Topics publications: Data analysis and statistics
Trade Reports
Trade Creation and Trade Diversion resulting from SACU trading agreements
Trade creation is new trade from a Free Trade Agreement (FTA) partner which would not have existed otherwise, and that, generally, is good. But often much of this may be just trade diversion away from other, non-preference partners, and that may be bad – bad in the sense that it has resulted from an artificial advantage under the FTA, meaning that one is not buying from the world’s lowest cost supplier.
Starting from 2005 imports and the 2006 Southern African Customs Union (SACU) tariff schedule and using the standard formulas for this type of analysis we find that the Trade, Development and Cooperation Agreement (TDCA) increases imports from the European Union (EU) into South Africa by some R4.3 billion, but R2.7 billion of this is trade diverted from other sources. Next, simulating the impacts of the Mercosur/SACU agreement as it now stands we found that it has limited impacts upon imports from Mercosur: trade creation of R93 million but diversion of R70 million for an overall gain of only R23 million.
We then sequentially applied the TDCA tariff preferences in turn to China, the US and then India, using the calculated post-TDCA trade flows from all the different import sources. Granting China these preferences increased Chinese imports by R4.1 billion, with R2.4 billion diverted and therefore R1.7 billion in new trade. Then, bringing a SACU/US FTA at TDCA preferences into operation increased the imports from the United States (US) by R0.7 billion, with R0.5 billion of this being trade diversion. Next, granting India the same preferences led to trade creation of R325 million but some R 260 million of this in trade diversion limited the overall increase to only R65 million.
Finally, to ‘level the playing field’ somewhat and examine what a moderate outcome from the Doha Development Agenda (DDA) of the World Trade Organization (WTO) may do we reduced bound tariff rates by 30 percent in all cases except heavy motor vehicles and applied these rates to the imports from all those import sources excluded from preferences to date. The trade creation here was another modest R453 million, but with only R58 million in trade diversion and therefore an overall import increase of R395 million. Thus, a Doha outcome would make limited difference to South Africa’s import profile under these conditions where much (64.75%) of the imports were already entering under preferences.
What is significant with respect to the SACU Customs revenue pool is that this revenue reduces by an estimated 29.7 percent from a non-preference base, and, given that Lesotho and Swaziland rely on this revenue for half or more of their total government revenues, this will have serious consequences for them. Otherwise, at the end of all this creating and diverting, the total imports into South Africa increase by only around one percent. There will, of course, be general welfare effects that ripple through the economy, and these are not considered. As always, several assumptions have been made, and there are limitations to the study that are acknowledged.
Readers are encouraged to quote and reproduce this material for educational, non-profit purposes, provided the source is acknowledged. All views and opinions expressed remain solely those of the authors and do not purport to reflect the views of tralac.
Trade Reports
South African Merchandise Trade with China
The data analysis in this paper 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 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 per cent from 2004. In ‘real’ terms, this represented 0.52 per cent 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 per cent.
South African imports into China are highly concentrated, with the top ten lines at the HS 2 chapter level accounting for 92.5 per cent 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.
A look at revealed comparative advantage shows that aside from the spectacular growth a remarkable feature of Chinese imports is their domination of the market where they do compete, with most of the textile, clothing, footwear and leather chapters holding a market share of at least 50 per cent. Associated with this are the equally remarkable growth rates to achieve this dominance, as some 97 per cent of the individual HS 4 import lines have increased their market share over the last ten years.
‘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 items from South Africa may be motor cars 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.
Readers are encouraged to quote and reproduce this material for educational, non-profit purposes, provided the source is acknowledged. All views and opinions expressed remain solely those of the authors and do not purport to reflect the views of tralac.