Is there scope for further unilateral trade reform in South Africa Presentation at SAIIA 2 August 2006 Lawrence Edwards

Structure Some benefits from multilateral liberalisation Scope for unilateral reform 1: Simplification and Direction Scope for unilateral reform 1: Economics Trade liberalisation and growth Trade liberalisation and export performance Trade liberalisation and consumption Trade liberalisation and prices Conclusion

Some benefits of multilateral liberalisation Reciprocal reductions in tariffs and market access to enhance exports Facilitates alliance building among smaller countries for greater leverage Rules-based international trading system increases transparency of trading: Dispute settlement Growth in world output and trade flows Facilitates “Quid pro quo” reductions: No first move advantage. “Tie government’s hands” to insulate from lobby groups

Scope for unilateral reform 1: Simplification and Direction Transparent, coherent, predictable and credible trade reform strategy necessary for business restructuring Multilateral liberalisation has halted since 2000 Average MFN rate in manufacturing: 23% in 1994, 12% in 01, 8-9% in 06. Tariff peaks remain and effective protection is high in many sectors 14% of positive lines have tariffs  30% (Clothing, Textiles, Footwear, vehicles) Tariff structure remains complex Rationalisation of tariff lines from over 12 000 in 1990 to 6 673 in 2004, but bilateral/regional agreements have effectively raised lines 38 Ad valorem bands, rather than proposed 6. Rises to 101 if other tariff rates are included. “SA tops world list of anti-dumping complaints” (Business Day, 05) No clear industrial strategy or incentive structure behind tariff structure

Gain from simplified tariff structure Simple to administer Simple to defend against interest groups Provides clear incentives to firms Lowers scope for corruption

Scope for unilateral reform 2: Economic gains 1. Tariff protection inhibits economic growth Jonsson and Subramanian (2001) 90% of TFP growth between 1970-97 explained by trade Fedderke (2005), Belli et al. (1993), Tsikata (1999) find consistent results Harding and Rattso (2005) Liberalisation explains 70% of productivity improvement Liberalisation enhances spillover from international productivity improvements

What about market access?

Economic gains, cont. Market access is important for exports, but lower tariff protection on intermediate inputs and output are even more so, particularly for manufacturing. SA exporters are found to be very responsive to changes in profitability Tariffs raise the costs of production, making exports less profitable Econometric evidence indicates that a 1% reduction in tariffs increases exports/output by 1.67% (Alves and Edwards, 2005) Current tariff structure still ‘taxes’ exporters (Edwards, 2005) Cost effect is ± 10% of value added High costs on exporting found in processed Agricultural products, Clothing and Textile articles

Economic gains, cont. Import tariffs are a tax on consumption, particularly of poor households Trade liberalisation disciplines firm pricing behaviour (Fedderke et al. 2004; Edwards & van de Winkel, 2005) Source: Daniels and Edwards (2005)

Economic gains, cont. Trade flows during 1990s have created and destroyed jobs, but aggregate effect small However, tariffs liberalisation reduced demand for labour, particularly semi-and unskilled labour, relative to capital Liberalisation unlikely to substantially raise demand for semi-and unskilled labour (Edwards and Dunne, 2005)

Conclusion Is there scope for further unilateral trade reform? YES Case for simplification even if there is no further reductions in average levels of protection Case for reform because of economic gains Can unilateral trade reform be undertaken? Macro stability Credibility of past reform, but need to “Tie hands” Implementation needs to be complemented by other policies Evaluation of adjustment costs and formulation of appropriate policies

Final lessons Trade liberalisation has had substantial impacts on the economy. Positive impact on economic growth Improved export performance, but effect offset by removal of subsidies Reduced tax burden on consumption, particularly of poor Disciplined pricing behaviour of industries Negatively affected demand for semi-and unskilled labour relative to capital in manufacturing.

Strategic Objectives for WTO Negotiations “… developing countries must pursue industrialization by processing their natural and utilizing their human resources where they possess comparative advantage. However, realising the full potential of these advantages has been frustrated by projectionist interests in some of the developed countries under various national policy regimes, and buttressed by multilaterally negotiated disciplines in the WTO.” “The strategic objective in the new negotiations is, therefore, for developed countries to undergo far reaching structural adjustment in their economies. Such restructuring requires reducing a range of protective and support measures to inefficient "grandfather" industries and sectors in the economies of the developed countries, and thereby allows a relocation of production and investment to developing countries, which process comparative advantages in these areas.” “This understanding has informed our approach to future trade negotiations in the WTO” Source: “A Broad South African Approach to New Multilateral Trade Negotiations in the World Trade Organisation” (DFA: http://www.dfa.gov.za)