CoPS/IMPACT Working Paper Number G-147

Title: The Effects of a Free Trade Agreement Between the USA and the South African Customs Union (SACU)

Authors: Philip D. Adams and J. Mark Horridge


This paper documents analysis of the economic effects of the proposed SACU/USA free trade agreement using a specially-built dynamic version of the GTAP world general equilibrium model. At the core of the new model is the standard GTAP Version 6.0 framework, released in April 2001. Onto this basis we add the following.

* A series of new variables representing useful aggregates of primary agricultural and agriculture-related sectoral outputs, exports and imports. These do not alter the basic theory of GTAP in any way and are merely defined for convenience.

* New variables and equations which furnish GTAP with simple dynamic behaviour. These allow us to run linked annual GTAP simulations for each year between 1997 and 2023. For each region, the new equations: (a) link net investment in each year to the change in the capital stock for that year; (b) allow employment to respond temporarily to changes in real wage rates; and (c) allow rates of return to capital to respond temporarily to changes in demands for capital. In the long run, all 3 dynamic equations reduce to simpler forms: investment moves in proportion to capital stock; and employment and rates of return converge to baseline trend levels.

Seven scenarios are modelled. The first is a baseline projection. The baseline is a sequence of annual forecasts for the global economy, constructed using external forecasts for macro variables and for rates of import protection and export subsidies. In effect, the baseline shows what might be expected to happen if there were no free trade agreement between the SACU and the USA. The remaining six scenarios embody various forms of the SACU/USA free trade agreement. The effects of the agreement in each of the alternative scenarios are expressed as deviations away from baseline values. Our main findings are:

* Progressive cuts in protection through the ten years 2005 to 2014 lead to increased employment, increased capital and higher real wage rates in the SACU;

* The effects of the agreement vary across industries. The mechanisms, however, are fairly straightforward, depending primarily on the extent to which the protection cuts exposes sectors to additional import competition and on each sector's export orientation.

* From the SACU's point of view the free trade agreement is trade creating, with little evidence of increased trade diversion.

JEL classification: C68, F15

Keywords: Multiregional, CGE, trade, liberalisation, dynamics.

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