percent and addressing Chinese NTBs, but does so in a global environment
following the Doha Round Agreement described above. In other words, how much will
a modestly successful Doha outcome detract from the full FTA, or, conversely, what
are the expected outcomes of a comprehensive FTA with China following such an
outcome? In welfare terms, this scenario results in welfare gains to both South Africa
and China that are just over 70 percent of the original full FTA gains. South Africa’s
bilateral trade balance with China deteriorates by $185 million, while China’s trade
balance also deteriorates but by a lesser $83 million.
50 % cut in all SACU/China bilateral tariffs after Doha 30% (and no NTM
changes)
Quite frankly, this FTA is not worth negotiating from a purely economic perspective.
Firstly, consider that we have no gains from the removal of NTMs in China, and
secondly, we have a less than comprehensive FTA following a global outcome from
Doha. In welfare terms the results for both South Africa and China are 21 percent of
24
the full FTA in the absence of an outcome from Doha. South Africa’s bilateral trade
balance with China deteriorates by $37 million, while China’s improves by $15 million.
The scenarios – comments
These scenarios add little to the overall picture, and are largely straight-line reducing
extrapolations of the full FTA.
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29