The welfare impact of a free trade agreement between SACU and Mercosur

A free trade agreement (FTA) between SACU and Mercosur would be significant globally, as it would be a truly “south-south” relationship between three of the developing world's emerging agricultural powers, namely Argentina, Brazil and South Africa. In this article, the GTAP database and the associated general equilibrium model is used to assess the potential welfare and trade gains from such an agreement. The results show that there are comfortable welfare gains for South Africa derived from a better use of land, labour and capital (enhanced allocative efficiency); increased net investment increasing the amount of capital employed in the economy; and a small contribution from increased labour employment. These gains are negated somewhat by terms of trade that go against South Africa. However, an FTA with Mercosur is not good for the South African agriculture sector. Imports of agricultural products increase dramatically, mostly in terms of increased imports of secondary (processed) agricultural products. Export gains are modest, but are largely from trade creation rather than trade diversion. Furthermore, there are marginal reductions in the prices of all agricultural products, which benefits consumers but harm producers. Overall, the FTA is bad news for South Africa's commercial farmers. Whether small-scale and emerging farmers benefit depends on whether they are food deficit or food surplus producers.