Revenue, welfare and trade effects of European Union Free Trade Agreement on South Africa

Abstract

Background: Using the partial equilibrium WITS-SMART Simulation model to assess the impact of liberalisation under the Trade Development and Cooperation Agreement (TDCA) of a free trade area between the European Union and South Africa. The identification of the impact of such agreement allows for trade policy negotiation adjustment that can be beneficial for South Africa.

Aim: The aim of the study is to estimate and discuss the impact of a Free Trade Agreement (FTA) with the European Union and South Africa. More specifically, the study intends to estimate the impact of revenue, welfare, imports, exports, trade creation and to come up with policies options for South Africa that can be used in negotiations and policy formulations.

Setting: The study used international trade data (2012) available in the WITS-SMART model to assess bilateral trade agreement between the European Union and South Africa.

Methods: To identify the impact on revenue, welfare, imports, exports and trade creation, the study simulated an FTA (0% tariff rate) for all goods exchanged between the European Union and South Africa. Also, the elasticity of substitution used for the simulation model was 99%.

Results: The findings of the study reveal that total trade effects in South Africa are likely to surge by US$ 1.036 billion with a total welfare valued at US$ 134 million. Dismantling tariffs on all European Union (EU) goods would be beneficial to consumers through net trade creation. Total trade creation would be US$ 782 million. However, South African producers are likely to contribute a trade diversion of US$ 254 million which has a negative impact on consumer welfare. The country might also experience a revenue loss amounting to US$ 562 million because of the removal of tariffs. In trade, the country’s exports and imports to the EU are expected to increase by US$ 12.419 million and US$ 1.266 million, respectively.

Conclusion: The European Union–South Africa FTA would result in both trade creation and trade expansion effects. However, trade creation and revenue loss are potential threats. In order to mitigate revenue loss, government needs to consider alternative tax such as consumption tax on certain goods and value-added tax.