SOUTH AFRICA Selected Issues

This Selected Issues paper for South Africa presents a quantitative analysis of inflation dynamics in the country. The conduct of monetary policy has been complicated by a variety of unanticipated events that have had important effects on inflation. Exposed to exchange rate and other shocks, the model confirms that a delayed policy response to inflation shocks leads to persistently higher inflation rates and, subsequently, to a sharp real contraction of the economy.

Abstract

This Selected Issues paper for South Africa presents a quantitative analysis of inflation dynamics in the country. The conduct of monetary policy has been complicated by a variety of unanticipated events that have had important effects on inflation. Exposed to exchange rate and other shocks, the model confirms that a delayed policy response to inflation shocks leads to persistently higher inflation rates and, subsequently, to a sharp real contraction of the economy.

V. Trade Policy Issues in South Africa1

A. Introduction

1. South Africa’s trade regime has undergone significant transformation since the end of the apartheid era. Over the second half of the 1990s, the trade regime was substantially liberalized, both unilaterally and in response to multilateral commitments entered into through the WTO. The more recent past has been characterized by the negotiation of a series of regional and bilateral trading arrangements. This paper provides an overview of these developments and considers some of their potential implications.

B. The Evolution of South Africa’s Trade Policy Framework

Trade liberalization in the post-apartheid era

2. South Africa had a highly distorted system of protection in the early 1990s. About one sixth of tariff lines were subject to import controls, with great sectoral variation; while most sectors were relatively free of controls, some sectors were highly restricted, including agriculture (about 74 percent of tariff lines), food, beverages, rubber, tobacco (about 90 percent), and clothing (59 percent). The trade regime was highly complex, with a large number of tariff lines and tariff rates, a wide range of tariffs, and a very high level of dispersion (as measured by the coefficient of variation). A generalized subsidy program was available to exporters, with the value of the subsidies related to local content, the level of the exchange rate, and other factors.

3. The impetus for liberalization gained momentum following the end of apartheid. Trade policy was one element of a broad national development strategy that encompassed macroeconomic stabilization, and policies to promote industrialization, strengthen domestic regulatory frameworks, promote education, and establish social safety nets. South Africa adopted a two-pronged approach to trade liberalization, focusing on: (i) multilateral trade liberalization in the context of the Uruguay Round of trade negotiations; and (ii) unilateral trade liberalization.

4. Multilateral liberalization was initiated through the offer made to the WTO in 1994, involving comprehensive trade policy reform with a commitment to, among other things:

  • reduce industrial tariffs by one third during 1995–2000, with the exception of sensitive industries (textiles, clothing, and motor vehicles) which were to be liberalized by 2003;

  • increase the share of bound industrial tariff lines from 55 to 98 percent; and reduce the number of tariff rates to six

  • lower bound agricultural tariffs by 21 percent on average

  • convert quantitative restrictions and formula duties to bound ad valorem tariff rates

  • terminate export subsidies by 1997.

At the same time, South Africa cut some tariffs unilaterally such that, on average, applied tariffs fell well below rates bound in the WTO.

5. South Africa’s trade regime was thus substantially liberalized by 2002. Export subsidies under the Generalized Export Incentive Scheme were scrapped in 1997. Virtually all quantitative restrictions were eliminated; the tariff regime was rationalized, with the number of lines and tariff bands significantly reduced. And the simple unweighted average Most-Favored-Nation tariff rate declined over 20 percent in the early 1990s to 11.4 percent in 2002. Tariff reductions were front-loaded during this period. The reduction in average tariff rates since 1997 has been more measured and is broadly in line with the pace of tariff reductions in a number of other emerging markets (Table V.1).

Table V.1.

Cross-Country Comparison of Average Tariff Rates 1/

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Source: WTO and IMF Staff Estimates

Unweighted mean of all tariff lines and includes other duties and charges.

Figures for 2004 are latest available year (2002 for South Africa).

Unweighted average.

SADC countries excluding members of South African Customs Union.

6. Trade liberalization contributed to a rapid expansion of trade flows. The economy has become much more open, with the share of trade in GDP increasing from its low point of about 33 percent of GDP in 1992 to over 50 percent of GDP since 2000. The structure of trade has also become more diversified, with South Africa gradually becoming less reliant on exports of primary commodities.

7. Trade liberalization is, moreover, thought to have had a substantial positive impact on South Africa’s growth rate. In a cross-section analysis based on 24 manufacturing industries, Jonsson and Subramanian (2000) show that as much as 3 percent of the annual growth rate of manufacturing industry can be ascribed to trade liberalization during 1990–97. They also find evidence to suggest that employment fell by less in those sectors where tariffs were reduced more aggressively. More recent work by Edwards and van de Winkel (2005) tends to confirm that trade liberalization has enhanced competition in the manufacturing sector. They find that the reduction in tariff protection in the manufacturing sector from 1995 to 2002 reduced price mark-ups by about 15 percent.

outstanding issues in the current trade policy regime

8. Despite the impressive progress in the mid-to-late 1990s, the trade regime remains relatively complex. About one quarter of tariff lines continue to carry non ad valorem tariffs, including formula duties.2 The number of tariff bands remains high, with ad valorem duties applied at 39 different rates, ranging between 0 and 55 percent. Certain sectors also remain quite heavily protected, especially fisheries (for which import permits are still required and tariffs are largely unbound) and textiles and clothing where average tariffs are 30 percent or higher). The authorities are therefore developing proposals to further simplify the tariff structure that will involve significant reductions in the number of tariff bands and the application of ad valorem duties for most items.

9. Comparisons of tariff protection are always difficult but are further complicated in South Africa by the presence of non ad valorem tariffs. Nevertheless, they tend to confirm that average tariff rates in South Africa are similar to the average in other emerging markets but above the average in advanced economies (Figure V.1.).3 The complexity of the regime is also evident, with the number of tariff peaks (i.e., tariff lines carrying tariff rates in excess of 15 percent) and the share of non ad valorem duties in South Africa tending to be somewhat higher than the average for a sample of comparator countries.4

Figure V.1.
Figure V.1.

South Africa: Cross Country Comparison of Tariff Indicators

Citation: IMF Staff Country Reports 2005, 345; 10.5089/9781451966763.002.A005

Source: WTO and IMF staff estimates

10. South Africa continues to encourage exports through a range of incentive schemes, the costs of which are unclear. Some are quite general and can be found the world over. For example, various forms of marketing assistance are available through the Export Marketing and Investment Assistance Scheme. Export processing zone type facilities, offering exporters duty-exempt imports of production-related raw materials and inputs, are also available through recently established Industrial Development Zones. Other sector-specific incentives, however, are designed more specifically to develop new export markets, broaden the export base, and provide assistance to disadvantaged industries. The success of such schemes is debatable and their costs are unclear.5 The most prominent relates to the automotive industry through the Motor Industry Development Program (MIDP) (Box V.1).

C. Regional Trading Agreements

11. One notable feature of the recent evolution of South Africa’s trade policy regime has been the increase, either actual or prospective, in the number of bilateral and regional trading arrangements. South Africa is a very active participant in the current Doha Development Round of trade negotiations. It has provided leadership and support to other developing countries, and played a central role in the emergence of the G-20 group of developing countries, which adopted a common negotiating position on agriculture at the fifth WTO Ministerial in Cancun in September 2003. But motivated in part by a lack of progress with multilateral trade negotiations, South Africa in concert with its SACU partners has embarked on a fairly aggressive strategy to conclude a range of new bilateral and regional free trade arrangements. South Africa is of course not alone in this regard. These and other key existing arrangements are discussed in turn below.

The Motor Industry Development Program

As in many other countries, there is a long history of government support for the auto industry in South Africa. The establishment of the Motor Industry Development Program (MIDP) in 1995 marked a major shift in the nature of this support. Traditional local content requirements were abolished, consistent with the WTO agreement on Trade Related Investment Measures (TRIMS), and replaced by: an immediate reduction in tariff rates and establishment of a tariff phase-down schedule; a duty free allowance of 27 percent of the value of vehicles produced for the local market; and import rebate credit certificates (IRCCs), which enable exporters to earn tradable duty rebate credits in proportion to the local content of their exports.

Since its inception, the MIDP has been reviewed twice. Following the first review in 1999/2000, the program was extended from 2002 to 2007. The value of IRCCs was reduced through a further gradual reduction of import tariffs (see table). The “qualifying” value of exports was also slated to fall from 100 percent to 70 percent of the local content value of exported cars (and from 65 to 60 percent for exported components) by 2007. Offsetting this, however, was a new Productive Asset Allowance (PAA), under which investments aimed at increasing production for the export market earned duty credits worth 20 percent (phased over 5 years) of the investment. The MIDP was further extended to 2012 following the most recent review in 2002. Import tariffs are set to fall further, although the phase down in the qualifying value of exported cars to 70 percent was postponed from 2007 until 2009.1/

Import Tariff Rates

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The MIDP has had a major impact on the South African auto industry, most noticeably in terms of export performance: exports have more than threefold in US dollar terms since 1996 and now account for almost 10 percent of total exports.2/ The degree of specialization has also increased, with fewer product lines (for both vehicles and components) and larger production volumes. Also, the share of domestic sales accounted for by imports has increased. The impact on employment has been less striking, with most estimates suggesting that employment levels have at best increased only modestly in recent years (although this has been in the context of declining employment in the rest of the manufacturing sector).

uA05bx01fig01

South Africa. Exports of Vehicles/Components and Total Exports

Citation: IMF Staff Country Reports 2005, 345; 10.5089/9781451966763.002.A005

The MIDP has been criticized because: (i) it is complex and raises compliance costs; (ii) once established, such programs tend to become difficult to remove2/; and (iii) incentives available under the MIDP effectively act as subsidies, the ultimate costs of which are borne by consumers. The desire to create a level playing field for exporters has led many countries to establish export processing zones or duty drawback schemes, and these have been recognized as consistent with TRIMS. Under IRCCs, however, the duty credit is based on the local content value of exports (i.e., the opposite of more typical duty drawback schemes). Black and Mitchell (2002) and Flatters (2002) argue that as such it constitutes an export subsidy.3/ If the domestic price of vehicles is above duty free world prices, IRCCs provide scope for duty free imports which can then be sold at a mark-up. The resulting rents, it is argued, can then be used to boost profits on the sale of domestic vehicles or subsidize otherwise less profitable exports.4/

The future of the MIDP is uncertain. A further review of the program is scheduled to take place this year. Tariff rates are already relatively low compared with other Asian and Latin American emerging markets. Under existing plans, however, the value of incentives under the MIDP will decline as tariff rates on vehicles/components are gradually reduced and as the qualifying value of exports is lowered. Incentives could be further eroded by the inclusion of the auto sector in future trade agreements. The preferential tariff rate relative to MFN rates for imports from the EU under the Trade Development and Cooperation Agreement (TDCA), for example, is subject to negotiation.

1/ By 2012, therefore, the maximum rebate or credit available through IRCCs for each Rand of local content exported will be Rand 0.175 (i.e., the 25 percent tariff multiplied by the 70 percent qualifying value of exports) compared with Rand 0.65 in 1995.2/ Exports may also have been helped by the preferences enjoyed by South African vehicle exporters, although these preferences relative to MFN rates are quite modest. Vehicle exports to the EU face tariffs of 6.5 percent compared to MFN rates of 10 percent, and can be exported free of duty to the US under the Africa Growth and Opportunity Act (AGOA) compared to MFN rates of 2.5 percent.2/ See, for example, Pursell (2001) on lessons from Australia’s experience with local content programs. It suggests that such programs raise costs and prices and reduce competition and employment.3/Flatters (2002), for example, notes that more traditional duty drawback schemes (under which rebates are based on the value of imported inputs) are available to all manufacturers. The fact that vehicle and component manufacturers register under the MIDP suggests that the resulting credits are worth more.4/ Positive duty collection rates on vehicles would indicate the domestic prices are not yet fully determined by duty free world prices. More direct evidence on price differentials is subject to interpretation. Barnes and others (2003), for example, argue that retail prices in South Africa are lower than in the EU. Flatters (2004) and Kaplan (2003) dispute these findings on a number of grounds, arguing, for example, that comparisons of retail prices a not-necessarily meaningful and that the results are skewed by, among other things, temporary exchange rate movements.

Southern African Customs union

12. The Southern African Customs Union, comprising South Africa, Botswana, Lesotho, Namibia, and Swaziland, is the oldest customs union in the world. Until 2002, trade policy was effectively determined unilaterally by South Africa. South Africa is the dominant economic force within SACU, accounting for 86 percent of the population and more than 90 percent of GDP. South Africa accounts for about three quarters of trade flows for Botswana, Namibia, Lesotho and Swaziland (BLNS), whereas BLNS countries represent a relatively minor trade partner for South Africa.

13. The impetus to “democratize” SACU’s trade policy accelerated with the end of apartheid and, following eight years of negotiations, a new SACU agreement was signed in 2002. The main provisions of the new SACU agreement are as follows:

  • a common external tariff, zero tariffs on intra-SACU trade, and a common excise tax structure.

  • future bilateral and regional trading arrangements must be negotiated with SACU rather than individual member governments (although existing arrangements are allowed to remain in place—tariff preferences therefore continue to differ from one SACU country to another).

  • a new institutional structure consistent with shared responsibilities and decision making, with, for example, the discretion to set tariffs moving from the South African Board on Tariffs and Trade to a new SACU Tariff Board. A dispute settlement mechanism was also introduced.

  • new arrangements for sharing the revenues from customs and excise duties, which introduce more predictability into revenue flows. The South African share is no longer calculated by residual; the lag between trade and revenue distribution was shortened; and a development component was introduced under which a portion of (excise) revenues are determined according to per capital incomes.6

  • to foster deeper economic integration, a provision was made for common policies regarding industrial development, agriculture, competition, and unfair trade practices.

  • trade facilitation through the further harmonization of customs procedures, standards, and technical regulations, which would reduce costs for traders.

14. Progress towards deeper economic integration within SACU has been slow. While applied customs tariffs, excise duties, customs valuation, rules of origin, and contingency trade remedies have been harmonized, there has been little progress on, for example, customs procedures, standards, tax harmonization, industrial policy, and competition policy (countries retain the right to protect infant industries from other members).7 In the absence of harmonization, separate border posts have been retained. And no attempt was made to incorporate some of the “second generation” trade issues, such as trade in services and the movement of labor, within the SACU agreement.

Southern African Development Community

15. The Southern African Development Community was established in 1992 with the aim of achieving greater economic integration within Southern Africa.8 South Africa became a member in 1994. The trade protocol, which came into effect in 2000, aims at establishing a free trade area covering 98 percent of merchandise trade by 2012. The schedule of liberalization is asymmetric, with tariff reductions for South African products mid-to-back loaded. In March 2004, SADC announced ambitious plans to deepen regional integration, through the establishment of a customs union by 2010, a common market by 2012, and preparation for a single SADC currency by 2016.

European union

16. Europe has historically been South Africa’s largest trading partner and also accounts for 90 percent of foreign direct investment. The desire to secure long-term preferential access to the EU motivated the Trade Development and Cooperation Agreement (TDCA), which came into force in July 2000. It provides for trade liberalization between South Africa and the EU to form a free trade area by 2012. The agreement covers 95 percent of total EU imports and 86 percent of South African imports, with exclusions covering mainly agricultural products but also aluminum (EU) and petroleum products, some chemicals, textiles, and automotive products (South Africa). Tariffs will also be reduced faster, on average, in the EU than in South Africa, although the asymmetry is not all in the same direction in the sense that South Africa will liberalize a larger share of its agricultural trade (81 percent) than will the EU (61 percent).

17. The implications for other SACU and SADC members were to some extent taken into account in negotiating the TDCA.9 Some of the exclusions on the South African side reflected sensitive products in Botswana, Lesotho, Namibia and Swaziland, which also benefit from more generous rules of origin.10 SADC preferences are also built into the TDCA. Under the SADC trade protocol, countries cannot offer trade benefits to a third country without first extending them to all SADC members. South Africa has therefore offered to open its market first to SADC members before extending similar preferences to the EU. As a result, SADC preferences are currently lower than EU preferences.

Prospective SACU-wide preferential trading arrangements

18. In concert with its SACU partners, South Africa has recently launched negotiations for a number of preferential trade arrangements, with a number of future negotiations still under discussion:

  • The first such agreement, with Mercosur, was signed in December 2004.11 SACU exporters will now face lower tariffs on about 1,000 product lines, with the aim being to eventually establish a free trade area through the further expansion of product coverage.

  • Discussions with EFTA began in mid-2003 and are expected to be concluded by mid-2005.12 The aim has been to negotiate a trade agreement that was as close as possible to the TDCA, which would simplify matters for exporters and importers by harmonizing trade relations between South Africa and western Europe generally.

  • Negotiations towards a free trade agreement with the U.S. were launched in June 2003. The proposed agreement would extend and make permanent the unilateral provisions of the U.S. Africa Growth and Opportunity Act, which is scheduled to expire in 2015. The agreement would extend beyond traditional market access issues to encompass “second generation”, including services, investment, intellectual property rights, government procurement, labor and environmental standards (none of which are currently covered in the new SACU agreement). Negotiations were supposed to have concluded by end-2004 but have stalled.

19. Bilateral agreements with Nigeria, China, India, Egypt and Singapore have also been proposed. Substantive negotiations have yet to begin, although a framework agreement for a SACU-India free trade agreement was signed in November 2004.

Policy issues associated with bilateral and regional trade arrangements

20. As has been widely discussed, bilateral and regional trading arrangements can have positive or negative effects on trade depending on their design and implementation. The most important ingredient for success is low trade barriers with all global partners. Nondiscriminatory liberalization (i.e., on a most-favored nation basis), which creates more trade, is thought to be the most efficient way to increase trade among signatories to a preferential trading arrangement. Agreements that minimize the number of excluded products also help to expand the scope for positive net benefits through competition and trade creation. Recent research suggests that non-restrictive rules of origin are also crucial for success. Together with MFN liberalization, these ensure that firms can source materials at the lowest cost.

21. One particular problem associated with the proliferation of bilateral and regional trading arrangements has been the number of overlapping arrangements, or the development of the so-called “spaghetti bowl” of agreements. South Africa’s position within the African nexus of trade arrangements is shown in Figure V.2. Membership of overlapping regional and bilateral arrangements with different geographical coverage, trade liberalization agenda, and trading rules (e.g., non-tariff measures, phase in periods, and rules of origin) complicates the trade regime. Countries face different access conditions to the South African market depending on which agreement(s) they belong to, and their stage of implementation. The same applies to South African exports. In cases where trade flows are potentially covered by more than one agreement, it is not always clear which one takes precedence.13 This may distort trade and incentive patterns in an unpredictable manner as well as raising the administrative costs for both enterprises and the government.

Figure V.2.
Figure V.2.

The “Spaghetti Bowl” of Africa’s Overlapping Trade Arrangements

Citation: IMF Staff Country Reports 2005, 345; 10.5089/9781451966763.002.A005

22. There are also specific problems associated with overlap. The intention to establish a customs union in SADC, for example, creates an obvious problem in the sense that a country cannot be a member of two different customs unions. The Common Market for Eastern and Southern Africa (COMESA), which includes Swaziland, is also seeking to establish a customs union. Kenya, Uganda, and Tanzania—the first two of which belong to COMESA and the latter to SADC—have already established a customs union (the East African Community). Moreover, MFN tariff schedules are quite different across the membership of potential customs (Table V.2). The adoption of a common external tariff would require substantial changes in the MFN regimes of some or all members. This raises the question of the direction in which any harmonization should take place. The MFN schedule of SACU is notably more complex than that of some of its potential SADC customs union partners. The MFN schedules of Malawi, Mozambique, Tanzania, and Zambia by contrast have a much lower number of tariff bands, no specific duties, and more modest tariff peaks.

Table V.2.

MFN Tariff Schedules - Selected SADC Members

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Source: WTO and IMF Staff Estimates

23. South Africa’s trading relationship with the EU also has important implications for some of its neighbors. The current preferential access to the EU which South Africa’s SACU and SADC partners enjoy under the Cotonou Agreement will eventually be replaced by Economic Partnership Agreements (EPAs). These are expected to be concluded by 2008. Unlike the Cotonou Agreement, trade liberalization under the EPA will be on a reciprocal basis (i.e., tariffs on imports from the EU will need to be reduced). For BLNS countries, this schedule of liberalization has effectively already been pre-empted under the South Africa-EU TDCA. EPA negotiations have now begun at the regional level, with the BLNS countries and three neighboring SADC countries (Angola, Mozambique, and Tanzania) forming a negotiating group. It seems unlikely that the latter would also accept the TDCA schedule (doing so would imply substantial and rapid liberalization toward the EU without exclusions for sensitive product unless already covered by the TDCA). Another option would be for BLNS countries to retain membership of two distinct reciprocal trade arrangements with the EU. In practice, this would require the retention of robust rules of origin and customs controls between the BLNS countries and the rest of the EPA negotiating group. This would undermine regional integration—one of the purposes of EPAs. A more radical alternative be for SACU to form the core of a new regional customs union that could gradually expand to include other members of SADC, starting perhaps with Angola, Tanzania, and Mozambique.65

D. Policy Conclusions

24. South Africa has made significant progress since the end of apartheid in simplifying and liberalizing its trade regime. Nevertheless, there are further gains to be made. Lowering the overall level of protection, harmonizing protection across sectors, reducing the number of tariff bands, and applying ad valorem duties for most items, would enhance competition, increase productivity, and support growth. The future of the MIDP should also be carefully considered in the light of evidence elsewhere that such programs entail significant costs. At a regional level, the potential benefits of the Southern African Customs Union could be more fully exploited through further harmonization of policies in a range of areas. Further opening up through the negotiation of preferential trading arrangements beyond SACU may help to promote trade and investment. Experience suggests that the gains from such arrangements are higher where external barriers to trade are low and rule of origin are simple and nonrestrictive. Streamlining existing preferential trading arrangements would also help to reduce trading costs.

South Africa: Tax Summary as of June 200566

(All amounts in South African rand)

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E. References

  • Barnes, Justin, R. Kaplinsky, and M. Morris, 2003, “Industrial Policy in Developing Economies: Developing Dynamic Comparative Advantage in the South African Automobile Sector”, prepared for TIPS/DPRU Forum on The Challenge of Growth and Poverty: The South African Economy Since Democracy.

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  • Edward, Lawrence and T. van de Winkel, 2005, “The Market Disciplining Effects of Trade Liberalisation and Regional Import Penetration on Manufacturing in South Africa”, Trade and Industrial Policy Strategies Working Paper 1–2005, (Pretoria: Trade and Industrial Policy Strategies).

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  • Flatters, Frank, 2002, “From Import Substitution to Export Promotion: Driving the South African Motor Industry”.

  • Flatters, Frank,, 2004Is the MIDP a Model for Selective Industrial Policies”? http://qed.econ.queensu.ca/pub/faculty/flatters/writings/ff_is_the_midp_a_model.pdf

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  • Jonsson, Gunnar and A. Subramanian, 2000, “Dynamic Gains from Trade: Evidence from South Africa”, IMF Working Paper 00/45, (Washington DC: International Monetary Fund).

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  • Kaplan, David, 2003, “Manufacturing Performance and Policy in South Africa - A Review”, prepared for TIPS/DPRU Forum on The Challenge of Growth and Poverty: The South African Economy Since Democracy.

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  • Khandelwal, Padamja, 2004, “COMESA and SADC: Prospects and Challenges for Regional Trade Integration”, IMF Working Paper 04/227, (Washington DC: International Monetary Fund).

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  • Pursell, Garry, 2001, “Australia’s Experience with Local Content Programs in the Auto Industry: Lessons for India and Other Developing Countries”, World Bank Policy Research Working Paper No. 2625, (Washington DC: World Bank).

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  • Stevens, Christopher and J. Kennan, 2004, “The TDCA, EPAs, and Southern African Regionalism”, paper prepared for a conference on ‘The TDCA: Impacts, Lessons and Perspectives for EU-South and Southern Africa Relations’ Johannesburg, November 2004.

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  • World Bank, 2004, “Global Economic Prospects 2005. Trade, Regionalism, and Development”, (Washington DC: World Bank).

  • World Bank, 2005, “Global Monitoring Report 2005. Millennium Development Goals: From Consensus to Momentum”, (Washington DC: World Bank).

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  • World Trade Organization, 2003, “Trade Policy Review. Southern African Customs Union”, (Geneva: World Trade Organization).

  • Yang, Yongzheng and S. Gupta, 2005, “Regional Trade Arrangements in Africa: Past Performance and the Way Forward”, IMF Working Paper 05/36, (Washington DC: International Monetary Fund).

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1

Prepared by Robert Burgess (PDR).

2

Formula duties are typically based on domestic reference prices for a particular product, with tariffs applied or increased if the international price of that product falls below the domestic reference price. Maize (South Africa’s most important field crop) and wheat, for example, carry formula based duties.

3

Recent work by the World Bank (2005), which attempts to estimate the distortionary effect of trade barriers, suggests that trade restrictiveness may be lower than average in South Africa, given its stage of economic development.

4

The sample of countries shown in Figure V.1. reflects selected industrial countries and larger emerging markets and is based on the availability of data in recent WTO Trade Policy Reviews.

5

The WTO, for example, has argued that special programs for manufacturing industries in South Africa have not had the desired impact on growth, employment, or income distribution. See WTO (2003).

6

For more details on the new revenue sharing arrangements see WTO (2003).

7

There is, for example, no common policy on standards. South African product standards are generally used in Lesotho and Namibia, whereas Botswana and Swaziland have their own product standards. In a similar vein, SACU members continue to retain separate VAT or sales taxes at somewhat different rates. This can increase transaction costs for traders, encourage smuggling and tax evasion, and distort trade flows.

8

Membership comprises the five SACU countries and Angola, Democratic Republic of Congo, Malawi, Mauritius, Mozambique, Seychelles, Tanzania, Zambia, and Zimbabwe.

9

Unlike South Africa, other SACU and SADC members have preferential access to the EU market under the Cotonou Agreement (the successor to the Lomé Convention) which established EU trade preferences for African-Caribbean-Pacific (ACP) states.

10

Provided the final stage of processing takes place in South Africa, products made with inputs from BLNS countries are regarded as made in South Africa regardless of the amount of value added in South Africa.

11

Mercosur comprises Argentina, Brazil, Paraguay, and Uruguay.

12

EFTA comprises Switzerland, Norway, Iceland, and Liechtenstein.

13

South African imports of sugar from Malawi, for example, are covered by both a bilateral trade agreement and the SADC trade protocol. Import permits are required under the former but not under the latter.

65

Some streamlining has already taken place. Tanzania and Namibia, for example, have already left the COMESA agreement. For a more detailed discussion of the problems caused by the proliferation of overlapping preferential trading arrangements in Africa, see Khandelwal (2004) and Yang and Gupta (2005). Specific problems associated with the TDCA and EPAs are discussed in Stevens and Kennan (2004).

66

Updated by X. Debrun, Fiscal Affairs Department, July 2005. For further information, see http://www.sars.gov.za or www.treasurv.gov.za.

67

The worldwide basis for income taxation was introduced from January 1, 2001.

68

The capital gains tax became effective on October 1, 2001.

69

The average rate for 2002/03 was R 1.40 per R 100 of earnings.

70

A tax of 0.25 percent of the purchase value of marketable securities (Act No. 32 of 1948) was repealed on December 22, 2003.

71

Fuel excise rates are from April 7, 2004.

South Africa: Selected Issues
Author: International Monetary Fund