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Regional Value Chains and Trade in SADC

Regional Value Chains and Trade in SADC

With the globalisation of capitalism and production networks many firms have become internationalised and, in some cases, industrial production no longer occurs within one country. This has had a strong influence on the emergence of the regional and global value chains. A value chain typically refers to the entire process of value addition, including production processes from inputs to final product or service, marketing and provision of after sales services. Typical value addition activities that comprise a value chain include research and design, marketing, distribution and customer support[1].

While a value chain can be contained in one country, region, or even within a single firm – a global or regional value chain is so titled as the many activities involved in the production of the final product are spread across multiple locations and potentially many different firms. In the context of globalisation, various stages of value-addition within a production process tend to occur in locations, and by firms, most optimally placed to carry out each activity. This ‘optimal environment’ is a result of a plethora of factors, including labour costs and skill and the ability of firms to capitalise on favourable government policies.

Approximately 60.0% of global trade comprises of intermediate goods and services that are integrated to the production of final products and services[2]. Such globalised production networks have come to be known as global value chains (GVCs). In the case of multi-firm GVCs, a unique governance structure tends to emerge, characterised by a ‘lead firm’ and ‘follower firms’ with varying degrees of vertical integration. Lead firms are usually closer to the end product or service and focus strongly on design and marketing of the final product; whilst the follower firms focus on repetitive productive tasks based on lead firms’ needs, designs and intellectual property[3]. The development of regional and global production networks is driven by multinational firms who are the centre of the international trade and investment nexus. Governing regional and global production networks is complicated by the complexity of ownership structures, particularly that of affiliates to multinational enterprises. Currently, more than 40.0% of all foreign affiliates to multinational enterprises are owned through complex vertical integration arrangements with multiple cross-border linkages involving, on average, three jurisdictions which blurs firm and investor or owners’ nationality[4].

Developmental Impact of GVCs?

Cross-border value chains provide both potential benefits and risks for participating economies. In many cases, the development of GVCs has resulted in an asymmetrical balance of power which tends to favour lead firms[5]. This is largely due to the fact that there are few multinational corporations engaged in foreign direct investment whilst there is a plethora of sovereign governments competing to attract foreign direct investment[6]. And the development of follower firms often depends on the lead firms’ productive demands and corporate arrangements framing the conditions of supply production by follower firms. Industrial policy directed at benefiting the lead firm and, or, final product will likely have some beneficial knock on affect for supplying follower firms. But without the necessary structures in place to allow for simultaneous learning and industrial upgrading follower firms, which are typically in developing countries, will find themselves locked into a position of repetitive productive with limited scope for value addition and technological upgrading. Moreover, the development of supplying follower firms is often tied to their geographical proximity to large markets where consumers are located and sometimes where the lead firms are headquartered; or the bargaining ability of host governments and labour which depends on political will and their position in geopolitics[7].

An often-cited example is that of Mexican firms who have been able to transfer skills and functions, expanding their relations with lead firms based in the United States (US). Meanwhile follower firms in Sub-Saharan Africa have faced great difficulty with expanding their operations beyond “cut, make and trim” under the Africa Growth and Opportunities Act which was intended to allow greater market access for African producers exporting to the US market[8]. This example exposes the unequal work of foreign direct investment and multinational operations which determine the developmental impact of regional and global value chains. When small landlocked countries with limited proximity to key markets and little bargaining power have not been able to negotiate their way towards mutually-beneficial deals with multinational corporations, countries have banded together through regional economic communities in order to negotiate as a bloc and improve the developmental prospects of being integrated in global production networks.

Regionally economic communities, such as Common Market for East and Southern Africa, the East African Community and the Southern African Development Community (SADC), provide a unique opportunity to coordinate cross-border production in a mutually beneficial way to benefit the region. The emergence of the SADC Industrialisation Strategy and Roadmap is the beginning of such an initiative to coordinate and consolidate regional industrial development needs of SADC Member States. National consultations and regional meetings on the SADC Industrialisation Strategy were held and the Strategy was adopted by the SADC Summit of Heads of State and Government on 29 April 2015[9].

South Africa’s and SADC Value-Chains

When discussing regional value chains in SADC one cannot discard South Africa’s productive and trade capacity in the region. South Africa contributed approximately 62.2% of the SADC regional gross domestic product over the two decades ending in 2015; and in 2015 this contribution has declined to 49.9% largely due to growing output from Angola that currently contributes 21.6%. Similarly, South Africa contributes significantly to SADC trade. South Africa has contributed approximately 54.8% of SADC total exports over the two decades ending in 2015, which declined slightly to 52.1% largely due to rising exports from Angola that grew from 8.4% in 1995 to 12.7% in 2015. Similarly, South Africa has imported an average 60.2% of total SADC imports from 1995 to 2015, which declined to 51.2% in 2015. Therefore, South Africa is the primary industrial base in SADC due to its contribution to total SADC output and trade. Hence, when looking at intra-regional production and trade, South Africa has the strongest potential to influence the development of regional value chains within SADC. The following analysis gives some insight into the current state of potential and existing value chains linking South Africa to the SADC region.

Imports
Angola accounts for approximately 30.2% of South Africa’s imports from the SADC region over the decade ending in 2014. Primary products such as petroleum, petroleum products and related materials accounted for approximately all (98.9%) of all South African imports from Angola from 2010 to 2014. The nature of South African imports and the proximity to Angola means there is little room for establishing coherent regional value chains or cross-border beneficiation between the two countries. Moreover, the recent commodity price shocks affecting fuel products has a negative impact on the sustainability of trade flows. This shows in the volatility of Angola’s share of South African imports from SADC which drops from 45.4% in 2008 to 26.1% 2011 before recovering to the average of about 30.0%.

Figure 1: South African Goods Imports, % of Intra-SADC Imports (2000-2014)

Source: UNCTAD 2016b. UNCTADStat Database, United Nations Conference on Trade and Development: Geneva. Available At: http://unctadstat.unctad.org/ [Last Accessed: 25 July 2016].

The trade profile between South Africa and Swaziland is slightly different. South Africa imports mostly agricultural and other resource-based manufactures such as essential oils for perfume materials and cleaning preparations, and chemical materials and products; which account for approximately 50.0% of South Africa imports from Swaziland. Primary food products such as sugar and feedstock for animals accounted for an average of 23.6% of South African imports from Swaziland from 2010 to 2015. The proximity, long established trade links, and liberalised trade between South Africa and Swaziland under the Southern African Customs Union (SACU) and Common Monetary Area (CMA) are strong foundations for further enhancing regional value chains in agro-processing and chemical products given the profile of trade between the two countries. South Africa has a strongly supported and growing agro-processing industry which, if integrated to primary product imports from Swaziland, could allow South African firms to take the position of lead-firms in the regional agro-processing and chemical product value chains.

Exports
Mozambique, Zambia and Zimbabwe have gone from accounting for more than 60.0% of all South African export to SADC in 2000, to accounting for approximately 30.0% since 2007. These SADC export markets for South African goods have been partially replaced by Botswana and Namibia since about 2007. This shows the increasing importance of the SACU market for South African trade relations. The growth in SACU export markets coincides with the period when the 2002 SACU Agreement came into effect; after which South African exports to Botswana and Namibia grew strongly to overtake the Mozambican, Zambian and Zimbabwean markets. The growing importance of the SACU market is also shown by the growth in South African exports to Lesotho and Swaziland. Collectively, SACU Member States now accounts for approximately 50.0% of South African exports to the SADC region.

Figure 2: South African Goods Exports, % of Intra-SADC Exports (2000-2014)

Source: UNCTAD 2016. UNCTADStat Database, ibid.

Botswana accounted for an average of 20.3% of South Africa’s exports to the SADC from 2007 to 2015. Petroleum, non-metallic mineral manufactures, and machinery and transport equipment account for more than 60.0% of South African exports to Botswana since 2010. This is a well-diversified export basket similar to South African exports to Namibia. Machinery and transport equipment, and manufactured goods (primarily metal product manufactures) account for more than 60.0% of South African exports to Namibia. Although exports to Botswana and Namibia are diversified in manufactured goods, and machinery and transport equipment, there is little regional integration in the domestic production of these goods in South Africa. The South African machinery and transport equipment sectors are not integrated in the region nor is there substantial regional sourcing, except in the case of automotive trim and other small components sourced from Swaziland and Lesotho.

Policy Implications
However, the issue of developing regional value chains does not simply depend on regional sourcing behaviour of South Africa producers because other considerations such as security of supply and manufacturing capabilities take precedence. Moreover, this requires regional cooperation between governments to support the development of regional value chains; and governments are faced with complex trade-offs between sharing productive capacity, which reduces domestic employment, and developing regional value chains. Despite this, trade relations and economic infrastructure enabled through SACU and the CMA present the greatest prospects for regional value chains between South Africa and other SACU Member States.

Figure 3: Transport Infrastructure in Southern Africa

Source: PCC 2016b. Development of Mozambique’s Port and Rail Systems, Port and Corridor Cooperation: Den Haag. Available At: http://portandcorridor.org/ [Last Accessed: 25 November 2016].

As discussed, Botswana and Namibia have grown as South African export markets to overtake the historical importance of Mozambique, Zambia and Zimbabwe since 2007. This transition was driven by the growing importance of SACU exports markets for South African goods and the decline in mineral fuels, lubricants and related product exports to Mozambique, Zambia and Zimbabwe since 2007. On the other hand, South African exports in machinery and transport equipment, manufactured goods, and chemical products to Mozambique, Zambia and Zimbabwe have remained resilient. Hence, these sectors have great potential for establishing regional value chains in the SADC region if the South African government can make the compromise to share productive capacity in return for the possibility of expanding and enhancing throughout the region. Nevertheless, given the advanced availability of infrastructure and productive capacity in South Africa, the regional integration process and the development of regional value-chains could place South African firms at an advantageous position of lead-firms in the region.

Lastly, the rising importance of the SACU market for South African trade shows the benefits of reduced tariff barriers. But the development of regional value chains requires more concerted work to reduce non-tariff barriers such as logistical challenges, harmonisation of policies and production standards, and the provision of other forms of enterprise support to ensure that gaps in security of supply and productive capacity can be overcome.

By Michelle Livie & Siyaduma Biniza


[1] Gereffi, G. & Fernandez-Stark, K. 2016. Global Value Chain Analysis: A Primer, Duke University: Durham. Available At: https://gvcc.duke.edu/ [Last Accessed: 8 November 2016].
[2] UNCTAD 2013. World Investment Report 2013: Global Value Chains: Investment and Trade for Development, United National Conference on Trade and Development: Geneva. Available At: http://unctad.org/ [Last Accessed: 6 November 2016].
[3] UNCTAD 2013. World Investment Report 2013: Global Value Chains: Investment and Trade for Development, ibid.
[4] UNCTAD 2016. World Investment Report 2016:  Investor Nationality – Policy Challenges’, United National Conference on Trade and Development: Geneva. Available At: http://unctad.org/ [Last Accessed: 6 November 2016].
[5] Epstein, G. & Burke, J. 2001. Threat Effects and the Internationalization of Production, University of Massachusetts: Amherst. Available At: https://www.peri.umass.edu/ [Last Accessed: 7 November 2016].
[6] Epstein, G. & Burke, J. 2001. Threat Effects and the Internationalization of Production, ibid.
[7] Epstein, G. & Burke, J. 2001. Threat Effects and the Internationalization of Production, ibid.
[8] Epstein, G. & Burke, J. 2001. Threat Effects and the Internationalization of Production, ibid.
[9] SADC 2015. SADC Industrialisation Strategy and Roadmap: 2015-2063, Southern African Development Community: Gaborone. Available At: http://www.sadc.int/ [Last Accessed: 7 November 2016].

Khanyisa Mchavi

Siya Biniza

Siyaduma Biniza

Michelle Livie

Khanyisa Mchavi

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