A General Equilibrium Analysis of the COMESA-EAC-SADC Tripartite FTA

This study provides an ex-ante computable general equilibrium assessment of the planned Tripartite Free Trade Agreement between the member states of the Common Market for Eastern and Southern Africa, the East African Community and the Southern African Development. Community. The analytical framework is a global 21-region 22-sector CGE trade model.The simulation analysis considers eight distinct trade integration scenarios, that differ in their level of ambition. • All eight trade liberalization scenarios under consideration lead to positive net real income gains for the TFTA area as a whole. • The removal of remaining tariff barriers to intra-COMESA and intra-SADC trade by 2014 in the absence of a TFTA agreement (scenario S1) generates an estimated aggregate annual gain for the TFTA group on the order of US$ 328 million, a modest 0.04 percent of TFTA 2014 baseline final demand for goods and services. • The establishment of a free trade area with a full elimination of all tariffs on trade among all 26 potential partners (scenario S2) is projected to generate an annual welfare gain of US$ 578 million or roughly 0.1 percent of total TFTA area 2014 baseline absorption. Thus, if we assume that complete tariff liberalization within COMESA and SADC without any remaining exceptions for sensitive products will be achieved by 2014 prior to the implementation of TFTA, the additional welfare gain genuinely attributable to TFTA tariff liberalization among the three RECs is around US$ 250 million p.a. for the TFTA group as a whole. • In absolute terms, South Africa enjoys the largest real income gains under full intra-FTA tariff liberalization whereas the largest gains relative to baseline absorption are projected for “Other SACU” (i.e. Swasiland and Lesotho) (+0.8 percent) and Namibia (+0.4 percent).. • Zimbabwe and to a lesser extent Malawi, Zambia, Rwanda, South Central Africa (Angola and DR Congo), Botswana and Other East Africa suffer moderate welfare losses under this scenario as result of a terms-of trade deterioration that dominates the gains from lower consumer prices for TFTA imports. • If Ethiopia, Angola and DR Congo choose not to participate in the TFTA (scenario S3), the aggregate net welfare gain for the area as a whole drops by around US$ 260 million compared to the full participation scenario S2. The simulation results suggest that participation in the free trade agreement would be in Ethiopia’s own interest. • The exclusion of fossil fuels and sugar products as sensitive products from tariff liberalization (scenario S4) would reduce the total welfare gain for the TFTA group by roughly US$ 130 million per annum compared to S2. • The partial tariff liberalization scenario S6, which assumes full liberalisation of capital goods only, 80% tariff cuts on intermediate goods and 50% tariff cut on consumption goods, reduces the net aggregate welfare gain for the TFTA group by nearly US$ 150 million compared to the full liberalization scenario S2, and the increase in aggregate intra-TFTA trade flows is US$ 821 million lower than under S2. • In the least ambitious tariff liberalization scenario under consideration, only baseline tariffs with an ad valorem rate of up to 10 percent are removed completely, whereas tariffs with a higher rate are cut by 50 percent. In this case the aggregate net welfare gain for the TFTA group projected by the model is a meagre 0.04 percent of baseline absorption. • However, the strongest message emerges from the most ambitious TFTA scenario, which combines complete tariff liberalization for intra-TFTA trade with a reduction in non-tariff trade barriers that reduce the costs of border-crossing trade within the TFTA area. The projected aggregate net benefit for the TFTA group amounts to over US$ 3.3 billion per annum, that is nearly 0.4 percent of aggregate baseline absorption and more than five times the gains resulting from full intra-TFTA tariff liberalization alone. • Importantly, in contrast to the S2 scenario all TFTA regions enjoy a positive aggregate welfare gain in this case. The countries with the largest projected percentage increases in real absorption are Zimbabwe (+2.6 percent), Namibia (+2.4 percent), Mozambique (+2.2 percent), Botswana (+1.8 percent) and Other SACU (+1.5 percent). • In this most ambitious scenario, the total volume of intra-TFTA trade is boosted by US$ 7.7 billion, an increase of nearly 20 percent relative to the 2014 baseline volume. • The simulation results do not suggest that TFTA leads to systematic increase in wage inequality. • Significant sectoral production effects with corresponding significant implications for sectoral employment are concentrated in a sub-set of sectors including primarily sugar products with backward linkage effects to sugar cane production, beverages and tobacco and light manufacturing, and to a lesser extent for some TFTA countries in textiles, metals and metal production, and chemicals.