Effect of free trade agreements on international trade and employment in agro-processing industry in South Africa

Abstract

Unemployment in South Africa has averaged above 20% over the past ten years. Trade liberalisation is linked to an increase or a decrease in trade and employment. Though, on the one hand, the positive aspects of trade liberalisation are desirable, on the other hand, the negative implications of an increase in imports and unemployment are concerns for policy makers. The aim of the study was to analyse the effect of free trade agreement (FTA) on agro processing industry’s exports, imports and employment in South Africa. Firstly, the study analyses the effect of free trade agreement on South African exports of subsectors of agro processing industry. Secondly, it analyses the effect of the free trade agreement on South African imports of subsectors of agro-processing industry. Lastly, it assesses the implication of trade agreements on employment in the South Africa’s subsectors of the agro-processing industry. The study uses panel data, with exports and imports data sourced from United Nations Statistics Bureau, Commodity Trade Statistics (COMTRADE) and Global Trade Atlas databases. The real gross domestic product and population data were sourced from the International Monetary Fund and the World Bank. While the binary variables (landlocked, colony and common language) data and the data for area and distance were sourced from the CEPII database. The data for subsectors of the agro-processing industry was sourced from the Quantec EasyData database. The study used a gravity model to analyse the effect of trade agreements on subsectors of agro processing industry. The labour regression model was used to analyse the impact of trade on agro-processing employment. The gravity and labour model’s results were juxtaposed to assess the link between trade agreement, exports, imports and employment. The results showed that the Southern African Development Community (SADC) (excluding Southern African Customs Union (SACU)) trade agreement increases South African exports of woods and woods products and rubber products by 0.65% and 0.52%, respectively. Moreover, the SADC (excluding SACU) trade agreement increases South African textiles imports by 1.36%. The Trade, Development and Cooperation Agreement (TDCA), on the other hand, increases South African exports of food and beverages by 0.45%. However, in terms of imports, the TDCA increases South African imports of wood and woods products, paper and paper products and furniture by 0.44%, 0.62% and 0.70%, respectively. The Southern African Customs Union-European Free v Trade Association (SACU-EFTA) agreement showed no evidence of increasing exports and imports of the agro-processing divisions except for tobacco and rubber. The SACU-EFTA increases South African tobacco and rubber exports by about 1.74% and 1.10%, respectively. Lastly, it increases South African tobacco imports by 2.22%. On employment nexus, the results show that the SADC (excluding SACU) trade agreement benefits employment in the wood and wood products division. The employment for wood and wood products increases as its exports increase. On the imports side, the SADC (excluding SACU) trade agreement negatively affects employment in the textiles division. The TDCA’s exports increase employment in the wearing apparel division. The imports encouraged by the TDCA negatively affect employment in the furniture division. The exports influenced by the SACU-EFTA agreement positively affect tobacco division employment. This study recommends that South Africa, firstly, needs to go beyond traditional markets (markets where South Africa trades under free trade agreements) and open trade negotiations for new markets. Secondly, to boost exports-induced employment, majors to facilitate an increase in trade with traditional markets need to be prioritise, including trade facilitations majors that ensure effective and efficient movement of goods and services. Lastly, South Africa needs to identify priority products that could be supported to mitigate an adversely negative impact on employment induced by imports.