Welfare, macroeconomic and trade effects of the hypothetical Southern African Customs Union-United States free trade agreement

Abstract

Background: There is lingering uncertainty surrounding the renewal of the African Growth and Opportunity Act (AGOA), a United States (US) Trade Act enacted in 2000 and set to expire in 2025. However, the US is a traditional trading partner of the Southern African Customs Union (SACU), and all SACU members predominantly access the US market through AGOA.

Aim: This article assesses the welfare, macroeconomic and trade effects of the potential Southern African Customs Union-United States Free Trade Agreement (SACU-US FTA).

Setting: The expiry of AGOA and the uncertainty surrounding its renewal present trade policy challenges for AGOA beneficiary countries, particularly the SACU nations.

Method: The article employs the Global Trade Analysis Project (GTAP)-Computable General Equilibrium (CGE) model to simulate a scenario where SACU and the US eliminate all import taxes and export subsidies in their bilateral trade.

Results: The GTAP-CGE model simulation results reveal welfare gains of US$316.47 million for SACU and US$678.01 million for the US with favourable macroeconomic and trade effects for both parties. Net trade creation is estimated at US$3.06 billion.

Conclusion: The US interest in the potential SACU-US FTA rests in enhanced access to a smaller, but highly protected market where the European Union (EU) has already concluded preferential trade arrangements. Correspondingly, SACU aims for enriched access to a much larger, though less protected, market.

Contribution: While most studies on FTAs focus on distributional effects using CGE and partial equilibrium models, there is limited research on the welfare, macroeconomic, and trade impacts of the potential SACU-US FTA. This article, therefore, stimulates debate and navigate domestic policies on the welfare, macroeconomic and trade implications of the prospective trade agreement.