SACU Tariff Policies: Where Should They Go From Here? Lawrence Edwards & Robert Lawrence

Background Trade policy matters Liberalisation enhanced import growth and export growth and diversification from the 1990s Liberalisation effective in constraining pricing power Substantial progress in tariff liberalisation Average Most Favoured Nation (MFN) tariff fell from 28% in 1990 to 8.2% in EU and SADC trade agreements from SACU Agreement: Increases participation, reforms revenue sharing But MFN tariffs hardly changed since 2000 and challenges remain

Outline of paper (A) Characterize and consider rationales for current SACU tariff structure (B) Evaluate alternatives for a tariff policy rule. (C) Present options for regional trade arrangements.

A. Conclusion 1 on SACU Tariff Structure and Rationale Tariff structure remains complex Over 100 tariff bands vs. 6 proposed in 1994 Beef cuts (40% or 240c/kg), Beef tongue (0%), Swine (15% or 130c/kg), Sheep (40% or 200c/kg), Milk (0%), Tomatoes fresh (15%) tinned (30%), Wheat (2%), Pasta (30%), Apples (4%), Melons (15%), Guavas (35%), Avacadoes (5%) Trade restrictiveness over 20 percent on final goods and percent on inputs Anti-Export bias remains: Domestic production between 20 – 40 percent more profitable than export production Relatively complex compared to other middle-income countries

A. Conclusion 2 on SACU Tariff Structure and Rationale Inefficient and costly to consumers in preserving employment Jobs protected in clothing, textiles, footwear and motor vehicles But jobs lost in primary sectors, services and export sectors

Leading to High Consumer Cost per Existing Job and per Job Lost

Costs Fall Disproportionately on the Poor Relative to their Income

A. Conclusion 3 on SACU Tariff Structure and Rationale Protection cannot be justified on infant- industry grounds Nominal and effective protection are relatively high in sectors with low productive potential This means that the sectors that are being given protection are not those which are likely to enhance competitive capabilities in the future. But on the positive side, tariff protection does not impede export growth of sectors with high productive potential

B. An Alternative Structure: “Rule based approach”: you cannot have exceptions if you have no rule. Substantial simplification of tariff structures using 2-3 tariff bands Combine with extensive liberalisation of tariffs on inputs and a reduction of tariffs on outputs

The Key Ideas Simplification reduces the burden of administering tariffs, provides a transparent signal for resource allocation and is less open to corruption and industry lobbying Lower input tariffs promote exports by reducing export taxes, but increase effective protection on remaining sectors. This provides scope to benefit consumers by reducing output tariffs without severely dislocating production in sensitive sectors.

Simulation Scenarios Scenario 1 (Sim 1): Single Band Final goods Input liberalisation with a 15 % tariff on final goods with current tariffs in excess or equal to 10%. Zero tariff otherwise. Scenario 2 (Sim 2): Dual Band Final goods Input liberalisation with a 20, 10 or zero percent tariff on final consumption goods. Scenario 3 (Sim 3): Dual Band All goods Partial liberalisation of inputs (10 or zero percent) and a 20, 10 or zero percent tariff on final goods.

Scenarios achieve 60 – 70 Percent of National Welfare Gains from Liberalisation

With only 20 to 35 Percent of the Employment Losses from Liberalisation Figure: Employment changes

Leading to Higher Welfare Gains per Job Lost than Liberalisation

Employment is Re-oriented Towards Exports

B. An Alternative Structure: Conclusion Proposed tariff structure 1. Limits employment dislocation. 2. Stimulates exports. 3. Facilitates regional integration. 4. Enhances the value of industrial policy. 5. Assists consumption of the poor.

C. SA Regional Trade Arrangements Fundamental interests: Enhance export and investment opportunities. (Role as hub) Promote regional economic development. Deepen political relationships. Current Focus: SACU and SADC.

SACU Revenue Sharing Formula Deeply Flawed Inhibits trade. (Still need customs) Introduces payments volatility Payments unrelated to external revenues generated by trade Creates perverse incentives- BLNS to resist additional liberalization South Africa to use rebates as an industrial policy tool. Inhibits new accessions South Africa is unable to ensure that the funds are spent on development. Weakens BLNS incentives to develop adequate tax bases.

And needs to be fixed Provide Development Assistance Fund de-linked from tariff revenue. Share SACU tariff revenues on per capita basis.

Re-orienting the SADC SADC: A customs union by 2010? Overlapping regional agreements inconsistent with customs union Members economic needs diverse for one- size-fits all common tariff policy

SA Options (Alternative) Deepen and emphasize SADC FTA but postpone Customs Union. Can still pursue deep integration and cooperation Services liberalization. Rules of Origin obstacles remedied by new tariff structure Accommodates national differences in structure and strategy Preserves independence of action vis-à-vis third parties Avoids credibility problems. Avoids revenue sharing issues. In addition: Propose Comesa-SADC FTA.

Conclusions Tariff structure needs work. There are much better and simpler options. Emphasize input liberalization and a few bands RSF needs revision. Keep revenue sharing and assistance separate. Regional arrangements need rationalization. Stick to Free Trade Agreements.