Trade Liberalisation: What exactly does it mean for Lesotho?

As the euphoria of trade liberalisation is being replaced by hard and realistic analysis, a worrying feature is that the gains from comprehensive liberalisation are being reduced. This is especially so for the southern African region, as factors such as the loss of preferences into richer markets and the non-compensated losses from tariff revenues in the smaller Southern African Customs Union (SACU) states are being examined in detail. A particular feature for SACU is the issue of liberalisation impacts upon the protected clothing and auto sectors, and that is being brought to the fore with talks of a Free Trade Agreement (FTA) between China and SACU and the US and SACU respectively. Here, analysis suggests a potential cost to both sectors, and for the clothing sector with China adjustment costs on a par with global liberalisation but without the widespread compensatory gains that global liberalisation may bring to other SACU sectors elsewhere. Complicating both current and future clothing sector policies in South Africa is the potential impact upon Lesotho’s similar sector, with the difference here being that rather than an import substitution issue there is an almost total reliance in Lesotho upon a narrow range of clothing exports almost exclusively to the US. This is not to say that SACU must shun trade liberalisation; it is to say that it must carefully examine all the issues involved before committing to further trade agreements. Additionally, South Africa must recognise its new responsibilities, both legal and moral, under the new SACU agreement in this area of trade policy, in both industrial policy and tariff revenues. Based upon an assessment of 2005 imports into South Africa against the 2006 SACU tariff rates, at the mid-point of the Trade, Development and Co-operation Agreement (TDCA) and with SADC preferences now fully operationalised, these preferences reduce the tariff revenues by just under two billion rand, and extending the TDCA preferences to their end point adds another one and a half billion rand to this loss. These figures represent some 11 percent of the potential tariff revenues in the absence of the TDCA and SADC preferences. Should both the US and China be granted TDCA preferences the revenue loss would be another three and a half billion rand, and even a WTO outcome that reduced South African bound rates by 30 percent would reduce revenues further by R1.8 million. In addition, there will be tariff revenue losses of some R359 million from the trade creation/trade diversion switch to EU imports away from duty-paying imports, and the TDCA is currently being reviewed. Here we would expect the EU to seek concessions in the motor vehicle sector that currently provides the bulk of tariff revenues in the absence of preferences. On the basis of this information the revenue potentially available to Lesotho from the SACU Customs pool will decline by some 11 percent over the next few years, with further reductions a distinct possibility. As this revenue represents one half of the total Lesotho government revenue, the consequences will be crucial. To assess how crucial we feed this revenue loss into a macroeconomic model of the Lesotho economy. The results show a reduction in government expenditures in the next period and subsequent periods; that the Government budget moves into deficit in 2004 but subsequently shows a smaller surplus than is projected; and there is a reduction in gross domestic expenditures that rises to one percent annually. In addition, there are implications for projected capital expenditure, and should there be a down-turn in the vulnerable export of clothing under preferences to the US market these impacts would be greatly exacerbated.