Deepening Integration in SADC - Fes-botswana.org

agricultural products leave considerable margins for modifications of
applied tariffs.
In theory, trade diversion is defined as a movement from a cheap
source outside the economic grouping to a more expensive source
within the integrating countries. Economic integration benefits are
thus assessed on the basis of the degree to which 'trade creation'
outweighs 'trade diversion'. Where trade creation is predominant,
one of the members of the integration group at least must benefit, all
of them may benefit, or the world at large benefits, though the outside
world loses at least in the short run and can gain in the long run only
as a result of the positive externalities of the increased prosperity of
the Customs Union. If trade diversion predominates, at least one of
the members is bound to be injured and all combined will suffer a net
injury, and there will be injury to the outside world and to the world at
large (Tekere Moses and Ndlela Daniel, 2003).
Theory states that when trade flows are matched by opposite
monetary flows, unilateral trade liberalisation can result in a tendency
towards payments deficit on the balance of payments. Trade
liberalisation is believed to result in a deteriorating trade balance in
the short-run as imports explode while exports grow modestly. In
order to limit trade balance deterioration, trade liberalisation can be
accompanied by devaluation. It is argued that devaluation enhances
the competitiveness of exports by reducing the price in foreign currency
terms or by removing implicit export taxes inherent in overvalued
currencies. In addition to providing incentives to exporters, devaluation
normally accompanies trade reforms to make import liberalisation
macro compatible and safeguard external reserves. To be effective
however, devaluation should be accompanied by monetary and fiscal
measures. Contractionary monetary policies can squeeze domestic
demand and free resources for the production of exports. Tight fiscal
policy will also have the same effect on exports by reducing domestic
demand. However, the effectiveness of devaluation depends on the
price elasticity of exports, share of export inputs that are imported,
and the existence of excess capacity (Tekere Moses and Ndlela Daniel,
2003).
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