Discussions
Trade negotiations for a Free Trade Agreement: a guide to general principles and requirements
Ron Sandrey, tralac Associate, discusses the trade negotiation process towards a Free Trade Agreement, with reference to the Tripartite Free Trade Area (TFTA)
The objective of a new tralac Working Paper, entitled Trade negotiations for a Free Trade Agreement: a guide to general principles and requirements (click here to download), is to outline the process of a trade negotiation and offer a pathway to follow. It is important to accept that this process is just what it says it is: a negotiation. There are gains that are sought and positions that you would like to protect, while, similarly, the other side of the table is facing the same situation. As with any street-side discussion on price at a market stall anywhere in Africa, each party should have a clear picture of where their bottom line is. The points discussed in this paper are especially relevant and timely as the region starts the serious process of negotiations in the so-called Tripartite Free Trade Area (TFTA).
Primarily we must recognise that from an economic perspective any negotiation will end with both winners and losers within a country. Consumers benefit from the free trade agreement as they have a wider access to goods at lower prices. Producers in the importing country suffer losses, as there is a price decrease that induces a decrease in output of existing firms (and perhaps some closures), a decrease in employment, and a decrease in profit. The aggregate national welfare effect is found by summing these gains and losses to consumers and producers and to the government through reduced border taxation. While the relative size of these components is important, the overwhelming evidence from FTAs is that the overall effect is positive, not withstanding some negatives.
While an FTA analysis often focuses on merchandise goods, such an approach is a much narrower one than is needed for the modern FTA. There are several other issues such as market access for services, possible concessions on Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT) issues, and possible investment and investment-related benefits for example. These are all discussed in this tralac Paper, and it is stressed that in order to make some gains, concessions on other issues must be made. It is about give and take, and not just about the take that a defensive tariff offer would be. Crucially, it is a negotiation spread over a wide number of issues even though a tariff offer is likely to be the visible platform that negotiations are launched from.
As the region moves forward into the TFTA negotiations we consider it important for South Africa to carefully consider its position as the country with an asymmetrical power in the region. What South Africa does will largely dictate the final outcome of these negotiations. We believe that South Africa has a role and a duty to provide regional leadership in the formulation of this FTA. This belief is based upon both political-economy reasons as Africa’s leading industrial power and the well-established economic principle based upon the concept of comparative advantage that reciprocal trade liberalisation is beneficial to the partners concerned. Should South Africa start from a very negative tariff access offer to those countries outside of SADC, this would suggest to others that South Africa is determined to preserve its domestic manufacturing sector from even limited regional competition and forego an opportunity to enhance its regional champion reputation. Such an approach is in turn unlikely to induce reciprocal access opportunities for South Africa.
This is especially apparent when the merchandise trade with the TFTA region is assessed against the current trade and access conditions for SADC imports. There are two points here. The first is that an examination of the wider TFTA imports against the imports into South Africa from the Southern African Development Community (SADC) during 2012 shows that non-SADC imports from the greater TFTA area were a mere 3.6% of the total TFTA imports. The second point is that virtually all of these SADC imports are duty free under SADC concessions as part of the wider regional development agenda. We urge South Africa to take a leadership role in making a realistic tariff concession offer to non-SADC members of the TFTA. To do otherwise on 3.6% of the TFTA merchandise imports would do little to suggest that South Africa is serious about its regional leadership role on the one hand and on the other, do little to encourage the TFTA partners further north to in turn open their markets to South African exports.
Looking at the wider picture of an FTA in the Tripartite area, Hartzenberg (2012, page i) outlines in a tralac book how the potential TFTA is based upon the three pillars of traditional market access, infrastructural development and industrialisation in the region. These latter two pillars go beyond the general thinking of a tariff-related agreement and emphasise that the region is at least recognising the inter-relationships of modern trade and industrial policies. In particular, “these negotiations will be a test of how serious member states are about a development approach to regional integration” (Hartzenberg, 2012). We concur, and suggest that only by taking a leadership position to the initial tariff offer to the non-SADC members will the longer term goal of African regional integration be enhanced. There is too much to lose by not starting from a position that shows that South Africa recognises its wider role and does not sacrifice the 3.6% of TFTA imports at the altar of its own domestic industrial protection.
Reference:
Hartzenberg, T. et al (Eds), 2012. “The Tripartite Free Trade Area: towards a new African Integration Paradigm?” Stellenbosch: tralac.