Free Trade Agreements and the SADC Economies

Countries in Southern Africa have engaged in a variety of trade liberalization initiatives. For example, South Africa and the European Union (EU) negotiated a free trade agreement (FTA) in 1999. The EU unilaterally opened its markets to the least developing countries, which includes some of the countries in the region, in 2001 under its "Everything But Arms" (EBA) initiative. Although not formally established, countries in the region have discussed a SADC FTA. In this paper, we use a multi-country, computable general equilibrium (CGE) model to analyze the impact of trade liberalization on countries, sectors, and factor. To focus on trade flows among countries in Southern Africa, the model includes seven countries in the region (South Africa, Botswana, Malawi, Mozambique, Tanzania, Zambia, and Zimbabwe), the rest of SADC, the rest of Sub-Saharan Africa, and five other aggregate regions (the EU, High-Income Asia, Low-Income Asia, North America, and the rest of the world). First, we analyze the FTA between South Africa and the EU. Then, we consider how the rest of Southern Africa might respond: (1) by enforcing a SADC FTA; (2) by exploiting advantages of unilateral access to the EU in addition to a SADC FTA; and (3) by entering an FTA with the EU and other SADC countries. We find that trade creation dominates trade diversion for the region under all FTA arrangements. Some SADC economies are slightly hurt by the FTA between the EU and South Africa while others slightly gain. Overall, the agreement is not a beggar thy neighbor policy. Unilateral access to the EU is more beneficial, in terms of real GDP and real absorption, for SADC countries than a SADC FTA. However, reciprocal reforms, under an EU-SADC FTA dominate unilateral access to the EU because they require more structural adjustment. Finally, we find that South Africa is not large enough to serve as a growth pole for the region. Access to EU markets provides substantially bigger gains for the other SADC countries than access to South Africa.