The Impact of EU FTAs on the trade and economic performance of South Africa
09/06/2011 91Prof Claudio Dordi - Professor of International Law at Bocconi University (Milan), and MUTRAP III Team Leader
Mr Federico Lupo Pasini - Lawyer and consultant specialized in international economic law and policy. Based in Hanoi.
The literature on the assessment of the economic and trade performances of the FTAs concluded by the EU is quite comprehensive: however, most of the researches are conducted before the agreement is negotiated and is entered into force, as they are intended to support the negotiators to understand the magnitude of the effects of each agreement. Few analytical studies have been published to analyze the impact on trade and on the economies of the FTAs members after the agreement entered into force. In this research we select, among the countries which participated to a FTA agreement with the EU, only those agreements which might represent a reasonable example for Viet Nam. For this reason we excluded all the agreements with EU members’ candidates or with countries that are geographically close to the EU as well as the agreements with countries which are not comparable to that of Vietnam and we selected some agreements which already entered into force for a minimum number of years, allowing the possibility of an effective assessment of their impact on the members’ economies.
The Main Features of South Africa
| South Africa |
Surface | 1219,1 sq km |
Population | 49,3 millions |
GDP | 205,9 bn. Euro |
GDP per capita | 4175,2 Euro |
Export/GDP | 18,9% |
Import/GDP | 25,5% |
Trade/GDP | 44,3% |
The EU- South Africa Free Trade Agreement
| South Africa |
Signed | 11.10.1999 |
Entered into force | 1.1.2000 |
Introduction
South Africa negotiated a comprehensive Trade, Development and Cooperation Agreement (TDCA) with the European Union (EU) in October 1999. The agreement came into provisional effect on 1 January 2000: both parties have committed to tariff reductions based on the applied rates in existence on the day of entry into the agreement on trade in almost all sectors.
Under the TDCA, traded goods are divided into agricultural and industrial products. South Africa’s tariff elimination for industrial products is heavily ‘back loaded’ with tariff reductions predominantly in the second half of a 12-year implementation plan. The observed asymmetry in liberalization schedules for industrial products between South Africa and the EU is to allow for different respective levels of development.
The TDCA allows South Africa a longer transition period (12 years) than the EU (10 years) and it requires the EU to eliminate tariffs on a higher percentage of currently traded goods (95%) than is the case for SA (8%).
South Africa has committed to eliminating tariffs on 81% of EU agricultural exports to South Africa within 12 years, with an agreed 46% reduction within 5 years. The majority of EU agricultural products
are ‘back-loaded’, with tariffs due to be eliminated towards the end of the 10-year transition period, and on only 62% of South African agricultural exports to the EU.
It is important to note that this was the first time the EU has included the agricultural sector in an FTA. Nevertheless, a number of regionally sensitive South African agricultural products were excluded but subject to review, including meat and preserved meat products, sugar and high sugar content processed products like chewing gum, cereal products, and dairy products. For the most part, the issue surrounding exclusion of liberalization within these sectors had less to do with tariff elimination, than the extent and pattern of export subsidies that the EU provides as part of the Common Agricultural Policy (CAP).
Table 2.1 illustrates that according to the agreement, by the end of the transitional period in 2012, nearly 81 percent of European Union’s agricultural products and 86 percent of its industrial products may enter South Africa’s market duty-free. As table 2.1 further illustrates, both agricultural and industrial products will gradually become duty-free over this time period. For instance, additional five percent of the European Union’s agricultural products may enter South Africa’s market duty-free between 2000 and 2003. Different products within each sector (the agricultural– and the industrial sector) have different time frames for when to be added as duty-free products.
Table 1: South Africa’s liberalization of agricultural and Industrial products
Table 2 illustrates that 62 percent of South Africa’s agricultural products and 100 percent of their industrial products may enter the European Union’s market duty-free at the end of the transitional period in 2010. The European Union’s large liberalization on the industrial products suggests that South Africa is not seen as a big competitor within this sector. On the contrary, South Africa is perceived as a bigger competitor in the agricultural sector as the liberalization is relatively low for this sector. Through the different time frame it is possible to argue that the European Union opens its market faster than South Africa.
Table 2: EU liberalization of agricultural and industrial products
Trade performances
The impact of the EU-SA FTA, according to the trade data, has been huge. Imports, in the period 2001-2008, increased from 10.5 bn USD to 27.4 bn. (+160%) with an annual growth rate of 14.7%.Exports grew from 9.7 bn. in 2001 to 23.6 in 2008 (+143%). Trade balance deficit grew from 0.8 bn. in 2001 to 5.8 bn. in 2007 and 3.8 bn. in 2008. The FTAs, however, did not increase the market share of EU products in South African imports (on the contrary, there has been a decrease from 41.1% in 2001 to 31.3% in 2008), neither the market share of South African products in EU imports (from 0.58% in 2001 to 0.56% in 2008). Indeed, the trade between South Africa and the rest of the world increased more than the trade with the EU (see table 5).
Table 3: Trade relationships EU-SA (US bn.)
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 |
Import | 10.5 | 11.1 | 15.0 | 19.4 | 21.0 | 23.8 | 26.9 | 27.4 | 20.5 |
Export | 9.7 | 9.1 | 11.4 | 14.6 | 16.9 | 18.6 | 21.1 | 23.6 | 14.3 |
Trade balance | -0.8 | -2.1 | -3.6 | -4.8 | -4.1 | -5.2 | -5.8 | -3.8 | -6.2 |
% of import from EU | 41.1 | 42.4 | 43.4 | 40.7 | 38.1 | 34.7 | 33.7 | 31.3 | 32.2 |
% of export to EU | 37.2 | 39.4 | 36.0 | 36.3 | 36.0 | 35.4 | 33.0 | 31.9 | 26.5 |
EU import SA/world | 0.58 | 0.54 | 0.51 | 0.53 | 0.53 | 0.50 | 0.54 | 0.56 | 0.46 |
Table 4: EU-South Africa trade
Table 5: growth rate of South Africa-EU and South Africa-world trade
| growth 2001-2008: EU | growth 2001-2008: world |
Import | 14.7 | 19.2 |
Export | 13.6 | 16.1 |
Table 6 illustrates the 10 most imported products from the EU; it is interesting to not that the first six most imported products grew with a lower rate than the average import growth rate of EU products. Electronics, vehicles and other commodities are the three most important products, accounting for more than 1/3 of total imports.
Table 6. SA: ten most imported products from the EU
Product code | Product label | 2001 | 2005 | 2008 | 2009 | growth 2001-2008 |
'85 | electronics | 1606293 | 2562878 | 3149463 | 2319071 | 10.1 |
'87 | Vehicles | 1070701 | 3123805 | 3164917 | 2286155 | 16.7 |
'99 | Other commodities | 1238034 | 2457321 | 2883753 | 1902342 | 12.8 |
'30 | Pharmaceuticals | 455213 | 808097 | 985950 | 973154 | 11.7 |
'90 | Optical, photo, medical, etc | 417834 | 780601 | 991651 | 822129 | 13.1 |
'27 | Mineral fuels, oils, etc | 111346 | 274306 | 583145 | 699611 | 26.7 |
'39 | Plastics | 360878 | 671557 | 766944 | 621821 | 11.4 |
'38 | chemical products | 220969 | 447694 | 607376 | 512555 | 15.5 |
'48 | Paper & paperboard | 225417 | 394580 | 599356 | 498518 | 15.0 |
Raw materials and machinery are the most important exported products to the EU. It is quite interesting the annual growth rate of machinery (17.8%), testifying the improved industrialization process of the country.
Table 7: SA: ten most exported products to EU
Product code | Product label | 2001 | 2005 | 2008 | 2009 | growth 2001-2008 |
'27 | Mineral oils, etc | 1279213 | 2602301 | 2823216 | 1912109 | 12.0 |
'84 | Machinery | 1129491 | 2061641 | 3555347 | 1736057 | 17.8 |
'72 | Iron and steel | 670477 | 1744707 | 2947010 | 1286314 | 23.6 |
'26 | Ores | 398775 | 912553 | 2135841 | 1150306 | 27.1 |
'87 | Vehicles | 867644 | 1131225 | 1681650 | 1149136 | 9.9 |
'08 | Edible fruit | 359708 | 805316 | 947399 | 920331 | 14.8 |
'22 | Beverages | 212552 | 486467 | 578874 | 561121 | 15.4 |
'85 | electronics | 252863 | 366027 | 444972 | 313941 | 8.4 |
'94 | Furniture | 327439 | 420143 | 395417 | 298471 | 2.7 |
'29 | Organic chemicals | 65053 | 189753 | 379643 | 264688 | 28.7 |
Table 8 shows the reduction of weighted average duties following to the implementation of the FTA agreement. It should be noted that the reductions on the import to South Africa from the EU took place after 2005. Even in this case, it seems that tariffs reduction had not been a decisive factor in promoting the import into South Africa: indeed, the increase of trade between 2001 and 2005 (+100%) has been much higher than in the next four years (and this even excluding from the calculation the data of 2009, affected by the economic and financial crisis).
Table 8: SA: Reduction of tariff
| 2000 | 2005 | 2008 |
Total Trade | 6.35 | 8.79 | 3.97 |
Raw materials | 3.79 | 3.15 | 0.53 |
Intermediate goods | 4.63 | 6.36 | 2.36 |
Consumer goods | 11.13 | 15.35 | 7.48 |
Agricultural | 9.72 | 9.21 | 3.31 |
Industrial | 6.12 | 8.76 | 4 |
The following tables illustrate the increase of export of South Africa into the EU. Table 9 shows a very low correlation between reduction of tariffs (weighted) and increase of trade. In general, with the exception of raw materials, the reduction of weighted tariffs applied by the EU is not particularly relevant, as the tariffs were already low before the entering into force of the FTA agreement. This suggests that the increase of South African exports is due to other important factors.
Table 9: EU Reduction of tariffs and trade
Product Name | Trade Year | Simple Average | Weighted Average | Imports Value x 1000 | Growth |
Total Trade | 1999 | 4.97 | 2.34 | 10021802.75 |
|
Total Trade | 2000 | 4.69 | 1.83 | 12200319.65 | 21.7 |
Total Trade | 2005 | 4.03 | 1.88 | 19529487.17 | 60.1 |
Total Trade | 2008 | 4.04 | 2.04 | 31069161.58 | 59.1 |
Table 10: Reduction of EU tariffs and import of raw materials.
Trade Year | Simple Average | Weighted Average | Raw material | Gowth |
1999 | 4.89 | 2.46 | 3701440 |
|
2000 | 4.75 | 1.51 | 5197519 | 40.4 |
2005 | 3.47 | 1.6 | 8855606 | 70.4 |
2008 | 2.93 | 1.48 | 14099990 | 59.2 |
Table 11: Reduction of EU tariffs and import of intermediate goods.
Trade Year | Simple Average | Weighted Average | Intermediate goods | Gowth |
1999 | 5.11 | 1.53 | 4346976 |
|
2000 | 4.95 | 1.38 | 4820923 | 10.9 |
2005 | 3.69 | 1.55 | 6301360 | 30.7 |
2008 | 3.63 | 1.74 | 9543017 | 51.4 |
Table 12: Reduction of EU tariffs and import of consumer goods.
Trade Year | Simple Average | Weighted Average | Consumer goods | Gowth |
1999 | 6.77 | 6.05 | 969005 |
|
2000 | 6.21 | 5.67 | 1025100 | 5.8 |
2005 | 5.68 | 5.4 | 1730215 | 68.8 |
2008 | 5.8 | 6.96 | 2183878 | 26.2 |
Table 13: Reduction of EU tariffs and import of agricultural products.
Trade Year | Simple Average | Weighted Average | Agricultural products | Gowth |
1999 | 12.11 | 9.91 | 1295520 |
|
2000 | 11.21 | 8.89 | 1197819 | -7.5 |
2005 | 6.69 | 9.68 | 2204385 | 84.0 |
2008 | 6.85 | 10.35 | 2963190 | 34.4 |
Table 14: Reduction of EU tariffs and import of Industrial products.
Trade Year | Simple Average | Weighted Average | Industrial products | Gowth |
1999 | 4.22 | 1.37 | 8726282 |
|
2000 | 4.04 | 1.15 | 11002500 | 26.1 |
2005 | 3.78 | 1.24 | 17325101 | 57.5 |
2008 | 3.76 | 1.44 | 28105970 | 62.2 |
Conclusions
The huge improvement of trade relationships between South Africa and the EU are not directly connected with the reduction of customs duties; first, on the side of the EU, weighted average customs duties remained stable (as they were already low before the entry into force of the agreement); second, the reduction of tariffs applied by South Africa took place mainly after 2005 and in particular after 2007: therefore, taking into consideration the economic and financial crisis, it is not possible to provide a clear answer on the impact of tariffs reduction promoted by the FTA.
Committee on International Trade Policies - VCCI