The South African Institute of International Affairs “South Africa’s window on the world” SOUTH AFRICA’s FREE TRADE NEGOTIATIONS AGENDA Development Through Trade Project South African Institute of International Affairs

The South African Institute of International Affairs “South Africa’s window on the world” OVERVIEW A.FTAs: What’s the Point? B.SA Inc: Under Siege? C.What kind of design?

The South African Institute of International Affairs “South Africa’s window on the world” A. FTAs: What’s the Point? Whilst multilateralism stalls, FTAS are on the rise Source: The Economist

The South African Institute of International Affairs “South Africa’s window on the world” Issues with FTAs Potential for trade diversion “Spaghetti Bowl” of institutional requirements “Building blocks” of multilateralism or “stumbling blocks”? Hence economists prefer multilateral route But if the WTO isn’t working then FTAs are inevitable

The South African Institute of International Affairs “South Africa’s window on the world” Economic considerations  Domestic economic liberalization  Deepening: leveraging globalization  Lock-in: committing future governments  Disciplining: international competition  Access markets abroad  But you have to give in order to get!

The South African Institute of International Affairs “South Africa’s window on the world” Economic considerations We export in order to import, not to deny ourselves the benefits that specialization brings. David Ricardo…encouraged Britain and Portugal to specialize in cloth and wine and to trade; he did not suggest the Portuguese should specialize in wine and then go naked. Yet that would be considered a successful outcome from a [trade] negotiator’s perspective.” Grant Aldonas, Former US Under-Secretary of Commerce, Financial Times, May 3rd, 2006

The South African Institute of International Affairs “South Africa’s window on the world” SA is equally far from major markets! Source: The Economist

The South African Institute of International Affairs “South Africa’s window on the world” Key drivers of global trade But global trade is vulnerable to shocks; hence trade facilitation increasingly important Source: The Economist Source: The Financial Times Trade volumes driving world trade growth

The South African Institute of International Affairs “South Africa’s window on the world” It’s not just about goods… Source: The Economist Knowledge is a key driver

The South African Institute of International Affairs “South Africa’s window on the world” It’s not just about goods… Source: The WTO Services exports and FDI are booming

The South African Institute of International Affairs “South Africa’s window on the world” Political considerations Choice of partner(s) (foreign policy) Domestic sensitivities Partner’s sensitivities Politics shouldn’t undermine the economic rationale

The South African Institute of International Affairs “South Africa’s window on the world” Concluded FTAs 1.SA-EU TDCA (review underway) EU = 36.4% of total trade in SACU-EFTA FTA EFTA = 1.8% of total trade 3.SADC FTA (review underway) SADC = 5.5% of total trade 4.Fairly comprehensive goods coverage But altogether approximately 40% of total goods trade A number of exceptions And complex rules of origin (EU; SADC) 5.Services and regulatory issues largely excluded

The South African Institute of International Affairs “South Africa’s window on the world” B. SA Inc: Under Siege? EU USA India China SA

The South African Institute of International Affairs “South Africa’s window on the world” Current FTA Negotiations 1.USA: “Life Support mode” NAFTA = 10.3% of total trade in 2004 Investment possibilities? Locking in and extending reforms? Counting the cost of missed opportunities… 2.Mercosur: “spot the concession” Mercosur = 2% of total trade Limited to small package of goods Negotiations on rules of origin ongoing

The South African Institute of International Affairs “South Africa’s window on the world” Future FTA Negotiations 1.Key developing countries targeted 2.An African country: will one please stand up? 3.India: “Spot the process – and concession” Likely to be limited in scope (á la Mercosur) Will take time to negotiate (Indian inflexibilities) 1.4% of total trade in India-Brazil-South Africa? Would be limited if it ever took off India + Brazil = 2.7% of SA’s total trade in 2004

The South African Institute of International Affairs “South Africa’s window on the world” …Future FTA Negotiations 5.China: “Not in my backyard” Why are ASEAN, Australia, New Zealand, Chile etc. queuing up to conclude FTAs with China? China = 4.9% of total trade in 2004

The South African Institute of International Affairs “South Africa’s window on the world” C. What kind of design?

The South African Institute of International Affairs “South Africa’s window on the world” Target the major markets: SA’s total trade by region, 2004 Source: ABSA

The South African Institute of International Affairs “South Africa’s window on the world” Don’t get hung up on sector strategies Potential costs (Government failure approach) State capture Inefficiencies in promoted sectors Anti-export bias Higher consumer prices Raising the domestic cost structure Loss of international competitiveness SACU partners? Potential benefits (Market failure approach) Industrial upgrading More focused interventions Better use of limited resources Employment generation? Rapid development? SACU partners?

The South African Institute of International Affairs “South Africa’s window on the world” Has the auto industry really been so successful? Source: Flatters (2005) Employment: Neutral Investment: positive Vehicle Trade: Neutral Vehicle Assembly in SA

The South African Institute of International Affairs “South Africa’s window on the world” Automotive import (reds and) blues Source: Financial Mail (07/07/06) What about car prices? Does the MIDP prevent FTAs in autos?

The South African Institute of International Affairs “South Africa’s window on the world” Get the basics right

The South African Institute of International Affairs “South Africa’s window on the world” Broaden the focus Source: The WTO SA services exports and FDI are growing strongly

The South African Institute of International Affairs “South Africa’s window on the world” What kind of design?  Timing and sequencing matter, but direction is crucial  Imports are good too  Regulatory agenda matters  Comprehensive approach required  Test case required: Singapore?  Extend economic reform process