EU-SA’s changing trade dynamic
THE length and intensity of the economic downturn in Europe is beginning to have what might be described as a host of “second wave” effects. These take place when economic actors, including importers and exporters, lose faith that the downturn is a temporary phenomenon and begin to make permanent changes to their actions.
Not by chance, two of these “second wave” effects were reported separately in Business Day yesterday. The first was a dramatic change in the way SA’s tariff body, the International Trade Administration Commission (Itac), might decide what constitutes a trade infringement. The second is a move to boost trade agreements with SA’s fellow Brics members (Brazil, Russia, India and China) and other African states.
Both are linked to SA’s burgeoning trade deficit, which hit a record R24.5bn in January before narrowing to R9.52bn in February, helped in part by a weaker rand-dollar exchange rate.
What appears to be happening is that, as European demand slows but production rates remain constant, farmers are moving into a position of surplus supply. The result is twofold: the law of supply and demand suggests the products should get cheaper, and there are inevitably attempts to get rid of the excess supply by exporting, facilitated by the declining price.
This has had the knock-on effect of increasing the competitiveness of imported goods in local markets, which of course has local producers worried. The extended downturn in Europe has made European Union (EU) countries desperate to increase their exports to maintain their own struggling trade balances. It is also worth noting that, in SA, farmers are under pressure from unions to improve the conditions of farm workers at precisely the time they are least able to do so.
Another consequence of this changing trade dynamic between SA and its oldest and still largest trading partners in Europe is that SA is no longer merely desirous of new trade relations with fastergrowing Asia and Africa, it is desperate for them. Hence the new urgency to create better trade relations with the Brics nations and African growth countries.
However, this process is fraught with danger. On the face of it, the new draft guidelines published by Itac are technical, but in effect they are likely to be dramatic. The key issue is that previously an applicant would have to prove a surge in imports to demonstrate that the EU was dumping agricultural products in SA. Now the applicant need only show that imports have had a negative effect on local production.
Another danger is that this move will put SA into more trade conflict with the EU. The proposed changes constitute the first amplification, we might call it, of the guidelines since SA concluded its trade development and co-operation agreement with the EU in 1999. That alone underlines how dramatic these events are. There has been a lot criticism of the agreement on the basis that SA went “too far” in offering concessions to the EU, particularly in the farm sector. The whole process was grating to local farmers, and the fact that European farmers are given such huge financial assistance by the EU just rubs salt in the wound. Under the EU’s common agricultural policy, European farmers are paid €43.8bn in subsidies, a third of the EU budget, which comes out at about R2,000 for every hectare farmed a year. Wouldn’t African farmers just love that kind of boost?
The biggest danger is that SA will replicate Europe’s subsidy system. One of the reasons Europe’s economy is in such a mess is policies such as the common agricultural policy.
This policy, and high tariff barriers, have gradually pushed up the cost of agricultural produce and prevented the creative destruction that might have helped the EU become more efficient and avoid its debt problems.