Predicting Trade Conflict Outcomes using a Third-Party Intervention Model by ijmrem journal

International Journal of Modern Research in Engineering & Management (IJMREM) ||Volume|| 1||Issue|| 11 ||Pages|| 27-34 || December 2018|| ISSN: 2581-4540

Predicting Trade Conflict Outcomes using a Third-Party Intervention Model 1, 1,2,3,

Rejoice Nyatsanza, 2,Haiyan Xu

Department of Management Science and Engineering, Nanjing University of Aeronautics and Astronautics

---------------------------------------------------ABSTRACT----------------------------------------------------As anti-import sentiment and protectionism have been increasing, more papers have focused on using theories to explain or resolve them. However, most research has focused on disputes involving larger nations such that there is not much relatable information for disputes such as the one between South Africa and Zimbabwe. The aim of this paper was to bridge the knowledge gap by using the graph model for conflict resolution and the decision support software GMCRII to simulate possible responses to this regional trade conflict. This thirdparty intervention model will assist in investigating and prescribing a diplomatic solution with fair compromise to resolve the unequal trade problem between Zimbabwe and South Africa without harming the economies of both the countries. This research found that a peaceful resolution of the disagreement could be found by the addition of a third-party to help in the conflict resolution thereby ending the prolonged trade conflict. This undertaking will serve as a template for modelling and predicting an outcome in the event of third-party intervention for future trade disputes involving regional trade partners with emerging or developing economies such as those that exist in Africa.

KEYWORDS: non-tariff measures, regional trade, third-party intervention model, GMCRII. ------------------------------------------------------------------------------------------------------------------------------------------Date of Submission: Date, 02 December 2018 Date of Accepted: 06 December 2018 -------------------------------------------------------------------------------------------------------------------------------------------

I. INTRODUCTION Trade deficits and the negative impact of non-tariff measures to trade have historically fascinated economists and scholars alike. Both have positive and negative impacts on the national gross domestic product and if mishandled have the impact of ruining economies and affecting the livelihoods of the societies within them. Over the last decade, institutions such as the World Trade Organization (WTO) and the Southern African Development Community (SADC) have been called upon to resolve disputes between international and African nations. This paper will look at a trade war in which retaliatory trading decisions are negatively affecting the wellbeing of each nation’s citizens. The Trade Conflict Between Zimbabwe And South Africa: South Africa and Zimbabwe are currently in a conflict over the non-tariff measures that were introduced by Zimbabwe over the period 2012 - 2017. Zimbabwe introduced these measures to mitigate the effects of trading arrangements that are heavily in favor of South Africa and contribute to Zimbabwe’s unsustainable net importer status. Both nations are part of the same regional economic community and rely on export revenue from similar goods and products. This has led to great competition for markets, especially since South Africa originally targeted non-African countries but now trades extensively with SACU and SADC and other non-REC members. With prolonged economic difficulties, Zimbabwe now imports an average of 60% of its total imports from South Africa resulting in the nation’s hypersensitivity to any changes in trade between the two states. In 2012, facing continued economic collapse and increased lack of competitiveness due to the recession and hyperinflation that lasted from 2002-2008, the Zimbabwean government decided to suspend its obligations to SADC and any other regional trade agreements. The aim was to boost government revenue by curbing any further outflow of foreign currency and at the same time bringing in more forex revenue through import duties and tariffs. This suspension meant that Zimbabwe would not operate under the purview of the SADC agreements and could officially place tariffs less than 15% on imports from SADC members [1]. Officially, such a move was allowable upon request for a two-year derogation, a process through which any SADC member state may delay full liberalization of trade within their borders. This delay was supposed to begin in 2012 and end in 2014.

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Predicting Trade Conflict Outcomes using Third-Party… However, Zimbabwe did not honor the derogation terms with regards to imports from South Africa. Tariffs ranging up to as much as 15% were only placed on goods from South Africa while imports from other countries within the region were imported duty free. Moreover, Zimbabwe maintained the tariff schedules against South Africa longer than the permissible period and introduced new tariffs the same year. In 2012 alone 46 goods were added to the tariff schedule in the new Statutory Implement 112 (S.I. 112) [2]. Also, the new tariffs included a 25% surcharge on imported goods such as second-hand cars, footwear and eggs among others. Further measures were taken against South African goods such as enforcing permits for importing goods such as soap and body care creams. Furthermore, there was the introduction of a permit system for importing basics such as milk, sugar, poultry and meat of swine. These were added as Statutory Implement 6 (S.I. 6) and Statutory Implement 126 (S.I. 126) of 2014 and 2015 [3] respectively. The conflict worsened the following year. As South Africa had maintained its silence during 2012 up to 2015, Zimbabwe decided to act further against South African imports. In 2016, 43 South African product categories were banned from being imported into Zimbabwe. This was done under Statutory Instrument 64 of 2016 (SI64). This move blatantly disregarded all trade arrangements with South Africa and was in direct violation of the protocols set by SADC and COMESA, the two leading Regional Economic Communities (RECs) in Africa. Zimbabwe, which had been experiencing deflation from the years 2014-2016 with the inflation rate as low as 1.69% in May 2016 (according to the Reserve Bank of Zimbabwe, 2016), claimed it was merely trying to curb dependence on imports and allow its manufacturing sectors the opportunity to compete fairly in the market. From the beginning of the conflict, South Africa had chosen to practice “quiet diplomacy” in its dispute with Zimbabwe. This approach involves trying to influence the behavior of others through secret negotiations or by refraining from taking a specific action [4]. South Africa, which had been enjoying a stable economy post-1994, was also beginning to experience low growth in GDP and now had an immediate need to increase exports so as to increase government revenue. The effects of these trade restrictions and their own stagnated economy required a response. So while they did not want to confront Zimbabwe, South Africa found it could no longer maintain the status quo. South Africa had hopes that by merely complaining without taking a more drastic measure, it could mobilize diplomacy and economic instruments to bring about a resolution [5]. However, this method was not working and at this point South Africa officially requested to meet with Zimbabwe to discuss a way forward. The state of affairs was having other undesirable effects. For instance, the livelihoods of informal traders from both countries had been affected. South African businesses that thrived on Zimbabwean demand experienced great losses and were demanding compensation for the increased cost of trade. In addition, spill-over effects such as increased economic immigrants from Zimbabwe increased. Moreover, local South Africans who had always been complaining about facing excessive competition for jobs from Zimbabweans and other immigrants resorted to violence in order to elicit a response from their government, risking international outrage against South Africa’s lack of action. All these made it difficult to practice silent diplomacy. So South Africa requested that Zimbabwe remove SI64 and give them compensation for the business lost during the implementation of the non-tariff measures. Economists and other observers expressed their concern that the next move by South Africa may not be as diplomatic and that retaliation for unfair practices might follow. As noted above, this dispute can have costly consequences for Zimbabwe if South Africa chooses to act and retaliate on the events that began in 2012. According to regional trade law and SADC protocols, South Africa is entitled to compensation for the disruption caused to its companies through S.I. 64. Furthermore, South Africa has a number of ways in which it can easily retaliate against Zimbabwe. It can stop selling electricity to Zimbabwe or even stop issuing work permits to Zimbabweans in South Africa among other things. Also, South Africa can take the case up to member states of SADC and WTO and request that economic sanctions be placed against Zimbabwe. On its part, Zimbabwe can refuse to bow down to South Africa. It can demand that South Africa first address and rectify the unfair measures it has taken against Zimbabwean imports since 1996 as it feels these have led to Zimbabwe’s dependence on South African goods. As Zimbabwe feels justified in their trade restrictions they can also take the case up to third parties such as SADC or the WTO to support their move against South African goods.

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Predicting Trade Conflict Outcomes using Third-Party…

II. METHODOLOGY In this section we will look at the options and actions available to each decision maker. Next, we will examine the preferences of each party and then conduct a stability analysis to predict potential solutions for the conflict. The analysis will be carried out using the decision support software GMCRII [7]. Modelling the conflict between Zimbabwe and South Africa: The conflict commences with two decision makers, namely South Africa (DM1) and Zimbabwe (DM2). These are the key decision makers and they represent the wishes of the government and the business sectors of each country. Each of the decision makers has to select an action to take and these actions are known as “options”. Table 1 Decision Makers (DMs) and descriptions of their Options DM South Africa (SA) Zimbabwe (ZIM)

Option 1. Retaliate

Explanation Retaliate by introducing NTMs as well as blocking exports and services to Zimbabwe Delay and negotiate for temporary protection of sunrise and sunset industries. Also continue to retool and reindustrialize Accept complaint, remove SI64 NTMs and compensate affected SA businesses

2. Delay 3. Accept

As shown in Table 1, South Africa has one option while Zimbabwe has two. South Africa’s option is to retaliate by introducing its own barriers to trade and services against Zimbabwe. This forceful option is due to the fact that they already requested for the removal of the Statutory Implement 64 (SI64) NTMs as well as compensation. As Zimbabwe has not yet responded, retaliation is the only option available to South Africa. Zimbabwe’s options include delaying and maintaining the NTMs while retooling and reindustrializing. The second option involves accepting South Africa’s request to remove the SI64 measures. States and movement: Once options have been determined we take a look at the possible states associated with the options. The states reveal all the possible movements from one option to the next as the DMs move through their conflict. The states are combinations of Yes (Y) and No (N) and only realistic states, known as feasible states, are to be considered. That is, only one option may be chosen by each party, to the exclusion of any other move, thereby establishing the feasibility or infeasibility of each state. To illustrate, using Table 2, s4 is a feasible state as it is possible for South Africa to retaliate against Zimbabwe. It is also possible that Zimbabwe will respond by delaying to give a response. On the other hand, s2 is infeasible as it is illogical for Zimbabwe to do nothing if South Africa retaliates. At this stage of the conflict, the two decision makers and their collective three options produce 23 = 8 feasible states as shown in Table 2. Table 2 Feasible States for Decision Makers (DMs) DM SA ZIM

Option 1. Retaliate 2. Delay 3. Accept

STATE

N N N s1

Y N N s2

N Y N s3

Y Y N s4

N N Y s5

Y N Y s6

N Y Y s7

Y Y Y s8

Preferences: As in any situation, each party has their own ideas of desired outcomes. These outcomes are known as preferences and conflict arises when the two decision makers want different outcomes. In this case the preferences for the two countries were inferred based on the public actions that have been taken since the conflict began right up to the point where it escalated in 2016. The preferences and their conditions are shown in Table 3.

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Predicting Trade Conflict Outcomes using Third-Party… Table 3 Decision Makers (DMs) Preferences without Third Party DM South Africa

Zimbabwe

Statement 3 -2 -1 3 IFF 1 2 -1

Explanation Zimbabwe removes SI64 NTMs Zimbabwe stops delaying and either agrees or declines to remove SI64 Does not want to retaliate Accept removal request if and only if SA retaliates Delay deciding thereby buying time to protect local industries from competition Does not want retaliation

South Africa’s Preference: South Africa’s ultimate preference is that Zimbabwe not delay. The next preference is that Zimbabwe agrees to remove the SI64 measures or else South Africa will choose to retaliate. Retaliate is the least preferred option as it has far reaching economic and social consequences. Retaliation will not only affect the operations of the South African businesses located in Zimbabwe but will also negatively impact those whose main market is in Zimbabwe. Moreover, retaliation would have the undesired effect of increasing spillover effects. The most immediate spillover effect would be an increase in the number of Zimbabwean immigrants settling in South Africa. Apart from this, retaliation is not in line with the principles of regional trade and would cause South Africa to be in breach of SADC rules. It is, therefore, South Africa’s wish that retaliation be a course of last resort to be chosen only when Zimbabwe has refused to accept the request to remove the statutory implements and has continued to add to the current ones. Zimbabwe’s Preference: For Zimbabwe, the most preferred state is s3 as it lets them maintain the NTMs and protect sunrise and sunset industries so as to achieve economic independence from South Africa. Zimbabwe also prefers that South Africa not retaliate as this would block access to inputs such as machinery and replacement parts from South Africa. Zimbabwe needs these in order to increase the capacity of the local industries they are trying to protect with the SI64 NTMs. The least preferred option is that South Africa retaliates and causes Zimbabwe to accept the request to remove the non-tariff measures and provide compensation. By regional trade law, South Africa is justified in demanding the removal of the non-tariff barriers as Zimbabwe failed to notify South Africa beforehand. This failure to follow protocol inconvenienced and disrupted South African businesses’ processes and may require compensation. For this reason, any move by South Africa to retaliate may cause Zimbabwe to remove the barriers to trade. The only way to maintain the barriers would be to investigate and show how South African imports harm the local industry. However, Zimbabwe claims it does not have the technical capability to conduct such an investigation. Moreover, it is difficult to prove causality as other economic circumstances, e.g. sanctions and increased availability of cheap Chinese imports, have contributed to Zimbabwe’s lack of manufacturing competitiveness. Ultimately, delaying and buying time so as to protect fledgling industries is a temporary solution and cannot solve the problem. The preferences can be listed in a descending order as follows: South Africa’s preference: s5 s6 s7 s8 s1 s2 s3 s4 Zimbabwe’s preference: s3 s8 s1 s6 s7 s4 s5 s2 Analysis of Conflict without Third Party using GMCRII : In order to determine the outcome of the conflict, the options and preference statements are combined and put through the GMCRII computer software. The decision support system takes the information and establishes the equilibria of the various states. Table 4 shows the calculated outcome of this conflict. Table 4 Equilibrium results without third party Solution Concepts Nash

GMR



SMR SEQ

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Predicting Trade Conflict Outcomes using Third-Party… In stability analysis the best obtainable stability definition is Nash as it shows a stable relationship with GMR, SMR and SEQ. In this conflict, the only state that meets the requirements is s3. In s3 South Africa does not retaliate and Zimbabwe delays in deciding and engages in negotiation. However, negotiation does not resolve the matter as Zimbabwe refuses to acknowledge its violations of regional treaty. This leads to an escalation of the conflict and creates the need for third party intervention. Modelling the Conflict with a Third Party: A third party is any entity that inserts themselves in a conflict so as to defuse or resolve a dispute. In Africa, trade dispute resolution is carried out using the codes set out by the Common Market for Eastern and Southern Africa (COMESA), Southern African Development Community (SADC) and East African Community (EAC). Both SADC and EAC set rules for free movement of labor, capital, goods and services within the two respective regions while COMESA aligns the interests of both the regions in such a way that promotes and enforces free trade. The COMESA-EAC-SADC Tripartite is regional and deals with cases affecting eastern and southern Africa. It has certain policies that mirror those set by WTO which has more resources and the most complete form of governance and enforcement. However, WTO proceedings take far too long, is too expensive and as it was designed for European systems, it fails to meet the needs of smaller African cases. In any case, African nations have a cultural tendency to negotiate things among themselves and not in international platforms such as WTO. As we have seen, Zimbabwe and South Africa have failed to resolve their conflict diplomatically. Instead, a third party must be introduced so as to help come up with a solution that both sides can accept as fair and will allow both parties to enjoy the benefits of bilateral trade with each other. This conflict has two options for a third party. South Africa may formally lodge a complaint with the regional trade bloc known as Southern African Development Community (SADC). Another option is to lodge a dispute claim with the World Trade Organization (WTO). We will use SADC in this model. Decision Makers (DMs): The involvement of SADC means the conflict now has three decision makers. They are: South Africa (DM1), Zimbabwe (DM2) and Southern African Development Community (SADC) (DM3). Options : South Africa may retaliate and start blocking Zimbabwean exports as well as make it difficult for Zimbabwe to obtain essential services such as electricity. Retaliation is however in violation of bilateral and regional agreements so South Africa will choose this option cautiously. However due to the long time it has taken to engage Zimbabwe it is likely that South Africa will retaliate if nothing is done soon. Zimbabwe may delay and maintain the current trade protections. Or they may decide to accept South Africa’s complaint, remove the NTMs as well as give South Africa compensation. SADC’s option is to enforce or not enforce the trade protocol for the region. The new options and their brief explanations are shown in Table 5. Table 5 Decision makers (DMs) and their options DM

Option

1. Retaliate

ZIM

2. Delay 3. Accept

SADC

4. Enforce

The updated preferences in descending order are as follows: South Africa’s preference: s6 s14 s13 s5 s8 s16 s15 s7 s2 s10 s9 s1 s4 s12 s11 s3 Zimbabwe’s preference: s3 s8 s1 s6 s14 s9 s16 s11 s4 s7 s2 s5 s13 s10 s15 s12 SADC’s preference: s13 s5 s15 s7 s14 s16 s6 s8 s9 s1 s11 s3 s10 s12 s2 s4

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Predicting Trade Conflict Outcomes using Third-Party… Table 6 Preference statements with third-party DM

Statement

3 -2

Explanation Wants Zimbabwe to remove SI64 NTMs Wants Zimbabwe to stop delaying and either agree or decline to remove SI64 Wants to force a response through retaliation Will not retaliate if and only if SADC agrees to intervene and enforce trade protocol Keeps delaying if and only if SADC does not enforce the trade rules Does not want SADC to enforce trade protocol Will accept removal request if and only if South Africa retaliates or SADC enforces trade protocol Delay deciding thereby buying time to protect local industries from competition Does not want retaliation Wants Zimbabwe to remove trade barriers and give South Africa compensation Does not want South Africa to retaliate Wants Zimbabwe to remove SI64 without the threat of retaliation Will enforce trade rules if South Africa retaliates Does not want Zimbabwe to delay Wants to enforce and uphold the trade protocol

1 4 IFF -1

ZIM

2 IFF -4 -4 3 IFF 1 & 4 2 -1 3

SADC

-1 3 IFF -1 4 IF 1 -2 4

The preference statements in Table 6 shows that as a third-party SADC aims to promote good trade between the two countries. The preference statement 3IFF-1 means that SADC wants Zimbabwe to remove non-tariff measures without being subjected to retaliation. Similarly, the statement -1 shows that SADC does not encourage South Africa to retaliate. Table 7 Feasible States for Decision Makers (DMs) with Third Party DM

Option

Retaliate

ZIM

Delay

Enforce

S10

S11

S12

S13

S14

S15

S16

SADC STAT E

There are now 24 = 16 possible states with the inclusion of the third party. These are represented in Table 7. The new equilibria for the conflict are revealed in Table 8. Table 8 Equilibrium results with SADC as third party s1 Nash GMR SMR SEQ

  

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 



 

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s10

s11

s12

s13 

s14    

s15

s16 

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Predicting Trade Conflict Outcomes using Third-Party… The new equilibrium with the third-party intervention is s14. State 14 is one in which all stabilities (Nash, GMR, SMR and SEQ) are satisfied. While it leads to the removal of the SI64 measures, it is not a satisfactory solution as it forces Zimbabwe to accept the costs of compensating South Africa. As Zimbabwe is a fragile state with an unstable economy this will cause trouble in future trade negotiations especially as Zimbabwe has a strong influence in SADC. Moreover, Zimbabwe is likely to default on compensation payments, instead opting to apply for derogation on the basis of a bad economy that needs bolstering. This will have the effect of either undoing the efforts of the third party or delaying the results of the resolution indefinitely while Zimbabwe follows its national industrialisation agenda. South Africa itself may not be happy with this resolution as retaliation will do further harm to Zimbabwe’s economy and consequently to South Africa through spill-over effects. The need to pay compensation will strain Zimbabwe’s economy and lead to further shrinkage of the economy and ultimately lead to less purchasing power for South Africa’s goods and services. Moreover, it will increase the number of economic refugees in South Africa as more Zimbabweans search for jobs.

III. CONCLUSION By using the graph model for conflict resolution and the third-party intervention model we have seen a possible solution for the conflict over SI64 non-tariff measures. However, the resolution is based South Africa’s willingness to be patient with their neighbor despite the fact that the barriers to trade are not in line with the goals of both SADC and WTO which both countries are members. Moreover, the resolution is not a permanent one as Zimbabwe still has other challenges that will affect their ability and willingness to remove or reduce nontariff measures. For instance, the inability to respond to extreme weather patterns from El Nino weather patterns and slow growth in manufacturing sectors coupled with inconsistent national policies suggest that there will be more problems within the region in the future. It is clear that inefficient practices and policies lead to leakages which make economies worse off. Secondly, greater efforts should be made in aligning policies geared towards supporting manufacturing sectors. For instance, a clear strategy with medium term objectives and long-term goals for capacity-building will help align government and private sector efforts towards increasing exports and reducing the total imports required to ensure a steady supply of goods for the nation. Such choices can be informed by analyzing the goods that Zimbabwe has comparative and absolute advantage in and focusing on those that will provide competitive markets producers can sustainably participate in. Similarly, further industrialization efforts would be more successful if there was more capacity building prior to the removal of imports or another drive towards local made products.

ACKNOWLEDGEMENTS The authors appreciate the financial support from the National Natural Science Foundation of China (71471087).

REFERENCES [1] [2]

[3]

[5]

[6] [7]

T. Iwanow, "Impact of Derogations from Implementation of the SADC FTA Obligations on IntraSADC Trade," SA Trade Hub, 2011. Zimbabwe Revenue Authority, "Statutory Instrument 126 of 2014, Control of Goods (Open General Import License) (No. 2) (Amendment) Notice, 2014 (No.3)," 2015. [Online]. Available: http://www.zimra.co.zw/index.php?option=com_phocadownload&view=category&id=25%3Astatutoryinstruments&Itemid=1&limitstart=150. K. Dlamini, "“Is Quiet Diplomacy an Effective Conflict Resolution Strategy?,”," SA Yearbook of International Affairs, 2002/03. [4] M. Adelmann, "Quiet Diplomacy: The Reasons behind Mbeki's Zimbabwe Policy," Africa Spectrum, vol. 39, no. 2, pp. 249-276, 2004. ZIMRA, "Statutory Instruments," 2012. [Online]. Available: http://www.zimra.co.zw/index.php?option=com_phocadownload&view=category&id=25%3Astatutoryinstruments&Itemid=1&limitstart=200. T. Iwanow, "Impact of Derogations from Implementation of the SADC FTA Obligations on IntraSADC Trade," USAID/Southern Africa, 2011. K. W. Hipel and M. D. Kilgour, "The Graph Model for Conflict Resolution: Past, Present, and Future," Group Decision and Negotiation, vol. 14, no. 6, p. 441, 2005.

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BIOGRAPHIES Rejoice Nyatsanza is a graduate student currently working on her master’s degree at NUAA. Her research interest is decision analysis and she is using this knowledge to improve her decision making as well as in analyzing world trends and everyday economic decisions. Professor Xu Haiyan has many years’ experiences mentoring and teaching postgraduates in the complexities of decision and conflict analysis; risk decision-making; environmental control; financial mathematics; portfolio optimization, as well as financial investment. Her contributions to the field of management science and engineering are well-documented by the quality of work she has published while working at the Nanjing University of Aeronautics and Astronautics and during time at the University of Waterloo.

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