Post on 04-Jan-2016
SACU Tariff Policies: Where Should They Go From Here?
Lawrence Edwards & Robert Lawrence
Background
Trade policy matters Liberalisation enhanced import growth and export
growth and diversification from the 1990s Liberalisation effective in constraining pricing power
Substantial progress in tariff liberalisation Average Most Favoured Nation (MFN) tariff fell from
28% in 1990 to 8.2% in 2006. EU and SADC trade agreements from 2000 2002 SACU Agreement: Increases participation,
reforms revenue sharing But MFN tariffs hardly changed since 2000 and
challenges remain
Outline of paper
(A) Characterize and consider rationales for current SACU tariff structure
(B) Evaluate alternatives for a tariff policy rule.
(C) Present options for regional trade arrangements.
A. Conclusion 1 on SACU Tariff Structure and Rationale Tariff structure remains complex
Over 100 tariff bands vs. 6 proposed in 1994 Beef cuts (40% or 240c/kg), Beef tongue (0%),
Swine (15% or 130c/kg), Sheep (40% or 200c/kg), Milk (0%), Tomatoes fresh (15%) tinned (30%), Wheat (2%), Pasta (30%), Apples (4%), Melons (15%), Guavas (35%), Avacadoes (5%)
Trade restrictiveness over 20 percent on final goods and 12-15 percent on inputs
Anti-Export bias remains: Domestic production between 20 – 40 percent more profitable than export production
Relatively complex compared to other middle-income countries
A. Conclusion 2 on SACU Tariff Structure and Rationale Inefficient and costly to consumers in
preserving employment Jobs protected in clothing, textiles, footwear
and motor vehicles But jobs lost in primary sectors, services and
export sectors
Leading to High Consumer Cost per Existing Job and per Job Lost
Consumer surplus gain/job loss for selected sectors
02468
10121416
Food
Tobac
co
Textil
es
Clothing
Footwea
r
Electr
mach
Tv & co
ms eq
Motv
eh &
parts
Furnitu
re
Traded
secto
rs
Man
ufac
turing
R m
illi
on
R139m
Costs Fall Disproportionately on the Poor Relative to their Income
Expenditure weighted average tariff by decile
0%1%
2%3%4%5%
6%7%8%
9%10%
1 2 3 4 5 6 7 8 9 10
Decile
Ave
rage
tari
ff r
ate
A. Conclusion 3 on SACU Tariff Structure and RationaleProtection cannot be justified on infant-
industry grounds Nominal and effective protection are relatively
high in sectors with low productive potential This means that the sectors that are being
given protection are not those which are likely to enhance competitive capabilities in the future.
But on the positive side, tariff protection does not impede export growth of sectors with high productive potential
B. An Alternative Structure:
“Rule based approach”: you cannot have exceptions if you have no rule.
Substantial simplification of tariff structures using 2-3 tariff bands
Combine with extensive liberalisation of tariffs on inputs and a reduction of tariffs on outputs
The Key Ideas
Simplification reduces the burden of administering tariffs, provides a transparent signal for resource allocation and is less open to corruption and industry lobbying
Lower input tariffs promote exports by reducing export taxes, but increase effective protection on remaining sectors.
This provides scope to benefit consumers by reducing output tariffs without severely dislocating production in sensitive sectors.
Simulation Scenarios
Scenario 1 (Sim 1): Single Band Final goods Input liberalisation with a 15 % tariff on final goods with
current tariffs in excess or equal to 10%. Zero tariff otherwise.
Scenario 2 (Sim 2): Dual Band Final goods Input liberalisation with a 20, 10 or zero percent tariff on
final consumption goods.
Scenario 3 (Sim 3): Dual Band All goods Partial liberalisation of inputs (10 or zero percent) and a
20, 10 or zero percent tariff on final goods.
Scenarios achieve 60 – 70 Percent of National Welfare Gains from Liberalisation
0
500
1,000
1,500
2,000
2,500
3,000
Liberalise Sim 1 Sim 2 Sim 3
National welfare gain (Rm)
All sectors (excl services) Manufacturing Manufacturing excl vehicles
With only 20 to 35 Percent of the Employment Losses from Liberalisation
Figure: Employment changes
-30000
-25000
-20000
-15000
-10000
-5000
0
Liberalise Sim 1 Sim 2 Sim 3
Employment change, numbers
Traded sectors Manufacturing Manufacturing excl vehicles
Leading to Higher Welfare Gains per Job Lost than Liberalisation
Net National Welfare gain (Rm) per job lost
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
Liberalise Sim 1 Sim 2 Sim 3
National welfare gain (Rm)/job lost
R m
illio
n
All sectors (excl services) Manufacturing Manufacturing excl vehicles
Employment is Re-oriented Towards Exports
Change in employment by end-use classification
-30,000
-25,000
-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
Lib
era
lise
Sim
1
Sim
2
Sim
3
Lib
era
lise
Sim
1
Sim
2
Sim
3
Lib
era
lise
Sim
1
Sim
2
Sim
3
Lib
era
lise
Sim
1
Sim
2
Sim
3
Final goods Inputs Exports Total
ch
an
ge
in
em
plo
ym
en
t
B. An Alternative Structure: Conclusion
Proposed tariff structure
1. Limits employment dislocation.
2. Stimulates exports.
3. Facilitates regional integration.
4. Enhances the value of industrial policy.
5. Assists consumption of the poor.
C. SA Regional Trade Arrangements
Fundamental interests:
Enhance export and investment opportunities. (Role as hub)
Promote regional economic development. Deepen political relationships.
Current Focus: SACU and SADC.
SACU Revenue Sharing Formula Deeply Flawed Inhibits trade. (Still need customs) Introduces payments volatility Payments unrelated to external revenues generated
by trade Creates perverse incentives- BLNS to resist
additional liberalization South Africa to use rebates as an industrial policy tool.
Inhibits new accessions South Africa is unable to ensure that the funds are
spent on development. Weakens BLNS incentives to develop adequate tax
bases.
And needs to be fixed
Provide Development Assistance Fund de-linked from tariff revenue.
Share SACU tariff revenues on per capita basis.
Re-orienting the SADC
SADC: A customs union by 2010? Overlapping regional agreements inconsistent
with customs union Members economic needs diverse for one-
size-fits all common tariff policy
SA Options (Alternative)
Deepen and emphasize SADC FTA but postpone Customs Union. Can still pursue deep integration and cooperation
Services liberalization. Rules of Origin obstacles remedied by new tariff
structure Accommodates national differences in structure and
strategy Preserves independence of action vis-à-vis third
parties Avoids credibility problems. Avoids revenue sharing issues.
In addition: Propose Comesa-SADC FTA.
Conclusions
Tariff structure needs work. There are much better and simpler options. Emphasize
input liberalization and a few bands RSF needs revision.
Keep revenue sharing and assistance separate. Regional arrangements need rationalization.
Stick to Free Trade Agreements.