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The African Continental Free Trade Area II – Projected Impact on South Africa

This brief identifies channels through which the African Continental Free Trade Area is expected to transform the South African economy, with positive projections for economic diversification, development and job creation.
The African Continental Free Trade Area II – Projected Impact on South Africa

Introduction

At the 2018 Investment Summit, President Ramaphosa reignited the nation’s commitment to increased international relations and trade, envisioned in the 2030 National Development Plan (NDP): ‘Its policies on African integration must be based on positioning South Africa as one of the continent’s powerhouses that would lead African development and influence in world affairs’.[1]

This brief investigates the channels through which the African Continental Free Trade Area (AfCFTA) could serve as an instrument of economic development, with conclusions for whether South Africans should stand behind ratification.

1. Access to African markets

Trade facilitation (TF) is foundational to AfCFTA. It has been estimated that enhanced TF would boost intra-African trade to the tune of 21.9% of total trade by 2022 (from 2010 levels) compared to 15.5% without it.[2] According to UNCTAD, this boost can only be achieved if AfCFTA’s complementary trade easing measures are pursued effectively (decreased customs periods, paperwork, port handling etc.).[3] For South Africa, TF means overcoming the dearth of trade-related infrastructure that prevents South African products from reaching an enormous portion of Africa.

Non-tariff barriers (NTBs) are also targeted by AfCFTA. In Africa, NTBs affect metal and arms primarily, but also minerals, textiles, vehicles and animals.[4] These are all major South African exports. Through the eradication of NTBs, South Africa and other developed economies like Nigeria and Egypt will be better equipped to replace Europe as primary trade partners for finished products in Africa.

Looking at import tariffs, the weighted mean MFN tariff[5] rate exceeds 10% in more than half of African countries. In all others except Mauritius (the only free-trade country in Africa), it exceeds 5%.[6] These tariffs are imposed by other countries on South African goods and vice versa, to protect local industries from more competitive foreign products.

As it stands, close to 20% of South African exports go to African economies. Exports consist predominantly of value-added goods, like iron and steel, motor vehicles, basic chemicals and refined petroleum products. Mined precious and non-ferrous metals make up a major portion of exports. South Africa is self-sufficient in virtually all major agricultural products and is a net food exporter. Maize, wheat, fruits, oats, sugar cane and wine are some of the top exports in agriculture.[7]

South Africa’s import profile consists mostly of machinery, transport equipment (which together make up more than one-third of the value of imports) and manufactured goods. However, only 10% of South Africa’s imports come from Africa. African imports include nuts and seeds, animal products, agricultural goods, and Nigerian oil and fuel products.[8]

Given this trade profile, the AfCFTA has invited concern around South Africa’s high minimum wage relative to other African countries. As per the 2018 minimum wage bill it is R3500 per month, versus R1190 in Nigeria and R500 in Kenya, for example. This raises the issue of the competitiveness of South African industries that have, until now, relied on tariffs for protection.

But a detailed look at our trade profile reveals that South Africa’s tariffs are relatively low. Unlike Nigeria, which applies a minimum tariff of 5% on imported goods, South Africa’s baseline is zero. After the 1994 Uruguay Round of the WTO, South Africa reduced its tariff rates from a simple average of more than 20% to an average of 5.8%.[9] South Africa applies no tariffs on imported minerals and very low tariffs on metals, including steel. The food products that are protected most are fish (tariff of 25%), processed sugar (37%), flour (20%), tomatoes (25-37%), wine (25%) and certain fruits (pineapple 55%, mangoes and guavas 35%). The manufactured products that enjoy significant protection are vehicles and vehicle parts (±22%), textile products (fabrics ± 22%, clothes 40-45%; footwear 30%) and furniture (20%).[10]

With AfCFTA, these tariffs will have to be reduced and eventually removed, compromising the survival of the abovementioned industries.

However, South Africa is one of the few industrialised countries in Africa. Its value-added imports come primarily from outside the continent which means reduced tariffs in manufactured products will have a net effect of increasing exports and revenue from Africa. This is with the exception of the struggling textile industry which will face competition from African cotton-producing states with lower production costs (Mali, Burkina Faso, Benin, Senegal). The steel industry will have to compete with Egyptian steel, while the vehicle industry will face competition from one of the few successful vehicle manufacturing economies in Africa, Morocco.

Still, with liberalised access to less-developed African markets, South Africa’s manufacturing industries will benefit. For example, the reduction of Nigeria’s high tariff on imported vehicles (average of 26) will allow imported South African vehicles to replace vehicles from outside of Africa. This trend will help offset the net decrease in South African exports by 2.6% experienced between 2017 and 2018, which resulted partially from the 7% decrease in exports for machinery and electronics and the 6% decrease for vehicle and transport equipment.[11]

It is evident that increased access to African markets through TF, NTBs and lower tariffs will promote growth in manufacturing. But what of the agricultural industry responsible for some 8.5 million people’s employment and income? The following section unpacks the effects of AfCFTA on specific sectors.

2. Industry transformation and job creation

In food, South Africa is almost entirely self-sustaining. But without tariffs, cheaper agricultural and animal products from Africa will damage the sector. Among other foodstuffs, cheaper Egyptian tomatoes, Sudanese sugar, Ugandan bananas and Moroccan fish will put pressure on local producers.

While this will increase efficiency and competitiveness (benefitting the consumer), South Africa’s farming industry is responsible for some 8.5 million people’s employment and income.[12] The industry will retain a competitive edge owing to its developed infrastructure, especially in agro-processing. But rural communities and isolated fishing and farming societies are likely to bear the brunt of AfCFTA.

In a study conducted on the impact of the prospective Tripartite Free Trade Agreement (TFTA), it was concluded that the decrease in demand for primary industry goods (grains and crops, livestock and meat products) as well as textiles and clothing, would be outweighed by positive demand for secondary industry goods (processed foods, petroleum and coal products, manufactured goods).[13]

Because secondary industries characteristically demand more labour, this would lead to an increase in demand for both unskilled and skilled workers (by 2.8% and 2.5% respectively). The outcome is a growing economy with increased demand for all products.[14] These conclusions can be adapted to AfCFTA, which goes beyond the COMESA-EAS-SADC agreement to include more LDC countries and developing players like Nigeria, Algeria, Morocco, Libya and Ghana.

This prediction falls in line with dependency and global value chain theory, which argue that there are winners and losers in free trade. While comparative advantage assures benefits to all, the more developed countries suffer low-skilled job loss which is often compensated by the bourgeoning of new high-skilled jobs. Through AfCFTA, South Africa can be expected to experience a higher growth trajectory than its less developed counterparts.

However, collateral damage to the primary sector must be prepared for adequately. The South African government must pre-empt structural unemployment and urbanisation and boost the competitiveness of primary industries. Competitiveness projects have been undertaken before. In response to outsourcing to Lesotho, the Department of Trade and Industry (DTI) established the South African Clothing and Textiles Competitiveness Programme. The Workplace Challenge Programme serves a similar purpose for the manufacturing sector, seeking to ‘assist South African enterprises to meet the challenges of entering domestic and global markets by becoming more productive and competitive’.[15]

Small and medium-sized enterprises (SMEs) are key to growth in Africa, accounting for close to 80% of the region’s businesses. SMEs often struggle to penetrate overseas markets, but through the infant industry protection and trade liberalisation assured by AfCFTA, they are well positioned to tap into regional markets. Regional value chains will stimulate local supply inputs and economic growth.[16]

3. Diversification from minerals and energy

Traditionally, oil and minerals have accounted for most of Africa’s exports. The value of these products are characteristically volatile, making the fiscal and economic fate of many African countries dependent on fluctuations in global demand. The lessons from global fuel, food and financial crises speak to the need for diversified and therefore resilient African economies.

Mining contributes 8% of South Africa’s GDP and 41.8% of exports.[17] The “minerals-energy complex” was coined in 1997 to denote South Africa’s dependence on mining and extraction to the detriment of diversification and industrialisation.[18]

In 2017, South Africa experienced a 5% decrease in exports of base metals resulting from a decline in global demand. Close to 50 000 jobs were compromised.[19] AfCFTA would allow the South African economy to pivot away from extractive exports, helping to secure more sustainable and inclusive trade.

Because of the labour-intensity of manufacturing, increased intra-African demand for South African manufactured goods will lead to greater employment.[20]

According to Mr Kirby, the President of Toyota South Africa, the automotive sector contributes 58% of total manufacturing and 6.9% of GDP. It has leap-frogged the mining sector becoming one of the top ten employers in the country.[21] Until now, this has been at the cost of protection, making foreign cars more expensive in South Africa.

Tariffs against European and Japanese vehicles aside, AfCFTA will encourage African demand for South African vehicles. At the same time, South Africa’s industry will have to remain competitive with Morocco’s, Egypt’s and Nigeria’s. Currently, South African tariffs on vehicles and vehicle parts are over 5% lower than Nigeria’s and over 20% lower than Egypt’s, but up to 15% higher than Morocco’s.[22]

The Automotive Masterplan 2035 targets the competitiveness of the sector. With the support of AFCFTA, South Africa’s goal to increase vehicle production to 1% of global output may be realised.[23]

4. A turn from China and the West

Ramaphosa’s commitment to AfCFTA is reminiscent of South Africa’s foreign policy glory days under Thabo Mbeki. Mbeki called for an “African Renaissance” that would promote the continent’s political, economic and social renewal and integrate it into the global economy. After years of neglect, this vision has cascaded down into the “African Agenda”, which frames the African continent as the apex priority for South African foreign policy.

As it stands, businesses face higher costs when they trade within Africa than outside of the continent. This is a result of high tariffs, NTBs and insufficient trade-related infrastructure. AfCFTA would not only protect South Africa from global economic crises and fluctuating overseas demand for primary products, but would change the shares of primary product exports and secondary exports. The existing export pattern is often argued responsible for sustaining the post-colonial hierarchy between developed and developing nations.[24]

As Ramaphosa highlighted at the Investment Summit, the CFTA presents immense investment opportunity. FDI from both Africa and Europe and China is bound to fill demand if or when the FTA begins to show signs of success, providing a much-needed injection of capital.

But foreign investment will not take from the advantages of decreased costs of trade and an increasingly self-sufficient African economy. Achieving this level of independence from the West and China would be both an economic and spiritual triumph for Africa, one that the Nassers and Nkrumahs of history and the Kagames and Ramaphosas of today would revere.

5. The question of rural development

Trade facilitation mechanisms are expected to reduce trade costs and tackle regional inequality.[25] As a general rule, globalisation exacerbates regional inequalities. But lower trade and transport costs through AfCFTA aim to increase supplier competition in remote areas to the benefit of the consumer.

For countries like South Africa, AfCFTA will lead to a decline in the agricultural sector. Left unmitigated, this is likely to put pressure on the metros and hinder rural development. However, according to DTI’s Deputy Minister Mr Bulelani Magwanishe, there is already a focus is on SME development in the borderlands. Targeted SMEs are being positioned to benefit from an expanding trade corridor.

Magwanishe says that prioritisation must be given to ‘agro-processing, service sector, freight industry and the manufacturing sector’ in borderlands, port towns and thoroughfares.[26] If undertaken effectively, such advances could uplift rural areas and stimulate trade-related and industrialising economies.

The determining role of government

South Africa is sure to benefit significantly from AfCFTA thanks to its relatively diverse and industrialised economy. But economic development will come at the costs of tariff revenue, adaption and structural changes in employment. The government must pre-empt and shoulder short-run costs to shield those worst affected. And a steadfast commitment to the long term must be allowed to guide the whole process.

Part III investigates foreseeable obstacles to implementation, asking whether the projected benefits of AfCFTA are within the continent’s grasp.

Tove van Lennep
Researcher
tove@hsf.org.za


[1]South African Government, 2013. National Development Plan 2030

[2]UNCTAD, 2016. African Continental Free Trade Area: Policy and Negotiation Options for Trade in Goods

[3]UNCTAD, 2016. African Continental Free Trade Area: Policy and Negotiation Options for Trade in Goods

[4]UNCTAD, 2016. African Continental Free Trade Area: Policy and Negotiation Options for Trade in Goods

[5] An MFN (Most Favoured Nation) tariff is the tax that countries commit to imposing on imports from other members of the WTO, unless the country is part of a preferential trade agreement

[6]Dabrowski, M. 2018. Free trade in Africa: An important goal but not easy to achieve

[7] Trading Economics, 2018. South Africa Exports

[10]WTO, 2018. Tariff Data: South Africa (from the WTO Tariff Download Facility)

[11] Trading Economics, 2018. South Africa Exports

[12] Brand South Africa, 2018. SA’s key economic sectors

[13] Walters, L. Bohlmann, H. & Clance, M. 2016. The Impact of the COMESA-EAC-SADC Tripartite Free Trade Agreement on the South African Economy

[14] Walters, L. Bohlmann, H. & Clance, M. 2016. The Impact of the COMESA-EAC-SADC Tripartite Free Trade Agreement on the South African Economy

[16] African Union, UN Economic Commission for Africa, African Trade Policy Centre, 2018. African Continental Free Trade Area: Questions and Answers

[17] Trading Economics, 2018. South Africa Exports

[18]Fine & Rustomjee, 1997. The Minerals Energy Complex

[19] Business Day, 30 March 2017. Job losses in mining close to 50,000 mark

[20] African Union, UN Economic Commission for Africa, African Trade Policy Centre, 2018. African Continental Free Trade Area: Questions and Answers

[22]WTO, 2018. Tariff Download Facility: Morocco, Egypt, Nigeria

[24]Cardoso, H. 1979. Dependency & Development; Velasco, A. 2009. The Dustbin of History: Dependency Theory

[25] Donaldson, D. Jinhage, A. & Verhoogen, E. 2017. Beyond borders: Making transport work for African trade