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Global Trade Analysis Project Analysis of Free Trade Areas (FTAs) in Southern Africa.

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Presentation on theme: "Global Trade Analysis Project Analysis of Free Trade Areas (FTAs) in Southern Africa."— Presentation transcript:

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2 Global Trade Analysis Project Analysis of Free Trade Areas (FTAs) in Southern Africa

3 Global Trade Analysis Project 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

4 Global Trade Analysis Project 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

5 Global Trade Analysis Project 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

6 Global Trade Analysis Project 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.

7 Global Trade Analysis Project 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

8 Global Trade Analysis Project Q P S’ S Closure definition & labour market D 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 D’

9 Global Trade Analysis Project Reference simulation: non-reciprocal removal of all import duties on imports from South Africa into the European Union

10 Global Trade Analysis Project Change in welfare under trade liberalisation with wage indexation, relative to the reference case $US million

11 Global Trade Analysis Project Change in regional employment values under trade liberalisation with wage indexation, $USmillion

12 Global Trade Analysis Project Change in sectoral output in the European Union under trade liberalisation

13 Global Trade Analysis Project Sectoral labour intensity of output in the EU, 1995

14 Global Trade Analysis Project SA-EU FTA for all products, import tariffs and exports subsidies Nash Eq.

15 Global Trade Analysis Project SA-RSA FTA for all products, import tariffs and exports subsidies Nash Eq.

16 Global Trade Analysis Project EU-SA&RSA FTA for all products, import tariffs and exports subsidies Nash Eq.

17 Global Trade Analysis Project SA harmonizes import tariffs and/or export subsidies for each product across all regions

18 Global Trade Analysis Project EU-SA&RSA FTA for all products, import tariffs and exports subsidies Side payments

19 Global Trade Analysis Project Partial Vs Total Elimination of Tariffs in the FTA: SA - EU ( Hiroaki, Stephen, and Sylvain)

20 Global Trade Analysis Project Changes in output (qo), SA

21 Global Trade Analysis Project Changes in output (qo), EU

22 Global Trade Analysis Project Change in Total Welfare Effects (3 scenarios)

23 Global Trade Analysis Project Change in Total Welfare Effects, Allocative Efficiency

24 Global Trade Analysis Project Change in Terms of Trade

25 Global Trade Analysis Project Allocative efficiency by sector, SA

26 Global Trade Analysis Project 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.


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