This policy brief is a shortened version of the following paper: Overview of Trade Relations in SADC: Some Empirical Observations by Paul Kalenga

Kalenga, Paul

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Cape Town University OpenUCT

1DPRU Industrial Strategy ProjectIndustrialProjectStrategyREGIONAL   INTEGRATION,ECONOMIC COOPERATIONIN SOUTHERN AFRICAD P R UDevelopment Policy Research UnitUniversity of Cape TownDPRU Policy Brief No. 00/P3July 2000What are the critical issuesarising from the SADCtrade integration process?2Critical issues arising from the SADC trade integration processForewordThe Development Policy Research Unit (DPRU), located within the University of Cape TownsSchool of Economics, was formed in 1990 to undertake economic policy-oriented research.The aim of the units work is the achievement of more effective public policy for industrial developmentin South and Southern Africa.The DPRUs mission is to undertake internationally recognised policy research that contributes tothe quality and effectiveness of such policy.The unit is involved in research activities in the following areas:• Trade and Industrial policy• Technology policy• Labour market policy• Industrial organisationThese policy briefs are intended to catalyse policy debate. They express the views of theirrespective authors and not necessarily those of the DPRU.They present the major research findings of the Industrial Strategy Project (ISP). The aim of theISP is to promote industrial development in the Southern African Development Community(SADC) through regional economic integration and cooperation.  It is a three-year project thatcommenced in August 1998 and is funded by the International Development Research Centre(IDRC). Ultimately, this project will identify the policies and programmes that support regionalinteractions that contribute to the industrialisation of SADC national economies.This policy brief is a shortened version of the following paper:Overview of Trade Relations in SADC:  Some Empirical Observationsby Paul KalengaIf you have any questions, or comments pertaining to the content of this policy brief,please do not hesitate to contact us:Trudi HartzenbergDeputy DirectorE-mail: trudi@hiddingh.uct.ac.zaTel: (021) 480 7155/62Fax: (021) 423 25013DPRU Industrial Strategy ProjectIntroductionThis policy brief highlights critical issues confronting the Southern AfricanDevelopment Communitys (SADC) trade policy regime.Redressing existing imbalancesThe 1990s have witnessed a general improvement in cross-border trade flows inSouthern Africa.  However, intra-regional trade is still dominated by the moreindustrialised countries, mostly South Africa and Zimbabwe.  Intra-regional trade doesnot exhibit regional orientation but is rather concentrated among few countries,mostly following bilateral relationships.South Africas trade surplus with most SADC countries has been rising since the early1990s. This can be attributed to the end of sanctions on South Africa and generalimport liberalisation in structurally adjusting SADC countries.There is no doubt about the fact that South Africas rising trade surplus with SADC is asource of strain in its relations with the region. This situation is not politicallysustainable and may undermine the regions trade integration process.Export competitiveness is ineffective, but SADC countries do have export expansionpotentialMany SADC countries are unable to effectively compete in the South African marketdue to a lack of export supply capacity. Some SADC countries (particularly Zimbabwe, Zambia and Mauritius) regard theexistence of trade barriers as a critical stumbling block to effectively compete inthe Southern African Customs Union (SACU) market. There are countries in SADC, which are competitive exporters of certainproducts to the rest of the world. South Africa does import such products from the rest of the world as well. SACUhas started to import some of these products from SADC countries, although insmall quantities.4Critical issues arising from the SADC trade integration processSADCs export expansion requires the following improvements: Access into the South African market(eliminating tariff and non-tariff trade barriers) Export competitiveness through growth-enhancing supply-side measures.Compensating for trade imbalances: Increasing flows of investment capital from SAThe South African Government has relaxed exchange control restrictions allowing SouthAfrican firms to invest up to over US$40 million per investment in any SADC country.Some South African firms in clothing production have relocated their productioncapacities to other SADC countries (mainly to Malawi and Mozambique) in response toincreasing global competition and the search for low cost labour.Malawi, for example, has become the biggest exporter of clothing apparel to South Africaafter China (IDC, 1998). This has also been facilitated by the existence of a preferentialbilateral trade agreement between Malawi and South Africa (the agreement provides forduty-free access into South Africa for goods of Malawian origin, with some exceptions).This supports the argument that a reduction in trade barriers between SADC countriesencourages investment by South African companies wishing to capitalise on low-costlabour in other SADC countries (McCarthy 1999).Investments are not necessarily concentrated in primary extractive industries or retailingand wholesaling. Substantial investment has also been directed towards the food andbeverage sector, involving some form of processing as well as in financial and otherservice industries (Kalenga & Oosthuisen 1999).SADC countries export competitive commodities to the rest of the worldSADC countries Competitive exportsZimbabwe, Mauritius, Mozambique, Tanzania and Angola Food, beverages and tobaccoAngolaPrimary commodities such aspetroleumTanzania, Zimbabwe and Mozambique CottonOther resource-intensive basic manufactures such as refined copper, cotton yarn, leather, copperwire, toilet and kitchen linen, woven fabrics, furniture, travel goods, footwear and toys etc.Source:  Kirchbach and Roelofsen (1998)5DPRU Industrial Strategy ProjectThere is, as yet, no conclusive evidence on the impact of such investment on the recipienteconomies. Some SADC countries are capitalising on investment by South African firms Other SADC countries have been rather sceptical fearing domination by the regionaleconomic giant.To the extent that this investment enhances local supply capabilities and raises export competitiveness, it constitutes a mechanism for redressing existing imbalances. SACU share of imports by commodity from SADC (%)  CH22 Description 1991 1992 1993 1994 1995 1996 1997 1998 01 Live animals  animal products 3.1 2.8 3.4 3.3 4.1 2.4 2.4 2 02 Vegetable products 11.1 9.3 16.3 11.1 9.2 7.1 9.8 9.3 03 Animal, vegetable fats & oils 0.7 1.7 1.1 1.4 0.3 0.7 1 0.8 04 Prepared foodstuffs, beverages, tobacco 29.6 21.7 19 14.5 17.6 17.5 13.7 17.5 05 Mineral products 8.8 8.3 6.9 4.5 4.1 21.6 15.1 6.9 06 Products of chemical or allied industries 1.1 1.6 1.8 1.8 1.9 1.3 1.3 1.5 07 Platiscs and rubber 1.7 2.4 2.2 1.9 2 1.7 1.9 2 08 Raw hides and skins, leather 1.7 1.9 1.9 2.4 2.3 1.3 0.8 0.8 09 Wood, cork, straw 3.5 6.4 5 5.9 7.5 7.1 6.1 5.3 10 Pulp, paper & paperboard, books 0.9 1 1.2 1.1 1.5 1.6 1.9 1.1 11 Textiles, fabrics, clothing 18.4 19.9 16.9 25.5 20.6 18.5 25.7 30 12 Footwear, headgear, umbrellas 1.6 2.7 3.4 2.4 3 1.3 0.7 0.6 13 Articles of stone asbestos ceramics glass 0.5 0.6 0.6 0.7 0.8 0.7 0.9 0.8 14 Precious metals 0.4 0.3 0.6 1.7 1.8 0.3 0.2 0.4 15 Base metals 8.1 10.6 9.2 11.1 11.5 7.4 7.3 9.4 16 Machinery, mechanical & electrical 3.8 4.8 6.2 5.5 5.4 4.5 5.3 6.6 17 Vehicles, aircraft, ships 1.8 2.2 1.4 2.3 2 1.7 1.8 1.5 18 Optical photoghraph measuring musical inst 0.3 0.2 0.4 0.3 0.4 0.6 2 1.5 20 Miscellaneous manufactured articles 1.3 1.6 2.4 2.7 3 2.4 2.1 1.9 21 Works of art collectors pieces & antiques 0 0 0 0.2 0.1 0.2 0.1 0.1 22 Other unclassified goods 1.7 0 0 0 0.9 0 0 0  Total 100 100 100 100 100 100 100 100  Source: TIPS Database         6Critical issues arising from the SADC trade integration processRules of origin problemsRules of origin are necessary to prevent trade deflection promote local value additionComplicated rules of origin may act as a significant non-tariff barrier (NTB).In Southern Africa, overlapping trading arrangements and domestic pressure to protectsensitive industries are likely to produce some complications in the design andadministration of rules of origin.It is already becoming evident that the implementation of the SADC Trade Protocol isbeing delayed by differences in the rules of origin for some sensitive products.7DPRU Industrial Strategy ProjectHarmonising external tariffsA free trade area with significant differences in the level of external tariffs is likely to resultin trade diversion and deflection, regardless of the existence of rules of origin.There is a need to set external tariffs at roughly the average of the rates of the partnercountriesThis may mean that some countries will have to raise their external tariffs, while others willdecline.The SADC Trade Protocol (1996) does not address itself to external tariff policies:The SADC Trade Protocol allows members to grant or maintain preferential trade arrangementswith third countries, provided that these do not impede or frustrate the objectives of theprotocol and that these should also be extended to other members.Harmonising external tariffs requires countries rising above national interests, particularly with regard to tariff structures forcertain products. a move towards common external trade and industrial strategies on products requiringcertain levels of protection.8Critical issues arising from the SADC trade integration processLoss of government revenueWhich SADC countries will lose government revenue from a free trade area?Mostly Zimbabwe, Zambia and Malawi, that is, countries that have higher tariffs on intra-SADC import and those that largely depend on intra-regional importsThe Common Market for Eastern and Southern Africa (COMESA) tariffs reduction scheduleand the eventual establishment of a COMESA free trade area (FTA) will also have fiscalimplications, although the amount of revenue likely to be lost would be very small.Under the cross border initiative (CBI), the co-sponsors of the initiative (World Bank,International Monetary Fund, the European Union and the African Development Bank)have undertaken to compensate CBI participating countries for the loss of revenueresulting from tariff reduction and eventual elimination. In the final analysis, due tomultilateral trade liberalisation, trade tariffs are diminishing in importance.The challenge is for countries to devise strategies that help them reduce their dependencyon import tariff revenue and switch to other alternative sources of revenue.Mauritius and Tanzania source few imports from SADC.  The BLNS countries (Botswana,Lesotho, Namibia and Swaziland) do not trade substantially with SADC, but depend heavilyon SACU revenues. The EU-South Africa trade agreement will significantly reduce thisrevenue.9DPRU Industrial Strategy ProjectThe need for an institutional frameworkThe failure of regional integration efforts in Africa has been attributed to a lack of implementation and poor design of integration schemes and delayed implementation of agreed tariff reduction schedules.There is thus a need to have a strong institution responsible for ensuring adequateimplementation.In this regard, developing countries can learn lessons from the European experience: lodge responsibility for trade policy and all its outcomes in a single unified executivebody. This body should be subjected to broad periodic guidance and review from electedlegislatures. Winter (1997) warns against placing such responsibility in committees ofnational bureaucrats.As far as SADC is concerned, the present institutional framework remains largelyinadequate.10Critical issues arising from the SADC trade integration processConclusionsThere is a need for convergent bilateral and multilateral trading arrangements in SADCso as to avoid trade deflection and diversion as well as to ensure ease of administration.There is also a need to arrive at an appropriate institutional framework to ensure effectiveand efficient implementation of the potential trade protocol. The growth in intra-regionaltrade over the last few years seems to suggest that tariff reduction and general tradeliberalisation are starting to positively impact intra-regional trade flows of some SADCcountries, particularly those economies with a capacity to compete in regional markets.A critical challenge facing the region is the need to attract both domestic and foreigninvestment to raise export competitiveness, which requires a credible trade integrationprocess.In order for the trade integration process to be perceived as credible by investors, thefollowing needs to occur: A move towards some form of trade policy harmonisation and convergence,underpinned by institutional strengths political stability greater co-ordination stability and predictability of macroeconomic policies.

What are the critical issues arising from the SADC trade integration process?

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What are the critical issues arising from the SADC trade integration process?

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