Academic journal article Contemporary Economic Policy

Endogenous Protection in a Trade Liberalizing Economy: The Case of South Africa

Academic journal article Contemporary Economic Policy

Endogenous Protection in a Trade Liberalizing Economy: The Case of South Africa

Article excerpt

I. INTRODUCTION

Trade and industrial policy in South Africa initially followed the orthodox route of developing the economy through import substituting measures. These policies were in large part driven by the reaction of the world to the policies of the apartheid state and its need to establish strategic industries. However, with the transition to democracy in 1994, liberalization measures were adopted, first under the aegis of the Uruguay Round negotiations and subsequently with the introduction of a five-year trade liberalisation program in 1996 that consisted of a Tariff Rationalization Process (TRP). The democratically elected government recognized that South Africa should actively seek to benefit from the growth in world trade by stimulating exports and integrating into the world economy. The reform process included a complete restructuring of the incentives given to trade, industry, and agriculture.

This article has several goals. First, it seeks to establish whether any changes have occurred in the institutional structures governing trade policy in the period of democracy and liberalization. Second, it examines the forces that have influenced the application of tariff policy on the part of the major tariff-setting bodies in the country during the period 1990-98. The article therefore seeks to explain how trade policy has been determined in South Africa and applies the various theories of endogenous protection to the decisions that have been made.

This research is unique in the sense that a study has not been performed at the firm level of aggregation for South Africa. The interest in the study also lies in whether multilateral commitments on trade policy have acted as a disciplining force once South Africa democratized. In particular, it examines whether the adjustment costs arising out of the liberalization were of concern to policy makers.

II. INSTITUTIONAL STRUCTURES

Past development of the manufacturing sector in South Africa had been spearheaded by policies of import substitution for infant industries. This policy was reinforced by the need to achieve independence from the rest of the world for strategic reasons. Although the limitations of this approach had been recognized by government, the ability to encourage exports was always constrained by the political reality of sanctions. Despite these constraints, since the early 1980s the trade regime was gradually liberalized with the tarrification of quantitative restrictions, the adoption of a more flexible exchange rate, and the provision of general incentives to exports.

However, it was only with the move to democracy in 1994 that significant trade reform actually occurred. The offer made by South Africa under the Marrakesh Agreement of the General Agreement on Tariffs arid Trade (GATT) has been viewed as remarkable in that it was negotiated by the National Economic Forum, a tripartite body consisting of government, labor, and business, before the elections that took place in April 1994 (International Labor Organization [ILO], 1999). This agreement took effect in January 1995.

Since 1988 the tariff structure has been based on the harmonized system. At the end of June 1997 the tariff had 7814 lines at the eight-digit HS level (World Trade Organization [WTO], 1998) consisting of ad valorem, specific, mixed, compound, and formula duties. Seventy-five percent of the tariff lines bore ad valorem duties in the range between 0 and 57.5% Half of these were duty-free. The percentage of lines with zero rates rose from 20% in 1993 to 44% in 1997, and under the TRP the tariff was simplified further by a reduction in the number of lines, tiers, and tariff peaks. The TRF aimed at achieving ad valorem rates of 30% on final products, 20% on intermediate goods, and 10% on primary goods (WTO, 1998).

All quantitative restrictions have been tariffied and 98% of tariff lines bound at the HS eight-digit level at the end of the Uruguay Round. …

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