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This paper characterizes the current South African Customs Union (SACU) tariff structure, considers its rationale, proposes and evaluates some alternatives for reform. While considerable progress was made earlier in liberalizing and simplifying SACU’s tariff structure, over the past few years such movement appears to have halted. This is unfortunate because trade performance is a key constraint in attaining South Africa’s growth objectives. The tariff structure remains excessively complex and opaque and biased against exports. The differentiation provided to different sectors appears mainly to be the result of historical accident and is not justifiable as efficient job preservation, equitable income distribution or on infant industry grounds.
Some still continue to defend the complex structure as necessary to provide producers of particular products with precisely the amount of protection they need to become competitive. But their arguments are unconvincing. There may be a case for exceptional temporary safeguards and infant industry protection but a broad complex structure is likely to allocate resources inefficiently: channelling them away from activities in which South Africa is competitive and towards those in which it is less efficient. Protection of inputs is particularly damaging and distorting of the choices of those seeking to beneficiate and export. In addition, the government simply does not have the requisite information (or instruments) to apply such differentiation appropriately to such a large number of products. Inevitably, therefore the structure encourages and reflects rent seeking.
Using simple tariff structures that have a zero and just one or two tariff bands we show that it is possible simultaneously to provide benefits to consumers, limit employment dislocation by conferring a reasonable degree of effective protection on finished goods, reduce export taxes, improve transparency and provide a norm against which industrial policy priorities can be set. The long run goal would be a globally competitive SACU region that provides producers with access to inputs at world prices.
South Africa’s regional trade policies require attention. The African continent plays a key strategic role in South Africa’s export diversification strategy and regional development is a vital priority. The current SACU tariff sharing formula is expensive and defective. A major reform of SACU tariffs would make particular sense for the BLNS countries, allowing these nations access to cheaper inputs and final products. It would also provide the opportunity to renegotiate the SACU revenue-sharing formula, more clearly and rationally separating its aid and tariff-revenue sharing components. SACU should avoid unrealistic commitments to customs unions with other African partners. In its other regional arrangements (e.g. with SADC) SACU should place primary reliance on free trade agreements and other projects (e.g. infrastructure) that enhance integration.