Modeling tariff rate quotas in the South African livestock industry

The Uruguay Round of trade negotiations resulted in three main areas of trade liberalization in agriculture, namely market access, domestic support, and export subsidies. In terms of market access, the introduction of tariff rate quotas (TRQs) was one of the main tools to facilitate greater market access. After the liberalization of the agricultural sector and phasing out of past protection mechanisms South Africa introduced a process of tariff reform in compliance with WTO regulations. Furthermore, a system of TRQs was introduced in compliance with WTO regulations. Literature on South African agricultural trade shows that very little research has been conducted on the impacts of TRQs. In this study the impacts of further TRQ liberalization on the South African livestock industry were investigated using four TRQ liberalization scenarios, namely: 33 per cent expansion of import quotas, 33 per cent reduction in ad valorem MFN tariffs, a combination of the first two scenarios and a complete removal of tariffs. The approach followed in this study is spatial partial equilibrium in nature and consists of the primary (beef cattle, broilers, pigs, and sheep) and secondary (beef, poultry, pork and sheep meat) sub-sectors. The model delineates South Africa into its nine provinces, as well as neighbouring important meat producers - Namibia and Botswana. For the four secondary products (beef, poultry, pork and sheep meat) the border prices declined by between 0.89 and 2.39 per cent for scenario one, 2.35 and 7.96 per cent for scenario two, 2.96 and 9.97 per cent for scenario three and 8.25 and 25.19 per cent for scenario four. The largest decline in beef and sheep meat prices due to liberalization was recorded in the Eastern Cape and KwaZulu-Natal Provinces. Cattle and sheep numbers owned by emerging producers are more than those of the established commercial farmers in these two provinces. The implication is that the development efforts by government aimed at commercializing emerging commercial stock farming in order to address equity and poverty may be slowed down considerably with further trade liberalization. The study used the consumer and producers surplus concepts, as well as the equivalent variation concept to measure the impact on welfare of potential trade policy changes mentioned. Welfare as measured by consumer surplus increases by R230.8 million in scenario 1 to R1 880.8 million in scenario 4. Producer surplus decreases by R77.6 million in scenario 1 to R656.89 million in scenario 4. Welfare as measured by equivalent variation increased by R60.6 million in scenario 1 to R468.2 million in scenario 4. The equivalent variation concept revealed much more moderate changes to consumer well being. The reason for this is that consumer and producer surplus estimations assume linearity of the demand and supply curves, whereas the model used in this study accounts for the non-linearity of demand and supply curves. Consumer and producers surplus estimates nevertheless provide useful insight into the relative impact of trade policy changes.