Analysis of Free Trade Areas (FTAs)

1
Analysis of Free Trade Areas (FTAs) in Southern
Africa
2
Overview of Basic Application

• Analysis of FTAs for South Africa
• Non-Reciprocal Tariff Removal - Non Agricultural
  and Food Imports- All Imports
• Reciprocal Tariff Removal - Non Agricultural
  and Food Imports- All Imports
• Regional FTA

3
Summary of Basic Application Results

• Simulation of Non-Reciprocal Tariff Removal - Non
  Ag./Food Imports- All sectors affected-
  Importance of trade diversion
• Simulation of Non-Reciprocal Tariff Removal - All
  Imports - Extent of welfare gain for South
  Africa- Strength of trade creation effect
• Simulation of Reciprocal Tariff Removal - Non
  Ag./Food Imports - Importance of trade diversion
  cost on SA- Importance of trade creating benefit
  to EU

4
Summary of Basic Application Results

• Simulation of Reciprocal Tariff Removal - All
  Imports Effect on Rest of Southern Africa-
  Importance of trade diversion
• Simulation of Southern African FTA- Gain to both
  partners- Little trade diversion

5
Extensions to the Basic Model

• Wage Indexation - Shows effects of wage rigidity
  on trade liberalisation impacts - Price
  unskilled labour indexed to consumer price index
  
• Unilateral Liberalisation by SA-What kind of
  trade policy should South Africa be pursuing?-
  Examination of a range of alternatives
• Partial vs. Total Elimination of Tariffs in FTA
  between SA and EU - Unrealistic to consider
  total elimination of tariffs in one step. -
  Two-step approach to elimination of tariffs
  used.

6
Background to wage indexation extension

• Developments in the labour market constitute some
  of the most striking results of all trade
  liberalisation simulations between the EU and
  South Africa
• Increase in labour cost may be overestimated in
  both regions due to high levels of unemployment
  and subsequent wage rigidities
• Examination of the impact of wage indexation on
  the allocation of inputs between sectors and the
  development in output and changes in welfare

7
Closure definition labour market

• Shock indexation of wages to inflation,
  maintaining the ratio (wage/inflation constant)
• The variable wage/inflation (pfactreal in the
  model) becomes exogenous in the EU, South Africa
  and Rest of Southern Africa
• Labour supply becomes endogenous
• Any increase in labour demand is assumed to be
  covered by unemployed
• Other endowments become exogenous in these 3
  regions all endowments in other regions

P
S
S
D
D
Q
8
Reference simulation non-reciprocal removal of
all import duties on imports from South Africa
into the European Union
9
Change in welfare under trade liberalisation with
wage indexation, relative to the reference
caseUS million
10
Change in regional employment values under trade
liberalisation with wage indexation, USmillion
11
Change in sectoral output in the European Union
under trade liberalisation
12
Sectoral labour intensity of output in the EU,
1995
13
SA-EU FTA for all products, import tariffs and
exports subsidies
Nash Eq.
14
SA-RSA FTA for all products, import tariffs and
exports subsidies
Nash Eq.
15
EU-SARSA FTA for all products, import tariffs
and exports subsidies
Nash Eq.
16
SA harmonizes import tariffs and/or export
subsidies for each product across all regions
17
EU-SARSA FTA for all products, import tariffs
and exports subsidies
18
Partial Vs Total Elimination of Tariffs in the
FTA SA - EU(Hiroaki, Stephen, and Sylvain)
19
Changes in output (qo), SA
20
Changes in output (qo) , EU
21
Change in Total Welfare Effects (3 scenarios)
22
Change in Total Welfare Effects , Allocative
Efficiency
23
Change in Terms of Trade
24
Allocative efficiency by sector, SA
25
Conclusion

• A partial free trade agreement between South
  Africa and the EU will be more beneficial to
  South Africa than immediate and absolute free
  trade agreement. Why?
• Total allocative efficiency is greater in Stage 1
  (65.4) than in both the Immediate Stage (-63.7)
  and Stage 2 (-129.9). This could be the result
  of trade diversion.