Technical Report: Impact of Derogations from Implementation of the SADC FTA Obligations on Intra-SADC Trade

Technical Report: Impact of Derogations from Implementation of the SADC FTA Obligations on Intra-SADC Trade Tomasz Iwanow, Trade Economist Submitted by: AECOM International Development Submitted to: USAID/Southern Africa June 2011 USAID Contract No. 674-C-00-10-00075-00 DISCLAIMER The author s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government. PO Box 602090 Plot 50668, Tholo Park, Fairgrounds Gaborone, Botswana Phone (267) 390 0884 Fax (267) 390 1027 info@satradehub.org www.satradehub.org

Table of Contents Executive Summary... 4 1. Introduction... 6 2. Background to the Requests for Derogations... 7 2.1 Tanzania... 7 2.1.1 Derogation on Sugar... 7 2.1.2 Derogation on Paper Products... 8 2.2 Zimbabwe... 9 2.2.1 Zimbabwe s Category C SADC Tariff Liberalization Schedule (excluding South Africa)10 2.2.2 Zimbabwe s Category C SADC Tariff Liberalization Schedule for South Africa.. 12 3. Impact of FTA on Intra-Regional Trade: Theory... 13 4. Analysis of SADC Trade Patterns... 14 4.1 Intra-SADC Trade Since the Creation of FTA... 14 4.2 Analysis of Tanzania s Trade in Sugar and Paper... 15 4.2.1 Sugar... 15 4.2.2 Paper... 16 4.3 Zimbabwe Trade in Category C Products... 17 4.3.1 Trade in Zimbabwe s Category C of the SADC Tariff Liberalization Schedule (Excluding South Africa)... 17 4.3.2 Zimbabwe s Imports of Goods in Category C from South Africa... 19 5. Assessment of the Impact of Derogation on Intra-SADC Trade with Special Reference to Smaller Economies... 22 5.1 Trade Patterns Analysis... 22 5.1.1 Tanzania... 22 5.1.2 Zimbabwe... 23 5.2 Tariffs Analysis... 24 5.3 The duration and scope of the derogations.... 25 5.4 Analysis of Revealed Comparative Advantage... 26 6. Policy Implications and Conclusion... 30 2

List of Abbreviations CMT DRC EU FTA MFN MS NTB RTA UN SA SADC SACU ZIMRA Council of Ministers responsible for Trade Democratic Republic of Congo European Union Free Trade Area Most Favorable Nation Member States Non-Tariff Barriers Regional Trade Agreement United Nations South Africa Southern African Development Community Southern Africa Customs Union Zimbabwe Revenue Authority 3

Executive Summary The Southern African Development Community (SADC) Protocol on Trade establishing entered into force in 2000. The Protocol included, among other provisions, tariff phasedown schedules for each SADC Member State, to be completed by 2012. 1 Article 3(1)(c) of the Protocol states that Member States that have been adversely effected by the removal of tariffs may be granted a grace period to afford them additional time for the elimination of tariffs and (NTBs). At the recent Committee of Ministers of Trade (CMT) held in Windhoek on 12 February 2011, two such grace periods were discussed: o Tanzania requested to re-impose duties on selected sugar and paper products. o Zimbabwe requested a two-year suspension of the tariff phase-down schedule in Category C (sensitive) products. This study evaluated the impact of these derogations on intra-sadc trade and in particular on smaller SADC Member States. A detailed analysis of intra-sadc trade, tariffs on goods under derogations, and indexes of revealed comparative advantage suggests that the overall impact of the derogations on intra-sadc trade is unlikely to be significant. This conclusion is based on several reasons: o Only a small share of SADC trade will be affected by the derogations. In fact, SADC exports of goods in category C to Zimbabwe (excluding South Africa) comprise only 3.3% of total SADC exports in this category. 2 For South Africa, this share is larger, amounting to 17% in 2010. Similarly, the re-imposition of tariffs on sugar and paper products by Tanzania is unlikely to significantly affect SADC exports. Tanzania only imports paper products from South Africa, for which these exports constitute only 3.13% of total exports in the category. Other SADC Member States do not export paper products under derogation to Tanzania. Regarding reimposition of tariffs on sugar products, trade data indicate that for three main exporters of sugar products to Tanzania (South Africa, Malawi and Zambia), the shares of their exports to Tanzania as percentage of total sugar exports are 3.8%, 1.81% and 1.48%, respectively. Therefore, only a very small fraction of SADC trade will be affected by Zimbabwe s and Tanzania s derogations. o The derogations are implemented for a limited time period. The derogations have been granted for a fairly short grace period. Once this period is over, Tanzania and Zimbabwe are expected to revert to tariff-free trade. Hence, it is unlikely that the derogations will have a lasting effect on intra-sadc trade. o SADC economies on the whole do not specialize in exporting goods under derogation. Analysis of Revealed Comparative Advantage shows that SADC economies tend not to specialize in exports of commodities under derogation. These facts allow to conclude that smaller SADC economies are unlikely to be heavily impacted by the temporary reversal of market access opportunities offered by the FTA, since their current exports will not be significantly affected. Although South Africa, the 1 One exception is Mozambique s tariff liberalization schedule towards South Africa, which is expected to be completed by 2015. 2 Figure for 2008. 4

largest economy in the region, has been exporting goods under derogation, these exports represent only a small share of its total exports and output, and thus the economic impact should not be significant. An economic analysis of the impact of derogations should also examine which tariffs are actually being applied. According to the Zimbabwe Revenue Authority (ZIMRA) website, Zimbabwe has already granted tariff-free access to a portion SADC imports of Category C goods originating in all SADC Member States except South Africa. This also moderates the impact of delays in implementation of category C phase-downs. Despite the expected limited impact of the derogations on intra-sadc trade, the grace periods have to some extent shaken the principle of reciprocity within SADC. This is because the majority of Member States, including several smaller economies, are on schedule with regard to SADC FTA tariff phase-downs. SADC has yet to design clear rules and procedures for approving derogations which can partially eliminate the problem. Article 3(1)(c) of the Protocol on Trade states that CMT shall elaborate appropriate criteria for the consideration of applications for derogations. Hence, the protocol itself calls for the formation of appropriate criteria for granting derogations. In order for the principle of reciprocity in SADC to be fully maintained and in order to make the process fully transparent and regulated, it is recommended that SADC undertake a review of its derogation procedures. The review may entail a study that examines the possibility of establishing general rules and criteria for approval of derogations from the SADC FTA. These criteria may address the following: o Establish a maximum time threshold for the duration of derogations and specify whether, and under what conditions, extensions of derogation can be granted. o Establish a percentage value of rise in imports that can be qualified as an import surge and other criteria for granting a derogation. o Establish a minimum time (in years or months) of a continuous rise in imports after which a derogation can be granted. o Clarify required documents to be presented to the CMT along with an application for derogation. Recommendation: Commission a study that will guide the establishment of general rules and procedures for approval of derogations by the CMT. 5

1. Introduction The Southern African Development Community (SADC) Protocol on Trade that established the SADC Free Trade Area (FTA) entered into force in 2000 upon ratification by two-thirds of Member States. The Protocol included, among other provisions, tariff phase-down schedules for each Member State. Implementation of tariff phase-downs commenced in 2001 and was expected to be completed by 2012, with the exception of Mozambique s offer to South Africa that will be completed by 2015. According to the tariff phase-down schedules, Member States were expected to liberalize 85% of tariff lines by 2008 and reach 100% coverage by 2012. 3 While the tariff phase-down schedules constitute an integral part of the SADC FTA, Article 3(1)(c) of the Protocol on Trade states that: Member States which consider they may be or have been adversely affected, by removal of tariffs and non-tariff barriers (NTBs) to trade may, upon application to CMT, be granted a grace period to afford them additional time for the elimination of tariffs and NTBs. CMT shall elaborate appropriate criteria for the consideration of such applications. A number of Member States have sought derogations from implementation of their tariff reduction obligations under this provision. The meeting of the Committee of Ministers of Trade (CMT) on 12 February 2011 in Windhoek, Namibia, approved Zimbabwe s request to suspend tariff phase-downs for Category C products until 2012, and for the annual reductions to then resume and be completed in 2014. At the same meeting, Tanzania also sought relief under Article 3(1)(c) for its sugar and paper industries and requested permission to reintroduce duties. At the February 2011 meeting of the CMT it was agreed that a detailed study should be carried out to analyze the possible impact of derogations on intra-sadc trade and in particular on the smaller SADC economies. The overall objective of the study is to investigate whether the approval of the derogations would create adverse effects for Member States. In particular, the purpose of this report is to evaluate the implications of the derogations on intra-sadc trade, with specific attention to trade flows between Member States seeking derogation and the region s smaller economies. Our definition of smaller economies is outlined in Box 1 below. 3 An exception is a small number of tariff lines in the so-called Category E that were excluded from liberalization. 6

Box 1: Definition of smaller economies within SADC For the purpose of this study, we define smaller economies as countries classified by the World Bank as low-income (GDP of US$ 995 or less) and as lower-middle-income (GDP between US$ 996 and US$ 3,945). Based on this definition, SADC economies fall into the following categories: Source: World Bank The study also recommends policy steps to ensure that the approval of the derogations does not result in adverse effects and that all Member States continue to derive benefits from the FTA. The study is structured as follows. Section 2 provides background information on the requests for derogation and specific tariff lines affected by these derogations. Section 3 briefly describes the underlying economic theory behind the analysis of derogations effects. Section 4 provides an overview of trade patterns in SADC with special focus on goods under derogations. Section 5 offers an analysis of the possible economic effects of the derogations, and Section 6 provides policy recommendations and conclusions. 2. Background to the Requests for Derogations 2.1 Tanzania Smaller Economies Tanzania has requested SADC to approve a re-imposition of tariffs on its sugar and paper products. The reminder of this section provides some background information on these requests. 2.1.1 Derogation on Sugar Tanzania has requested to re-impose duties on sugar products. In line with the SADC FTA tariff liberalization schedule, Tanzania has allowed duty-free access for sugar entering from SADC but since then imports have increased significantly (refer to Table 10). Tanzania has therefore reinstated tariffs on sugar products which are now at 25%, although industrial users are allowed to import at a special 10% rate. The Most Favored Nation (MFN) tariff is currently 100% c.i.f. or $200 per ton. Under the new tariffs on sugar, there is a disaster clause which allows for duty-free imports. This clause was invoked during the March-May 2011 period due to increasing world prices, and no tariff was applied during this period. There are currently four major firms: Other Economies Low-income Lower-middle income Higher-middle income Congo, Democratic Rep. Angola Botswana Madagascar Lesotho Mauritius Malawi Swaziland Namibia Mozambique South Africa Tanzania Seychelles Zambia Zimbabwe 7

Mtibwa Sugar: the largest firm located near Kilumbesa. It is 75% owned by Ilovo sugar. Moshi-based TPC: a 75/25 percent private/government partnership with investors from Mauritius. Kilombero: a Tanzanian investment group. Kagera Sugar: a wholly government-owned firm. The Sugar Board estimates that employment at sugar factories and estate farms is approximately 20,000. Additionally, all firms except one have smallholder farmers (4,000 outgrowers). In total, the Sugar Board estimates that 65,000 people derive their income from the industry. Tanzania is a net importer of sugar and is currently producing sugar only for the local market. Previously, Tanzania exported to the European Union (EU) but these exports ceased following the EU sugar reforms. The domestic market size is currently estimated at 500,000 metric tons (MT) while domestic production is estimated at 300,000 MT. The 200,000 MT shortfall is supplied from several sources including South Africa and other SADC countries. Table 1 shows the tariff lines for Tanzania s derogation as reported by the SADC Secretariat. The table shows that Tanzania has requested a derogation in a fairly limited number of tariff lines. For sugar the derogation is likely apply to only 8 tariff lines at a disaggregate 8-digit level. Despite the implementation of the derogation SADC Member States will continue to benefit from preferential market access in sugar as the SADC 25% tariff rate is significantly lower than the 100% MFN Tariff that is applied on sugar imports from the rest of the world. Table 1: Tanzania s Tariff Lines of Sugar Products covered by the Derogation HS Code Description 170111 Cane sugar (raw sugar not added flavoring or coloring matter) 1702.11.00 Lactose and lactose syrup 1702.90.00 Sugars, incl. invert sugar & other sugar 1703.10.00 Cane molasses 1703.90.00 Molasses, other than cane molasses 1704.10.00 Chewing gum 1704.90.00 Sugar confectionery other than chewing gum Source: SADC Secretariat 2.1.2 Derogation on Paper Products Tanzania s pulp and paper industry is relatively small but growing. There is one mediumsized company, Mufinidi Paper, and two small factories manufacturing industrial packaging grades. Mufinidi Paper was privatized in 2003, and the new investor has already invested more than US$ 60 million in the company. According to Mufinidi Paper: The company currently produces about 43,000 tons annually. This capacity is too small to achieve significant economies of scale. Therefore, the firm has put in a 8

place a roadmap to increase capacity and achieve a competitive scale. Over the next five years, it is planned to increase capacity more than threefold to 150,000 tons annually. The factory provides direct and indirect employment to around 2,000 people. Tanzania has made a request for derogation for its paper industry to support it in achieving required economies of scale and to successfully compete in international markets. In its official request for derogation Tanzania has argued that: The domestic paper industry has no cost competitiveness at its present level of development to face the completion of zero rated imports from the large economy of scale paper mills in South Africa and may lead to their closure. Investments made so far and further investments the investor is willing to make towards development of the domestic paper industry will be under threat. Potential closure of the domestic paper industry on account of zero rated imports from SADC will lead to loss of employment and revenue to the government. Tanzania has therefore requested to invoke Article 3(1)(c) of the SADC Protocol on Trade with regards to industrial packaging grades and to apply a 25% tariff under HS Codes 48.4 and 48.5. The request seeks for the derogation to be applied until 2018. 2.2 Zimbabwe Zimbabwe has requested a two-year delay in its tariff liberalization schedule for goods in Category C (sensitive) products. This category encompasses goods of economic importance to member states and can only represent 15% or less of tariff lines. The SADC Protocol on Trade envisions full liberalization of trade in these tariff lines by 2012. Therefore, Zimbabwe s request for derogation delays full liberalization until 2014. The request for derogation has been submitted by Zimbabwe s government as a response to a particularly difficult economic situation in the country. Over the past 20 years, Zimbabwe has suffered the most severe recession among countries that have been at peace, as its economy contracted by over 45% between 2002 and 2008 (Table 2). The recession, which was coupled with the highest hyperinflation in economic history, shrunk government revenue to just 3% of GDP in 2008 (Table 3), as the poverty rate rose to 57%. Table 2: GDP Growth in Zimbabwe (in percent) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2.7-9.8-17.2-6.9-6.1-3.3-3.7-17.3 5.7 9 Source: World Development Indicators Zimbabwe s economy is currently on the road to recovery with economic growth reaching 9% in 2010. Hyperinflation has been subdued through dollarization, and other economic stabilization measures have increased government revenue to over US$ 2 billion, or 25% of GDP in 2010 (Tables 3 and 4). Nevertheless, due to the prevailing economic circumstances, Zimbabwe has requested a two-year suspension of SADC in order to boost government revenue. 9

Table 3: Total Government Revenue in Zimbabwe 2001-2010 (in US$ billion) 3 2.5 2 1.5 Total Revenue 1 0.5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: World Bank s Blog, Africa Can End Poverty Table 4: Zimbabwe s Government Revenue as Share of GDP (in percent) 30 25 20 15 Revenue to GDP 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: World Bank s Blog, Africa Can End Poverty During the negotiations, several SADC Member States have submitted two liberalization schedules with different tariff phase-downs for South Africa and for the rest of SADC. In the case of Zimbabwe, tariff lines in Category C for South Africa and other SADC differ significantly. Consequently, the economic and trade impacts of the derogation will differ as well. In the following two sub-sections we separately describe the Category C phasedown schedules for South Africa and other SADC states. 2.2.1 Zimbabwe s Category C SADC Tariff Liberalization Schedule (excluding South Africa) Zimbabwe s Category C SADC Tariff Liberalization schedule contains 410 eight-digit tariff lines in a wide variety of good such as beverages, wheat flour, potatoes, vehicle and vehicle parts, iron, aluminum, ceramic and oil and petrol products, electrical machinery, matches, paper, printed matter, tools and tubes. Only selected tariff lines are included within these categories. Table 5 shows the MFN and SADC tariff rates in selected goods 10

within Category C, obtained from the website of the Zimbabwe Revenue Authority (ZIMRA). 4 Table 5: Snapshot of Tariff Rates Levied by Zimbabwe in Category C, 2011 (SADC phase-down schedule) Product Category Tariff: South Africa Tariff: Other SADC members MFN tariff Alcohols - Wines 20% 0% 75% - Spirits 0%-20% 0%-10% 0%-40% Cigarettes 0%-75% 0% N/A Matches 0.02% 0% 0% Medicines and 0% 0%-10% chemicals 5%-10% Petroleum 0%-10% 0% 5%-20% Paper 0%-10% 0% 5%-10% Pasta and couscous 10% 0% 40% Potato (frozen) 10% 0% 40% Printed matter 0%-10% 0% N/A Tobacco 50% 0% 100% Water (bottled) 0% 0% 60-85% Wheat flour 5% 5% 25% Source: Zimbabwe Revenue Authority internet Website A snapshot of the country s current tariff rates in Category C goods suggests the following conclusions: Zimbabwe has already liberalized some Category C tariff lines for SADC Members other than South Africa, with the majority of tariff lines having a duty of 0%. While Zimbabwe applies significant MFN tariffs in Category C goods ranging from 0% to 100%, South African exports of goods in Category C products to Zimbabwe are subject to moderate tariff rates of 0% to 10% for the majority of goods analyzed. Key exceptions are tobacco and cigarette products which have duties of up to 75% in some product lines. Zimbabwe s tariff structure for SADC imports diverges from its original SADC tariff liberalization schedule. Zimbabwe seems to already provide duty-free access for the some category C goods coming from SADC Member States. At the same time, Zimbabwe applies tariffs on goods coming from South Africa even though in several instances these goods fall outside Category C and therefore should be imported duty free. This preliminary examination of Zimbabwe s compliance with the SADC FTA tariff phasedown schedule shows a divergence between its commitments under the FTA and the actual tariffs currently implemented. In some instances, and especially with regard to South African goods, Zimbabwe applies tariffs that are higher than its obligations under 4 It is important to note that not all of the 410 tariff lines in this analysis have been analyzed and therefore the analysis in this section only provides a snapshot or a general trend in the tariff structure of Zimbabwe s Category C goods. 11

SADC. For other SADC Members, Zimbabwe already provides some duty-free access even though the approval of the derogation allows it to retain duties until 2014. Finally, it is important to mention that high MFN tariffs for Category C goods coupled with fairly low or zero-rated tariffs for SADC Members indicate a significant degree of preferential treatment provided by Zimbabwe for SADC Members even though its tariff structure is not fully aligned with SADC tariff liberalization schedule. 2.2.2 Zimbabwe s Category C SADC Tariff Liberalization Schedule for South Africa The Category C tariffs phase down schedule for South Africa is broader than for the other SADC Members, containing 751 eight-digit tariff lines in contrast to 410 tariff lines for all other SADC countries. The commodity composition of Category C includes a large number of agricultural goods such as dairy, wheat, wheat four, cooking oils, meats and pasta as well as manufactured products like machinery, vehicles, jewelry, metals, furniture, glass and ceramics. Despite the fact that the phase-down schedule for South African Category C exports follows similar categories as the one for all other SADC Members there is surprisingly little overlap between the two categories as only 116 tariff lines are included in both categories. This indicates that to a large extent Zimbabwe sought to delay tariff phase-downs in different type of goods for South Africa and for other SADC Member States. Tables 6 and 7 provide a snapshot of tariffs Zimbabwe currently applies on South African exports, obtained from ZIMRA website. 5 The tables show a similar pattern in Zimbabwe s tariff schedule as the one in Table 5. Zimbabwe has mostly liberalized trade generally with SADC Members other than South Africa, and most goods coming from other SADC Members enter Zimbabwe duty free. Some tariffs remain for goods entering from South Africa, but these tariffs are low in comparison to the MFN rates and provide for preferential treatment. A key exception to this pattern are tariffs levied on vehicles and vehicle parts for which the South African tariff rate is broadly similar to the MFN rate.. Table 6: Snapshot of Tariff Levels Levied by Zimbabwe on Category C Agricultural Goods, 2011 Agricultural good Tariff: South Africa Tariff: Other SADC members Dairy 0-15% 0-15% 40% Meat 15% 15% 40% Pasta 10% 0% 40% Cooking Oils 15% 0% 40% Wheat flour 5% 5% 25% MFN tariff Source: Zimbabwe Revenue Authority Table 7: Snapshot of Tariff Levels Levied by Zimbabwe in Category C Manufactured Goods, 2011 5 These tables provide only indicative tariff levels as not all tariff lines were verified. 12

Product Group Source: Zimbabwe Revenue Authority Tariff: South Africa Tariff: Other SADC members MFN tariff Carpets 10% 0% 40% Cosmetics 15% 0% 40% Furniture Seats 10% 0% 40% Matrasses 0-10% 0% 40% Sleeping Bags 10% 0% 40% Machinery Automatic Washing Machines 15% 0% 30% Domestic Drying Machines 15% 0% 30% Vacuum cleaners 15% 0% 30% Other manufacturers Brooms and brushes 15% 0% 40% Hand-operated floor sweepers, 15% 0% 40% Paint, or similar brushes 15% 0% 40% Optical instruments Projection screens 10% 0% 40% Cameras (SLR), <35MM film, 0% 0% 15% Paper, Kraft (only) 0-5% 0% 0-10% Petrol 0-15% 0-15% N/A Plastics (Tubes only) 5-40% 0% 0-10% Rubber products New pneumatic tyres, of rubber 10% 0% 25% Tools and toys Video games 10% 0% 40% Umbrellas 10% 0% 40% Vehicles and vehicle parts Motorcycles 10-15% 0% 15-25% Bicycles and other cycles 15% 0% 20% Trailers and semi-trailers 15% 0% 25% Helicopters 15% 0% 15% Fishing boats 15% 0% 15% 3. Impact of FTA on Intra-Regional Trade: Theory A recent study by a group of economists from the University of Sussex (UK) entitled Assessing Regional Trade Agreements with Developing Countries: Shallow and Deep Integration Trade, Productivity and Economic Performance 6 provides a general set of rules which can measure the effects of preferential liberalization as well as a guide in the analysis of the economic impact of the derogation. The rules described in this study list 6 Evans D, Gasiorek M, Holmes P, Iwanow T, Jackson K, Robinson S, Jim Rollo and others. Regional Trade Agreements with Developing Countries: Shallow and Deep Integration, Trade, Productivity and Economic Performance, DfID Project Number 04 5881, University of Sussex, 2005. 13

key indicators that can enhance intra-regional trade after the creation of a Regional Trade Agreement (RTA). These rules are: 1. The higher the percentage of trade with potential partners, the more likely the RTA is to enhance welfare. 2. The effects will be greater with higher initial RTA tariffs. 3. The greater the number of RTA partners, the greater the possibility of trade creation. 4. Wide differences in comparative advantage are likely to lead to a welfare-improving RTA, provided the initial tariffs are not too high. It is possible to apply a similar set of rules to the analysis of the economic impact of the derogation. In the case of this analysis, key rules of thumb that will guide the investigation are as follows: 1. The higher the trade with a partner in commodities under derogation before application of the grace period, the larger the trade-stifling effect of the derogation. 2. The higher the size of the tariff after the application of the derogation, the larger the negative effects on trade. 3. The greater the number of countries to which the derogation applies, the greater the effects of derogation. 4. The wider the differences in comparative advantage between RTA Members, the greater the negative effect of the derogation. The analysis of economic impact of derogation in this study will broadly follow the above rules in assessing the impact of derogation on intra-sadc trade. 4. Analysis of SADC Trade Patterns 4.1 Intra-SADC Trade Since the Creation of FTA Since the creation of the SADC FTA in 2000, intra-sadc trade has nearly doubled from US$ 5.02 billion in 2000 to US$ 10 billion in 2010 (Table 8). 7 The rise of SADC exports to the world has also nearly doubled in the same period from US$ 36.2 billion to US$ 71.8 billion. The portion of SADC exports destined to the region, at around 14%, therefore remained fairly constant. Both intra-sadc trade and SADC exports to the world are dominated by South Africa. In 2010, South Africa was the source of 76.8% of total SADC exports and accounted for approximately 71% of intra-sadc trade. These ratios are in line with South Africa s economic weight in the FTA, comprising roughly 70% of the total GDP of SADC. 7 This analysis excludes exports of Angola and DRC and Lesotho for which data was unavailable. 14

Table 8: Total SADC Trade Since the Creation of the FTA (in constant 2000 US$, billions) 90 80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Compiled by the author with data from UN COMTRADE 4.2 Analysis of Tanzania s Trade in Sugar and Paper 8 This section will provide an overview of trade patterns in sugar and paper products for which a derogation is sought by Tanzania. 4.2.1 Sugar The top part of Table 9 shows Tanzania s import of sugar products for which derogation was requested. It highlights that, in 2010, Tanzania s sugar imports amounted to US$ 92.5 million. 18.4% of these imports (US$ 17.02 million) originated from SADC. In 2010 South Africa was the source of 78% of Tanzania s sugar imports from SADC. Zambia and Mozambique have also exported sugar to Tanzania but precise volumes of these imports are difficult to establish given large differences between export volumes of sugar to Tanzania as reported by Mozambique and Zambia and imports from these countries as reported by Tanzania. For example, in 2010 Tanzania reports importing US$ 4 million worth of sugar products from Mozambique but no corresponding exports are reported by Mozambique. Similarly, in 2010 Zambia reports exporting sugar products to Tanzania worth US$ 2 million but Tanzania s import statistics do not record such exports. Table 9: Tanzania s Imports of Paper and Sugar Products (2010) SADC South Africa World US$ '000 % of total US$ '000 % of total US$ '000 Sugar 17029 18.4% 14802 16 % 92478 Paper 6400 96.5% 6400 96.5% 6630 Source: Compiled by the author with data from UN COMTRADE SADC Total Exports Intra-SADC Trade SA export to SADC SA Total Exports Table 10 analyzes Tanzania s imports of sugar under derogation in the last decade. In particular, it highlights that these imports have risen significantly, especially since 2008. In 2008 sugar imports were worth US$ 41.5 million and by 2010 they have more than 8 For the purpose of this analysis we define sugar and paper as commodities for which Tanzania has sought a derogation. 15

doubled to US$ 92.4 million. There was also a significant rise of imports from SADC and South Africa, in particular. Sugar imports from SADC rose from US$ 4.2 in 2008 to US$ 17 million in 2010. The overall surge in Tanzania s imports of sugar was partially the result of the emergence of Brazil as a major exporter to Tanzania, which in both 2009 and 2010 exported sugar worth US$ 20 million, and partially due to a rise in export from countries that, according to trade statistics, traditionally export sugar product to Tanzania such as Saudi Arabia and the United Arab Emirates. Table 10: Tanzania s Imports of Sugar from SADC in US$ 2000-2010 ( 000) 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Compiled by the author with data from UN COMTRADE SA Malawi Zambia World SADC 4.2.2 Paper An analysis of trade in paper products under derogation by Tanzania is shown in the bottom part of Table 9. The table shows Tanzania s imports of these products from SADC and the world. In 2010 Tanzania imported paper products worth US$ 6.63 million of which US$ 6.4 million (or 96.5%) was from South Africa. Table 11 shows Tanzania s imports of paper products since 2000. This table, in turn, shows that imports of paper products have fluctuated significantly in the past decade but since 2008 a significant rise in these imports is observed. In 2006 Tanzania s imports of paper products from South Africa amounted to US$ 2.3 million and rose to US$ 6.2 million in 2010. Throughout the decade, South Africa remained the main exporter to Tanzania of these goods. Table 11: Tanzania s Imports of Paper Products in US$ ( 000) 16

7000 6000 5000 4000 3000 2000 World SA 1000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Compiled by the author with data from UN COMTRADE 4.3 Zimbabwe Trade in Category C Products This section analyzes Zimbabwe s imports in Category C goods. Since Zimbabwe has provided for a differential tariff phase-down schedule for SADC Members and for South Africa, these are analyzed in two separate sub-sections. 4.3.1 Trade in Zimbabwe s Category C of the SADC Tariff Liberalization Schedule (Excluding South Africa) Zimbabwe has requested for a two-year delay in the implementation of tariff phase-downs on goods in category C. As this section demonstrates, trade between Zimbabwe and SADC Members (except South Africa) is rather low. In fact, SADC exports of goods in Category C to Zimbabwe (excluding South Africa) comprise only 3.3% of total SADC exports in this category. Table 12 shows that in 2009 the majority of products in Category C (78% of the total) that Zimbabwe imported originated from within SADC. South Africa was the biggest exporter to Zimbabwe with 62% of total imports in the category. In terms of trade values, Zimbabwe s 2009 imports of Category C products from SADC, South Africa and the world amounted to US$ 491 million, US$ 391 million and US$ 629 million, respectively. Category C products are a significant share of Zimbabwe s total imports. In 2009, Zimbabwe imported goods worth US$ 3.52 billion, and hence Category C products constituted 17.8% of Zimbabwe s total imports. Table 12: Zimbabwe Imports of Goods in Category C by Destination, 2009 SADC South Africa World Cat 'C' in US$ '000 % of imp in Cat 'C' in US$ '000 % of imp in Cat 'C' in US$ '000 491,514 78% 391,732 62% 629,778 Source: Compiled by the author with data from UN COMTRADE Table 13 disaggregates Zimbabwe s SADC imports of goods in Category C by country. In addition to South Africa other SADC countries Botswana, Mozambique, Mauritius, Malawi, Tanzania and Zambia export goods to Zimbabwe in these types of products. 17

The biggest exporter, other than South Africa, is Zambia whose share of Zimbabwe s imports amounts to 6.4%. The shares of Mozambique and Botswana are both roughly 4%, and Malawi s is 1.8%. Other countries shares are insignificant. Table 13: Zimbabwe s Intra-SADC Imports of Goods in Category C 3.8% 4.0% 0.2% 6.4% 83.7% 1.8% 0.1% Botswana Mozambique Mauritius Malawi Tanzania South Africa Zambia Source: Compiled by the author with data from UN COMTRADE It is also important to highlight the composition of Zimbabwe s import in Category C by product type. Table 14 provides this analysis. Tobacco and Cigarettes are the only category where South Africa does not dominate SADC exports into Zimbabwe. Zambia and Malawi are the main exporters of tobacco and cigarettes to Zimbabwe. In 2009 these countries exported goods worth US$ 24 million and US$7 million, respectively. Together these two countries were the main exporters in this category. The share of tobacco and cigarettes in Zimbabwe s total imports from SADC in Category C is 6%. Another category where countries other than South Africa export to Zimbabwe is wheat flour. In 2009, SADC Members other that South Africa exported wheat flour worth US$ 10 million. The total SADC exports of alcohol to Zimbabwe amount to US$ 23 million. Nearly all of the alcohol products in Category C that are exported to Zimbabwe originate from South Africa. Other than South Africa, only Botswana and Mauritius report exports in this category, but these exports are negligible at below US$ 1 million. As in the case of alcohol, a vast majority (67%) of bottled water exported to Zimbabwe comes from South Africa. However, in 2009 Zambia and Botswana exported goods in that category worth US$ 2 and US$ 3 million, respectively. The value of exports of bottled water is US$ 12 million and comprises 2% of total Zimbabwe s SADC imports in Category C. Regarding machinery and electrical machinery, the combined value of exports in Category C in 2009 was slightly above US$ 18 million. As before, the main exporter to Zimbabwe was South Africa. Imports from this destination amounted to 84% of the country s total imports of Category C from SADC. Zimbabwe only exported aluminum products from South Africa which in 2009 were worth nearly US$ 5 million. 18

The value of Zimbabwe s imports of the rest of commodity sub-groups included in Category C (such as medicine, vehicle and vehicle parts, paper, potatoes, matches, printed matter, tubes, tools, cutlery and others) was below US$ 3.5 million. In addition, over 90% of imports in these commodity groups originated from South Africa, and hence the value of exports from smaller Member States was negligible and is not analyzed in detail here. Table 14: Zimbabwe s Imports of Goods in Category C from SADC, by Product Type, 2009 Product Category SADC Value in US$ 000 % total imports of Category C South Africa Value in US$ 000 SA share of Zim s imports 1 Oil and petrol products 198,337 68% 193,696 97% 2 Wheat flour 37,661 13% 27,072 72% 3 Tobacco and cigarettes 31,103 11% 6,703 22% 4 Alcohols 23,620 8% 20,870 88% 5 Bottled water 11,982 4% 8,025 67% 6 Electrical machinery 10,264 4% 7,952 77% 7 Machinery 7,937 3% 7,207 91% 8 Aluminum products 4,975 2% 4,972 100% 9 Drugs and chemical products 3,296 1% 2,892 88% 10 Vehicles and vehicle parts 3,232 1% 3,025 94% 11 Paper 2,754 1% 2,738 99% 12 Potatoes (frozen) 1,967 1% 1,967 100% 13 Matches 1,959 1% 1,616 82% 14 Tubes 1,385 0% 1,373 99% 15 Printed matter 1,220 0% 1,204 99% 16 Tools and cutlery 945 0% 896 95% 17 Ceramics products 429 0% 410 96% Source: Compiled by the author with data from UN COMTRADE 4.3.2 Zimbabwe s Imports of Goods in Category C from South Africa This section discusses Zimbabwe s import of goods in Category C from South Africa. Zimbabwe s SADC FTA tariff liberalization schedule for South Africa contains several agricultural tariff lines; therefore analyses will be done separately for agricultural and manufactured goods. As Table 15 illustrates, over the past 9 years Zimbabwe s imports of agricultural products in Category C goods were just a fraction of South African export in that category of goods. In 2010 Zimbabwe s imports amounted to 10.6% of South Africa s total exports in that category, and the value of these exports was nearly US$ 307 million. South Africa s total agricultural exports in Category C goods amounted to nearly US$ 2.9 billion. Similarly, Zimbabwe s imports of manufacturing goods in Category C constituted a fairly small share South Africa s total export in that category. As illustrated in Table 16, South 19

Africa s total exports of manufactured goods in Category C were US$ 3.52 billion, of which US$ 303 million were destined for Zimbabwe. Therefore, only 8.6% of total South African exports of manufacturing goods in Category C were exported to Zimbabwe. Table 15: South African Export of Agricultural Goods in Category C to Zimbabwe and the World, 2002-2010 (in US$ 000) 3500000 3000000 2500000 2000000 1500000 1000000 500000 SA export to the World SA exports to Zimbabwe 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Compiled by the author with data from UN COMTRADE Table 16: South African exports of Manufacturing Goods in Category C to Zimbabwe and the World, 2002-2010 (in US$ 000) 4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 SA Export to the World SA Exports to Zimbabwe 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Compiled by the author with data from UN COMTRADE An aggregate analysis of Zimbabwe s imports in Category C may mask some important differences at product level. The reminder of this section therefore provides a more detailed commodity-level overview of Zimbabwe s imports from South Africa in Category C goods. Table 17 analyzes Zimbabwe s imports of Agricultural goods. It shows that for some goods such as cooking oils and wheat South Africa s exports to Zimbabwe are the majority of South Africa s total exports to the world. Also for pasta and dairy products Zimbabwe s 20

share of South African export is significant. For pasta this share is over 41% and for dairy products over 28%. For other commodity groups Zimbabwe s share in South Africa s total export in the category does not exceed 15%. Table 17: South African Exports of Agricultural Goods in Category C to Zimbabwe, SADC and the World, by Product Group (2010) Zimbabwe SADC World Product Category % of $US '000 % of total $US '000 total $US '000 Agricultural Goods 306,975 10.67 672,859 23.3 2,876,389 Cooking Oils 130,798 80.30 155,184 95.2 162,882 Dairy 17,490 28.16 57,749 92.9 62,104 Fruits and Vegetables 16,601 0.83 91,563 04.5 1,992,803 Juices 3,383 5.74 26,572 45.0 58,936 Pasta 32,454 41.3 68,341 87 78,551 Prepared Meats 4,868 13.07 18,234 48.9 37,237 Other 42,795 15.64 146,712 55.7 270,623 Sugar Products 7,108 6.34 35,140 31.3 111,953 Wheat 50,872 57.58 78,963 89 88,344 Source: Compiled by the author with data from UN COMTRADE In terms of manufactured products in Category C, petrol was the largest imported item in that group with imports amounting to nearly US$ 200 million in 2010 (Table 18). Cosmetics imports worth US$ 91 million were the second largest item in terms of value. In fact, more than a quarter of all South Africa s exports in that category went to Zimbabwe. Zimbabwe s other large import items were paper products (US$ 48 million), machinery (US$ 31 million), vehicle and vehicle part (US$ 27 million) and metal products (US$ 24 million). For none of these product groups Zimbabwe s share of South Africa s total exports exceeded 15%. South Africa s imports were insignificant in other product groups with the exception of matches. Although South African exports of matches to Zimbabwe amounted to only US$ 4.3 million, they nevertheless constituted over 35% of South Africa s total exports of matches. Table 18: South Africa Exports of Manufactured Goods in Category C by Product Group to Zimbabwe, SADC and the World (2010) Zimbabwe SADC World Product Category % of % of $US '000 total $US '000 total $US '000 Carpets 1,682 5.1 5,832 18.01 32,371 Cosmetics 91,805 26.0 221,089 62.6 352,723 Furniture 16,599 2.7 125,702 20.5 612,494 Glass and Ceramics 5,165 16.3 17,113 54.1 31,580 Jewelry 41 0.1 1,992 5.03 39,543 Machinery 31,069 10.1 164,253 53.5 306,897 Other Manufacturers 1,411 11.1 7,049 55.9 12,600 Matches 4,347 35.5 9,998 81.7 12,232 21

Metal Products 24,633 6.8 232,922 64.7 359,624 Optical Instruments 534 4.71 2,980 26.2 11,338 Paper Products 48,468 13.4 141,965 39.2 361,523 Petrol 199,623 15.6 556,961 43.5 1,278,077 Plastic Products 13,065 11.5 59,612 52.7 113,116 Rubber Products 28,249 12.6 113,557 50.9 222,760 Tobacco and Cigarettes 3,790 6.85 3,922 7.09 55,314 Tools and Toys 7,490 4.9 33,435 22.08 151,367 Umbrellas 139 3.08 1,711 37.9 4,514 Vehicles and Vehicle Parts 27,439 3.15 157,333 18.1 868,953 Source: Compiled by the author with data from UN COMTRADE 5. Assessment of the Impact of Derogation on Intra-SADC Trade with Special Reference to Smaller Economies This section analyzes the impact of the derogations on intra-sadc trade following the rules described in Section 3 with particular focus on SADC s smaller economies. We structure this section in line with these rules. 5.1 Trade Patterns Analysis Rule 1: The higher the trade with a partner before the derogation was implemented the larger the trade-stifling effect of the derogation. 5.1.1 Tanzania According to trade data presented in Section 4.2 Tanzania is experiencing a surge in imports of sugar products under derogation. Imports from the world and from SADC have increased substantially. Trade statistics show that in the period 2008-2010 Tanzania s imports of sugar rose by 121% and 279% from the world and from SADC, respectively. SADC s imports however have been rising from a low base, and now constitute only 18% of Tanzania s total imports in this category. Analysis of trade patterns indicates that the derogation on sugar is unlikely to have a significant negative effect on intra-sadc trade. For South Africa, SADC s largest exporter of sugar to Tanzania, the share of total sugar exports going to Tanzania is only 3.8%. South Africa s total exports in 2010 amounted to nearly US$ 400 million. Therefore, the reimposition of duty on sugar will affect 3.8% of South Africa s total exports in sugar categories under derogation. Other SADC Member States such as Malawi, Zambia and Mozambique have also registered exports of sugar to Tanzania. As in the case of South Africa, these exports are insignificant in comparison to the total sugar exports of these countries. The share of sugar products going to Tanzania as a share of Malawi s and Zambia s total sugar exports are 1.81% and 1.48%, respectively. 9 Hence, these two countries will be affected by the 9 Figure for Malawi for 2007. 22

derogation to even a smaller extend than South Africa. Also in terms of volumes Zambia, Malawi and Mozambique do not export a significant amount of sugar to Tanzania. In the past decade, none of these countries exported sugar worth more than US$ 4 million. Finally, it is important to note that SACU and Malawi have excluded some key sugar tariff lines from the SADC FTA tariff phase-down schedule, hence the implementation of a derogation on sugar by Tanzania seems not to significantly violate a spirit of reciprocity vis-à-vis these countries. Moving on to an analysis of an impact of derogation on paper products, trade data in section 4.2 indicate that the sole SADC exporter of these products to Tanzania is South Africa, and thus any negative economic effects of the derogation are likely to be confined to that country. As in the case of sugar, paper products exported to Tanzania are only a small fraction of South Africa s total, and hence only a small share of its exports will be affected by the re-imposition of duty. The share of South Africa s total exports in the category going to Tanzania is only 3.13%, while the total South Africa s export in paper products under derogation has reached US$ 199 million in 2009. 5.1.2 Zimbabwe Impact on SADC Member States with the Exception of South Africa As highlighted in Section 4.3.1, SADC Member States with the exception of South Africa are not large exporters of Category C goods to Zimbabwe. The combined value of export of all SADC Members States to Zimbabwe in Category C in 2009 was US$ 100 million. In fact, nearly 79% of all Zimbabwe s 2009 imports in this category originated from South Africa. Only in the case of wheat flour, tobacco and cigarettes, and bottled water does Zimbabwe register a significant amount of imports from other SADC Members. In order to assess the impact of the derogation on smaller states it is necessary to investigate Zimbabwe s imports in these sub-categories more closely. In 2009 the key exporters of wheat flour to Zimbabwe were Mozambique and Zambia with exports amounting to US$ 15 million and US$ 12 million, respectively. Malawi also has the potential to export to this market given its comparative advantage in wheat flour production, despite not registering exports of wheat flour to Zimbabwe. It is important to note that SADC trade in wheat flour and wheat flour products is far from being fully liberalized. Therefore, a re-imposition of a tariff on wheat flour by Zimbabwe is not unusual among SADC Member States. Tobacco and cigarettes are the only products in Category C for which the majority of Zimbabwe s SADC imports do not come from South Africa. The key exporters to Zimbabwe in these categories are Zambia and Malawi, which together exported goods worth US$ 31 million. Malawi is one of the world s largest exporters of tobacco. In fact, Malawi s exports of tobacco and cigarettes to Zimbabwe as a share of its total exports in the category were less than 1%. The situation is a little different for Zambia according to trade statistics. In 2009, Zambia exported a total of US$ 89 million worth of tobacco, 30% of which (US$ 27.5 million) was destined for Zimbabwe. Therefore, a two-year delay in tariff phase-downs can be a 23

temporary obstacle for Zambian tobacco exporters as intra-sadc duties will be levied on more than a third of Zambian total tobacco exports. Overall, trade data analysis indicates that the economic impact of the derogation is likely to be limited for SADC s smaller economies. This is because smaller economies export few goods under the derogations in terms of value. Zimbabwe does import tobacco and wheat flour from smaller SADC economies, but very little else. According to ZIMRA website, Zimbabwe has already granted tariff-free access to SADC imports in Category C goods coming from all SADC Member States, except South Africa. This will minimize the impact of the derogations particularly on the smaller Member States. Impact on South Africa South Africa has historically been Zimbabwe s main trading partner. Section 4.3 shows that Zimbabwe imports over US$ 600 million worth of goods in Category C. This is 17% of Zimbabwe s total imports. Exports to Zimbabwe have constituted an important share of South Africa s total exports of commodities in Category C. In 2010, 21% of South Africa s total exports in this category were destined for Zimbabwe. By implication, 21% of South African exports in this category will be affected. South African exports will be particularly affected in commodity groups such as cooking oils, selected dairy products, matches, selected cosmetic products and wheat for which Zimbabwe s imports constitute a large share of South Africa s total exports. The overall economic impact of the derogation on South African manufacturers will however be dependent on the share of South African industrial output that is exported to Zimbabwe. For South African producers of commodities under derogation by Zimbabwe, the domestic market is the key market and only a limited share of output is exported to Zimbabwe. Therefore, from this perspective the economic impact of the derogation is unlikely to be significant. 5.2 Tariffs Analysis Rule 2: The higher the size of the tariff after the implementation of the derogation the larger the negative effects on intra-sadc trade of a derogation. Tanzania currently has a rather sophisticated system of tariffs on imports of sugar products. The MFN tariff is 100% c.i.f. or $200 per ton. The SADC rate is 25%, although industrial users are allowed to import at a special rate of 10%. Under the new tariffs on sugar, there is a disaster clause which allows for duty-free imports. This clause was invoked during the March-May 2011 period due to increasing world prices, and no tariff was applied during this period. Such structure of tariffs implies that the impact of a re-imposition of duties on intra-sadc trade might less than the full 25%. This prediction is based on several reasons: SADC Member States will be provided with a large margin of preference of 75% in importing sugar to Tanzania. The margin of preference is calculated as the difference between SADC preferential rate on imports of 25% and the MFN rate of 100%. 24