SACU Tariff Policies: Where Should They Go From Here? Lawrence Edwards and Robert Lawrence CID Working Paper No. 169 May 2008 © Copyright 2008 Lawrence Edwards, Robert Lawrence, and the President and Fellows of Harvard College at Harvard UniversityCenter for International DevelopmentWorking PapersSACU Tariff Policies: Where Should They Go From Here? Lawrence Edwards and Robert Lawrence May 2008 Abstract: This paper characterizes the current South African Customs Union (SACU) tariff structure, considers its rationale, proposes and evaluates some alternatives for reform. While considerable progress was made earlier in liberalizing and simplifying SACU’s tariff structure, over the past few years such movement appears to have halted. This is unfortunate because trade performance is a key constraint in attaining South Africa’s growth objectives. The tariff structure remains excessively complex and opaque and biased against exports. The differentiation provided to different sectors appears mainly to be the result of historical accident and is not justifiable as efficient job preservation, equitable income distribution or on infant industry grounds. Some still continue to defend the complex structure as necessary to provide producers of particular products with precisely the amount of protection they need to become competitive. But their arguments are unconvincing. There may be a case for exceptional temporary safeguards and infant industry protection but a broad complex structure is likely to allocate resources inefficiently: channelling them away from activities in which South Africa is competitive and towards those in which it is less efficient. Protection of inputs is particularly damaging and distorting of the choices of those seeking to beneficiate and export. In addition, the government simply does not have the requisite information (or instruments) to apply such differentiation appropriately to such a large number of products. Inevitably, therefore the structure encourages and reflects rent seeking. Using simple tariff structures that have a zero and just one or two tariff bands we show that it is possible simultaneously to provide benefits to consumers, limit employment dislocation by conferring a reasonable degree of effective protection on finished goods, reduce export taxes, improve transparency and provide a norm against which industrial policy priorities can be set. The long run goal would be a globally competitive SACU region that provides producers with access to inputs at world prices. South Africa’s regional trade policies require attention. The African continent plays a key strategic role in South Africa’s export diversification strategy and regional development is a vital priority. The current SACU tariff sharing formula is expensive and defective. A major reform of SACU tariffs would make particular sense for the BLNS countries, allowing these nations access to cheaper inputs and final products. It would also provide the opportunity to renegotiate the SACU revenue-sharing formula, more clearly and rationally separating its aid and tariff-revenue sharing components. SACU should avoid unrealistic commitments to customs unions with other African partners. In its other regional arrangements (e.g. with SADC) SACU should place primary reliance on free trade agreements and other projects (e.g. infrastructure) that enhance integration. Keywords: trade policy, regional integration, South Africa, trade simulations JEL Codes: F13, F15, F17 This paper is part of the CID South Africa Growth Initiative. This project is an initiative of the National Treasury of the Republic of South Africa within the government’s Accelerated and Shared Growth Initiative (ASGI-SA), which seeks to consolidate the gains of post-transition economic stability and accelerate growth in order to create employment and improve the livelihoods of all South Africans. For more information and the entire series of papers, visit the project's web site at http://www.cid.harvard.edu/southafrica.1 SACU Tariff Policies: Where should they go from here? By Lawrence Edwards and Robert Z Lawrence∗* Lawrence Edwards is an Associate Professor at the University of Cape Town; Robert Lawrence is the Albert L Williams Professor of International Trade and Investment at the John F Kennedy School of Government, Harvard University and a Senior Fellow at the Peterson Institute for International Economics, Washington DC. We thank Iza Lejarraga and Owen Willcox for research assistance.2ABSTRACT This paper characterizes the current SACU tariff structure, considers its rationale, proposes and evaluates some alternatives for reform. While considerable progress was made earlier in liberalizing and simplifying SACU’s tariff structure, over the past few years such movement appears to have halted. This is unfortunate because trade performance is a key constraint in attaining South Africa’s growth objectives. The tariff structure remains excessively complex and opaque and biased against exports. The differentiation provided to different sectors appears mainly to be the result of historical accident and is not justifiable as efficient job preservation, equitable income distribution or on infant industry grounds. Some still continue to defend the complex structure as necessary to provide producers of particular products with precisely the amount of protection they need to become competitive. But their arguments are unconvincing. There may be a case for exceptional temporary safeguards and infant industry protection but a broad complex structure is likely to allocate resources inefficiently: channelling them away from activities in which South Africa is competitive and towards those in which it is less efficient. Protection of inputs is particularly damaging and distorting of the choices of those seeking to beneficiate and export. In addition, the government simply does not have the requisite information (or instruments) to apply such differentiation appropriately to such a large number of products. Inevitably, therefore the structure encourages and reflects rent seeking. Using simple tariff structures that have a zero and just one or two tariff bands we show that it is possible simultaneously to provide benefits to consumers, limit employment dislocation by conferring a reasonable degree of effective protection on finished goods, reduce export taxes, improve transparency and provide a