The Impact of EU FTAs on the trade and economic performance of South Africa

09/06/2011

Prof Claudio Dordi - Professor of International Law at Bocconi University (Milan), and MUTRAP III Team Leader
Mr Federico Lupo Pasini - Lawyer and consultant specialized in international economic law and policy. Based in Hanoi.
The literature on the assessment of the economic and trade performances of the FTAs concluded by the EU is quite comprehensive: however, most of the researches are conducted before the agreement is negotiated and is entered into force, as they are intended to support the negotiators to understand the magnitude of the effects of each agreement. Few analytical studies have been published to analyze the impact on trade and on the economies of the FTAs members after the agreement entered into force. In this research we select, among the countries which participated to a FTA agreement with the EU, only those agreements which might represent a reasonable example for Viet Nam. For this reason we excluded all the agreements with EU members’ candidates or with countries that are geographically close to the EU as well as the agreements with countries which are not comparable to that of Vietnam and we selected some agreements which already entered into force for a minimum number of years, allowing the possibility of an effective assessment of their impact on the members’ economies.
The Main Features of South Africa

 

South Africa

Surface

1219,1 sq km

Population

49,3 millions

GDP

205,9 bn. Euro

GDP per capita

4175,2 Euro

Export/GDP

18,9%

Import/GDP

25,5%

Trade/GDP

44,3%

The EU- South Africa Free Trade Agreement

 

South Africa

Signed

11.10.1999

Entered into force

1.1.2000

Introduction
South Africa negotiated a comprehensive Trade, Development and Cooperation Agreement (TDCA) with the European Union (EU) in October 1999. The agreement came into provisional effect on 1 January 2000: both parties have committed to tariff reductions based on the applied rates in existence on the day of entry into the agreement on trade in almost all sectors.
Under the TDCA, traded goods are divided into agricultural and industrial products. South Africa’s tariff elimination for industrial products is heavily ‘back loaded’ with tariff reductions predominantly in the second half of a 12-year implementation plan. The observed asymmetry in liberalization schedules for industrial products between South Africa and the EU is to allow for different respective levels of development.
The TDCA allows South Africa a longer transition period (12 years) than the EU (10 years) and it requires the EU to eliminate tariffs on a higher percentage of currently traded goods (95%) than is the case for SA (8%).

South Africa has committed to eliminating tariffs on 81% of EU agricultural exports to South Africa within 12 years, with an agreed 46% reduction within 5 years. The majority of EU agricultural products

are ‘back-loaded’, with tariffs due to be eliminated towards the end of the 10-year transition period, and on only 62% of South African agricultural exports to the EU.

It is important to note that this was the first time the EU has included the agricultural sector in an FTA. Nevertheless, a number of regionally sensitive South African agricultural products were excluded but subject to review, including meat and preserved meat products, sugar and high sugar content processed products like chewing gum, cereal products, and dairy products. For the most part, the issue surrounding exclusion of liberalization within these sectors had less to do with tariff elimination, than the extent and pattern of export subsidies that the EU provides as part of the Common Agricultural Policy (CAP).
Table 2.1 illustrates that according to the agreement, by the end of the transitional period in 2012, nearly 81 percent of European Union’s agricultural products and 86 percent of its industrial products may enter South Africa’s market duty-free. As table 2.1 further illustrates, both agricultural and industrial products will gradually become duty-free over this time period. For instance, additional five percent of the European Union’s agricultural products may enter South Africa’s market duty-free between 2000 and 2003. Different products within each sector (the agricultural– and the industrial sector) have different time frames for when to be added as duty-free products.
Table 1: South Africa’s liberalization of agricultural and Industrial products

Table 2 illustrates that 62 percent of South Africa’s agricultural products and 100 percent of their industrial products may enter the European Union’s market duty-free at the end of the transitional period in 2010. The European Union’s large liberalization on the industrial products suggests that South Africa is not seen as a big competitor within this sector. On the contrary, South Africa is perceived as a bigger competitor in the agricultural sector as the liberalization is relatively low for this sector. Through the different time frame it is possible to argue that the European Union opens its market faster than South Africa.

Table 2: EU liberalization of agricultural and industrial products

 

Trade performances
The impact of the EU-SA FTA, according to the trade data, has been huge. Imports, in the period 2001-2008, increased from 10.5 bn USD to 27.4 bn. (+160%) with an annual growth rate of 14.7%.Exports grew from 9.7 bn. in 2001 to 23.6 in 2008 (+143%). Trade balance deficit grew from 0.8 bn. in 2001 to 5.8 bn. in 2007 and 3.8 bn. in 2008. The FTAs, however, did not increase the market share of EU products in South African imports (on the contrary, there has been a decrease from 41.1% in 2001  to 31.3% in 2008), neither the market share of South African products in EU imports (from 0.58% in 2001 to 0.56% in 2008). Indeed, the trade between South Africa and the rest of the world increased more than the trade with the EU (see table 5).
Table 3: Trade relationships EU-SA (US bn.)

 

2001

2002

2003

2004

2005

2006

2007

2008

2009

Import

10.5

11.1

15.0

19.4

21.0

23.8

26.9

27.4

20.5

Export

9.7

9.1

11.4

14.6

16.9

18.6

21.1

23.6

14.3

Trade balance

-0.8

-2.1

-3.6

-4.8

-4.1

-5.2

-5.8

-3.8

-6.2

% of import from EU

41.1

42.4

43.4

40.7

38.1

34.7

33.7

31.3

32.2

% of export to EU

37.2

39.4

36.0

36.3

36.0

35.4

33.0

31.9

26.5

EU import SA/world

0.58

0.54

0.51

0.53

0.53

0.50

0.54

0.56

0.46

Table 4: EU-South Africa trade

 

Table 5: growth rate of South Africa-EU and South Africa-world trade

 

growth 2001-2008: EU

growth 2001-2008: world

Import

14.7

19.2

Export

13.6

16.1

Table 6 illustrates the 10 most imported products from the EU; it is interesting to not that the first six most imported products grew with a lower rate than the average import growth rate of EU products. Electronics, vehicles and other commodities are the three most important products, accounting for more than 1/3 of total imports.
Table 6. SA: ten most imported products from the EU

Product code

Product label

2001

2005

2008

2009

growth 2001-2008

'85

electronics

1606293

2562878

3149463

2319071

10.1

'87

Vehicles

1070701

3123805

3164917

2286155

16.7

'99

Other commodities

1238034

2457321

2883753

1902342

12.8

'30

Pharmaceuticals

455213

808097

985950

973154

11.7

'90

Optical, photo, medical, etc

417834

780601

991651

822129

13.1

'27

Mineral fuels, oils, etc

111346

274306

583145

699611

26.7

'39

Plastics

360878

671557

766944

621821

11.4

'38

chemical products

220969

447694

607376

512555

15.5

'48

Paper & paperboard

225417

394580

599356

498518

15.0

Raw materials and machinery are the most important exported products to the EU. It is quite interesting the annual growth rate of machinery (17.8%), testifying the improved industrialization process of the country.
Table 7: SA: ten most exported products to EU

Product code

Product label

2001

2005

2008

2009

growth 2001-2008

'27

Mineral oils,  etc

1279213

2602301

2823216

1912109

12.0

'84

Machinery

1129491

2061641

3555347

1736057

17.8

'72

Iron and steel

670477

1744707

2947010

1286314

23.6

'26

Ores

398775

912553

2135841

1150306

27.1

'87

Vehicles

867644

1131225

1681650

1149136

9.9

'08

Edible fruit

359708

805316

947399

920331

14.8

'22

Beverages

212552

486467

578874

561121

15.4

'85

electronics

252863

366027

444972

313941

8.4

'94

Furniture

327439

420143

395417

298471

2.7

'29

Organic chemicals

65053

189753

379643

264688

28.7

Table 8 shows the reduction of weighted average duties following to the implementation of the FTA agreement. It should be noted that the reductions on the import to South Africa from the EU took place after 2005. Even in this case, it seems that tariffs reduction had not been a decisive factor in promoting the import into South Africa: indeed, the increase of trade between 2001 and 2005 (+100%) has been much higher than in the next four years (and this even excluding from the calculation the data of 2009, affected by the economic and financial crisis).

Table 8: SA: Reduction of tariff

 

2000

2005

2008

Total Trade

6.35

8.79

3.97

Raw materials

3.79

3.15

0.53

 Intermediate goods

4.63

6.36

2.36

 Consumer goods

11.13

15.35

7.48

Agricultural

9.72

9.21

3.31

Industrial

6.12

8.76

4

The following tables illustrate the increase of export of South Africa into the EU. Table 9 shows a very low correlation between reduction of tariffs (weighted) and increase of trade. In general, with the exception of raw materials, the reduction of weighted tariffs applied by the EU is not particularly relevant, as the tariffs were already low before the entering into force of the FTA agreement. This suggests that the increase of South African exports is due to other important factors.
Table 9: EU Reduction of tariffs and trade

Product Name

Trade Year

Simple Average

Weighted Average

Imports Value x 1000

Growth

Total Trade

1999

4.97

2.34

10021802.75

 

Total Trade

2000

4.69

1.83

12200319.65

21.7

Total Trade

2005

4.03

1.88

19529487.17

60.1

Total Trade

2008

4.04

2.04

31069161.58

59.1

Table 10: Reduction of EU tariffs and import of raw materials.


Trade Year

Simple Average

Weighted Average

Raw material

Gowth

1999

4.89

2.46

3701440

 

2000

4.75

1.51

5197519

40.4

2005

3.47

1.6

8855606

70.4

2008

2.93

1.48

14099990

59.2

Table 11: Reduction of EU tariffs and import of intermediate goods.


Trade Year

Simple Average

Weighted Average

Intermediate goods

Gowth

1999

5.11

1.53

4346976

 

2000

4.95

1.38

4820923

10.9

2005

3.69

1.55

6301360

30.7

2008

3.63

1.74

9543017

51.4

Table 12: Reduction of EU tariffs and import of consumer goods.


Trade Year

Simple Average

Weighted Average

Consumer goods

Gowth

1999

6.77

6.05

969005

 

2000

6.21

5.67

1025100

5.8

2005

5.68

5.4

1730215

68.8

2008

5.8

6.96

2183878

26.2

Table 13: Reduction of EU tariffs and import of agricultural products.

Trade Year

Simple Average

Weighted Average

Agricultural products

Gowth

1999

12.11

9.91

1295520

 

2000

11.21

8.89

1197819

-7.5

2005

6.69

9.68

2204385

84.0

2008

6.85

10.35

2963190

34.4

Table 14: Reduction of EU tariffs and import of Industrial products.


Trade Year

Simple Average

Weighted Average

Industrial products

Gowth

1999

4.22

1.37

8726282

 

2000

4.04

1.15

11002500

26.1

2005

3.78

1.24

17325101

57.5

2008

3.76

1.44

28105970

62.2

Conclusions
The huge improvement of trade relationships between South Africa and the EU are not directly connected with the reduction of customs duties; first, on the side of the EU, weighted average customs duties remained stable (as they were already low before the entry into force of the agreement); second, the reduction of tariffs applied by South Africa took place mainly after 2005 and in particular after 2007: therefore, taking into consideration the economic and financial crisis, it is not possible to provide a clear answer on the impact of tariffs reduction promoted by the FTA.

Committee on International Trade Policies - VCCI