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Bilateral Free Trade Agreement Between SADC

and EU

byNermeen Elmeligy, Daniel McDonald, Mythili G, Hina Nazli, Vijay Ojha, Luciano Sampaio,

Shaymal Shrestha, Janeka Wijayasiri

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Overview• SADC’s share in world GDP is only 1 percent, whereas

EU’s share in world GDP is 28 percent.• In SADC, Botswana is heavily dependent on mining;

South Africa’s primary dependence is on manufacturing; Rest of SADC depends on primary commodities.

• In SADC, South Africa has EU as its largest trade partner; Botswana also has about 13% of its imports originating in EU.

• South Africa’s exports and imports are dominated by manufacturing commodities. Botswana’s imports are also primarily manufacturing commodities, but exports are dominated by mining commodities.

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• Free trade agreement between SADC (i.e., SA, Botswana and Rest of SADC (RSADC)) and EU has potential for economic gains for the SADC region.

• To do this, we have shocked the GTAP model for a complete removal of import tariffs and export taxes in SADC and EU.

• In the standard GTAP closure we made the following changes:– The ratio of trade balance to income of all developing regions

was fixed, with savings as a proportion of income being treated as variable

– In order to capture the unemployment of unskilled labor, real wage rate for this labor was fixed exogenously, and its supply was endogenized.

– World price and quantity of Botswana’s exports of diamond were fixed. Likewise, quantity and price of Botswana’s meat exports to EU were fixed.

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Welfare Decomposition by Region

WELFAREAllocative Efficiency

Endowment effct

Terms of trade effect

Capital goods effect

Tax pool effect

Welfare ($Usm)

Botswana 0.24 0.70 0.34 0.33 -0.61 70.9South Africa 0.24 0.73 -0.01 0.02 0.02 2,766.7Rest of SADC 0.14 0.63 0.20 0.01 0.00 1,868.8SADC 0.20 0.69 0.08 0.02 0.00 4706.417Rest of Africa 0.29 0.67 -0.01 0.05 0.00 -60.6EU 0.74 0.00 0.29 -0.03 0.00 1,082.8NAFTA 0.05 0.00 0.75 0.20 0.00 -193.9MERCUSOR 0.21 0.30 0.36 0.13 0.00 -161.0Rest of Europe -0.02 0.47 0.54 0.01 0.00 -73.4Rest of America 0.20 0.32 0.35 0.13 0.00 -83.2Rest of the World 0.17 0.46 0.38 -0.02 0.00 -1,063.6Total 0.36 0.63 0.00 0.00 0.00 4,153.5

Share of welfare change (%)

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Results• After the removal of trade barriers, GDPs of Botswana, South Africa

and EU changed marginally.• However, in RSADC it has increased impressively by 5.2%.• A large increase in value added of textiles in Botswana, sugar and

meat in South Africa, and sugar, meat and milk in RSADC took place.

• For example:– in Botswana, value added in textile has increased by 90%– In South Africa, value added in sugar has increased by 55% – In RSADC, value added in sugar has increased by 324%

• This increase is driven by the increased demand for unskilled labor. • For example:

– in Botswana, unskilled labor in textile has increased by 93%– In South Africa, unskilled labor in sugar has increased by 57% – In RSADC, unskilled labor in sugar has increased by 346%

• In EU, in most of the sectors, this demand has declined and increased marginally in few sectors, such as wood, metal, other manufacturing.

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• There are massive increases in exports of grain, meat, milk, sugar, other food and textiles from SADC region to EU.

• The increases are in the range of 48% to 1772%

• In the imports of SADC the largest increase are in beverages .

• The increases are in the range of 11% to 371%

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1st Extension

Sub-Groups Commodities

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Sub-Groups Commodities Two Major Sub-Groups:- Agfd: Agricultural and food products.

(grain, veg, oagric, lstoc, meat, milk, ofood, sug, bev)

- Agfdn: nonagricultural and food products.

(mine, text, wood, pchem, metal, mprod, vtran, oman, util, cons, trad)

Experiment: (partial liberalization)

50% tariff reduction on agfd.On both SADC and EU products

100% tariff reduction on agfdnOn both SADC and EU products

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Sub-Groups Commodities (Cont’d)RESULTS

Eq. Var. Base Exper. S.G Exper

BWA 70.89 72.8

XSC 2766.72 1611.2

SAD 1868.8 1180.3

XAF -60.59 -59.9

EUR 1082.75 1347.8

NAF -193.9 -179.2

MER -160.98 -134.6

XEU -73.37 -118.4

XAM -83.22 -38.7

XWA -1063.56 -1054

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Sub-Groups Commodities (Cont’d)Interpretation

• The two major factors leading to these losses are:- Allocative Effeciency.- Endowment Effect.

Endowment Effect: (for XSC)-It represents nearly 83% of the welfare decomposition. -The major player is the unskilled labor factor (closure: employment is

varying)-By imposing 50% tariff reduction on agfd products( which require

unskilled labor), South Africa losses primarily through the reduction in employment of the unskilled labor.

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Goal and observations:

• To analyze welfare gains due to bilateral agricultural liberalization between EU and SADC by 50%

• Observations: Different outcomes for SADC members due to liberalization within the group and with the EU

• South Africa (XSA) receives higher welfare gains when tariffs are liberalized in EU

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EV (US$ million)

Country EV Agr(By EU)

Agr (BySADC)

Non-agr (By EU)

Non-agr (by SADC)

BWA 73 7 3 -5 -31

XSA 1611 206 436 431 -463

SAD 1179 290 67 379 67

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Analyzing results

• South Africa’s case (XSA): a large economy in the SADC group

• XSA gains due to liberalization on both agriculture and non-agriculture

• Endowment effects and allocative efficiency after liberalization

• There is an allocative efficiency of 351/922 for XSA

• There is an endowment efficiency of 1345/1673 for XSA assuming employment of unskilled labor

• XSA has a total welfare gain of 1611/2636=61%

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2nd Extension

Elimination of Agricultural Subsidies in EU

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Elimination of Agricultural Subsidies in EU

• Selected 4 agricultural commodities (grain, veg., other agri., livestock)

• Primary input subsidies are very high for grain, other agri., and livestock .

• Primary input subsidies mainly go to land and capital in the EU.

• Base Run : The major contributing trade policy instrument is elimination of import tariff by SADAC holding other things constant.

• Both EU and SADC gained

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Simulations

• Considered different levels of domestic farm subsidy reductions:

• Pattern of results same for all simulations

• Selected 50% as the experiment for the analysis

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Results

• Comparison of simulation experiment with the base run• Domestic farm liberalisation in EU has not made much

impact for SADAC• Exploring

Composition of exports shifting from agriculture to manufacturing in the base run in SAAfter domestic farm lib. in EU, composition of exports move back to agriculture from manufacturing in SA

. The advantage of domestic farm subsidy in EU is not going to SADAC but going to other countries.

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Base Run

Total EV

Countries Base Run Subtotal 3 Subtotal 4 Subtotal 6

bwa 70.89 0.4 9.31 99.3

xsc 2766.73 2.1 1171.99 1130.26

sad 1868.8 -46.1 1340.26 432.58

xaf -60.59 0.7 -16.22 -10.18

eur 1082.76 3.6 -807.11 -170.87

naf -193.9 -0.8 -34.69 -15.23

mer -160.98 0.6 -15.06 -21.17

xeu -73.37 -0.1 56.32 6.56

xam -83.22 0.1 -59.94 6.29

xwo -1063.56 6.5 -261.97 -237.08

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Welfare decomposition

welfare decomposition

WELFARE 1 alloc_A1 2 endw_B1 5 tot_E1 6 IS_F1

1 bwa 16.8 49 23.2 23.8

2 xsc 664.1 2013.2 -33.7 48.5

3 sad 260.9 1182.4 369.2 21.8

4 xaf -51.9 -125.3 -82.8 -4.6

5 eur 4029.1 0 115.3 -1

6 naf -108.1 0 194 -44.2

7 mer -19.6 -67.3 -12.5 -16.3

8 xeu -105.3 -114.7 10.9 -2.1

9 xam -23 -50 -73.5 -15.2

10 xwo -453.7 -1131.8 -513.2 -10.2

Total 4209.4 1755.4 -3 0.5

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Simulation – removal of domestic Farm subsidies in EU

simu 2 50 % reduction in tf subsidy in EU primary factor in agri

EV sadc3 Subtotal 1 Subtotal 2 Subtotal 3 Subtotal 4 Subtotal 5 Subtotal 6

bwa 69.8 1.3 -2.2 0.4 9.5 -37.1 99.2

xsc 2748.3 17.6 -162.4 2.2 1175.2 608.4 1130.4

sad 1873 8.6 -51.1 -46.1 1342.7 185.6 432.8

xaf -264.6 12.1 -0.7 0.7 -16.4 -45.4 -10.3

eur 4144.5 -94.7 86.8 3.6 -820.8 2059.5 -171.7

naf 41.8 6.8 3.2 -0.8 -34.9 -153 -15.3

mer -115.7 0.9 4.8 0.6 -15.3 -130.9 -21.2

xeu -211.2 5.1 3.8 -0.1 55.9 -145.4 6.5

xam -161.8 1.2 0.3 0.1 -59 -30.9 6.3

xwo -2108.8 1.6 -9.7 6.5 -268.2 -561.8 -237

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3rd Extension

Closure Changes

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Closure changes:

1) Base: Unemployment in unsklab Change: employment is fixed

! swap qo("unsklab",sadc) = pfactreal ("unsklab",sadc);

Welfare Effects:

Main responsible: positive welfare endowments componentcaused by an increasing in employment

Employment fixed

Unemployment Difference

Botswana 15.5 70.9 + 55.4

XSC (RSA) 642.9 2766.7 + 2123.8

SAD 645.3 1868.8 + 1223.5

EU 1004.1 1082.8 + 78.7

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In both cases: the FTA caused: more production, more exports, etc

So the labor demand increased

If employment is:fixed: the wages goes up

variable: labor goes up (wages are fixed)

EV is bigger when employment is varying. Why?

the wages didn’t change too much

Hypothesis: qo is fixed (for all other endw)Data: no substitution from others to unsklab

But the use of unsklab is bigger in all the sectors

CONCLUSION:

More labor more income welfare endowment up

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w/p

L

Ld

L’d

Full emp

L fe L unp

Ls full

Ls unp

Employment: fixed x variable

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Welfare decomposition by region – with tax replacement

  Welfare (US$m)Allocative efficiency

Endowment effect

Terms of trade

Botswana -48 13 -60 31.1

South Africa 122 373 -426 85.8

Rest of SADC 208 71 -364 437.1

EU 986 790 0 221.8

Total -412 984 -1437 -17.9

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Tracing the effects……..

ConsumptionTaxes

Unskilled employment

Input demand

Priv. domestic consumption

Domestic production

Negative endowment effect

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Selected key results

  tp

Unsklab share to service sector

qds(serv)

qo(serv)

qfe(unsklab,

serv)qo

(unsklab)

% % % % % %

Botswana 7.6 34 -0.2 -0.2 -4.7 -5.6

South Africa 2.4 28 -0.7 -0.7 -1.6 -0.8

Rest of SADC 8.3 17 -3.2 -4.2 -8.4 -2.8

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Conclusions

• The FTA between SADC and EU initiates an outward- looking strategy in the former region

• Partial tariff reductions can lead to gains for EU and losses for SADC

• No difference to SADC from EU domestic subsidy reductions

• Closure assumptions can have massive effects on outcomes