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

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Food

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Textil

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Electr

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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

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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.