An Analysis of a US–Southern African Customs Union (SACU) Free Trade Agreement

World Development Vol. 36, No. 3, pp. 461–484, 2008  2007 Elsevier Ltd. All rights reserved 0305-750X/$ - see front matter www.elsevier.com/locate/worlddev

doi:10.1016/j.worlddev.2007.03.005

An Analysis of a US–Southern African Customs Union (SACU) Free Trade Agreement DRUSILLA K. BROWN Tufts University, USA KOZO KIYOTA Yokohama National University, Japan University of Michigan, USA

and ROBERT M. STERN * Gerald R. Ford School of Public Policy, University of Michigan, USA Summary. — This paper analyzes the potential economic effects of bilateral negotiations for an FTA between the United States and the Southern African Customs Union (SACU). The US– SACU FTA bilateral negotiations were initiated in June 2003, but have become deadlocked over a series of issues of concern to the SACU. To determine whether a bilateral FTA might be in the SACU members’ interests, we use the Michigan Model of World Production and Trade to assess the welfare and other economic effects of a bilateral FTA. We conclude that the benefits of an FTA are rather small, and that the interests of the global trading community, including the United States and SACU, could be better served by unilateral and especially multilateral liberalization.  2007 Elsevier Ltd. All rights reserved. Key words — Free trade agreements, Unilateral liberalization, Multilateral liberalization, Africa, Southern African Customs Union

1. INTRODUCTION This paper presents an analysis of the potential effects of a US bilateral free trade agreement (FTA) with the Southern African Customs Union (SACU), whose members include Botswana, Lesotho, Namibia, South Africa, and Swaziland. The bilateral FTA negotiations were notified to the US Congress by the US Trade Representative (USTR) in November 2002 but have become deadlocked following six official negotiating meetings. In mid-April 2006, a less ambitious program of bilateral negotiations was announced by the USTR, with FTA negotiations possibly to be resumed at some future date. In Section 2 following, we present some background information on the SACU member 461

countries, outline the objectives and main features of a US–SACU FTA, and provide a discussion of the conduct and current status of the US–SACU negotiations. Section 3 briefly describes the main features and data of the Michigan Model of World Production and Trade that we use to analyze a potential US– SACU FTA, together with the computational

* Helpful comments on earlier versions of the paper were provided by Greg Schoepfle and anonymous referees. Kozo Kiyota gratefully acknowledges financial support from the Japan Society for the Promotion of Science (JSPS) 2006 Postdoctoral Fellowships for Research Abroad. Final revision accepted: March 23, 2007.

462

WORLD DEVELOPMENT

modeling results of the FTA on the economic welfare, trade, output, and employment for the United States and the SACU. In Section 4, we provide a broader perspective on a US– SACU FTA that takes into account the potential effects of the unilateral removal of trade barriers by the United States and the SACU, and the effects of global free trade in which all countries/regions covered in the model are assumed to remove their existing trade barriers on a multilateral basis. A summary and concluding remarks are contained in Section 5. 2. THE CONTEXT, MAIN FEATURES, AND CURRENT STATUS OF NEGOTIATIONS ON A US–SACU FTA (a) Background information on the SACU member countries As noted in WTO (2000, p. xvii), the SACU countries differ significantly in terms of their levels of economic scale, structure, and development. Botswana and South Africa are upper middle-income countries, Namibia and Swaziland are lower middle-income countries, and Lesotho is the least developed country. Information on the structure of output and exports and imports of goods and services for 2004 is indicated in Table 1. It is evident that South Africa dwarfs the other SACU member countries. As noted in WTO (2000, pp. 57–58), SACU exports go primarily to Western Europe and, within SACU, to South Africa. Imports are diversified across sectors and South Africa is the major supplier to the other SACU countries. SACU exports to the United States, which are comparatively small, are covered by US trade preferences under the Generalized System of Preferences (GSP) and the African Growth and Opportunity Act (AGOA). An indication of these preferences is indicated in Table 2 for Botswana, South Africa, and Other SACU for 2001–03. Noting the second last line indicating the share of the GSP/AGOA imports, it appears that the US preferential imports from the SACU consist mainly of textiles and apparel products and transportation equipment. In our computational analysis to follow, we shall accordingly assign zero US bilateral tariffs vis-a`-vis the SACU to take the preferences into account.

(b) The main features of a US–SACU FTA USTR Robert Zoellick (USTR, 2002) notified the US House and Senate on November 5, 2002 that the Administration intended to initiate free trade negotiations with sub-Saharan nations. The expressed objectives of the negotiations are as follows: • To serve as the catalyst for increasing free trade between the United States and subSaharan Africa and increasing the private sector in the region. • Deepen US economic and political ties to sub-Saharan Africa and lend momentum to development efforts for the region. • Build on the success of the African Growth and Opportunity Act (AGOA) by expanding US access to the SACU market, further linking trade to SACU’s economic development strategies, encouraging greater foreign direct investment, and promoting regional integration and economic growth. • Strengthen growing bilateral commercial ties and address barriers in the SACU countries to US exports. Advance US objectives for the WTO multilateral negotiations and level the playing field in areas where US exporters are disadvantaged by the European Union’s free trade agreement with South Africa. • Reinforce the SACU reforms that have taken place and encourage additional progress where needed. An enhanced framework of rules governing trade and close cooperation will promote stronger economies, greater respect for the rule of law, sustainable development, and accountable institutions of governance. • Focus ongoing bilateral and multilateral development assistance and trade-related technical assistance to support commitments that the SACU countries make as part of the FTA, and strengthen the government institutions in SACU countries that will be responsible for implementing their commitments.’’ In pursuing bilateral FTAs, the United States uses a common framework covering the issues to be negotiated with the partners involved. This framework, which is patterned after the North American Free Trade Agreement (NAFTA) negotiated in 1992–93, specifies in detail US negotiating objectives covering: 1. Trade in Industrial Goods and Agriculture. 2. Customs Matters, Rules of Origin, and Enforcement Cooperation.

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

463

Table 1. Structure of output, exports, and imports for SACU countries, 2004 Botswana

Lesotho

Namibia

South Africa

Swaziland

Structure of output Value (millions of dollar) Share agriculture Industry Manufacturing Services

8,974 3.0 51.0 5.0 47.0

1,312 18.0 41.0 19.0 42.0

5,712 10.0 32.0 14.0 58.0

212,777 3.0 32.0 20.0 65.0

2,369 13.0 47.0 39.0 40.0

Merchandise exports Value (millions of dollar) Share food Agricultural raw materials Fuels Ores and metals Manufactures

3,467 n.a. n.a. n.a. n.a. n.a.

726 n.a. n.a. n.a. n.a. n.a.

1,833 48.0 1.0 1.0 7.0 41.0

46,029 9.0 2.0 9.0 22.0 58.0

1,900 15.0 8.0 1.0 0.0 76.0

Merchandise imports Value (millions of dollar) Share food Agricultural raw materials Fuels Ores and metals Manufactures

3,340 n.a. n.a. n.a. n.a. n.a.

1,400 n.a. n.a. n.a. n.a. n.a.

2,435 15.0 1.0 10.0 4.0 69.0

57,100 5.0 1.0 14.0 2.0 69.0

2,000 18.0 2.0 13.0 1.0 64.0

Structure of service exports Value (millions of dollar) Share transport Travel Insurance and financial services Computer, information, communications, and other commercial services

647 10.7 70.6 5.5 13.2

56 1.1 60.4 4.7 33.8

463 7.1 87.5 0.0 5.5

8,066 17.1 70.3 4.5 8.1

485 5.5 19.6 60.3 14.7

Structure of service imports Value (millions of dollar) Share transport Travel Insurance and financial services Computer, information, communications, and other commercial services

652 38.1 35.2 4.2 2.5

86 64.6 35.3 0.0 0.1

376 36.1 23.3 5.5 35.1

9,079 50.6 29.5 7.6 12.3

517 14.0 10.0 49.0 27.0

Note: ‘‘Industry’’ covers mining, manufacturing (also reported separately), construction, electricity, water, and gas. Source: World Bank (2006).

3. Sanitary and Phytosanitary (SPS) Measures. 4. Technical Barriers to Trade (TBT). 5. Intellectual Property Rights. 6. Trade in Services. 7. Investment. 8. Electronic Commerce. 9. Government Procurement. 10. Transparency/Anti-Corruption/Regulatory Reform. 11. Trade Remedies. 12. Labor, including Child Labor. 13. Environment.

14. State-to-State Dispute Settlement. 15. Other legitimate US objectives including, but not limited to, the protection of legitimate health or safety, essential security, and consumer interests. A US–SACU FTA thus reflects a myriad of objectives from the US perspective, with a focus on expanding market access in the SACU for US goods and services and shaping the regulatory environment in the SACU member countries to conform to US principles and institutions. By the same token, the SACU members may be attracted by the more

464

WORLD DEVELOPMENT Table 2. GSP/AGOA imports of the United States from SACU countries, 2001–03 (Percent) Botswana

South Africa

Other SACU countries

2001 2002 2003 2001 2002 2003 2001 2002 2003 Agricultural products

Non-GSP/AGOA imports GSP/AGOA imports Total

0.5 0.1 0.6

0.5 0.1 0.6

0.1 0.0 0.1

3.2 1.5 4.7

3.4 2.2 5.7

3.2 2.0 5.2

4.2 1.4 5.6

1.5 0.8 2.3

1.4 0.6 2.0

Forest products

Non-GSP/AGOA imports GSP/AGOA imports Total

0.0 0.0 0.0

0.0 0.0 0.0

0.2 0.0 0.2

0.9 0.2 1.1

0.8 0.3 1.1

1.0 0.3 1.4

0.5 0.0 0.6

0.5 0.0 0.6

0.2 0.0 0.2

Chemical and related products

Non-GSP/AGOA imports GSP/AGOA imports Total

0.0 0.0 0.0

0.0 0.0 0.0

0.0 0.0 0.0

5.3 2.4 7.6

4.8 2.4 7.2

5.3 2.7 7.9

0.2 0.0 0.2

0.1 0.1 0.2

0.2 0.0 0.2

Energy-related products

Non-GSP/AGOA imports GSP/AGOA imports Total

0.0 0.0 0.0

0.0 0.0 0.0

0.0 0.0 0.0

1.2 0.0 1.3

0.8 0.0 0.8

0.7 0.0 0.7

2.4 0.0 2.4

3.4 0.0 3.4

1.5 0.0 1.5

Textiles and apparel Non-GSP/AGOA imports GSP/AGOA imports Total

13.1 0.0 13.1

18.5 10.8 29.3

35.8 31.7 67.5

4.0 0.6 4.6

3.9 1.6 5.4

4.1 2.0 6.1

57.0 29.6 86.7

46.6 44.0 90.6

46.7 43.1 89.8

Non-GSP/AGOA imports GSP/AGOA imports Total

0.0 0.0 0.0

0.0 0.0 0.0

0.5 0.0 0.5

0.0 0.0 0.0

0.0 0.0 0.0

0.0 0.0 0.0

0.0 0.0 0.0

0.0 0.0 0.0

0.0 0.0 0.0

Minerals and metals Non-GSP/AGOA imports GSP/AGOA imports Total

69.7 0.0 69.7

62.5 0.3 62.8

30.2 0.0 30.2

52.0 5.9 57.9

44.0 6.7 50.7

41.5 6.1 47.6

2.6 0.0 2.6

1.3 0.0 1.3

4.4 1.2 5.6

Footwear

Machinery

Non-GSP/AGOA imports GSP/AGOA imports Total

0.3 0.0 0.4

0.0 0.0 0.0

0.1 0.0 0.1

4.8 0.4 5.3

4.1 0.3 4.4

2.7 0.2 2.9

0.5 0.0 0.5

0.1 0.0 0.1

0.0 0.0 0.0

Transportation equipment

Non-GSP/AGOA imports GSP/AGOA imports Total

0.0 0.0 0.0

0.0 0.0 0.0

0.0 0.0 0.0

7.4 5.6 13.0

11.0 9.8 20.8

12.5 11.2 23.7

0.0 0.0 0.0

0.1 0.0 0.1

0.0 0.0 0.0

Electronic products

Non-GSP/AGOA imports GSP/AGOA imports Total

0.0 0.0 0.0

0.0 0.0 0.0

0.2 0.0 0.2

0.5 0.1 0.6

0.4 0.1 0.5

0.6 0.2 0.8

0.1 0.0 0.1

0.8 0.0 0.8

0.0 0.0 0.0

Miscellaneous manufactures

Non-GSP/AGOA imports GSP/AGOA imports Total

7.8 5.3 13.1

4.1 2.1 6.3

0.0 0.0 0.0

1.1 0.5 1.6

1.1 0.7 1.8

1.2 0.8 2.0

0.9 0.0 0.9

0.5 0.0 0.5

0.4 0.0 0.4

Special probisions

Non-GSP/AGOA imports GSP/AGOA imports Total

2.9 0.0 2.9

0.9 0.0 0.9

1.2 0.0 1.2

2.2 0.0 2.2

1.6 0.0 1.6

1.7 0.0 1.7

0.4 0.0 0.4

0.3 0.0 0.3

0.2 0.0 0.2

All sectors

Non-GSP/AGOA imports 94.5 86.7 68.3 82.8 75.9 74.6 68.9 55.2 55.1 GSP/AGOA imports 5.5 13.3 31.7 17.2 24.1 25.4 31.1 44.8 44.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: USITC (2004).

favorable access that the FTA will provide for their exports to the US market and the opportunities to improve their economic efficiency

and to design and implement more effective domestic institutions and development policies. 1

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

(c) Conduct and current status of the US–SACU negotiations The US–SACU FTA talks began in November 2002, and there have been six rounds of formal negotiations during June 2003 to June 2004 and an additional meeting in July 2004. But, as noted in Inside US Trade (April 21, 2006), ‘‘. . .the two sides were never able to overcome their different demands on what the scope of the agreement should be, even with the involvement of senior officials.’’ Langton (2005, pp. 4–5) cites a number of reasons for the deadlock: • ‘‘The United States and SACU may be focused on different negotiating interests. As per their mandate to pursue comprehensive FTAs, US negotiators have attempted to proceed with negotiations on intellectual property rights, government procurement, investment, and services. However, SACU officials have reportedly argued for these issues to be excluded from the negotiations. They have been more focused on locking in AGOA benefits and achieving deeper market access. • The United States and SACU have different views on the inclusion of certain [services] sectors in the negotiations. The United States prefers what is called a negative list, where all [services sectors] are negotiable unless specifically excluded. Meanwhile, SACU prefers a positive list, where the [sectors] to be included in the negotiations are specified in advance, and additional [sectors] may be included in the agreement over time. • The United States and SACU have differed on issues concerning labor rights and environmental regulations. • The Black Economic Empowerment (BEE) program of South Africa may be another significant hurdle to the negotiations. The BEE program involves criteria for companies to increase opportunities for non-white business partners through equity ownership and executive board positions. US businesses have indicated that they may have difficulty meeting the BEE criteria, and alternate ways of addressing BEE goals have been proposed by US negotiators.’’ Issues of intellectual property rights, involving pharmaceuticals in particular, have also been a significant stumbling block in the negotiations. As noted in Avafia (2005, pp. 20–21): ‘‘Given its influential pharmaceutical lobby, the US is interested in ensuring bilateral protection of numer-

465

ous intellectual property rights (IPR) issues with SACU. The most pressing intellectual property (IP) matters pertain to public health. The five SACU countries have some of the highest HIV/AIDS prevalence rates in the world. The United States is particularly interested in ensuring that patent protection in SACU countries is rigorously enforced. Lack of strict IPR enforcement attracted considerable attention during the April 2003 SACU trade policy review. Ambassador Zoellick made it clear that the United States is seeking to establish IP standards similar to those found in domestic US law. The United States is likely to press for provisions dealing with compensation for patent holders whose IPRs have been infringed and the establishment in SACU countries of criminal sanctions against IPR violations. The South African government recently approved a programme to make antiretrovirals available nationwide and to grant voluntary licences to generic manufacturers to produce and distribute antiretrovirals. The agreement may create a path for producers of generic medicines to manufacture, export, market and distribute their versions of antiretrovirals throughout sub-Saharan Africa. Free trade provisions with the United States could clash with these initiatives in pricing essential medicines, and negatively impact SACU area consumers.’’

In light of the many problems encountered in the bilateral negotiations and the presumed difficulties among the SACU members to achieve a negotiating consensus, the Bush Administration announced, in a USTR press release on April 18, 2006 (USTR, 2006), the suspension of FTA negotiations with the SACU countries. Instead, the two sides would seek to negotiate a framework for ‘‘trade and investment-enhancing agreements.’’ But, according to Deputy United States Trade Representative Karan Bhatia, ‘‘. . .the framework would establish a basis and building blocks for pursuing the FTA over the longer term.’’ Rather than leaving the matter here, assuming that an FTA was to be negotiated, the question is what the potential economic effects would be for both the United States and the SACU members. This could help the SACU members in particular to decide whether it was in their joint interest to negotiate a bilateral FTA with the United States or to pursue trade liberalization along other lines. To analyze the FTA issues, in what follows, we draw upon the Michigan Model of World Production and Trade. This is a multi-country/multi-sectoral computable general equilibrium (CGE) model of the global trading system that we have used on numerous occasions to analyze the economic effects of multilateral, regional, and

466

WORLD DEVELOPMENT

bilateral trade negotiations and a variety of other changes in trade and trade policies. 3. THE MICHIGAN MODEL OF WORLD PRODUCTION AND TRADE (a) Overview of the Michigan model The version of the Michigan Model that we use here covers 18 economic sectors, including agriculture, manufactures, and services, in each of 24 countries/regions. The distinguishing feature of the Michigan Model is that it incorporates some aspects of trade with imperfect competition, including increasing returns to scale, monopolistic competition, and product variety. Some details follow. 2 A more complete description of the formal structure and equations of the model can be found online at www.Fordschool.umich.edu/rsie/model/ and in Brown, Kiyota, and Stern (2006). (i) Interpreting the modeling results To help the reader interpret the modeling results that follow, it is useful to review the features of the model that serve to identify the various economic effects to be reflected in the different applications of the model. Although the model includes the aforementioned features of imperfect competition, it remains the case that markets respond to trade liberalization in much the same way that they would with perfect competition. That is, when tariffs or other trade barriers are reduced in a sector, domestic buyers (both final and intermediate) substitute towards imports and the domestic competing industry contracts production while foreign exporters expand. Thus, in the case of multilateral liberalization that reduces tariffs and other trade barriers simultaneously in most sectors and countries, each country’s industries share in both of these effects, expanding or contracting depending primarily on whether their protection is reduced more or less than in other sectors and countries. Worldwide, these changes cause increased international demand for all sectors. World prices increase most for those sectors where trade barriers fall the most. This in turn causes changes in countries’ terms of trade that can be positive or negative. Those countries that are net exporters of goods with the greatest degree of liberalization will experience increases in their terms of trade, as the world prices of their exports rise relative to their imports. The re-

verse occurs for net exporters in industries where liberalization is slight—perhaps because it may already have taken place in previous trade rounds. The effects on the welfare of countries arise from a mixture of these terms-of-trade effects together with the standard efficiency gains from trade and also from additional benefits due to the realization of economies of scale. Thus, we expect on average that the world will gain from multilateral liberalization, as resources are reallocated to those sectors in each country where there is a comparative advantage. In the absence of terms-of-trade effects, these efficiency gains should raise national welfare measured by the equivalent variation for every country, 3 although some factor owners within a country may lose, as will be noted below. However, it is possible for a particular country whose net imports are concentrated in sectors with the greatest liberalization to lose overall, if the worsening of its terms of trade swamps these efficiency gains. On the other hand, although trade with imperfect competition is perhaps best known for introducing reasons why countries may lose from trade, actually its greatest contribution is to expand the list of reasons for gains from trade. Thus, in the Michigan Model, trade liberalization permits all countries to expand their export sectors at the same time that all sectors compete more closely with a larger number of competing varieties from abroad. As a result, countries as a whole gain from lower costs due to increasing returns to scale, lower monopoly distortions due to greater competition, and reduced costs and/or increased utility due to greater product variety. All of these effects make it more likely that countries will gain from liberalization in ways that are shared across the entire population. 4 The various effects just described in the context of multilateral trade liberalization will also take place when there is unilateral trade liberalization, although these effects will depend on the magnitudes of the liberalization in relation to the patterns of trade and the price and output responses involved between the liberalizing country and its trading partners. Similarly, many of the effects described will take place with the formation of bilateral or regional FTAs. But in these cases, there may be trade creation and positive effects on the economic welfare of FTA-member countries together with trade diversion and negative effects on the economic welfare of non-member countries.

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

The net effects on economic welfare for individual countries and globally will thus depend on the economic circumstances and policy changes implemented. In the real world, all of the various effects occur over time, some of them more quickly than others. However, the Michigan Model is static in the sense that it is based upon a single set of equilibrium conditions rather than relationships that vary over time. The model results therefore refer to a time horizon that depends on the assumptions made about which variables do and do not adjust to changing market conditions, and on the short- or long-run nature of these adjustments. Because the supply and demand elasticities used in the model reflect relatively long-run adjustments and it is assumed that markets for both labor and capital clear within countries, 5 the modeling results are appropriate for a relatively long time horizon of several years—perhaps two or three at a minimum. On the other hand, the model does not allow for the very long-run adjustments that could occur through capital accumulation, population growth, and technological change. The modeling results should therefore be interpreted as being superimposed upon longer-run growth paths of the economies involved. To the extent that these growth paths themselves may be influenced by trade liberalization, therefore, the model does not capture such effects. (ii) Benchmark data Needless to say, the data needs of this model are immense. Apart from numerous share parameters, the model requires various types of elasticity measures. Like other CGE models, most of our data come from published sources. The main data source used in the model is ‘‘The GTAP-6.0 Database’’ of the Purdue University Center for Global Trade Analysis Project (Dimaranan & McDougall, 2005). The reference year for this GTAP database is 2001. From this source, we have extracted the following data, aggregated to our sectors and countries/regions 6: • Bilateral trade flows among 24 countries/ regions, decomposed into 18 sectors. Trade with the rest-of-world (ROW) is included to close the model. Botswana, South Africa, and Other SACU countries (Lesotho, Namibia, and Swaziland) are included separately in the country coverage. • Input–output tables for the 24 countries/ regions, excluding ROW.

467

• Components of final demand along with sectoral contributions for the 24 countries/ regions, excluding ROW. • Gross value of output and value added at the sectoral level for the 24 countries/ regions, excluding ROW. • Bilateral import tariffs by sector among the 24 countries/regions. • Elasticity of substitution between capital and labor by sector. • Bilateral export-tax equivalents among the 24 countries/regions, decomposed into 18 sectors. The monopolistically competitive market structure in the non-agricultural sectors of the model imposes an additional data requirement of the numbers of firms at the sectoral level, and there is need also for estimates of sectoral employment. 7 The employment data, which have been adapted from a variety of published sources, will be noted below. To construct the baseline, the GTAP-6.0 2001 database has been projected to the year 2020, which is when we assume that the Doha Round currently underway will have been completed and fully implemented. In this connection, we extrapolated the labor availability in different countries/regions by an annual-average, weighted-population growth rate that varies by country/region. 8 All other major variables have been projected, using an average weighted growth rate of GDP of 3.1%. In the computational scenarios to be presented below, we use these extrapolated data as the starting point to carry out our liberalization scenarios for the US–SACU bilateral FTA and for the accompanying unilateral and global free trade scenarios. In the GTAP-6.0 2001 database, the barriers on agricultural products consist of import tariffs, export subsidies/taxes, and domestic support. Tariffs on food and agriculture come from the Agricultural Trade Policy Database of the Economic Research Service in the US Department of Agriculture. Domestic support data are based on the producer support estimates for OECD countries and input–output tables for non-OECD countries if data are available. Tariffs on merchandise come from the World Integrated Trade Solutions system of the World Bank and UNCTAD. To incorporate the implementation of the Doha Round, the GTAP-6.0 2001 database has been adjusted using the tariff-cutting scenario provided by GTAP. 9 The implementation of the Doha Round means that developed countries cut agricultural protection by the percentages specified

468

Table 3. Post-Doha round tariff rates and employment by sector for the United States and SACU countries United States

Botswana

South Africa

Other SACU

Agriculture Mining Food, beverages & tobacco Textiles Wearing apparel Leather products & footwear Wood & wood products Chemicals Non-metallic min. products Metal products Transportation equipment Machinery & equipment Other manufactures Elec., gas & water Construction

0.9 0.0 2.1

0.0 0.0 0.0

1.7 0.0 3.2

0.0 0.0 15.8

1.5 0.0 4.2

24.0 0.0 12.6

0.0 0.0 0.0

0.0 0.0 0.0

6.3 0.0 7.4

7.2 0.1 7.4

0.0 0.0 0.0

0.0 0.0 0.0

1.9 0.1 4.0

27.1 0.0 26.1

0.0 0.0 0.0

0.0 0.0 0.0

4.5 5.7 7.0

8.7 6.3 0.0

5.7 6.7 0.1

7.4 6.9 2.5

4.9 5.3 3.1

11.9 26.3 21.8

0.0 0.0 0.0

0.0 0.0 0.0

11.9 23.9 15.2

12.2 23.7 13.2

0.0 0.0 0.0

0.0 0.0 0.0

8.9 4.4 2.4

6.7 21.3 6.1

0.0 0.0 0.0

0.0 0.0 0.0

0.1

6.0

0.0

0.0

0.3

6.1

0.0

0.0

3.6

3.2

0.0

0.0

0.4

7.0

0.0

0.0

0.9 1.9

1.9 0.0

0.2 0.0

0.0 0.0

0.3 0.4

2.8 3.2

0.0 0.0

0.0 0.0

2.9 4.7

2.6 2.4

0.0 0.0

0.0 0.0

0.2 0.5

2.2 3.3

0.0 0.0

0.0 0.0

0.7 0.6

3.6 0.0

0.1 0.0

0.0 0.0

0.2 3.8

7.7 0.5

0.0 0.0

0.0 0.0

2.9 12.4

3.8 4.7

0.0 0.0

0.0 0.0

0.6 4.7

5.0 10.5

0.0 0.0

0.0 0.0

0.3

0.0

0.0

0.0

1.2

2.5

0.0

0.0

2.2

2.0

0.0

0.0

0.8

1.0

0.0

0.0

0.6 0.0

1.3 0.0

0.0 0.0

0.0 0.0

0.4 0.0

9.6 0.0

0.0 0.0

0.0 0.0

3.6 0.0

2.2 0.0

0.0 0.0

0.0 0.0

1.5 0.0

14.9 0.0

0.0 0.0

0.0 0.0

4.5

4.5

4.5

4.5

0.5

0.5

0.0

0.0

0.5

0.5

0.0

0.0

0.5

0.5

0.0

0.0

WORLD DEVELOPMENT

World Botswana South Other World United South Other World United Botswana Other World United Botswana South Africa SACU States Africa SACU States SACU States Africa

13.5

13.5

13.5

13.5

5.5

5.5

0.0

0.0

5.5

5.5

0.0

0.0

5.5

5.5

0.0

0.0

15.5

15.5

15.5

15.5

8.5

8.5

0.0

0.0

8.5

8.5

0.0

0.0

8.5

8.5

0.0

0.0

12.5

12.5

12.5

12.5

2.0

2.0

0.0

0.0

2.0

2.0

0.0

0.0

2.0

2.0

0.0

0.0

Number of workers Agriculture Mining Food, beverages & tobacco Textiles Wearing apparel Leather products & footwear Wood & wood products Chemicals Non-metallic min. products Metal products Transportation equipment Machinery & equipment Other manufactures Elec., Gas and water Construction Trade & transport Other private services Government services Total

3,559,337 615,851 2,154,563 844,752 615,892 91,748 2,236,392 2,717,185 723,522 3,120,179 2,245,828 5,335,171 519,173 1,529,309 10,406,472 39,103,833 18,105,155 52,786,155 146,710,516

%

Number of workers

%

Number of workers

%

Number of workers

%

2.4 0.4 1.5 0.6 0.4 0.1 1.5 1.9 0.5 2.1 1.5 3.6 0.4 1.0 7.1 26.7 12.3 36.0

233,236 19,438 7,455 2,516 4,351 1,115 7,438 5,994 2,701 7,485 3,126 6,473 907 5,832 36,410 131,225 102,885 177,044

30.9 2.6 1.0 0.3 0.6 0.1 1.0 0.8 0.4 1.0 0.4 0.9 0.1 0.8 4.8 17.4 13.6 23.4

2,670,497 833,858 369,128 124,601 215,430 55,229 368,274 296,798 133,728 370,629 154,763 320,484 44,906 125,923 887,606 4,436,496 3,346,183 3,085,123

15.0 4.7 2.1 0.7 1.2 0.3 2.1 1.7 0.7 2.1 0.9 1.8 0.3 0.7 5.0 24.9 18.8 17.3

371,918 10,712 9,552 3,224 5,575 1,429 9,530 7,680 3,461 9,591 4,005 8,293 1,162 11,615 60,353 147,114 213,026 317,751

31.1 0.9 0.8 0.3 0.5 0.1 0.8 0.6 0.3 0.8 0.3 0.7 0.1 1.0 5.0 12.3 17.8 26.6

100.0

755,636

100.0

17,839,669

100.0

1,195,988

100.0

Sources: Tariff and trade data are adapted from Brown et al. (2002) and Dimaranan and McDougall (2005) and adjusted using the tariff-cutting scenario provided by GTAP. For more detail, see main text. Employment data are adapted from ILO website (2005), UNIDO (2005), World Bank (2006), Statistics South Africa (2006), Central Statistics Office (2006), and Ministry of Labour (2006).

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

Trade & transport Other private services Government services

469

470

Table 4a. Trade by sector for the United States and Botswana, 2001 United States

Exports (million $) World

Total

South Africa

Exports (%) Other SACU

Imports (million $)

World

Botswana

South Africa

Other SACU

World

Imports (%)

Botswana

South Africa

Other SACU

World

Botswana

South Africa

Other SACU

31,488 4,260 29,107

1 0 0

38 6 58

4 0 5

100.0 100.0 100.0

0.0 0.0 0.0

0.1 0.1 0.2

0.0 0.0 0.0

20,644 77,530 34,790

0 2 1

78 147 110

2 29 14

100.0 100.0 100.0

0.0 0.0 0.0

0.4 0.2 0.3

0.0 0.0 0.0

12,625 5,116 1,930

0 0 0

25 6 4

0 1 0

100.0 100.0 100.0

0.0 0.0 0.0

0.2 0.1 0.2

0.0 0.0 0.0

30,961 50,788 22,480

1 3 0

131 118 24

117 180 0

100.0 100.0 100.0

0.0 0.0 0.0

0.4 0.2 0.1

0.4 0.4 0.0

28,075

2

109

1

100.0

0.0

0.4

0.0

63,362

0

87

9

100.0

0.0

0.1

0.0

104,495 13,890

2 1

489 100

8 1

100.0 100.0

0.0 0.0

0.5 0.7

0.0 0.0

117,226 20,054

0 0

414 51

13 1

100.0 100.0

0.0 0.0

0.4 0.3

0.0 0.0

33,490 110,075

1 13

86 892

1 177

100.0 100.0

0.0 0.0

0.3 0.8

0.0 0.2

64,781 191,656

0 1

2,279 427

13 1

100.0 100.0

0.0 0.0

3.5 0.2

0.0 0.0

279,309

20

924

20

100.0

0.0

0.3

0.0

373,201

1

367

4

100.0

0.0

0.1

0.0

14,710

0

62

1

100.0

0.0

0.4

0.0

57,287

18

572

2

100.0

0.0

1.0

0.0

1,416

0

6

1

100.0

0.0

0.5

0.1

1,766

0

9

0

100.0

0.0

0.5

0.0

2,739 62,203 109,632

0 14 38

0 307 232

1 22 69

100.0 100.0 100.0

0.0 0.0 0.0

0.0 0.5 0.2

0.0 0.0 0.1

764 82,987 69,873

0 22 12

0 503 109

0 53 18

100.0 100.0 100.0

0.0 0.0 0.0

0.1 0.6 0.2

0.0 0.1 0.0

44,252

12

192

21

100.0

0.0

0.4

0.0

20,736

17

94

15

100.0

0.1

0.5

0.1

888,812

104

3,538

333

100.0

0.0

0.4

0.0

1,300,886

80

5,518

473

100.0

0.0

0.4

0.0

WORLD DEVELOPMENT

Agriculture Mining Food, beverages & tobacco Textiles Wearing apparel Leather products & footwear Wood & wood products Chemicals Non-metallic min. products Metal products Transportation equipment Machinery & equipment Other manufactures Elec., Gas and water Construction Trade & transport Other private services Government services

Botswana

Botswana

Total

United States

South Africa

Other SACU

World

United States

South Africa

Other SACU

World

United States

16 65 86

0 2 1

6 26 20

0 0 0

100.0 100.0 100.0

2.9 3.2 1.7

35.9 39.5 22.8

0.4 0.3 0.2

75 21 201

1 0 0

31 21 7

1 3 0

12 11 1

0 0 0

100.0 100.0 100.0

2.9 15.3 0.1

38.3 53.2 12.4

0.1 0.2 0.5

41 36 24

15

0

11

0

100.0

1.0

76.0

3.1

38 1

0 0

28 1

0 0

100.0 100.0

0.9 3.3

74.5 71.3

150 50

0 0

4 43

0 1

100.0 100.0

0.3 1.0

47

1

18

1

100.0

2,388

18

5

0

3

0

0

2 116 72

0 22 12

55 3,162

South Africa

Other SACU

World

United States

South Africa

Other SACU

67 16 173

0 0 2

100.0 100.0 100.0

1.8 0.6 0.1

88.6 72.3 86.2

0.4 1.7 1.0

0 0 0

26 29 19

0 0 0

100.0 100.0 100.0

0.5 1.1 0.3

64.3 79.2 82.4

0.1 0.1 0.1

176

2

162

0

100.0

1.1

92.3

0.1

0.2 1.4

302 78

2 1

277 72

0 0

100.0 100.0

0.6 0.7

91.9 92.1

0.1 0.1

2.9 85.9

0.3 1.3

159 205

1 13

142 108

0 0

100.0 100.0

0.4 6.4

89.3 52.7

0.1 0.1

1.4

38.9

1.4

500

20

352

1

100.0

4.0

70.3

0.1

100.0

0.7

0.2

0.0

51

0

19

0

100.0

0.4

37.6

0.0

0

100.0

13.7

3.6

0.2

11

0

8

0

100.0

1.5

78.5

0.0

0 0 0

0 0 0

100.0 100.0 100.0

13.5 19.2 17.1

0.3 0.4 0.4

0.1 0.0 0.0

6 84 185

0 14 38

0 1 0

0 0 0

100.0 100.0 100.0

8.3 17.2 20.5

0.0 0.6 0.1

0.0 0.1 0.0

17

0

0

100.0

30.3

0.3

0.0

23

12

0

0

100.0

50.0

0.3

0.0

80

186

3

100.0

2.5

5.9

0.1

2,177

105

1,472

4

100.0

4.8

67.6

0.2

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

Agriculture Mining Food, beverages & tobacco Textiles Wearing apparel Leather products & footwear Wood & wood products Chemicals Non-metallic min. products Metal products Transportation equipment Machinery & equipment Other manufactures Elec., gas & water Construction Trade & transport Other private services Government services

World

471

472

Table 4b. Trade by sector for the South Africa and other SACU countries, 2001 South Africa

Total

World

United States

2,037 4,422 2,047

68 136 101

531 302 210

Botswana

Exports (%) United States

Botswana

Imports (million $)

Other SACU

World

Other SACU

59 14 158

94 7 243

100.0 100.0 100.0

3.3 3.1 4.9

2.9 0.3 7.7

4.6 0.2 11.9

125 114 23

25 28 18

51 59 28

100.0 100.0 100.0

23.5 37.6 11.2

4.6 9.1 8.6

1,963

79

147

149

100.0

4.0

4,083 493

395 45

262 59

497 72

100.0 100.0

11,530 2,783

2,234 416

132 105

169 220

3,681

353

338

1,572

570

369

World

Imports (%)

United States

Botswana

Other SACU

World

597 2,559 1,387

40 7 64

6 27 22

103 25 223

100.0 100.0 100.0

9.6 19.5 13.3

775 342 287

27 6 4

12 12 1

48 27 4

7.5

7.6

1,108

118

13

9.7 9.2

6.4 11.9

12.2 14.5

3,769 729

513 123

100.0 100.0

19.4 14.9

1.1 3.8

1.5 7.9

1,754 4,163

413

100.0

9.6

9.2

11.2

18

31

100.0

36.3

1.1

9

8

49

100.0

2.4

5 2,616

0 503

0 1

0 1

100.0 100.0

802

109

0

1

301

94

0

39,747

5,372

1,371

United States

Botswana

Other SACU

6.7 0.3 4.6

1.0 1.1 1.6

17.2 1.0 16.1

100.0 100.0 100.0

3.4 1.9 1.5

1.6 3.4 0.3

6.1 8.0 1.5

262

100.0

10.6

1.1

23.7

33 1

88 3

100.0 100.0

13.6 16.9

0.9 0.1

2.3 0.4

91 903

5 47

34 20

100.0 100.0

5.2 21.7

0.3 1.1

1.9 0.5

7,785

955

19

48

100.0

12.3

0.2

0.6

2.0

614

64

5

36

100.0

10.5

0.8

5.9

2.2

13.3

467

6

0

1

100.0

1.4

0.0

0.2

8.7 19.2

0.0 0.0

0.0 0.0

11 1,832

0 307

0 0

0 1

100.0 100.0

4.2 16.7

0.1 0.0

0.0 0.1

100.0

13.6

0.0

0.1

1,225

232

0

0

100.0

19.0

0.0

0.0

0

100.0

31.1

0.0

0.0

383

192

0

0

100.0

50.2

0.0

0.0

2,083

100.0

13.5

3.4

5.2

29,786

3,654

202

924

100.0

12.3

0.7

3.1

WORLD DEVELOPMENT

Agriculture Mining Food, beverages & tobacco Textiles Wearing apparel Leather products & footwear Wood & wood products Chemicals Non-metallic min. products Metal products Transportation equipment Machinery & equipment Other manufactures Elec., gas & water Construction Trade & transport Other private services Government services

Exports (million $)

Other SACU

Total

United States

Botswana

South Africa

World

United States

Botswana

South Africa

World

United States

Botswana

South Africa

World

United States

Botswana

South Africa

155 152 656

2 28 13

0 0 2

79 22 206

100.0 100.0 100.0

1.3 18.8 2.0

0.2 0.2 0.3

51.1 14.3 31.4

120 29 310

4 0 5

0 0 0

104 9 261

100.0 100.0 100.0

3.2 0.4 1.6

0.1 0.7 0.1

86.8 32.0 84.2

181 222 16

113 173 0

0 0 0

46 26 4

100.0 100.0 100.0

62.3 78.3 2.3

0.0 0.0 0.1

25.4 11.8 23.7

158 74 35

0 1 0

0 0 0

54 62 30

100.0 100.0 100.0

0.2 0.7 0.9

0.0 0.1 0.1

34.2 83.5 85.6

286

8

0

240

100.0

2.9

0.0

84.0

180

1

1

166

100.0

0.6

0.3

92.4

202 12

13 1

0 0

84 2

100.0 100.0

6.6 6.6

0.1 0.7

41.7 21.0

571 95

9 1

0 0

525 86

100.0 100.0

1.5 0.7

0.0 0.0

91.9 91.1

90 52

12 1

0 0

33 19

100.0 100.0

13.3 2.1

0.2 0.6

36.6 37.5

222 459

1 185

0 1

181 228

100.0 100.0

0.4 40.4

0.2 0.1

81.5 49.6

101

3

1

46

100.0

3.4

0.6

45.7

602

20

1

430

100.0

3.4

0.1

71.4

540

2

0

35

100.0

0.4

0.0

6.5

51

1

0

33

100.0

2.2

0.0

64.9

4

0

0

1

100.0

7.4

0.0

18.6

79

1

0

49

100.0

1.1

0.0

62.1

3 269

0 53

0 0

0 1

100.0 100.0

3.6 19.8

0.0 0.0

0.1 0.4

15 159

1 22

0 0

0 1

100.0 100.0

8.6 13.7

0.0 0.0

0.0 0.5

131

18

0

0

100.0

13.9

0.0

0.2

355

69

0

1

100.0

19.5

0.0

0.2

51

15

0

0

100.0

29.5

0.0

0.3

42

21

0

0

100.0

51.3

0.0

0.2

3,123

458

4

845

100.0

14.7

0.1

27.1

3,555

343

3

2,220

100.0

9.6

0.1

62.4

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

Agriculture Mining Food, beverages & tobacco Textiles Wearing apparel Leather products & footwear Wood & wood products Chemicals Non-metallic min. products Metal products Transportation equipment Machinery & equipment Other manufactures Elec., gas & water Construction Trade & transport Other private services Government services

World

473

474

WORLD DEVELOPMENT

in the Doha Development Agenda, and all countries are assumed to adopt 50% tariff cuts for non-agricultural goods and manufactures. The services barriers are based on financial data on average gross (price-cost) margins constructed initially by Hoekman (2000) and adapted for modeling purposes in Brown, Deardorff, and Stern (2002), Brown, Deardorff, and

Stern (2003). 10 The gross operating margins are calculated as the differences between total revenues and total operating costs. Some of these differences are presumably attributable to fixed costs. Given that the gross operating margins vary across countries, a portion of the margin can also be attributed to barriers to FDI. For this purpose, a benchmark is set for

Table 5. Stock of US foreign direct investment in South Africa, 2005 (Percent of total FDI stock and millions of US dollars)

Mining Manufacturing total Of which:

Food Chemicals Primary and fabricated metals Machinery Computer and electronic products Electrical equipment, appliances, and components Transportation equipment Other manufacturing

Wholesale trade Information Depository institutions Finance (except depository institutions) and insurance Professional, scientific, and technical services Holding companies (nonbank) Other industries Total

World Mil.

SACU Mil.

114,386 451,402 31,524 109,354 21,671 29,224 58,785 13,079 48,930 138,836 142,960 55,479 70,331 393,723 49,202 623,076 169,424

( 5) 1,610 10 281 ( 21) 246 35 43 816 199 437 147 n.a. 61 114 n.a. 279

2,069,983

3,594

World % Mining Manufacturing total Of which:

Food Chemicals Primary and fabricated metals Machinery Computer and electronic products Electrical equipment, appliances, and components Transportation equipment Other manufacturing

Wholesale trade Information Depository institutions Finance (except depository institutions) and insurance Professional, scientific, and technical services Holding companies (nonbank) Other industries Total Notes: (1) FDI data for SACU refer only to South Africa. (2) n.a. means not available. Source: Adapted from US Bureau of Economic Analysis (2006, Table 10.3).

SACU %

5.5 21.8 1.5 5.3 1.0 1.4 2.8 0.6 2.4 6.7 6.9 2.7 3.4 19.0 2.4 30.1 8.2

0.1 44.8 0.3 7.8 0.6 6.8 1.0 1.2 22.7 5.5 12 4.1 n.a. 1.7 3 n.a. 7.8

100.0

100.0

0.44 0.46 1.23 11.0

0.41 0.41 1.14

0.01 0.01

9.3 1.4 0.1 1.2 0.1 0.3

Labor Capital Bil.

Total

0.07 0.02 0.10

0.1

0.21 0.11 0.43

1.6

0.37 0.49 0.71

9.3

0.64 0.61 1.24

0.05

8.1 1.1 0.0 1.0 0.1 0.2 0.05

1.2 0.3 0.0 0.2 0.0 0.1 0.01

0.0 0.0 0.0 0.0 0.0 0.0 0.00

United States SACU Botswana South Africa Other SACU countries Other countries

% Bil. %

Bil.

%

Bil.

%

Total Services barriers Manufactures tariffs Agricultural protection

Table 6. Global welfare effects of US–Southern African Customs Union (SACU) FTA (Billions of US dollars and percent)

Real returns

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

475

each sector in relation to the country with the smallest gross operating margin, on the assumption that operations in the benchmark country can be considered to be freely open to foreign firms. The excess in any other country above this lowest benchmark is then taken to be due to barriers to establishment by foreign firms. That is, the barrier is modeled as the cost-increase attributable to an increase in fixed cost borne by multinational corporations attempting to establish an enterprise locally in a host country. This abstracts from the possibility that fixed costs may differ among firms because of variations in market size, distance from headquarters, and other factors. It is further assumed that this cost increase can be interpreted as an ad valorem equivalent tariff on services transactions generally. The services barriers based on Hoekman (2000) are considerably higher than the import barriers on manufactures. While it is generally acknowledged that many services sectors are highly regulated and thus restrain international services transactions, the Hoekman services barriers may be overstated for the reasons mentioned above. We have accordingly reduced these services barriers by 50% for modeling purposes in what follows. The GTAP 6.0 (2001) base data for tariffs and the estimated tariff equivalents of services barriers are broken down by sector on a global and bilateral basis for the United States, Botswana, South Africa, and Other SACU (Lesotho, Namibia, and Swaziland) in Table 3. According to GTAP (http://www.cepii.fr/ anglaisgraph/bdd/macmap/pdf/List_of_agreements_2001), many of the existing preferential arrangements are taken into account in calculating the GTAP tariff rates. This includes the GSP and AGOA preferences that are applicable to the SACU. For the United States, the highest import tariffs for manufactures are recorded for textiles, wearing apparel, and leather products & footwear, both globally and bilaterally. There is reason to believe, however, that the foregoing rates, which apply to the year 2001, do not accurately reflect the SACU preferences. This is because, as noted in Table 2, the preferential coverage of US imports from SACU was comparatively small compared to the subsequent years shown. It is for this reason that, in our computational analysis to follow, we have chosen to set the US bilateral rates equal to zero for the SACU on textiles, apparel, and for South Africa transportation equipment rather than using the benchmark rates in Table

476

Exports (%) United States Agriculture Mining Food, beverages & tobacco Textiles Wearing apparel Leather products & footwear Wood & wood products Chemicals Non-metallic min. products Metal products Transportation equipment Machinery & equipment Other manufactures Elec., gas & water Construction Trade & transport Other private services Government services

0.03 0.01 0.05 0.09 0.09 0.11 0.05 0.04 0.06 0.03 0.17 0.01 0.03 0.01 0.01 0.08 0.06 0.02

Botswana

South Africa

0.29 0.47 0.14 0.06 0.44 0.36 0.09 0.17 0.29 0.41 2.16 0.07 0.06 0.02 1.98 7.39 7.03 10.80

0.24 0.29 0.77 0.05 0.01 0.21 0.16 0.16 0.04 0.26 0.52 0.04 0.19 0.12 1.36 7.66 5.85 10.82

Imports (%) Other SACU 0.13 0.27 1.31 0.13 0.14 0.29 0.08 0.01 0.32 0.32 0.51 0.10 0.32 0.50 0.78 8.84 6.47 10.48

United States 0.04 0.01 0.08 0.01 0.01 0.01 0.01 0.01 0.01 0.03 0.01 0.01 0.01 0.01 0.03 0.27 0.10 0.23

Botswana 1.48 0.86 0.43 0.02 0.53 0.33 0.40 0.38 0.44 0.42 0.26 0.26 0.25 0.49 0.41 2.48 4.80 2.69

South Africa 1.84 0.13 1.05 1.19 0.67 0.48 1.29 1.22 1.27 0.40 2.29 0.48 0.53 0.01 0.08 2.16 4.47 2.88

Other SACU 2.85 0.33 1.07 0.31 0.37 0.37 0.65 0.56 0.39 0.21 4.26 0.33 0.89 0.38 0.20 0.63 3.62 2.66

WORLD DEVELOPMENT

Table 7a. US–Southern African Customs Union (SACU) FTA: Change in exports and imports (Percent, millions of dollars, and the number of workers)

Exports (value)

Total

17 ( 1) 28 20 8 4 23 83 15 17 325 70 8 (0) (0) 87 124 14

(0) (1) (0) (0) (0) (0) (0) (0) (0) ( 2) ( 2) (0) 2 (0) 0 15 9 10

9 23 28 0 0 1 6 12 0 53 ( 26) 3 5 1 0 357 84 58

(0) 1 17 0 1 0 0 (0) 0 0 (0) (0) 3 0 0 41 15 9

13 18 45 3 5 2 12 23 3 29 ( 17) 83 10 0 0 402 123 84

2 0 1 (0) 0 0 1 2 1 1 1 2 0 0 0 4 16 1

18 ( 5) 24 16 4 2 24 78 15 12 167 65 6 (0) 0 71 98 20

6 0 5 1 0 0 2 5 1 1 34 3 1 1 0 2 23 2

840

33

614

87

840

33

614

87

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

Agriculture Mining Food, beverages & tobacco Textiles Wearing apparel Leather products & footwear Wood & wood products Chemicals Non-metallic min. products Metal products Transportation equipment Machinery & equipment Other manufactures Elec., gas & water Construction Trade & transport Other private services Government services

Imports (value)

477

478

Output (%)

Agriculture Mining Food, beverages & tobacco Textiles Wearing apparel Leather products & footwear Wood & wood products Chemicals Non-metallic min. products Metal products Transportation equipment Machinery & equipment Other manufactures Elec., gas & water Construction Trade & transport Other private services Government services

United States

Botswana

0.00 0.01 0.00 0.02 0.01 0.02 0.01 0.01 0.01 0.01 0.04 0.01 0.01 0.01 0.00 0.00 0.00 0.00

0.12 0.45 0.10 0.05 0.37 0.37 0.02 0.01 0.04 0.50 2.03 0.05 0.12 0.29 0.29 0.74 0.18 0.74

Employment (%)

South Africa 0.12 0.39 0.25 0.02 0.01 0.19 0.23 0.19 0.01 0.31 0.71 0.05 0.30 0.32 0.25 0.77 0.34 0.26

Other SACU 0.17 0.61 0.87 0.49 0.38 0.38 0.48 0.49 0.91 0.68 3.25 0.28 0.57 1.26 0.47 2.06 0.87 0.69

United States 0.00 0.00 0.00 0.01 0.00 0.02 0.00 0.01 0.01 0.00 0.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Botswana 0.12 0.49 0.16 0.33 0.75 0.55 0.32 0.29 0.18 0.63 2.38 0.33 0.22 0.03 0.00 0.28 0.15 0.23

South Africa 0.11 0.06 0.09 0.35 0.37 0.22 0.13 0.19 0.26 0.08 1.26 0.30 0.11 0.02 0.02 0.10 0.05 0.01

Other SACU 0.16 0.01 0.04 0.41 0.50 0.45 0.31 0.35 0.06 0.30 5.21 0.48 0.33 0.30 0.07 0.38 0.31 0.04

WORLD DEVELOPMENT

Table 7b. US–Southern African Customs Union (SACU) FTA: Change in outputs and number of workers (Percent, Millions of Dollars, and the Number of Workers)

Employment (number of workers)a

Output (value)

Total a

16 9 44 48 22 6 60 168 23 92 490 115 6 35 98 66 292 9 1,601

( 1) ( 1) 2 0 (0) (0) (0) 0 (0) ( 3) ( 2) 0 6 1 4 17 4 20

20 85 73 2 0 3 36 64 (0) 106 ( 108) 8 11 87 38 548 181 113

3 3 23 4 2 0 5 4 3 4 ( 12) 1 6 4 4 68 19 17

164 ( 5) ( 33) 112 30 17 55 152 59 147 905 138 9 17 25 ( 1,444) 128 ( 477)

( 272) ( 92) ( 12) ( 8) ( 30) ( 6) ( 23) ( 17) ( 5) ( 45) ( 70) ( 20) ( 2) 2 (0) 349 ( 143) 394

3,010 497 ( 335) ( 457) ( 832) ( 126) ( 518) ( 604) ( 370) ( 308) ( 2,048) ( 1,024) ( 52) ( 30) ( 199) 4,792 ( 1,667) 270

649 2 5 ( 14) ( 29) ( 7) ( 31) ( 29) 2 ( 29) ( 219) ( 42) ( 4) 37 ( 44) 598 ( 701) ( 145)

47

1,267

157

0

0

0

0

Changes in employment sum to zero because of assumption of full employment.

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

Agriculture Mining Food, beverages & tobacco Textiles Wearing apparel Leather products & footwear Wood & wood products Chemicals Non-metallic min. products Metal products Transportation equipment Machinery & equipment Other manufactures Elec., gas & water Construction Trade & transport Other private services Government services

479

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3. The SACU tariff rates on agricultural products, food, beverages & tobacco, textiles, wearing apparel, leather products & footwear, and some durable manufactures are relatively high. The value and shares of exports and imports of goods and services for 2001 for the United States, Botswana, South Africa, and Other SACU are broken down by sector according to destination and origin in Tables 4a and 4b. It is evident that US trade with the SACU is relatively small, mostly with South Africa, and concentrated in manufactures and services. There is a considerable amount of intra-SACU trade in many of the sectors shown. Total employment in 2001 is broken down by sector and indicated in the bottom part of Table 3. Information on the stock of US foreign direct investment (FDI) in South Africa is indicated in Table 5 for 2005. The total is $3.6 billion, with 44.8% in manufacturing and the remainder in services and related sectors. With the foregoing by way of background, we turn now to our computational analysis, which will focus on the economic effects on the United States and the SACU of the bilateral removal of trade barriers on agricultural products, manufactures, and services as the result of a US–SACU FTA. As already indicated, to take the existing US GSP and AGOA preferences into account, we set the US bilateral tariffs equal to zero for imports from SACU of textiles, clothing, and transportation equipment. Depending on the details of the FTA negotiations, many of the remaining bilateral barriers would be removed immediately, but some would be phased out over longer periods of time. For modeling purposes, however, we assume that all barriers remaining are removed at the same time rather than in phases. (iii) Computational results of a US–SACU FTA The global welfare effects of the bilateral removal of agricultural protection, manufactures tariffs, and services barriers are indicated in Table 6. It can be seen that there are negligible effects on economic welfare with the bilateral removal of agricultural protection. US economic welfare is increased by $1.2 billion with the bilateral elimination of manufactures tariffs and $8.1 billion with the bilateral elimination of services barriers. The total improvement of US economic welfare is $9.3 billion, which is 0.05% of US GDP. The real returns to US capital and the real returns to labor are increased negligibly. Global economic welfare rises by $11.0 billion. Economic welfare for the SACU members is in-

creased by $1.4 billion (0.6% of GDP for Botswana and Other SACU and 1.2% for South Africa). The real returns to capital and labor rise by about 0.4% in Botswana and Other SACU and by 1.1% and 1.2% in South Africa. The sectoral effects on exports, imports, gross output, and employment are indicated in Tables 7a and 7b. Total US exports and imports are increased by $840 million. The percentage increases in US sectoral exports are all considerably below 1%. The largest absolute increases in US sectoral exports are in transport equipment and services. The increases in US imports from SACU are also very small in percentage terms. The largest absolute increases in US imports are in food, beverages, and tobacco, machinery & equipment, and services. Total SACU exports are increased by $734 million, with the largest increases in food, beverages & tobacco, mining and metal products, and services. The percentage increases in SACU exports are sizable in textiles and wearing apparel and services. SACU imports increase especially in chemicals, transportation equipment, machinery & equipment, and services. There are significant percentage increases in several SACU import sectors. South Africa, being the largest member of the SACU, accounts for most of the changes in trade. There are comparatively small changes in US sectoral gross output and employment. There are also comparatively small changes in output in the SACU members, with the most noteworthy output declines in transportation equipment. There are indications of small employment increases in services in Botswana, agriculture, mining, and services in South Africa, and agriculture and services in the other SACU members. Since a US–SACU FTA would be phased in over a period of years, the SACU employment shifts noted suggest that there would be minor adjustment problems for dislocated workers who would change employment between sectors. We have also calculated the effects on bilateral US trade with SACU and other trading partners. The results, which are available on request, show indications of trade diversion, but the amounts involved are very small. Our modeling results just described reflect the bilateral elimination of barriers to trade in agricultural products, manufactures, and services. As noted in the discussion of the main features and objectives of the US–SACU FTA, there are a number of non-trade features that are covered as well. While no allowance has been made

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

for these other features, as discussed above, there has been concern especially from the SACU members about the potentially detrimental effects of the restrictions involving intellectual property rights, in particular access to low-cost pharmaceuticals. While there may be benefits from some particular non-trade features, the relatively small size of the benefits calculated from a bilateral FTA suggests that these non-trade benefits are likely also to be fairly small. It should also be noted that no account has been taken of possible increases in US foreign direct investment in the SACU members in response to the incentives provided by the bilateral liberalization, and no allowance has been made for possible increases in capital formation and economic growth and improvements in productivity in the United States and the SACU members. But again, these effects are likely to be small. It can be said therefore that while our modeling results may constitute a lower bound to

481

the welfare changes due to a US–SACU bilateral FTA, it remains unclear how significant any beneficial non-trade and growth effects of the SACU FTA may be. There is reason to believe accordingly that the SACU members would obtain only limited benefits from a FTA with the United States. This conclusion is reinforced by the SACU GSP/AGOA preferences noted that are already in place and provide duty-free access to the US market for textiles, apparel, transport equipment, and other products.

4. WELFARE COMPARISONS OF A US–SACU BILATERAL FTA, UNILATERAL FREE TRADE, AND GLOBAL FREE TRADE Having analyzed the economic effects of a bilateral US–SACU FTA, we now consider

Table 8. Computation of welfare effects of bilateral FTAs, unilateral free trade, and global free trade (billions of dollars and percent) All barriers

Agricultural protection

Manufactures tariffs

Services barriers

(United (% of GDP) (United (% of GDP) (United (% of GDP) (United (% of GDP) States $) States $) States $) States $) US–SACU bilateral free trade United States 9.3 0.1 Botswana 0.1 0.6 South Africa 1.2 0.6 Other SACU 0.1 1.2 Global 11.0 Unilateral free trade by United States United States 304.8 1.7 Botswana 0.1 1.1 South Africa 0.8 0.4 Other SACU 0.0 0.1 Global 453.1 Unilateral free trade by SACU United States 3.0 0.0 Botswana 0.3 3.6 South Africa 5.9 2.9 Other SACU 0.5 5.2 Global 21.9 Global free trade United States 501.3 Botswana 0.3 South Africa 11.1 Other SACU 0.5 Global 2290.1

2.8 2.9 5.5 5.4

0.0 0.0 0.0 0.0 0.1

0.0 0.1 0.0 0.1

1.2 0.0 0.2 0.0 1.6

0.0 0.2 0.1 0.4

8.1 0.0 1.0 0.1 9.3

0.0 0.4 0.5 0.7

20.7 0.0 0.2 0.0 18.0

0.1 0.0 0.1 0.1

20.0 0.0 0.2 0.0 32.6

0.1 0.2 0.1 0.5

304.1 0.1 0.8 0.0 438.4

1.7 1.0 0.4 0.5

0.4 0.0 1.4 0.1 1.2

0.0 0.5 0.7 1.4

1.7 0.2 2.3 0.2 14.3

0.0 2.0 1.1 2.5

0.9 0.1 2.3 0.1 6.4

0.0 1.1 1.1 1.3

6.0 0.0 1.3 0.1 59.7

0.0 0.2 0.6 0.9

56.0 0.0 7.5 0.1 704.6

0.3 0.5 3.7 1.3

439.3 0.2 4.9 0.3 1525.8

2.4 2.2 2.4 3.3

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for illustrative purposes whether the US and SACU economic interests would be more or less enhanced by unilateral free trade and global (multilateral) free trade as compared to the adoption of a bilateral FTA. The welfare comparisons are indicated in Table 8 and can be summarized as follows: 1. Global economic welfare is increased by $453.1 billion with US unilateral free trade and by $21.9 billion with SACU unilateral free trade, as compared to US–SACU FTA liberalization of $11.0 billion. 2. With unilateral free trade, US economic welfare increases by $304.8 billion (1.7% of GDP) compared to $9.3 billion (0.1% of GDP) with a bilateral US–SACU FTA. SACU unilateral free trade increases SACU welfare by $6.7 billion compared to $1.4 billion with a US–SACU FTA. 3. Global (multilateral) free trade increases total economic welfare by $2.3 trillion compared to $453.1 billion and $21.9 billion with unilateral US and SACU free trade and $11.0 billion with a bilateral US–SACU FTA. 4. With global free trade, US economic welfare rises by $501.3 billion (2.8% of GDP) compared to $304.8 billion with unilateral free trade and $9.3 billion with a bilateral US–SACU FTA. SACU welfare increases by $11.9 billion with global free trade compared to $6.7 billion for SACU unilateral free trade and $1.4 billion for bilateral US– SACU FTA liberalization. 5. The sources of the welfare gains for the United States and South Africa especially are concentrated in the liberalization of manufactures and services barriers. These calculations clearly show that multilateral trade liberalization offers potentially far greater increases in economic welfare for the United States and the SACU and other countries/regions in the global trading system as compared to a bilateral US–SACU FTA and unilateral liberalization. This would be the case even if there would be less than complete free trade globally. That is, if existing trade barriers in the ongoing Doha Development Agenda negotiations were to be reduced, for example, by one-third or one-half, the resulting global and national gains would be proportionally lower. But these welfare gains would still far exceed the welfare gains from a bilateral US– SACU FTA and would serve to offset the negative welfare effects of any trade diversion resulting from a US–SACU FTA. This would

almost certainly remain true even if there are other benefits from the non-trade aspects of the US–SACU FTA and possible increases in capital accumulation and productivity. 5. SUMMARY AND CONCLUSIONS This paper has been designed to analyze the potential economic effects of bilateral negotiations for an FTA between the United States and the Southern African Customs Union (SACU). The US–SACU FTA bilateral negotiations were initiated in June 2003. But following a number of official meetings, the negotiations were deadlocked over a series of issues of concern to the SACU. The bilateral FTA negotiations have now been replaced by an effort to negotiate a framework agreement covering trade and investment issues and possibly a bilateral FTA at some future time. To help determine whether a bilateral FTA might be in the SACU members’ joint interests, we have used the Michigan Model of World Production and Trade to assess the welfare and other economic effects of a bilateral FTA. For modeling purposes, we set the US bilateral tariffs on textiles, apparel, and transport equipment equal to zero to take into account the GSP/AGOA preferential access to the US market already in place. Based on our computational analysis, the conclusion is that the welfare benefits of a US–SACU FTA are rather small in both absolute and relative terms, and that the non-trade and dynamic benefits of the SACU FTA are unlikely to alter these results significantly. To provide a broader perspective on the potential economic effects of a US–SACU FTA, the model was also used to calculate the effects of unilateral tariff removal and global free trade. It was shown that unilateral free trade would result in much larger increases in economic welfare for the United States and SACU as compared to the FTA bilateral trade liberalization. Finally, the effects of global (multilateral) free trade were shown to be greater for the United States and SACU as compared to both the bilateral FTA liberalization and unilateral tariff removal. Our results suggest accordingly that the interests of the global trading community, including the United States and SACU, could be better served by unilateral and especially multilateral liberalization rather than a bilateral FTA. 11

AN ANALYSIS OF A US–SOUTHERN AFRICAN CUSTOMS UNION (SACU)

483

NOTES 1. For further elaboration and analysis of the US competitive liberalization strategy, specific negotiating issues, prospective benefits, and the asymmetric characteristics and implications of a US–SACU FTA, see Leith and Whalley (2004). 2. See also Deardorff and Stern (1990, esp. pp. 9-46) and Brown and Stern (1989a, 1989b).

3. The equivalent variation is a measure of the amount of income that would have to be given or taken away from an economy before a change in policy to leave the economy as well off as it would be after the policy change has taken place. If the equivalent variation is positive, it is indicative of an improvement in economic welfare resulting from the policy change.

4. In perfectly competitive trade models such as the Heckscher–Ohlin Model, one expects countries as a whole to gain from trade, but the owners of one factor— the ‘‘scarce factor’’—to lose through the mechanism first explored by Stolper and Samuelson (1941). The additional sources of gain from trade due to increasing returns to scale, competition, and product variety, however, are shared across factors, and we routinely find in our CGE modeling that both labor and capital gain from multilateral trade liberalization.

5. The analysis in the model assumes throughout that the aggregate, economy-wide, level of employment is held constant in each country. The effects of trade liberalization are therefore not permitted to change any country’s overall rates of employment or unemployment. This assumption is made because overall employment is determined by macroeconomic forces and policies that are not contained in the model and would not themselves be included in a negotiated trade agreement. The focus instead is on the composition of

employment across sectors as determined by the microeconomic interactions of supply and demand resulting from the liberalization of trade. 6. Details on the sectoral and country/region aggregation are provided in Brown, Kiyota, and Stern (2004) and are available on request. Because of data constraints, the SACU is represented to include Botswana, South Africa, and Other SACU (Lesotho, Namibia, and Swaziland). 7. Notes on the construction of the data on the number of firms and for employment are available from the authors on request. 8. The growth projection of the labor force from 2001 to 2020 is obtained from US Census Bureau, IDB Summary Demographic Data for Taiwan, and United Nations, World Population Prospects (The 2004 Revision, medium variant, http://esa.un.org/unpp) for other countries/regions. For a more elaborate and detailed procedure for calculating data extrapolations, see Van der Mensbrugghe (2005) and related documents. 9. For more detail, see https://www.gtap.agecon.purdue.edu/databases/v6/V6_dohascen.asp. 10. The GTAP service sectors have been aggregated as follows: Trade & transport (Trade, Transport, nec, Water Transport, and Air Transport); Other private services (Communication, Financial services, Insurance, and Business services, nec): and Government services (Recreational and other services, and public administration, defense, education, and health). 11. This conclusion is reinforced in Brown et al. (2006) in which the negative effects of overlapping FTAs negotiated or in process by the United States and Japan are contrasted with the benefits that unilateral or multilateral free trade may provide.

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