Trade Policy and Strategy Framework

International Trade and Economic

Development

Presentation to the Portfolio Committee on

International Relations and Cooperation
02 September 2009
Dr. Mzukisi Qobo
 Introduction
• Trade Policy and Strategy Framework
emerges in the context of broad national
development strategy.
• Need to address key structural challenges in
the domestic economy.
• Dynamic changes in the regional and global
economic context.

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 Cont…Introduction
• Structural challenges: widespread poverty; severe
inequalities; high levels of unemployment; and
stunted growth.
• Production and employment patterns - capital
intensive and skills-bias.
• Our export profile - highly resource-intensive and
commodity-based.
• The previous growth path placed emphasis on
capital goods in its industrial policy.

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 Cont…Introduction
• The TPSF complements the industrial policy
which is a central component of the ASGI-SA.
• The objective of SA’s development strategy: to
promote & accelerated economic growth along a
path that generates decent jobs.
• A supportive trade policy and an appropriate tariff
reform programme contributes to industrial
development and upgrading, employment growth
& export of sophisticated value-added products.

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 Linkages between trade and
industrial policy
• Tariff policy to be decided primarily on a sector-by-sector
basis and dictated by the needs of sector strategies.
• We have adopted a strategic trade policy: more calibrated
and sequenced and assumes a developmental approach to
tariff reform.
• Tariff policy supports industrial policy and delineates our
terms of engagement in international trade negotiations.
• Carving a policy space in global economic relations to
enable SA to pursue its developmental objectives.

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 Changes in Global Trade
• The nature of global competition has changed.
• Comparative advantage no longer determine
success in international trade. A combination of
factors, incl. processes of “self-discovery”,
purposeful intervention and building of
appropriate production capacities are at play.
• Fastest growing exports in world trade are non-
resource based manufacturers, with medium and
high-tech predominating.

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 Changes in Global Trade
• Structure of trade increasingly assumes intra-
industry rather than inter-industry character.
• As a group developing countries’ exports growing
faster than the world average. The Asian countries
have by and large predominated.
• Emergence of global supply-chains for
manufacturing & services as a result of production
unbundling and growing trade in intermediate
products.

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 Changes in Global Trade
• With declining emphasis on comparative advantage,
developing production capacities, investment in human
capital, research and innovation & technology mastery
become important.
• Managing this requires strategic collaboration between
government and business.
• Strategic trade policies thus aim at shifting the structure of
products & exports away from commodity dependence
towards sophistic and value-added production (content of
exports matter).

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 SA Trade Reform Experience
• Trade liberalisation experience since the 1990s occasioned
significant trade growth, with both imports & exports
growing as a % of GDP. However, the pattern of trade has
not changed significantly:
• Manufacturing exports in capital and high skills intensive
sectors and products have expanded through trade; labour
intensive production has contracted in the face of import
penetration especially leather, footwear & textiles.
• Openness has led to contraction of certain labour-intensive
sectors, with dire employment consequences.

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 SA Trade Reform Experience
• Liberalisation episode in the 1990s deepened comparative
advantage in capital intensive production based on the
extraction of mineral wealth.
• Accumulation of capital assets & technical knowledge in
these sectors have made them more competitive than
labour-intensive sectors (previous industrial policies).
• Essentially SA faces competitive pressure both from
developed and developing countries (largely Asia).
• Liberalisation in SA reinforced a capital & high skill-
intensive growth path exacerbating bias against low-skilled
labour-intensive production.

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 SA Trade Reform Experience
• Further tariff liberalisation is likely to intensify this trend.
• SA is to a considerable extent outwardly oriented: the ratio
of trade in goods & services to GDP has risen from below
40 % in 1993 to over 60% in 2006.
• SA exports constitute around 0.5% of world merchandise
exports: lagging behind China, Brazil and India. Ranked
24th among developing countries; and 47th overall in terms
of presence in exports of dynamic products.
• Commodity products continue to dominate SA’s exports:
the top 25 export categories are dominated by mineral
products. Precious metals; base metals; and other mineral
products are dominant.

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 SA Trade Reform Experience
• SA has undertaken significant tariff reforms since 1994.
• During Uruguay Round, SA undertook tariff commitments
as a developed country rather than a developing country.
• Its simple average of the final bound rate is 20.9%, with
tariffs on agric products bound at 43.5%, and on non-agric
at ceiling rates aver 18.1%.
• Simple averaged MFN applied rate declined from 15% in
1997 to 8.2 % in 2006. Aver tariff for inputs is 5.4%.
• Considerable simplification: 1990, tariff schedule – 13609
lines; by 2006 – 6420. SA has 54% duty free tariff lines.
• SA TDCA and SADC Protocol on Trade set further
parameters. SA trade with EU accounts for 40% of total.

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 Future Directions for Tariff Policy
• We have chosen a development path aimed at achieving
accelerated and inclusive growth to address poverty &
inequality. Facilitating industrial upgrading and
diversification of industrial base will create economy-wide
positive spill-over.
• In this context, the role of tariff policy will be to support a
growth path oriented towards labour-intensive
industrialisation, and a long-term trajectory towards a
knowledge-base economy.
• Trade policy will be informed by sector strategies, with
focus on reducing input costs for labour-intensive & value
adding manufacturing sectors.

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Future Directions of Trade Policy
• Unlike in the past where much focus was on
upstream capital intensive projects, the current
focus on is on down-stream, more labour
intensive, and employment creating activities.
• Major initiatives in tariff policy since 2007 has
been to lower tariffs on upstream, capital intensive
industries as these produce inputs that are cost-
items for downstream industries.

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Future Directions of Trade Policy
• Investigations are continuing. If evidence leads to
the conclusion that it is necessary to reduce or
remove duties where clear benefits would be
gained by downstream sectors, this will be done.
• Where processes of “self-discovery” recommend
tariff increases that industry will be supported.
• Industrial policy sets parameters for tariff policy.

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 Agricultural Trade Strategy
• Over the past 15 years agriculture has undergone key
reforms, paving a way for entry into global value chains.
• Trade in the sector is highly distorted as a result of
subsidies in OECD countries.
• There are strong backward-and-forward linkages to other
sectors of the economy: purchase of fertilisers, chemicals
and implements; as well as supply of raw materials to
industry in the food value chain.
• About 70% of agricultural output is used as intermediates.
• The sector accounts for 8% of formal employment.

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 Agriculture Trade Strategy
• Tariffs are a tool to promote sectoral growth, employment
creation, investment attraction, productivity growth, food
security & rural development.
• Tariff determination will be made on a case-by-case basis,
paying particular attention to global distortions in
agricultural trade.
• Striking a balance between the profitability of farmers,
including addressing supply-side constraints and
competition; consumer prices, especially given the price-
raising effects of tariffs for the vulnerable.

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 Agricultural Trade Strategy
• The sector also carries significance for food
security as well as to create basis for economic
activity in rural communities.
• Jobs created per unit of investment is higher than
any other sector, evidence of the sector’s high
potential for employment and poverty alleviation.
• Share of agricultural exports in total exports – 7%;
share of processed agricultural products within the
country’s total exports has increased to more than
50%.

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The Role of International Trade and
Administration Commission (ITAC)
• Mandate defined by the International Admin Act 2002.
• Has developed a sophisticated and rigorous methodology
that includes firm level investigations.
• Sets tariffs on the basis of cost-and-benefit analysis,
guided by evidence and responding to the imperatives of
industrial policy:
– Competitive position of the product; whether the product or
substitute is manufactured in SACU; effective rate of protection;
value chain implications; and macro-economic & social impact.
• Deals with applications for tariff changes and trade
remedies.

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Strategic Integration into the Global
Economy
• There are other areas that are prioritised in
SA’s trade policy and Strategy Framework:
– African Agenda: mainly focused on building
trade and investment relations across the
continent; building effective regional markets;
enhancing production capacities; sustaining
regional integration; and cross-border
infrastructure development through spatial
development initiatives (SDIs).

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 Strategic Integration
– Regional & Bilateral Relations: Intra-Africa trade
remains important to SA. This remains low (10 %) and
needs to be enhanced. More positively, this is worth 21
percent of total exports for African countries although
the intra-Africa trade ratio is 10 percent. SA continues
to pursue regional arrangements both in Southern
Africa & beyond: SADC Trade Protocol & SACU;
SACU-EFTA FTA; SACU-MECOSUR PTA.
– (negotiating outcomes to deal with non-tariff barriers as
well; as well as to forge sectoral agreements that could
benefit SA).

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 Strategic Integration
• SACU and SADC
– SA remains committed to pursuing regional integration
in the context of SACU & SADC.
– The new SACU Agreement that entered into force in
2004 represents important departures: establish a
democratic, consensus-based decision making
mechanism; foresees new supranational institutions
including a Tribunal to settle disputes, a SACU Tariff
Board to determine changes to the CET, and a
Secretariat; envisions deeper integration through
development of common policies; and establish a
revenue-sharing formula.

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 Strategic Integration
• SACU & SADC
– Future value of SACU will lie in its ability to be used
as a vehicle for advance & deepening developmental
integration in the region, and as an anchor for SADC
regional project.
– This requires SACU members to forge common trade
& industrial policies, where production value chains in
agriculture and industry are developed.
– SACU can be an important nucleus for deeper SADC
integration and a crucial platform to facilitate beneficial
global integration.

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 Strategic Integration
• SADC: aims to combine market integration through trade protocol
with policy coordination & sectoral cooper in a broad development
project.
• Free trade negotiations concluded in 2000, and implementation of
tariff reduction began that time. By 2008, 85% of goods – duty free;
by 2012 this will be 99%.
• Challenges remain: including with Rules of Origin, development of
region-wide standard-setting capacity, and work on trade facilitation.
• Promising signs in T&C and sugar sectors. But SADC production
structures is still undeveloped.
• Consolidating FTA and addressing real economy capacity constraints
is a priority.
• Need to align this to ongoing tripartite FTA: COMESA, EAC and
SADC to build the region’s competitive advantage.

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 Strategic Integration
• Economic Partnership Agreements: SA’s objective in
entering negotiations – to preserve regional unity and
advance regional integration on developmental basis.
– SA has its own TDCA with the EU.
– The Interim EPA is far from advancing regional integration and
development but accentuates dependencies, and forecloses
diversification of trade relations in future (MFN).
– Under EPA, SADC has 5 separate trade relation and regimes with
the EU and all are different. This complicates internal trade
relations, makes it difficult to ensure policy harmonisation:
services, investment, competition and procurement.
– EPA also threaten to weaken SACU.

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 Opportunities for South-South
• Need for enhanced trade & investment linkages among
Southern economies.
• Developing countries share of international trade continue
to grow, acc for around 37 % of world trade in 2007; aver
growth rates of 18% in goods, and 13 % in services –
much higher than those recorded in OECD countries –
13% and 8% respectively.
• Center of gravity is shifting towards emerging powers of
the South.
• South-South trade increase at an annual rate of 11 percent;
with services trade on the rise.

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 Opportunities for South-South
• These are also high growth economies with
consumer needs diversifying.
• Offer possibilities for export diversification for
other developing countries.
• Possibilities for cooperation and sharing of
experiences, including attraction of FDI and
technology sharing.
• Constructing PTAs on the basis of our relative
strengths and what we can benefit.

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Relations with countries of the North
• SA’s relations with key countries of the North
remains vital. These are major sources of
investment & technology.
• TDCA offers the basic framework for trade &
investment expansion.
• In 2008 SACU-European Free Trade Association
entered into force – offering SACU duty & quote
free access on industrial products.
• With the US, there is AGOA and the SACU-US
Trade, Investment, Development & Cooperation
Agreement (TIDCA).

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 World Trade Organisation & Doha
• SA remain a strong proponent of multilateralism
as an appropriate institutional response to manage
globalisation.
• There remain imbalances in the multilateral trade
rules, prejudicing developing countries’ interests.
• Global reform should ensure greater transparency
& inclusiveness, with the interests of developing
countries guaranteed.
• SA’s support for the Round was premised on
overcoming the imbalances and securing a
developmental outcome for developing countries.

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 World Trade Organisation & Doha
• SA will not take deeper cuts than it would benefit from the
global trade negotiation. Developed countries’ higher
ambition on industrial goods negotiations is not properly
matched in Agriculture. This erodes the Round’s
development content.
• SA’s negotiating objectives aim to:
– Enhance market access for products of export interests to
developing countries;
– Renegotiate rules that perpetuate imbalances in international trade
regime;
– Ensure appropriate policy space for developing countries to pursue
development objectives through meaningful implementation of the
principle of S&DT.

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 An Agenda for Future Trade Policy
Work
• SA trade policy also looks at starting a work-programme
on Services and New Generation Issues:
– Services
– Other new generation issues: investment, competition, intellectual
property, government procurement, labour and the environment.
– Other behind-the-border protection measures that impede
developing countries’ access to markets of advanced economies.
SA will develop a proactive stance on these areas, and guided by its
development objectives and the need to preserve policy space to
regulate in the public interest; balance economic efficiency with
socio-economic equity; and enhance economic competitiveness.

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 Accompanying Policies
• Trade reform creates winners and losers. Thus a crucial
area for the future will be in the area of “accompanying
policies”.
• Adjustment costs of previous liberalisation was
disproportionately borne by the poorest sectors of the
population who witnessed the rising tide of
unemployment.
• Accompanying policies will need to pay attention to
appropriate measures to cushion vulnerable sectors.
• Safety nets, retraining and a range of support will thus be
explored.

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 Conclusion
• Trade Policy complements industrial policy and seeks to contribute to
growth, industrial upgrading, export diversification, and employment
creation.
• Apart from using tariff policy as an industrial policy support measure,
there are other new frontiers of trade policy that we are devoting
resources to, including services and other new generation issues.
• Defining terms of integration in the global economy on beneficial
basis is an important objective of trade policy. This includes the nature
of relations at the regional, bilateral, and multilateral levels.
• In the ultimate, trade policy has to make a meaningful and positive
contribution towards achieving desired developmental outcomes.

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Thank You

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