SOUTH AFRICA ‘S POSITION IN WORLD Trade: A COMPARATIVE STUDY OF SOUTH AFRICA ‘S COMPARATIVE ADVANTAGE WITHIN THE EU AND SADC

Introduction

“ The South African economic system has undergone a gradual procedure of trade reform in the last three decennaries, the ultimate purpose being to better resource allotment by switching policy towards a more competitory, export-oriented focal point, and more specifically to diversify exports into non-gold points ” ( PETERSSON, 2005 ) .

Over the last two decades the universe has seen the creative activity of many discriminatory trade countries both within and across continents. Today South Africa has signed trade understandings with many states including China, India, USA ( through AGOA ) and notably free trade understandings ( FTAs ) with the South African Development Community ( SADC ) and the Trade, Development and Co-operation Agreement ( TDCA ) with the EU. The chief end of this survey is to analyse and pull a comparing between South Africa ‘s comparative advantage within the European Union and within the SADC FTAs and look into the effects of these trade understandings on trade flows among the participating/ economically allied states. This survey will besides analyse the credibleness and relationship between South Africa ‘s policy of free trade and its ain economic public presentation.

Background to the Study

South Africa signed the Trade, Development and Co-operation Agreement ( TDCA ) with the European Union ( EU ) in 1999 and with the SADC in ( 2000 ) which were intended to take most of the trade barriers over the following decennary.

The European Union has been South Africa ‘s biggest trading spouse both before and after Apartheid. From 1999, the European Union was a finish of more than 40 % of South Africa ‘s exports while at the same clip accounting for over 70 % of South Africa ‘s Foreign Direct Investment ( FDI ) . The TDCA was chiefly intended to make a free-trade country between South Africa and the EU, in order to guarantee that South Africa enjoyed free entree to the EU market and frailty versa. The Agreement provided for liberalisation of 95 % of the imports by the EU from South Africa within the period of 10 old ages, and 86 % of imports by South Africa from the European Union in twelve old ages. However vulnerable sectors both within the EU and South Africa are allowed to be protected from competition. For illustration, the EU is allowed to go on protecting its agricultural merchandises against similar imports from South Africa and the understanding permits South Africa to shelter some industrial merchandises. Thus some motor vehicle merchandises, crude oil and crude oil merchandises, beef, sugar, cocoa, Ice pick, dairy, chemical merchandises, certain fabric and vesture merchandises etc, are protected against similar imports from the European Union merchandises.

In 1994 Economic countenances against South Africa had rendered the economic system inefficient due to old ages of isolation from the planetary economic system. The post-apartheid democratic authorities inherited many societal and economic jobs among which included: high unemployment particularly amongst the black population most of whom lacked instruction, differing degrees of poorness and income disparities and deficiency of fight in the industrial sector.

All these issues required pressing attending and an about complete restructuring of the economic system, the manner it was run and the acceptance of policies that would assist the state emerge from decennaries of apartheid and international isolation. Bing a complex economic system that exhibited characteristics of developing and developed states, South Africa met strong resistance notably from some EU member states. Later South Africa was denied trade grants ratified in the Lome[ I ]Convention that were intended for under developed states. , However South Africa itself did non see trusting on assistance as an of import scheme for its long term thrust towards development ( Perry, 2000 ) . As a consequence South Africa ‘s authorities embarked on bettering its fight in the universe economic system through advancing trade by negociating trade pacts with several states as a tool towards sustainable growing, obliteration of poorness and income inequality. South Africa and the European Union eventually signed a Free Trade Area understanding in 1999 after a long period of dialogues that were characterized by all sides seeking to negociate the best trade possible for themselves. In the terminal, both managed to procure barriers in countries where they feared fiercest competition. For illustration France and Portugal already had concerns about South Africa ‘s vino and agricultural exports that were in direct competition in the EU market even before the TDCA was in consequence and were loath to open their markets any farther. Likewise, South Africa wanted to protect some of its infant industry particularly in fabrication. Perry ( 2000 ) notes that South Africa will had to contend for each favourable term of trade in which it has a strong comparative advantage as some states within the European Union would hold preferred to screen their single sectors from any baleful outside competitory forces. They are merely likely to prosecute in free trade with states from which they expect more benefits instead than assisting developing states integrate into the universe economic system. Although there is no grounds yet to back up Perry ‘s statement, such should non be swept aside without consideration.

Some of the chief aims of the TDCA include back uping South Africa in its economic and societal passage, every bit good as advancing the state ‘s economic integrating in the universe economic system ( ROBLES, 2008 ) . This being the instance, the EU ‘s determination to enforce barriers on South Africa ‘s vino and Agricultural exports can be seen as a mark of dual criterions. The South African authorities could hold expected to have more grants in such sectors. .

Asante 1997 noted that the European Union is even more likely to profit than South Africa because of accommodation costs arising from a general decrease of duties and from protectionism in Agriculture by the EU. He farther stresses that South Africa duties are about five to six times higher than those of the EU. By taking duties on imports, South Africa looses five to six times deserving of gross than the EU. Losing so much revenue enhancement gross and still be able to run the economic system and vie efficaciously, will necessitate South Africa to hold a important comparative advantage over the EU in the production of assorted trade goods so that the losingss in gross are covered by additions from exports.

This paper is hence directed at placing sectors in which South Africa experiences a higher comparative advantage over any other member of the European Union. We would therefore anticipate these sectors to hold free entree to the European markets without import responsibilities being levied on them. Literally, achieving such trade footings would intend that South Africa has strong dickering power in the EU because it can pull strings policies that favor its competitory exports in the free trade zone.

It is argued that when states form a Free Trade Area by taking protectionist barriers ( e.g. duties on imports, import quotas, and subsidies on local industries ) , they strengthen greater trading dealingss among themselves. This sometimes consequences in increased production of goods and services as houses no longer aim domestic demand but besides reach the foreign market. Access to the EU and SADC markets in this instance will ever be determined by how diversified S. Africa ‘s and its trading spouses ‘ economic systems are, because it makes no point for states to prosecute in trade of merchandises that they can efficaciously bring forth for themselves. Diversification ensures that a state is more likely to bring forth what other states do non. If member states trade in similar merchandises, so there should be a higher grade of intra-industry trade for the exchange of goods and services to be successful. This calls for more research and the acceptance of efficient engineerings that make it possible for states to successfully distinguish those merchandises that are more or less indistinguishable. Product distinction means that states can bring forth an indistinguishable merchandise but with noticeable differences in footings of stigmatization, lastingness and value added.

One of the major grounds behind organizing Free Trade Area with SADC and the EU is to enable South Africa to successfully incorporate into the universe economic system ( ROBLES, 2008 ) . For South Africa ‘s major merchandising spouses in the EU for illustration, organizing a free trade country involves taking barriers to merchandise and doing few accommodations in order to let free motion of goods and services because they already possess the requirements for lasting trade competition under an unfastened economic system. However, for a developing economic system like South Africa, successful integrating into the EU and World market involves a really broad scope of policies. For illustration increasing production and variegation, following new production engineerings in order to increase value added to intercede inputs, easing local agricultural production to successfully vie with subsidised European Agriculture, contending offense and hiking local demand in order to increase investor assurance, and developing the local conveyance system. Execution of all these policies is a gradual procedure that requires non lone money and clip but besides a population that is every bit skilled and good away plenty to take part in production and once more absorb the increased returns from higher production and trade.

Harmonizing to Mthembu ( 2008 ) , states in Sub-Saharan Africa depend on revenue enhancements on trade to bring forth between a one-fourth and a 3rd of their national gross. By Forming Free Trade Areas South Africa hopes to increase its portion of universe exports by importing low cost engineering and transforming it into goods and services that can be exported at a higher value and monetary value and through bring forthing at a higher volume and basking higher economic systems of graduated table, thereby deriving more foreign exchange and employment that will speed up the growing of the economic system. However this comes at a cost of lost revenue enhancement grosss. Although it is true that when a state trades more, it can increase its portion of universe exports and demand and derive more power on the concluding universe monetary values and supply, this is non ever the instance. Opening up to merchandise does non automatically vouch economic success ( Krugman, 1996, Rodrik. 2005, Rodrik, 2008 ) . Thirlwall ( 2000 ) points out that trade between developing and developed states has frequently resulted into trade recreation instead than creative activity. Rodrik ( 2005 ) , amongst others, has suggested that states should merely open up to free trade when they have a really strong local industry that can vie on the universe market. It is merely when states have a strong economic base that they can get down profiting from international trade. Conversely, many other surveies have concluded that international trade has been a critical force behind the economic discovery of different states ( Hachicha 2003, Dhawan and Biswal 1999, Ahmed et Al. 2007, Tang 2010 ) by non merely increasing local production but besides by arousing growing between parts.

In South Africa ‘s instance, we need to analyze the relationship between its external trade and growing by analysing the causal relationship between international trade and economic public presentation. If it is found that it is growing that causes exports, so the South African policy should be redirected wholly from concentrating on international trade to other schemes for increasing domestic economic growing

Decision

At this phase, the most of import issue for South Africa is non whether to merchandise or non but instead it is about how to merchandise and with which merchandises. The over all additions from trade could be immense if the trade form with the EU and SADC provides merchandises in which South Africa has a strong competitory advantage and free entree to the several markets. With a favourable trade environment, South Africa would with no uncertainty accomplish sustainable growing and integrating into the universe economic system. This survey hence will analyze whether the two free trade understandings cited have had either positive or negative impact on the trading forms for South Africa by analyzing the growing features of trade flows between South Africa and each single free trade country shortly before and after their origin. If we find that South Africa ‘s exports have been diminishing while imports continue to turn, so South Africa should force for more favourable trade conditions. These conditions would be somewhat different if the imports are chiefly composed of capital goods.

Statement of the job

Trade with the European Union provides South Africa with diverse trading chances by leting it free entree to a really broad market composed of 25 different economic systems. On the other manus, given the fact that South Africa is a developing economic system, additions from trade are limited by deficiency of competitory advantage in fabrication, conveyance costs and the European Union ‘s protection of Agriculture and rational belongings rights.

From another position nevertheless, South Africa is in a better place to merchandise with SADC than it is with the European Union. This is because South Africa ‘s economic system is more advanced than most SADC states in footings of engineering, capital, fiscal establishments and skilled labour, which ought to give South Africa more competitory advantage. So, following the classical theory of trade, should South Africa work on increasing its trade with SADC instead than with the EU because it is more likely to ever import more than it exports to the European Union but export more than it imports from the SADC?

1.4. Aims of the survey

To understand and find South Africa ‘s comparative advantage in the European Union and SADC.

To find whether FTA ‘s have so created trade for South Africa or led to merchandise recreation.

To analyse the cogency of South Africa ‘s liberalisation of trade as the Major thrust towards sustainable economic growing by analysing the causal relationship between exports and GDP.

1.5. Research hypotheses

South Africa ‘s comparative advantage in the EU is limited to Mining and Agriculture.

South Africa enjoys more comparative advantage in the SADC than in the EU

Exports cause economic growing for South Africa.

There has been more trade creative activity between South Africa ‘s trade with the EU than with SADC.

Research methodological analysis

This chapter presents the maestro program of the survey implying processs that will be followed so as to obtain the ends of the research.

Study population, Sample size and beginning of informations

The survey will be conducted on a population of two Free Trade Areas ( FTAs ) viz. Southern Africa Development and Cooperation ( SADC ) and the European Union.

In order to find the comparative advantage of South Africa in the above mentioned FTAs, we shall see a sample size of 15 states from the EU states that trade with South Africa more than the others. The information from the other staying states will be used in computations of sums where necessary. The EU has 27 member states and stand foring and analysing trade informations for each member would be really boring and clip consuming. All of SADC states on the other manus will be included in the survey.

Data aggregation methods and Analysis

The survey will affect both qualitative and quantitative methods of informations aggregation. Documents will be reviewed in order to garner positions by different research workers on a given subject and so analyse their positions from our position.

We shall besides garner trade informations specifically from web-based databases ( for illustration United Nations and SADC ‘s international trade databases ) of all states involved in this survey.

The obtained informations will so be arranged in related forms and logical order that would let for arrested development analysis and hypothesis testing.

Harmonizing to Linda ( 2008 ) Data processing involves sum uping, collection, proof, tabular matter and analysis of informations in order to pull out utile information. The obtained informations will be processed and analyzed utilizing Microsoft Excel and SPSS 18 informations processing package bundles.

Aims, Indexs, Data beginning, Data aggregation techniques and methods of informations analysis ( drumhead )

Aim

Index

Datas

Beginnings

Collection technique

Method of analysis

To understand and find South Africa ‘s comparative advantage in the European Union and SADC.

The portion of South Africa ‘s exports in the trade country as opposed to the portion of exports of other spouses within the mention country.

W.T.O database and other paperss ( harmonizing to their handiness )

documental reappraisal of ( monthly, quarterly, semi and one-year bulletins )

Balassa index of comparative advantage

To find whether FTA ‘s have so created trade for South Africa or led to merchandise recreation

Changes in Trade flows and trade volumes between South Africa and the mention country since 1994 to 2009

W.T.O database and other paperss ( harmonizing to their handiness )

documental reappraisal of ( monthly, quarterly, semi and one-year bulletins )

The Gravity theoretical account

To analyse the cogency of South Africa ‘s trade policy by analysing the causal relationship between exports and GDP

Relationship between alterations in exports and alterations in GDP

W.T.O database and other paperss ( harmonizing to their handiness )

documental reappraisal of ( monthly, quarterly, semi and one-year bulletins )

Granger causality trial

Balassa index of revealed comparative advantage ( RCA )

In order to find the comparative advantage of South Africa in the EU and SADC we shall utilize the comparative export public presentation index normally known as balassa index. The Revealed comparative advantage ( RCA ) index is used to find whether a state ‘s trade flows have been increasing or diminishing within a specified period of clip. The index can besides be used to place merchandises that a state is bring forthing more efficaciously than the other trading spouses. More still, the index identifies industries in which a state is executing ill. This can be helpful particularly when a state wants to do policies that would advance the fight of those industries. Therefore, the RCA index provides really of import information about a state ‘s general trade with the remainder of the universe.

The index of revealed comparative advantage is stated as shown below:

xij: exports of merchandise J from state I

Eleven: entire exports from state I

xaj entire exports of merchandise J from the mention country ( e.g. the universe )

Xa: entire exports from mention country

The values of the index scope zero to Infinity. If the index takes on a value that is less than one implies that the state has a revealed comparative disadvantage in the merchandise. Similarly if the index takes on a value that exceeds one, the state is said to hold a revealed comparative advantage in that merchandise. It is possible for more than one state to hold comparative in the same merchandise. In this instance, a state with a higher value of the index has the strongest advantage because it can bring forth the merchandise in inquiry more efficaciously than the other states.

Causality trial

The variable of investing will be added to the equation of the growing theoretical account because of its significance in heightening economic growing. The map of the theoretical account will be expressed as GDP = degree Fahrenheit ( X, Inv ) where GDP represents economic growing, X and Inv represent export and investing severally.

GDP=bo + b1X + b2Inv + E

Harmonizing to Studenmunds ( 1987 ) the farmer causality trial should non be applied to non stationary informations because sometimes it may bring forth misdirecting consequences. Therefore before proving for causal relationship between exports and Growth, we shall prove for stationarity of the underlying informations series by proving for the unit root by using the ADF trial. The ADF trial determines whether or non the variables follow a stationary tendency.

If the clip series is non stationary, so we shall transport out a cointegration trial to find whether there is a long term relationship between the variables.

The gravitation theoretical account

In order to find whether FTAs have created or diverted trade, two theoretical accounts are normally applied ; the Computable General Equilibrium ( CGE ) and the Gravity theoretical account of bilateral trade. The CGE is suited for the analysis of trade among states before the remotion of trade barriers. The Gravity theoretical account on the other manus is used to analyse trade after the remotion of trade barriers among states ( Cenart 2003 )

The gravitation theoretical account originated from Newton ‘s jurisprudence of Universal Gravitation 1687 which states that the ability of one object to pull other atoms is positively related to its mass and the mass of the other objects and negatively related with the distance between them. More than 270 old ages subsequently, in 1962 Jan Tinbergen suggested the application of the same theoretical account to the analysis of trade flows among states by saying that bilateral trade is positively related to GDP and negatively related to distance. The theoretical account takes the signifier below:

Fij = I?0 MiMj/Dij

Where I, J = trading spouses

F = Trade flows

M = Economic Mass ( measured in GDP and population ) of a state

I?0 = Constant

Rewriting the above expression in a additive equation we introduce logs and the error term in order to let for the appraisal utilizing OLS.

Fij = I?0 + I?1 ( Mi + Mj ) + I?2 ( Pi + Pj ) – I?3Dij + Tocopherol

LogFij = I?0 + I?1 ( LogMiMj ) + I?2 ( LogPiPj ) – I?3LogDij + Tocopherol

Where D represents the distance between South African Port to the trading spouse ‘s port of entry ; P represents population of a given state. By presenting silent persons for FTAs, the theoretical account can capture whether the trade country enhances or restricts bilateral tradeaˆ¦..

We shall analyse the alteration in the importance of the coefficients after every two old ages since 1997 up to 2009. The inferior J will be used to stand for South Africa ‘s informations while inferior I will stand for informations for other trading spouses.

Trade creative activity and trade recreation ( specification of the gravitation theoretical account )

Different surveies have used the gravitation theoretical account to explicate creative activity and recreation of trade by Free Trade Areas ( commendation )

Scope of the survey

The survey will be focused on South Africa ‘s trade with the European Union and SADC states before and after their formation ; that is between the periods 1995 to 2009

Significance of the survey

The constitution of those sectors in which South Africa has a strong advantage will assist stakeholders to actuate farther liberalisation where they have been denied particularly in the European Union and besides design policies to better efficiency in the production of those trade goods in which South Africa is presently making ill but still has the potency to better.

Further more, the constitution of the relationship between free trade and South Africa ‘s economic public presentation will assist to add an penetration into South Africa ‘s trade policy. The findings of the survey can be based upon to plan policies that can make better to accomplish a good economic public presentation. The survey is besides expected to supply utile inputs to research workers and others who have a acute involvement in South Africa ‘s trade with the remainder of the universe.

Organization of the survey

The research work will dwell of five chapters and they will be arranged as follows:

Chapter one will dwell of the debut, background to the survey, statement of the job, aims of the survey, the research hypotheses, the significance of the survey, range of the survey and eventually the organisation of the survey.

The 2nd chapter will consist of literature reappraisal of assorted surveies by other research workers on this topic.

The 3rd Chapter will research methodological facets of how informations was obtained and analyzed.

The 4th chapter will show research findings, supply informations analysis and reading.

The 5th chapter will give sum-up of the findings, a decision and recommendations every bit good as suggestions for farther research in relation to the subject.