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Trade policy

Bilateral free trade agreements and customs unions: the impact of the EU Republic of South Africa free trade agreement on Botswana

Why the EU-South Africa free trade agreement adversely affects other Southern African nations

Authors: S. McDonald; T. Walmsley
Publisher: Global Trade Analysis Project , 2003

Full text of document

This paper analyses the free trade agreement (FTA) between the European Union and the Republic of South Africa, which is one of the first results of the stated aim of the EU that after 2008 its trade relationships with developing countries will be dominated by the development of preferential trade agreements. The paper uses an econometric model to estimate the extent to which third parties might be affected by the bilateral free trade agreement between the EU and South Africa.

Findings include:

  • the EU South Africa FTA will produce appreciable welfare gains for the EU and South Africa by promoting allocative efficiency in both partners’ economies, employment growth in South Africa and improvements in the terms of trade for the EU
  • however, these gains are acquired at the expense of the rest of the global economy, which loses out through reductions in allocative efficiency, employment and the terms of trade
  • these negative effects are most pronounced among the African states and in particular those states in the Southern African Development Community (SADC), with Botswana being the major loser
  • while the welfare effects are relatively small, the losses are only small if the economies of sub-Saharan Africa (SSA) can achieve appreciable structural changes, which history suggests is not an easy transformation
  • moreover the structural changes that are implied involve reductions in manufacturing capacities in SSA: changes that may be politically unpopular
  • the reluctance of the EU to fully liberalise trade in food and agriculture commodities results in a major reduction in the benefits for South Africa without ameliorating substantively the adverse implications for other nations
  • if the EU is serious about assisting African development through trade agreements then the EU needs to engage in comprehensive programmes of evaluation before entering into such agreements

[adapted from author]