Agricultural bilateral trade agreements between South Africa and the European Union : implications for the South African fresh orange industry.

Abstract

During October 1999 South Africa and the European Union (EU) signed the "Agreement on Trade, Development and Co-operation". This agreement includes a Free Trade Agreement (FTA) which will lead to a free trade area between both partners. The framework for a FTA is set by the World Trade Organization (WTO). This study focuses on the effects of the FTA on the South African fresh orange industry. Fresh oranges account for approximately ten percent of South African agricultural exports. On the other hand, South Africa is the second largest external supplier to the EU and dominates the EU off-season. Fresh oranges are only included in the FTA from June until September and tariffs are reduced by approximately three percent in this time which is the peak South African export season. A trade simulation model was developed using the programme STELLA to analyse the effects of the FTA on the South African fresh orange industry. The trade simulation model consists of seven sub-models for production according to region and cultivar; a local market model, an export market model and an exchange rate model. The production models run on an annual basis whereas the other sub-models run on a monthly basis to capture the seasonality in fresh orange trade. The simulation period lasts from 1997 until 2011, hence fifteen years. The production models use gross margins according to the age of the orchard. The annual production is divided into monthly production on the basis of industry information. The South African demand function in the local market model uses the consumption per person, the export price and trend as independent variables. A trend variable is included to cater for the change in consumer preferences, especially, the move from oranges towards easy-peelers. On the EU market, prices are seen as external variables, except for the months July until October when the South African market share exceeds 50 percent. During these months an import demand flexibility is derived on the basis of the South African market share. The exchange rate model derives from the purchasing power parity between the South African Rand and the Euro. Simulation model results indicate that the FTA is beneficial for South African producers while South African consumers may also benefit. Further producers are expected to benefit from a slight increase in real free-on-board prices and a slight increase in total production. South African consumers are expected to benefit from a simulated decrease in real local prices due to the predicted increase in production. The effects on the EU market are simulated to be even smaller. A slight increase in EU prices is simulated during South Africa's peak export season which is the EU off-season. Results for regional production areas in South Africa show that during the simulation period the area under Valencias increases strongly whereas the area under Navels decreases. A comparison with a scenario without any EU tariffs was carried out to estimate the total distortion effect of EU protection on the South African market. Both South African consumers and producers benefit in the scenario without EU tariffs. The results of the simulation indicate that the total effect of EU tariffs is relatively small. Predicted total South African orange production increases by 14.8 percent over the simulation period compared to 9.1 percent in the scenario without any preferential treatment. The difference in other results is even smaller. The FTA reverts only parts of the distortion effect of EU protection. There are still some further possibilities to reduce the effects of EU protection on the South African fresh orange industry.