CHINESE COMPETITION AND THE RESTRUCTURING OF SOUTH AFRICAN MANUFACTURING

1. CHINESE COMPETITION AND THE RESTRUCTURING OF SOUTH AFRICAN MANUFACTURING Rhys Jenkins (UEA) Lawrence Edwards (UCT)

2. 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

3. 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

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

5. 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?

6. Characteristics of SA trade with China

7. Composition of Trade Unbalanced Table: SA Trade with China by Type of Product (%)

8. With Increasing Trade Deficit, driven by Manufactures Figure: SA Bilateral Trade Balance with China, US$ bill

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

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

11. Trend in Chinese Imports as Share Domestic Demand

12. Chinese Imports Share of Domestic Consumption

13. Measuring the Impact of Chinese Import Competition on Manufacturing Industries

14. Increased imports from China Falling domestic prices Import using industries Import competing industries Rising profit margins Falling profit margins Defensive innovation by survivors Exit of least efficient firms Increased production Falling production Productivity changes Increased employment Falling Employment Increased wages Wages

15. 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

16. The Impact of Chinese Competition on Production

17. Loss of Market Share to China, Chenery Decomposition

18. Industries in Which Loss to Chinese Imports Represented More than 10% of 2001 Production, 2001-10

19. Supported by Econometric Results: Output Growth Slowest in Sectors With Highest Chinese Import Penetration, 2000-2010

20. With Remarkably Similar Estimates of Output Loss Note: Based on output elasticity of -1.19

21. The Impact of Chinese Competition on Employment and Wages

22. 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

23. Coinciding Increased Import Penetration in Economy

24. Changes in Employment, 1992-2001 and 2001-2010 Note: Based on Chenery Decomposition

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

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

27. Regression Results for Employment Models, 1992-2009

28. 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

29. The Impact of Chinese Competition on Prices

30. Chinese Import Prices Substantially Lower than Imports from Other Countries

31. Import Prices, Top Imported Chinese Products, US$

32. Econometric Estimates: Impact of Chinese Import Penetration on Producer Prices Note: Based on coefficient of 0.75

33. 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.

34. 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?