The timing of the third book in tralac’s ‘South Africa’s way ahead’ series exploring trade policy options fits perfectly with the recent interest in examining both South Africa’s Industrial Policy and Trade Policy. The book details the implications of taking the current SACU-Mercosur partial trading agreement (PTA) further to a full free trade agreement (FTA), and we consider that it makes a valuable contribution both trade and industrial policy insights with the Mercosur countries of Brazil and Argentina in particular. We conclude that such an FTA is worthy of serious consideration.

The book starts by detailing the political, economic and trading regimes and settings for both Mercosur and SACU before examining the agricultural production and policy profiles and trade regimes and performances of Brazil, Argentina and South Africa in particular. These three countries have much in common in that they are all, with Brazil and to a lesser extent South Africa, becoming significant actors upon the global agricultural trade reform stage resulting from their common positions as champions of a more liberal agricultural trading world. Specifically for South Africa we find that there are many similarities in the production patterns of the three countries, and while they are to a large degree competitors on in global markets for many products there are also many complementarities.

While recognising that models are never exactly right but arguing that they provide valuable insights, we use the internationally accepted benchmark GTAP global computer model as the analytical tool to examine an FTA between SACU and Mercosur that eliminates custom’ tariff barriers and a representative but conservative estimate of both non-tariff and service constraints between the parties. The results show that there are comfortable welfare gains to South Africa from; a better use of land, labour and capital (enhanced allocative efficiency); increased net investment increasing the amount of capital employed in the economy; and a small contribution from increased labour employment.

This FTA is not good for the South African agriculture sector, however. Imports of agricultural products increase leading to marginal reductions in the prices of all agricultural products. While this is bad news for farmers, it translates into good news for consumers as the reduced agricultural prices across the board help to lower the consumer price index which in turn contributes to the overall welfare gains for South Africa.

The gainers are the vast majority South Africans who are consumers and losers are mainly the small number of commercial farmers. The results for the manufacturing sectors are better news for South Africa, as despite a reduction in the value of production in the motor vehicle and parts sector there was an increase in overall value of manufacturing output. The big gainers were the chemicals, rubber and plastics sector and non-ferrous metals. Importantly, we run an extra scenario whereby changes to the vehicle sector were constrained, and while our modeling has several limitations the results suggested that protecting the motor vehicle sector against Brazilian imports is not in the best interests of South Africa or South African agriculture.

There are several other aspects of a possible FTA covered in this book, as a modern FTA is about more than just merchandise trade. A literature review of the relevant non-tariff barriers (NTBs) is presented which finds that technical barriers to trade seem to be the most common NTB facing exports to Brazil, Argentina and South Africa. Also, in the GTAP model we proxy a reduction of NTB resulting from an FTA and this provides a valuable perspective on the importance of these barriers.

Trade remedies traditionally consist of anti-dumping measures, countervailing duties and safeguards. We provide an analysis of how these are embodied within the trade policies of the main parties and show that they may become important should SACU and Mercosur move towards a comprehensive FTA.

For services, the SACU-Mercosur agreement is limited in scope and currently excludes any reference to trade in services. A key problem here is that SACU is embroiled in a number of regional and bilateral arrangements without having a common negotiating structure and no common position on how to treat the liberalisation of trade in services. In contrast the South American countries are more prepared and organised to liberalise trade in services.

While outside of the SACU-Mercosur mandate, Chile is a closely related South American country that shares many characteristics with South Africa. As an adjunct to the main research we similarly examine these implications for a South Africa/Chile FTA. While not providing major gains, this relationship has some intuitive appeal as there appear no obvious sensitive sectors such as clothing with China or autos and sugar with Brazil that are likely to lead to a cautious approach from South Africa.

Importantly, the implications for the Botswana, Lesotho, Namibia and Swaziland (BLNS) are examined in detail. Again most of the interest is in the agricultural sectors, and given that Mercosur is the global benchmark producer of cattle meat and sugar, both of which are important exports from the BLNS under EU preferences, this is to be expected. There are perhaps smaller reductions than feared in both of these sectors and limited changes in other agricultural products. However, the SACU tariff revenue pool implications for the BLNS countries are substantial and sobering following an FTA with Mercosur. Thus, it is not the direct trade effects from these FTAs that are the main interest to the BLNS but rather tariff revenue pool implications and this research puts some numerical values around that conflict.

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© 2010 Trade Law Centre for Southern Africa and the National Agricultural Marketing Council

Publication of this book was made possible by the support of the Trade Law Centre for Southern Africa (tralac) and the National Agricultural Marketing Council (NAMC). The views expressed by the authors are not necessarily the view of any of these institutions.

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