South Africa: Selected Issues

The external current account in South Africa has strengthened significantly in 1999, mainly owing to a large decline in imports. Compared with a deficit of about 1.5 percent of GDP in recent years, it is close to balance during the first three quarters of 1999. A resumption of investor confidence has led to an increase in international reserves and facilitated a decline in the net open forward position (NOFP). The external current account deficit has declined to 0.2 percent of GDP during the first three quarters of 1999.

Abstract

The external current account in South Africa has strengthened significantly in 1999, mainly owing to a large decline in imports. Compared with a deficit of about 1.5 percent of GDP in recent years, it is close to balance during the first three quarters of 1999. A resumption of investor confidence has led to an increase in international reserves and facilitated a decline in the net open forward position (NOFP). The external current account deficit has declined to 0.2 percent of GDP during the first three quarters of 1999.

III. Trade Policy Developments in South Africa in the 1990s49

99. Trade liberalization is an integral part of South Africa’s Growth, Employment, and Redistribution (GEAR) strategy. Indeed, the South African economy has opened up substantially during the 1990s, including reductions in both the degree of trade protection and the complexity of the trade regime. These efforts have improved the dynamic efficiency of the economy (see Section IV) and boosted its supply potential. This section provides a detailed description of the trade policy developments in South Africa during the 1990s, including the recent free trade agreements with the European Union (EU) and the imminent agreement with the Southern Africa Development Community (SADC).

A. Trade Policy Prior to the 1990s

100. During the 1960s and 1970s, South Africa’s trade regime was characterized by high tariffs and extensive import controls. In response to the perception that growth through import substitution was being exhausted and in the wake of declining manufacturing production and trade, attempts were made to mitigate the anti-export bias of the system. The focus, however, was on export promotion measures rather than on liberalization of the import regime. It was only in 1983, when about 77 percent of imports were subject to direct import controls, that the first systematic attempt was made to dismantle some of the controls, and in 1985 South Africa switched from a positive list of permitted imports to a negative list of prohibited imports covering about 23 percent of imports (see General Agreement on Tariffs and Trade (1993)).

101. However, with the imposition of financial sanctions and the debt standstill in 1985, balance of payments pressures halted, and even reversed, progress on trade liberalization. An import surcharge of 10 percent was introduced in 1985, which was increased to 60 percent on some items in 1988, and by 1990 there were three rates (10 percent, 15 percent, and 40 percent) for the surcharge. During the 1980s, a number of export promotion schemes were introduced in an attempt to offset the anti-export bias caused by the protectionist policy. In 1990, these were consolidated into one scheme—the Generalized Export Incentive Scheme (GEIS)—that provided a tax-free subsidy to exporters related to the value of exports, the degree of processing of the exported product, the extent of local content embodied in exports, and the degree of overvaluation of the rand.

102. In terms of import controls, 15 percent of tariff lines were affected by them by 1992, with great sectoral variation; while most sectors were relatively free of controls, some sectors were highly restricted, including agriculture (74 percent of tariff lines), food, beverages, rubber, and tobacco (about 90 percent), and clothing (59 percent). In addition, the trade regime was highly complex. By the end of the 1980s, South Africa had the most tariff lines (greater than 13,000), most tariff rates (200 ad valorem equivalent rates),5050 the widest range of tariffs, and the second-highest level of dispersion (as measured by the coefficient of variation) among developing countries (see Belli, Finger, and Ballivian (1993)). In sum, South Africa had a highly distorted system of protection (Table 6).

Table 6.

South Africa: Trade Regime, 1990 and 1998

(In Percent, unless otherwise indicated)

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Sources: GATT (1993); WTO (1998); IDC South Africa; and Beltiet (1993)

The Figure for 1998 refers to June 1997

At ISIC three-digit level; excludes import surcharge

The figure for 1990 refers to 1992

Actual subsidy disbursement were 2.7 percent of exports in 1990/91

The figure for 1990 refers to 1992. As percent of total tariff lines (other than those maintained for health, security, and environmental reasons)

B. Trade Policy in the 1990s

103. Liberalization started to gain momentum in the early 1990s, as reflected in a consultative process established under the auspices of the tripartite National Economic Forum involving government, labor, and organized business. As a result, South Africa adopted a two-pronged approach to trade liberalization during the 1990s. These included (i) multilateral trade liberalization in the context of the Uruguay Round of trade negotiations and (ii) unilateral trade liberalization.

104. Multilateral trade liberalization. In the context of the Uruguay Round, South Africa made a tariff offer phased over five years that took effect on January 1,1995 (except in the case of three sectors where the reductions were phased over a longer period (see below)). This offer was publicly announced in 1994 after extensive consultations with civil society within South Africa. The offer aimed to

  • reduce the number of tariff lines (from over 13,000) at the six-digit level by 15 percent in the first year and by 30 percent or more by 1999;

  • convert all quantitative restrictions (QRs) on agricultural imports to bound ad valorem rates, and lower all bound agricultural tariffs by 21 percent on average and reduce export subsidies by 36 percent;

  • increase the number of bindings511 on industrial products from 55 percent to 98 percent; replace all QRs and formula duties with tariffs, and reduce the number of tariff rates to six—0 percent, 5 percent, 10 percent, 15 percent, 20 percent, and 30 percent—with the exception of the “sensitive” (textiles, clothing, and motor vehicles) industries;

  • liberalize the sensitive industries over an eight-year period; and

  • phase out the GEIS by 1997.” 52

105.Unilateral trade liberalization. South Africa also announced, in 1994, a schedule of unilateral tariff liberalization expiring in 1999 that went beyond the Uruguay Round commitments. As a result, its average (import-weighted) tariffs in manufacturing declined from 15.8 percent in 1994 to 10.3 percent in 1998.53 The current average (import-weighted) tariff is below that bound in the World Trade Organization (WTO) in 2004 by more than 5 percentage points,54 although the “water in the tariff’ varies considerably between sectors.

106. As a result of these changes, South Africa’s trade regime has been considerably liberalized since the early 1990s. Virtually all quantitative restrictions have been eliminated, including those operating through agricultural marketing boards; also, the tariff regime has been rationalized, with the number of lines having been reduced from over 13,000 in 1990 to about 7,900 in 1998 and the number of tariff bands from well over 200 to 72. In addition, the tariff regime was simplified, as the number of lines carrying formula duties (which acted like variable import levies) was reduced from 1,900 in 1993 to 28 in 1997, and the number of lines facing specific tariffs was reduced from 500 to 227, respectively.

C. Recent Trade Agreements

The EU - South Africa Agreement

107. The European Union (EU) - South Africa free trade agreement went into force on January 1, 2000.55 The agreement embodies the principle of asymmetry in that liberalization by the EU will be faster (mostly over a three-year period, compared with a twelve-year period for South Africa) and broader in coverage (encompassing 95 percent of all imports, compared with 86 percent for South Africa) than that by South Africa.

108. Regarding the liberalization of EU markets, the elimination of tariffs on 91 percent of all industrial imports from South Africa will take place within three years, and the liberalization will cover almost all industrial imports within ten years. It should be noted, however, that the incremental liberalization by the EU will cover about 13 percent of imports, because currently about 78 percent of imports from South Africa already enter the EU duty free. In agriculture, the EU’s liberalization will be both partial and back-loaded, as restrictions would continue to apply to about 40 percent of South Africa’s agricultural exports to the EU by the end of the ten-year transition period.

109. South Africa will eliminate tariffs affecting 86 percent of the value of imports from the EU (comprising 73 percent of all tariff lines in the industrial sector) over twelve years, with about three-fourths of this taking place within the first three years. In addition, tariffs will be reduced, but not eliminated, on an additional 3 percent of imports. It is noteworthy that the sectors that are exempted from the tariff elimination account for about one-fourth of all tariff lines and are sectors with the highest tariffs. These sectors are textiles, with an average tariff rate of 29 percent (which compares with an average tariff rate of 14.4 percent in the manufacturing sector), clothing (57 percent), footwear (34 percent), and automotive products (38 percent). In agriculture, South Africa will eliminate its tariffs on about 81 percent of agricultural imports from the EU, with less than half of this liberalization taking place within the first three years of the agreement.

The SADC Agreement

110. South Africa has formally ratified the Trade Protocol of the SADC, as have six other SADC countries (8 out of the original 12 SADC member states need to ratify the agreement for it to come into force). South Africa is willing to implement the agreement unilaterally early next year, but only if an acceptable consensus can be reached on the rules of origin. Negotiations on this issue are ongoing. South Africa’s offer to its SADC partners also embodies the principle of asymmetry, as South Africa will liberalize faster than the other SADC countries. According to statistics compiled by the Department of Trade and Industry, 99 percent of tariff lines (97 percent of SADC imports) will qualify for duty-free access to South Africa by 2005, with duties on 63 percent of tariff lines (69 percent of SADC imports) eliminated upon the implementation of the agreement.

111. However, in order to qualify for duty-free access to South Africa, imports of textiles, clothing, leather, footwear, and automotive products will need to demonstrate sufficient processing and substantial transformation according to criteria set out in the following proposed rules of origin. First, all primary products, including agricultural products, must be wholly obtained from each member state. Second, processed industrial products can acquire originating status provided that the imported materials have undergone sufficient transformation such that (i) the c.i.f. value of those materials does not exceed 60 percent of the total cost of the materials used in the production of the goods; or (ii) the value added resulting from the process of production accounts for at least 35 percent of the ex-factory cost of the goods; or (iii) there is a change in the tariff heading of a product arising from a processing carried out in the nonoriginating materials.

D. Remaining Issues

112. Despite the considerable strides taken in liberalizing the economy, three issues with South Africa’s tariff regime and trade policy still need to be addressed. First, the tariff regime continues to be very complex. In relation to a number of comparator countries, several features of the tariff regime, such as the number of tariff rates and percentage of tariff lines carrying non-ad valorem rates, are still high (see Table 7).

Table 7.

Comparison of South Africa’s Trade Regime with Selected Countries

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Sources: OECD, Indicators of Tariff and Non-Tariff Trade Barriers, 1997; World Trade Organization, Trade Policy Reviews’, and Fund staff estimates.

113. Second, a number of key sectors, such as textiles and clothing, footwear, and automotive products, remain highly protected. Further tariff reductions in these sectors would help raise the economy’s efficiency.

114. Third, while the number of discretionary tariff changes has been reduced, South Africa has become a major user of antidumping actions. Table 8 shows that, while South Africa was a restrained user of antidumping actions during the period 1991-94, it has become one of the most frequent users of antidumping actions in the world since then. Continued heavy use of antidumping actions may eventually undermine the beneficial impact of trade liberalization that South Africa has experienced thus far.

Table 8.

Antidumping Indicators by Economic Taking Action

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sources: WTO Secretariat, rules division, Antidumping Measurable Database

Based on number of antidumping initiations 1995-98 and values of merchandise imports for 1996

The figure in the 1995-98 column refers to 1995-97

  • Belli, Pedro, J.M. Finger, and Amparo Ballivian 1993, “South Africa: A Review of Trade Policies,” World Bank Southern Africa Department Discussion Paper No. 4 (Washington: World Bank).

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    • Export Citation
  • General Agreement on Tariffs and Trade, 1993, Republic of South Africa: Trade Policy Review (Geneva: General Agreement on Tariffs and Trade)

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    • Export Citation
  • World Trade Organization, 1998, Republic of South Africa: Trade Policy Review, (Geneva: World Trade Organization).

49

Prepared by Arvind Subramanian

50

The 200 ad valorem equivalent rates comprised 35 ad valorem rates and about 2,865 tariff lines with either formula or specific rates (Belli, Finger, and Ballivian, 1993).

51

A binding represents a legal commitment to not raise tariffs beyond the level embodied in the binding.

52

The GEIS was altered in 1995 in two ways: the magnitude of support was scaled down, and payments under it were made taxable. In 1996, the GEIS was limited to fully manufactured products, and in July 1997 it was entirely eliminated.

53

In 1990, the average (unweighted) tariff was about 30 percent, while the average (weighted) tariff including import surcharges was 36 percent. These surcharges were eliminated in 1994.

54

The average bound tariff in the WTO in 2004 will be about 16 percent.

55

A controversial wine and spirits accord, which addresses the use by South Africa of appellations such as “port” and “sherry,” was to have been part of the overall agreement but is still being negotiated; it will move forward on its own schedule, delinked from the agreement.