Economic implications of trade liberalisation on the South African red meat industry

English: Successful agricultural trade relations have to a large extent become a function of how well countries are able to measure the possible impact of increased trade liberalisation. Many studies worldwide have attempted to gauge the impact of agricultural trade liberalisation on world production, consumption, trade and prices by means of mathematical programming models. Given the importance of the red meat sector in South Africa's agricultural economy, it is of the utmost importance that the red meat industry understands the implications and consequences of trade liberalisation. Such knowledge would enable this industry to pro-actively provide input to Government on the possible 'effects of trade liberalisation on the domestic red meat industry, that could be used in multi- or bilateral trade agreements. Furthermore, the industry would be in a position to identify threats and opportunities and make the necessary strategic decisions. In South Africa many studies have investigated various different issues of economic importance pertaining to the red meat industry. None of them have attempted to investigate the impact of trade liberalisation within the mathematical programming framework. This study employs a spatial partial equilibrium model embedded in the mathematical programming framework to analyse the possible effects of a reduction of tariffs, increases in world prices of red meat, changes in the exchange rate, the abolishment of the Lomé Convention and changes in population size. The model includes two-stage spatially separated markets for red meat products in South Africa that encompass behavioural parameters to gauge the impact of exogenous changes related to trade liberalisation. In the case where all tariffs on red meat imports are abolished, changes in prices of red meat products will be substantial. Producer prices for cattle, sheep and pigs will decline by 21.11 per cent, 13.90 per cent and 11.99 per cent, respectively. Beef, sheep meat and pork prices will, on average, decline by 27.88 per cent, 28.56 per cent and 13.16 per cent, respectively. Demand will increase substantially for all three meat types. From a welfare point of view consumers will experience welfare increases. Producers, on the other hand, will experience a drop in welfare. In monetary terms the welfare gains by consumers are greater than the welfare losses by producers, which constitutes a net welfare gain to society. Furthermore, the red meat industry in South Africa should carefully consider preferential access granted to third countries under FTA's. Preferential access could easily lead to a reduction in the marginal tariff rate which, in turn, would result in lower domestic prices of red meat. In the case where the world price increases more than 10 per cent for beef, 18 per cent for mutton and 6 per cent for pork, zero imports would result. The losses in welfare to consumers are greater than the gains in welfare by producers. The impact of a 40 per cent depreciation in the exchange rate is very similar to the situation when world prices are assumed to increase, whilst the effect of a possible abolishment of Lomé on the South African beef market would be minimal. Finally, an increase in the population size combined with an increase in world prices will only partly offset the impact of a total reduction in tariffs. Also, increases in demand due to lower prices will largely be met by higher imports.