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

2. 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

3. 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

4. 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 in 1990 to 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

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

6. Scope for unilateral reform 2: Economic gains
1. Tariff protection inhibits economic growth
Jonsson and Subramanian (2001)
90% of TFP growth between 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

7. What about market access?

8. 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

9. 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)

10. 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)

11. 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

12. 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.

13. 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: