News Features
Winners and Losers in the New SADC Free Trade Area
Improving Disaster Preparedness in SADC
Gender Equity is a Challenge not a Threat
Racism and Xenophobia Debate Gains Momentum

Documents
GAD Exchange, Issue No.22, October 2000
DRC Chronology, August 1998 - September 2000

This is the second in a four-part series on the recently launched SADC Free Trade Area.

    Southern Africa's long-conceived free trade area was launched last month amid high expectation from many including industry and commerce. But as borders gradually open up, critical issues relating to the impact of the free trade area on the consumer, industry and the public sector are slowly becoming imperative.

    Recent studies have shown that the magnitude of the impact, especially arising from the removal of tariffs and increased competition, will vary from sector to sector, and from country to country.

    As member countries lift import duties, one immediate effect would be lower prices of goods imported from countries that have a comparative advantage. But this is only assuming the importers are going to pass on the lower cost to the consumer.

    Under the SADC Trade Protocol, 47 percent of goods will immediately trade at zero tariffs. These goods will be mainly from countries categorised as developed, and would therefore be required to phase down tariffs faster than others.

    Such countries include South Africa, and the rest of the Southern African Customs Union (SACU) members - Botswana, Lesotho, Namibia and Swaziland. These would be followed by Mauritius and Zimbabwe, classified in the middle category. Last to liberalise will be the least developed countries - Malawi, Mozambique, Tanzania and Zambia. Angola, the Democratic Republic of Congo and Seychelles have not yet acceded to the Trade Protocol.

    The second fundamental impact will arise from increased competition once member states remove tariffs and subsidies. All companies in the same sector will be competing on an equal footing, regardless of their size. The stiff competition will manifest itself in both negative and positive employment effects.

    Weaker companies, or those previously overprotected, will likely downsize, if not shutdown completely, resulting in job losses. The more productive companies with cheaper products will find it easier to penetrate new markets, resulting in expansion and thus create new jobs. In the end, countries will be forced to concentrate on producing products in which they have a competitive advantage, benefiting the consumer.

    Employment effects are, however, likely to be felt in the short to medium term. In the long run, as countries specialise in areas where they have a comparative advantage, they will absorb the reserve army of labour previously offloaded by downsizing industries. The incidence of unemployment will also fade as previously less competitive firms acquire new technology and become more productive.

    But a more direct impact will be felt by governments through loss of revenue as tariffs are removed. The fiscal implications will vary depending on each country's reliance on customs revenue.

    Available data shows that customs revenue constitutes less than 10 percent of total government revenue in South Africa and Zambia. South Africa (less than two percent) has a wide domestic revenue base while Zambia (eight percent) owes it to extensive liberalisation under its structural adjustment programmes.

    On the other extreme, customs revenue constitute close to 50 percent of government revenue in Lesotho and Swaziland due to the revenue sharing arrangement under SACU. The other countries range between 15 percent (Botswana) to 30 percent (Mauritius).

    The net impact will, however, depend on the proportion of imports that actually originate from fellow SADC countries since the quoted statistics include revenue from products outside SADC, which will continue to attract import duty.

    It can be argued that the impact will be much lower than generally anticipated, since products that have high import duty are those already classified as sensitive products, and will not be immediately phased down or have completely been excluded from the Trade Protocol. These include several agricultural products, textiles and motor vehicles.

    And the "loss of import duty, however, can only be true in the short term, since in the long-term basis, the dynamic impact of larger SADC markets will attract new investments in the region, which should be capable of raising more revenue to outweigh the short-term revenue losses," argues AT Pallangyo, an advisor to the SADC Trade and Industry Sector coordinated by Tanzania.

    However, the overall impact of the free trade area will also be determined by even more complex factors such as existing bilateral and international trade agreements that SADC countries are members of. These include the trade agreement between South Africa and the European Union (EU) and the SADC-EU trade agreement under Suva I, the successor to the Lomé Convention.