International Trade: Evolution of South Africa Trade Policy - Case Study Example

Intеrnаtiоnаl Businеss Маnаgеmеnt International Trade: Evolution of South Africa Trade Policy Name Professor Course Date Introduction South Africa has changed its trade policies in a number of ways for almost twenty years. Economic growth rate of South Africa has been gradually increasing since 1990 when it was at 1% (Bahmani & Niroomand, 2008). An increase in export for the past two decades as identified by economists in the country is an indication that a tremendous increase in economy can be realized. The dwindling economic growth in South Africa is as a result of various challenges faced by the government, for instance; global economic recession, widening trade deficit, inflation, increasing infrastructural demands with respect to maritime transport and socio- political crises in some of the South Africa’s trading partners like Zimbabwe and Kenya uncertainty (Bahmani, 2008). The report hereby shows an in-depth review of South Africa’s trade policy for the last twenty years in conjunction with the evolution of tariff structure, and its effects on international trade. Evolution of South Africa’s trade policy South Africa’s trade policy has been changed and conducted at different levels since its independence in 1994.The country has realigned its business environment by doing away with a duo exchange rate as well as improving the capital account. It also liberalized its trade regime in 1995 when it became a member of World Trade Organization. This enabled South Africa to involve in international trade where European Union and European Trade Association were its partners (Bhorat, 2008). Products for export in South Africa reduced due to the unilateral tariff reduction thus the country adopted the WTO compatible supply strategy that are still existing in both textile and motor vehicle industries. The textile and clothing is subsidized by Textile Clothing Development Program (TCIDP). The TCIDP replaced the Duty Credit Certificate Scheme (DCCS) in 2006. The motor vehicle industry was under Motor Industry Development program (MIDP) which subsidized it to survive in the international market. The two industries were based on a mechanism that selectively reduced imports to reduce costs that are incurred (Edwards & Wilcox, 2003). A trade policy that South Africa had also adopted was the phasing out of import restriction and high charges on manufactured commodities in order to increase importation though this could not run for long as the tariffs still could reach their peaks for various products (Golub, 2000). South Africa has been struggling to find market opportunities for its products thus its government had to be actively involved in multilateral levels through government procurements, and subsidies to safeguard its industries ( Bleaney, 1999). Bilateral trade relation is another policy that South Africa is trying to pursue and engage in regional trade groupings like South African Development Community ( Bleaney, 1999). A number of preferential trade agreements were also made by the country to safeguard its commodities for instance; it was able to enter a trade treaty with EU on the Trade and Development Corporation Agreement (TDCA) that was active by the year 2000. Though some agreements on fisheries were not concluded, the white wine and spirit agreement were used to replace the treaties not agreed upon. Some clauses were not clarified on the trade treaty therefore, South Africa is evaluating more clearly the possible implication the treaty can result to some of its commodity (Golub, 2000). A major hindrance to South Africa’s trade policy is the assumption that the country may influence political and economic trend in a region thus many countries view it as a country that only takes into consideration its interests to an expense of other countries in the region. Negotiation as a bloc may cause a complications for instance China declined to negotiate with SACU because Swaziland recognized Taiwan as an independent nation which brought hindrance to South Africa’s Trade policy on bilateral trade (Edwards, 2001). Additionally SACU further has complicated negotiation at the bilateral level in the light of different development level among its member States. An example of how negotiation struggles to be concluding is the SACU- US free trade agreement (FTA) negotiation. This is due to the combination both systematical development level and the complexity of problems addressed in 2006 (Edwards, 2001). SACU negotiated a phased approach trade policy to initiate a free trade without addressing problem at as that moment but a breakthrough could not be realized hence South Africa was unable to utilize such an opportunity at stake this treaty is yet to be revisited (Edwards, 2005). Recently South Africa has faced stiff competition from china in the textile and clothing sector. The Chinese import benefit from the cheap labor and thus are more competitive price wise than those locally producers. The flood of cheap cloths import has led to many local textile industries calling for government to increase tariffs and implement quota system this might implicate negatively to the prices of goods that are exported to China from South Africa (Edwards, 2005). It is very important to note despite the textile and clothing being the most protected sector with tariffs of 30- 40 % which was decreased to 10-20% in 1990, still the Chinese import are still cheaper than locally produced goods (Edwards & Golub 2004). In order to succeed South Africa textile and clothing sector will need to compete with the other products in the international market by producing commodities of higher qualities and improved designs (Edwards & Golub 2004). South Africa being one of the SADC members has ambition of its member state set, this include tariff eliminations 0f on 85% of all goods by the year 2015, as well as formation of custom unions by year 2020, common market by the year 2025 and common monetary areas by the year 2025. The SADC has signed a number of agreements, although doubt is being casted on whether they can implement this (Goldstein & Khan, 2005). Evolution of tariff structure South Africa for a long time has been implementing different techniques in ensuring that its local industry are not phased out in market and also has strived to boost them by giving subsidies as well as changing structure of tariffs to imported goods. The country has been alternating tariff structure by removing of lines specific formula based, replacement of most compounds, and mixed rates by ad-valorem tariffs plus reduction of some rates levied (Fedderke & Schaling, 2005). In mid 90s the South Africa embarked on export substitution strategy where it exported more products to improve on its revenue and at the same time, protected its local industries by giving incentives, marketing the industries internationally and providing subsidies for its industries. During this period South Africa experienced a decrease in exchange rate, this resulted to an adoption of a more open trade stance. South Africa’s tariff reform has undergone transformation in four facets; 1. The nominal tariff reduction This was majorly implemented in the production sector as commitment by the country being a signatory to the General Agreement on Tariff and Trade (GATT) to face out distorting subsidies (Edwards & Alves, 2006). 2. Reduction of many trade tariffs to a minimal number The importance here was to curb on their costs since many high tariffs encourage less buying, the domestic industries thus sell less that leads to a reduction to economy (Edwards & Alves, 2006). 3. The removal of high quantitative control and surcharge costs to primary goods especially agricultural products enabled increased income to producers and encouraged production increase (Golub, 2000). 4. The abolition of unilateral reduction of tariffs. For instance 66% of tariff reduction was unilaterally agreed by countries that were partners of WTO between 1983 and 2003. Countries like South Africa experienced a fall in domestic production while consumption increased thus imports increased which resulted to reduced surplus (Edwards & Wilcox, 2003). A technique where tariffs are liberalized enabled more importation of commodities by South Africa in 90s though a slight decrease in weighted average was realized in tariffs (Fedderke & Schaling, 2005). Sector where the tariffs were greatly reduced are clothing, footwear, motor vehicles, beverages, printing, metal product and plastic product among many others. Of all this import the penetration ratio dropped, it is only in foot wear and clothing sector where increases were recorded. Those sectors with the greatest tariff reduction still had high rate of effective protection. Therefore, this enabled South Africa to involve in international trade (Bhorat, 2008). South Africa benefitted a lot in terms of increased production when the government abandoned high quantitative control and surcharge costs to primary goods especially agricultural products. Conclusion From the evolution of trade policy and tariff structure, we can conclude that South Africa is a good example of a developing nation whose economy is open and is ready to trade with the rest of the world. It is clear that there exist an active dialogue between government and private sector and the South Africa government is not rigid, is willing to make changes in trade policies for the benefit of all the stakeholders. References Bahmani, M & Niroomand, F 2008, “Long-run Price Elasticities and the Marshall-Lerner Condition Revisited.” Economics Letters, 61, pp. 101-109. Bahmani, M 2008, “Cointegration Approach to Estimate the Long-run Trade Elasticities in LDCs.” International Economic Journal, 12, 3: 89-96. Bhorat, H 2008, “Income and price Elasticities in Manufactured Exports”. Working Paper 13, Development Policy Research Unit. Bleaney, M 2009, “Trade reform, Macroeconomic Performance and Export Growth in Ten Latin American Countries, 1979-95.” Journal of International Trade and Economic Development, 8: 1, 89-105. Edwards, L & Wilcox, O 2003, “Exchange Rate Depreciation and the Trade Balance in South Africa.” Prepared for South African National Treasury. Edwards, L 2001, “Globalisation and the Skill Bias of Occupational Employment in South Africa.” South African Journal of Economics, 69, 1: 40-71. Edwards, L 2005, “Has South Africa Liberalised its Trade?” South African Journal of Economics, 73, 4: 754-775. Edwards, L. & Alves, P 2006, “South Africa’s Export Performance: Determinants of Export Supply.” South African Journal of Economics, 74, 3: 473-500. Edwards, L. & Golub, L 2004, “South Africa’s International Cost Competitiveness and Productivity in Manufacturing.” World Development, 32, 8: 1323-1339 Fedderke, J & Schaling, E 2005, “Modelling Inflation in South Africa: A Multivariate Cointegration Analysis.” South African Journal of Economics, 73, 1: 79-92. Goldstein, M. & Khan, M.S 2005, “Income and Price Effects in Foreign Trade.” In Jones, R.W. and Kenen, P.B. (eds.) Handbook of International Economics, Vol. II. Golub, S. 2000. “South Africa’s International Cost Competitiveness.” Paper presented at the TIPS annual forum, 18-20 September, 2000. Read More