Trade and Poverty in South Africa: The Roles of the Exchange Rate, Tariffs and Import Parity Pricing for CPI inflation

This paper's main conclusion is that protectionist policies - the presence of tariffs on imported goods - are very bad news for the consumer in general, and the poor consumer in particular. First, a tariff directly increases the rand price of imported goods, much like a weaker exchange rate - following a nominal depreciation - would do. We find that the presence of tariffs on outputs or final goods, say, is not the major threat to an orderly price transmission in general, or to poverty reduction in particular. Rather, the crux of international trade in South Africa is trade in intermediate inputs, such as chemicals and steel. Therefore, the potential adverse impact on poverty via higher rand prices of imported intermediate inputs is much larger than that of more expensive foreign final goods (as the latter effect constitutes only 10% or so of the consumer price index, or CPI). So, the first policy recommendation is that more gains are to be made for the domestic consumer by lowering tariffs on intermediate goods than on final goods.