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South Africa's Comparative Gain: EU and SADC



"The Southern African economy has gone through a gradual procedure for trade reform within the last three decades, the ultimate aim being to boost source allocation by shifting policy towards a far more competitive, export-oriented target, plus more specifically to diversify exports into non-gold items" (PETERSSON, 2005).

Over the previous two decades the globe has seen the creation of many preferential trade areas both within and across continents. Today South Africa has agreed upon trade agreements numerous countries including China, India, USA (through AGOA) and notably free trade agreements (FTAs) with the Southern African Development Community (SADC) and the Trade, Development and Co-operation Arrangement (TDCA) with the European union. The main goal of the study is to investigate and draw an evaluation between South Africa's comparative advantages within europe and within the SADC FTAs and check out the effects of the trade contracts on trade flows among the taking part/ economically allied countries. This research will also evaluate the reliability and relationship between South Africa's policy of free trade and its particular financial performance.

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) that have been intended to remove most of the trade obstacles over the next decade.

The EU has been South Africa's biggest trading spouse both before and after Apartheid. From 1999, europe was a vacation spot greater than 40% of South Africa's exports while at exactly the same time accounting for over 70% of South Africa's Foreign Direct Investment (FDI). The TDCA was mainly designed to develop a free-trade area between South Africa and the European union, to be able to ensure that South Africa savored free access to the European union market and vice versa. The Arrangement provided for liberalization of 95% of the imports by the European union from South Africa within the period of a decade, and 86% of imports by South Africa from the European Union in twelve years. However susceptible sectors both within the EU and South Africa are permitted to be protected from competition. For example, the EU is allowed to continue guarding its agricultural products against similar imports from South Africa and the arrangement permits South Africa to shelter some commercial products. Thus some automobile products, petroleum and petroleum products, beef, sugar, chocolate, Snow cream, dairy, substance products, certain textile and clothing products etc, are safeguarded against similar imports from europe products.

In 1994 Economic sanctions against South Africa got rendered the economy inefficient credited to years of isolation from the global market. The post-apartheid democratic government inherited many communal and financial problems among including: high unemployment especially among the black human population almost all of whom lacked education, differing degrees of poverty and income disparities and insufficient competitiveness in the professional sector.

All these issues required urgent attention and an almost complete restructuring of the market, just how it was run and the adoption of insurance policies that could help the nation emerge from ages of apartheid and international isolation. Being a complex overall economy that exhibited top features of expanding and developed nations, South Africa attained strong opposition notably from some EU member countries. Later South Africa was denied trade concessions ratified in the Lome Convention that were intended for under developed countries. , However South Africa itself didn't see relying on help as an important strategy for its long term drive towards development (Perry, 2000). As a result South Africa's administration embarked on enhancing its competitiveness on the planet market through promoting trade by negotiating trade treaties with several countries as a tool towards sustainable progress, eradication of poverty and income inequality. South Africa and the European Union finally signed a Free Trade Area contract in 1999 after an extended period of discussions that were characterized by all sides wanting to discuss the best package possible for themselves. In the end, both managed to secure barriers in areas where they feared fiercest competition. For example France and Portugal already possessed concerns about South Africa's wines and agricultural exports which were in direct competition in the EU market even prior to the TDCA was in place and were unwilling to open their markets any further. In the same way, South Africa wanted to protect a few of its child industry especially in creation. Perry (2000) records that south Africa will were required to fight for every favorable term of trade where it has a strong comparative benefits as some countries within europe could have preferred to protect their individual industries from any threatening outside competitive pushes. They are just likely to take part in free trade with countries from which they expect more benefits alternatively than helping expanding countries integrate into the world overall economy. Although there is no evidence yet to support Perry's argument, such shouldn't be swept besides without factor.

Some of the main goals of the TDCA include supporting South Africa in its financial and social transition, as well as promoting the country's financial integration on earth market (ROBLES, 2008). This being the situation, the EU's decision to impose barriers on South Africa's wine beverage and Agricultural exports can be seen as a sign of double standards. The Southern African government could have expected to get more concessions in such areas. .

Asante 1997 observed that europe is even much more likely to benefit than South Africa because of modification costs from a general reduction of tariffs and from protectionism in Agriculture by the European union. He further stresses that South Africa tariffs are about five to six times greater than those of the European union. By removing tariffs on imports, South Africa looses five to six times worth of revenue than the European union. Losing a lot tax revenue whilst still being have the ability to run the current economic climate and contend effectively, will require South Africa to have a significant comparative benefit over the EU in the production of various goods so the losses in revenue are included in benefits from exports.

This newspaper is therefore fond of identifying sectors in which South Africa experience a higher comparative benefit over any other member of the European Union. We would therefore expect these areas to get free access to the European markets without import obligations being levied to them. Practically, attaining such trade terms means that South Africa has strong bargaining electricity in the European union because it can manipulate plans that favor its competitive exports in the free trade area.

It is argued that whenever countries form a Free Trade Area by removing protectionist barriers (e. g. tariffs on imports, import quotas, and subsidies on local sectors), they strengthen greater trading relationships among themselves. This sometimes ends in increased development of goods and services as companies no longer concentrate on local demand but also reach the overseas market. Access to the EU and SADC markets in this case will be determined by how diversified S. Africa's and its trading partners' economies are, since it makes no point for countries to engage in trade of products that they can effectively produce for themselves. Diversification means that a country is more likely to produce how many other countries do not. If member countries trade in similar products, then there must be a higher degree of intra-industry trade for the exchange of goods and services to reach your goals. This demands more research and the adoption of efficient technologies that make it easy for countries to successfully distinguish those products that are more or less equivalent. Product differentiation means that countries can produce an identical product but with visible differences in conditions of branding, sturdiness and value added.

One of the major reasons behind building Free Trade Area with SADC and the European union is to enable South Africa to efficiently integrate in to the world market (ROBLES, 2008). For South Africa's major trading associates in the EU for example, forming a free trade area includes removing barriers to operate and making few adjustments in order to allow free motion of goods and services because they already own the prerequisites for surviving trade competition under an open up economy. However, for a producing market like South Africa, successful integration in to the EU and World market includes a very vast range of procedures. For instance increasing production and diversification, implementing new production technologies to be able to increase value added to intermediate inputs, facilitating local agricultural creation to successfully compete with subsidized Western Agriculture, fighting crime and boosting local demand in order to increase trader confidence, and developing the local transport system. Implementation of all these regulations is a progressive process that will require not only time and money but also a society that is evenly skilled and well off enough to participate in creation and again absorb the increased proceeds from higher creation and trade.

According to Mthembu (2008), countries in Sub-Saharan Africa be based upon fees on trade to create between a quarter and another of their nationwide earnings. By Forming Free Trade Areas South Africa desires to increase its talk about of world exports by importing low cost technology and changing it into goods and services that can be exported at a higher value and price and through producing at a higher amount and enjoying higher economies of range, thereby attaining more forex and job that will accelerate the expansion of the economy. However this comes at a price of lost duty revenues. Though it is true that when a country deals more, it can increase its share of world exports and demand and gain more ability on the ultimate world prices and supply, this is not always the case. Checking to trade will not automatically guarantee financial success (Krugman, 1996, Rodrik. 2005, Rodrik, 2008). Thirlwall (2000) highlights that trade between growing and developed countries has often resulted into trade diversion somewhat than creation. Rodrik (2005), among others, has suggested that countries should only open up to free trade when they employ a strong local industry that can contend on the globe market. It is only when nations have a solid economic base that they can start benefiting from international trade. Conversely, a great many other studies have concluded that international trade is a vital pressure behind the financial breakthrough of different countries (Hachicha 2003, Dhawan and Biswal 1999, Ahmed et al. 2007, Tang 2010) by not only increasing local production but also by provoking progress between parts.

In South Africa's circumstance, we need to examine the partnership between its exterior trade and progress by examining the causal romantic relationship between international trade and economical performance. If it is discovered that it is progress that causes exports, then your South African insurance plan should be redirected entirely from focusing on international trade to other approaches for increasing domestic monetary growth


At this stage, the main issue for South Africa is not whether to trade or not but instead it is about how to operate and with which products. The over-all gains from trade could be huge if the trade style with the European union and SADC provides products where South Africa has a strong competitive advantage and free usage of the respective markets. With a favorable trade environment, South Africa would with no doubt achieve ecological progress and integration into the world economy. This study therefore will verify if the two free trade contracts cited have had either positive or negative effect on the trading patterns for South Africa by studying the growth characteristics of trade flows between South Africa and every individual free trade area soon before and after their inception. If we discover that South Africa's exports have been reducing while imports continue steadily to expand, then South Africa should motivate for more advantageous trade conditions. These conditions would be slightly different if the imports are mainly composed of capital goods.

Statement of the problem

Trade with europe provides South Africa with diverse trading opportunities by allowing it free usage of a very wide market made up of 25 different economies. Alternatively, given the actual fact that South Africa is a producing economy, benefits from trade are tied to lack of competitive advantage in manufacturing, transport costs and the Euro Union's safeguard of Agriculture and intellectual property rights.

From another perspective however, South Africa is at an improved position to operate with SADC than it has been europe. It is because South Africa's market is more complex than most SADC countries in terms of technology, capital, financial institutions and skilled labor, which ought to give South Africa more competitive benefits. So, following classical theory of trade, should South Africa focus on increasing its trade with SADC rather than with the European union because it is more likely to always transfer more than it exports to the European Union but export more than it imports from the SADC?

1. 4. Goals of the study

To understand and determine South Africa's comparative benefit in europe and SADC.

To determine whether FTA's have indeed created trade for South Africa or led to trade diversion.

To examine the validity of South Africa's liberalization of trade as the Major drive towards lasting economic expansion by analyzing the causal romantic relationship between exports and GDP.

1. 5. Research hypotheses

South Africa's comparative gain in the European union is limited to Mining and Agriculture.

South Africa looks forward to more comparative benefits in the SADC than in the EU

Exports cause financial development for South Africa.

There has been more trade creation between South Africa's trade with the EU than with SADC.

Research methodology

This chapter presents the get better at plan of the analysis entailing procedures which will be followed to be able to have the goals of the study.

Study population, Sample size and source of data

The analysis will be conducted on a society of two Free Trade Areas (FTAs) specifically Southern Africa Development and Cooperation (SADC) and europe.

In order to look for the comparative good thing about South Africa in the above mentioned FTAs, we will consider a sample size of fifteen countries from the European union countries that trade with South Africa more than others. The info from the other staying countries will be utilized in computations of aggregates where necessary. The European union has 27 member countries and representing and inspecting trade data for each member would be very tiresome and time consuming. Most of SADC countries on the other hand will be contained in the study.

Data collection methods and Analysis

The study will involve both qualitative and quantitative ways of data collection. Documents will be examined in order to gather views by different experts on a given subject matter and then evaluate their views from our perspective.

We shall also gather trade data specifically from web-based directories (for example United Nations and SADC's international trade directories) of all countries involved in this research.

The obtained data will then be established in related patterns and reasonable order that would enable regression examination and hypothesis testing.

According to Linda (2008) Data control includes summarizing, aggregation, validation, tabulation and examination of data in order to draw out useful information. The obtained data will be refined and examined using Microsoft Excel and SPSS 18 data handling software programs.

Objectives, Indicators, Databases, Data collection techniques and ways of data evaluation (synopsis)





Collection technique

Method of analysis

To understand and determine South Africa's comparative advantage in the European Union and SADC.

The show of South Africa's exports in the trade area instead of the show of exports of other associates within the research area.

W. T. O databases and other documents (corresponding to their availability)

documentary overview of (monthly, quarterly, semi and gross annual bulletins)

Balassa index of comparative advantage

To determine whether FTA's have indeed created trade for South Africa or led to trade diversion

Changes in Trade moves and trade volumes between South Africa and the reference area since 1994 to 2009

W. T. O databases and other documents (matching to their availableness)

documentary overview of (monthly, quarterly, semi and total annual bulletins)

The Gravity model

To evaluate the validity of South Africa's trade coverage by inspecting the causal marriage between exports and GDP

Relationship between changes in exports and changes in GDP

W. T. O databases and other documents (according to their availableness)

documentary overview of (every month, quarterly, semi and gross annual bulletins)

Granger causality test

Balassa index of revealed comparative benefits (RCA)

In order to determine the comparative good thing about South Africa in the European union and SADC we shall use the comparative export performance index often called balassa index. The Uncovered comparative edge (RCA) index is employed to determine whether a country's trade flows have been increasing or lowering within a particular period of time. The index can also be used to identify products that a country is producing better than the other trading associates. More still, the index recognizes industries when a country is doing poorly. This can be helpful especially when a country would like to make insurance policies that would promote the competitiveness of those business. Therefore, the RCA index provides very important info in regards to a country's basic trade with the rest of the world.

The index of revealed comparative benefit is explained as shown below:

xij: exports of product j from country i

Xi: total exports from country i

xaj total exports of product j from the reference point area (e. g. the globe)

Xa: total exports from reference area

The beliefs of the index range zero to Infinity. When the index assumes a value that is less than one means that the united states has a revealed comparative disadvantage in the merchandise. Likewise if the index assumes a value that surpasses one, the united states is said to have a revealed comparative advantages for the reason that product. It's possible for more than one country to acquire comparative in the same product. In this case, a country with a higher value of the index has the strongest advantage because it can produce the merchandise in question better than the other countries.

Causality test

The varying of investment will be put into the equation of the growth model due to its significance in boosting economic expansion. The function of the model will be expressed as GDP = f(X, Inv) where GDP symbolizes economic progress, X and Inv signify export and investment respectively.

GDP=bo + b1X + b2Inv + E

According to Studenmunds (1987) the granger causality test should not be put on non fixed data because sometimes it could produce misleading results. Therefore before trials for causal marriage between exports and Progress, we shall test for stationarity of the root data series by evaluating for the unit root by applying the ADF test. The ADF test determines set up variables follow a stationary trend.

If enough time series is non stationary, then we will perform a cointegration test to ascertain whether there is a long term romance between the variables.

The gravity model

In order to determine whether FTAs have created or diverted trade, two models are usually applied; the Computable Standard Equilibrium (CGE) and the Gravity model of bilateral trade. The CGE is well suited for the research of trade among countries before the removal of trade barriers. The Gravity model on the other palm is used to investigate trade following the removal of trade obstacles among countries (Cenart 2003)

The gravity model originated from Newton's legislations of General Gravitation 1687 which says that the power of one subject to get other particles is favorably related to its mass and the mass of the other items and negatively related with the distance between them. More than 270 years later, in 1962 Jan Tinbergen advised the application of the same model to the examination of trade moves among countries by stating that bilateral trade is positively related to GDP and adversely related to distance. The model will take the form below:

Fij = 0 MiMj/Dij

Where i, j = trading partners

F = Trade flows

M = Monetary Mass (assessed in GDP and population) of any country

0 = Constant

Rewriting the above formulation in a linear formula we bring in logs and the mistake term in order to allow for the estimation using OLS.

Fij = 0 + 1(Mi + Mj) + 2(Pi + Pj) - 3Dij + E

LogFij = 0 + 1(LogMiMj) + 2(LogPiPj) - 3LogDij + E

Where D signifies the distance between South African Interface to the trading partner's slot of entry; P represents people of a given country. By launching dummies for FTAs, the model can catch if the trade area enhances or restricts bilateral trade. .

We shall evaluate the change in the importance of the coefficients after each two years since 1997 up to 2009. The subscript j will be used to signify South Africa's data while subscript i will represent data for other trading companions.

Trade creation and trade diversion (specs of the gravity model)

Different studies have used the gravity model to make clear creation and diversion of trade by Free Trade Areas (citation)

Scope of the study

The study will be focused on South Africa's trade with the European Union and SADC countries before and after their formation; that is between your cycles 1995 to 2009

Significance of the study

The establishment of these sectors in which South Africa has a solid advantage will help stakeholders to inspire further liberalization where they are refused especially in europe and also design procedures to improve efficiency in the development of those commodities where South Africa is currently doing poorly but still has the potential to boost.

Further more, the establishment of the partnership between free trade and South Africa's financial performance will add an perception into South Africa's trade policy. The findings of the analysis can be based mostly upon to design plans that can do better to achieve a good economic performance. The study is also likely to provide useful inputs to researchers and others who have an enthusiastic desire for South Africa's trade with all of those other world.

Organization of the study

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

Chapter one will consist of the introduction, qualifications to the analysis, statement of the problem, objectives of the study, the study hypotheses, the importance of the analysis, scope of the study and finally the business of the study.

The second chapter will comprise of literature review of various studies by other researchers on this subject.

The third Section will explore methodological areas of how data was obtained and analyzed.

The fourth chapter will present research conclusions, provide data research and interpretation.

The fifth section will give summary of the conclusions, a final result and advice as well as suggestions for further research with regards to the topic.

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