CHINESE COMPETITION AND THE RESTRUCTURING OF SOUTH AFRICAN MANUFACTURING

Rhys Jenkins (UEA)Lawrence Edwards (UCT)

1

Growth of China

• GDP growth of > 9% p.a. for three decades• Overtakes Japan as 2nd largest economy in the

world• Share of world trade increased from 1% to 8%

(1980-2009)• Overtakes Germany as world’s largest

exporter

2

Rising Importance of China as Trade Partner with South Africa

• In 2009 China becomes South Africa’ s largest export market ahead of the United States– 11% total exports in 2010

• And its largest supplier of imports ahead of Germany– 15% total imports in 2010

3

Coinciding with Long-run Decline in Share of Manufacturing in South African GDP and

Employment

4

Key Questions• What types of products are being imported

from China? • Consumer goods• Intermediate goods• Capital goods

• Which industries are affected by Chinese competition?

• Are Chinese imports displacing imports from other countries or domestic production?

• What is impact of Chinese competition on employment and prices?

5

Characteristics of SA trade with China

6

Composition of Trade Unbalanced

  Exports  Imports   2000 2010 2000 2010

Raw materials 43% 81% 3% 1%

Intermediate goods 45% 17% 21% 16%

Consumer goods 2% 0% 52% 40%

Capital goods 10% 1% 24% 42%

Table: SA Trade with China by Type of Product (%)

7

With Increasing Trade Deficit, driven by Manufactures

Figure: SA Bilateral Trade Balance with China, US$ bill

8

China’s Share in SA’s Imports and Exports of Manufactures, 1996-2010 (%)

9

China’s Ranking as a Source of Imports by Sector and Share of Chinese Imports in Total Imports

1995 2010 1995 2010Meat, fish, fruit, vegetables, oils 20 8 0.8 4.3Dairy products 23 18 0.0 0.8Beverages 49 17 0.0 0.2Knitted and crocheted fabrics 5 1 5.4 66.7Clothing 1 1 29.0 75.1Footwear 1 1 35.5 76.8Sawmilling/planing of wood 41 4 0.0 5.8Basic chemicals 13 1 1.4 12.6Other chemicals 15 4 0.8 7.2Non-metallic mineral products 8 1 5.1 25.0Basic iron and steel 19 1 0.9 16.4Structural steel products 21 3 0.4 13.4General purpose machinery 15 1 1.1 23.8Household appliances 2 1 13.7 62.6Electrical motors, generators 13 1 1.2 23.4TV, radio and other electronics 11 1 2.2 33.5Motor vehicles 25 8 0.0 3.0Bodies for motor vehicles 6 1 1.4 32.6Total Manufacturing 10 1 2.0 18.5

Country ranking of China as source of imports by sector

Share Chinese imports in total SA imports

10

Trend in Chinese Imports as Share Domestic Demand

11

Chinese Imports Share of Domestic Consumption

Industry 2010Footwear 46%Knitted and crocheted fabrics 42%Television, radio and other electronic equipment 32%Electric lamps and lighting equipment 31%Clothing 28%General purpose machinery 23%Household appliances 21%Leather and leather products 19%Spinning and weaving 18%Furniture 15%Other textiles 13%Special purpose machinery 11%Electrical motors, generators and transformers 11% 12

Measuring the Impact of Chinese Import Competition on

Manufacturing Industries

13

Increased imports from China

Import competing industries

Import using industries

Falling profit margins

Exit of least efficient firms

Defensive innovation by survivors

Falling production

Productivity changes

Falling Employment

Wages

Rising profit margins

Increased production

Increased employment

Increased wages

Falling domestic prices

14

Methodology for Analysing the Impacts of Imports from China

• Chenery-type decomposition to estimate impacts on output and employment.

• Estimate extent to which China displaces other imports and/or domestic production

• Use of employment coefficients to estimate employment effects

• Panel data estimation• Estimate conditional relationship using structural

models

• Data• 44 manufacturing industries, 1992-2009

15

The Impact of Chinese Competition on Production

16

Loss of Market Share to China, Chenery Decomposition

  1992-2001 2001-2010

Total gain by China (R. mn.) 7 242 41 384Gain from Domestic Producers (R mn.) 7 161 30 296As % of Total Gain 98.9% 73.2%

As % of Domestic Sales in Base Year 1.50% 5.00%

17

Industries in Which Loss to Chinese Imports Represented More than 10% of

2001 Production, 2001-10

Loss to China

Growth in Manufacturing Sales

Knitted and crocheted fabrics 60.50% -23.50%Footwear 45.30% 2.40%Clothing 31.10% -7.60%General purpose machinery 28.50% -19.10%Household appliances 26.40% 16.90%Television, radio and other electronic equipment 21.50% 11.00%Special purpose machinery 18.70% 1.80%Medical appliances, measuring and controlling equip. 18.00% 17.00%

Electric lamps and lighting equipment 13.30% 0.30%Leather and leather products 12.90% 30.00%

Electrical motors, generators and transformers 12.30% -7.30%Other textiles 11.10% -19.70%Spinning and weaving 10.50% -41.70%

18

Supported by Econometric Results: Output Growth Slowest in Sectors With Highest Chinese

Import Penetration, 2000-2010

19

Change in log sales volume against change in Chinese import penetration, 2000-2010

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

-10% 0% 10% 20% 30% 40%

Change in Chinese import penetration

Cha

nge

in lo

g sa

les

volu

me

With Remarkably Similar Estimates of Output Loss

 1992 (R bill)

2000 (R bill)

2009 (R bill)

Change 1992-09 

(R bill)

Annual log 

growthActual 484 579 632 148 1.6%Counterfactual 484 584 667 183 1.9%difference -6 -34   -0.3%Note: Based on output elasticity of -1.19

20

The Impact of Chinese Competition on Employment and

Wages

21

Employment in SA Manufacturing Industry

• Measurement of employment made difficult by inconsistent data series and surveys

• Share of manufacturing in total employment declined from 17% in early 1990s to 13% in 2010

• With close to 300 000 jobs lost between 1992-2010

• And 113 000 lost in post 2000 period– 55 000 decline in Clothing– 21 000 decline in Textiles– But 12 000 to 20 000 increase in chemicals and

machinery

22

Coinciding Increased Import Penetration in Economy

23

Changes in Employment, 1992-2001 and 2001-2010

1992-2001 2001-2010Loss of employment to Chinese imports -24 117 -77 751Loss of employment to all imports -144 734 -110 318Productivity growth -352 617 -226 124Change in employment -179 457 -113 467Gain from exports to China 2 585 4 080

Note: Based on Chenery Decomposition

24

Estimated Job Losses as a Result of Increased Import Penetration from China, 2001-2010

Employment Loss

Total decline in employment 

(%)Clothing 22 640 -45%General purpose machinery 12 717 51%Special purpose machinery 7 224 15%Knitted and crocheted fabrics 3 991 -53%Other textiles 3 053 -22%Spinning and weaving 2 851 -37%Footwear 2 521 -55%TV, radio and other electronic equipment 2 453 -17%Other chemicals 2 442 30%Other electrical equipment 2 059 5%Other fabricated metal products 1 983 -4%Furniture 1 895 -40%

25

Econometric Analysis: Employment Growth Slowest in Sectors With Highest Chinese Import Penetration, 2000-2010

26

Regression Results for Employment Models, 1992-2009

VARIABLESEmpl: static within

Empl: instrume

nt

Empl: dynamic

within

Empl: gmm diff

Employmentt-1 0.819** 0.668**

Real Wage -0.038 -0.065+ -0.078** -0.169*

Output 0.238+ 0.312** 0.102** 0.230**

Tariff 0.347 0.396** 0.144* 0.23

Import penetration, other -0.344 -0.185 -0.036 0.091

Import penetration, China -2.084** -1.444** -0.289* -0.417

Export orientation 0.633** 0.535** 0.120+ 0.202

Constant 1.964** 1.553** -0.164

-0.588 -0.272 -0.158

Long-run effect

Import penetration, China     -1.55 -1.23

Observations 792 792 748 704

R-squared 0.399   0.829  

27

Caveats• Much of action occurs in firms within

industries - need firm data• Unexplained productivity effect dominates• Positive and negative impacts in

downstream/upstream industries not captured

• Employment growth effect in retail sector missing

• Productivity impact of cheaper capital and intermediate goods not accounted for 28

The Impact of Chinese Competition on Prices

29

Chinese Import Prices Substantially Lower than Imports from Other Countries

Import unit values of China relative to imports from other countries (Chinese imports as weights)

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2001

2002

2003

2004

2005

2006

2007

2008

2009

Pchina/P Developing Pchina/P Developed

30

Import Prices, Top Imported Chinese Products, US$

 HS code and description Unit China Emerging

High-income

401120 New Pneumatic Tyres, Buses or Lorries Item 74.4 89.3 144.4

610910 Cotton T-shirts Item 1.4 5.5 5.4

620342 Men's or Boys' Trousers, Cotton Item 3 12.7 22.2

620462 Women's or Girls' Trousers, Cotton Item 3.4 9.9 16.5

640419 Other Footwear, Rubber /Plastics Pair 2.3 11.8 18

844350 Other Printing Machinery Item 343.3 339.5 1009.7

847120 Digital Automatic Data Processing Machines Item 558.6 582.3 576.1

851730 Telephonic Switching Apparatus Item 171.1 499.8 542.6852520 Transmission Apparatus Incorporating Reception Apparatus Item 64.8 151 226.3

852810 Colour Television Receivers Item 83.4 206.5 295.1

31

Econometric Estimates: Impact of Chinese Import Penetration on

Producer Prices

 Annual log growth, 1992-

2009Annual log growth, 

2000-2009

Actual 6.61% 6.48%

Counterfactual 6.93% 6.98%

Log difference 0.32% 0.50%

32

Note: Based on coefficient of 0.75

Conclusion• Significant impact of Chinese competition on South

African manufacturing• China’s share of the domestic market increased

steadily, but still less than 7% in 2010• Uneven nature of import penetration means that some

industries face very significant competition from China. • Bulk of increase in Chinese penetration been at

expense of local production rather than imports from other countries

• Been associated with significant job losses in labour-intensive industries such as clothing and footwear.

• But also lower priced products.33

Implications• China poses considerable challenge to growth

of manufacturing output and employment– Decline in manufacturing relative to services– Within manufacturing shift to resources

• What policy response?