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 gt 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 worlds 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 ()
  Exports  Exports  Imports  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
8
With Increasing Trade Deficit, driven by
Manufactures

• Figure SA Bilateral Trade Balance with China,
  US bill

9
Chinas Share in SAs Imports and Exports of
Manufactures, 1996-2010 ()
10
Chinas 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
Industry 2010
Footwear 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
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
  1992-2001 2001-2010
Total gain by China (R. mn.) 7 242 41 384
Gain from Domestic Producers (R mn.) 7 161 30 296
As of Total Gain 98.9 73.2
As of Domestic Sales in Base Year 1.50 5.00
18
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
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
  1992 (R bill) 2000 (R bill) 2009 (R bill) Change 1992-09 (R bill) Annual log growth
Actual 484 579 632 148 1.6
Counterfactual 484 584 667 183 1.9
difference difference -6 -34   -0.3
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
1992-2001 2001-2010
Loss of employment to Chinese imports -24 117 -77 751
Loss of employment to all imports -144 734 -110 318
Productivity growth -352 617 -226 124
Change in employment -179 457 -113 467
Gain from exports to China 2 585 4 080
Note Based on Chenery Decomposition
25
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
26
Econometric Analysis Employment Growth Slowest
in Sectors With Highest Chinese Import
Penetration, 2000-2010
27
Regression Results for Employment Models,
1992-2009
VARIABLES Empl static within Empl instrument 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  
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
 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 171.1 499.8 542.6
852520  Transmission Apparatus Incorporating Reception Apparatus Item 64.8 151 226.3
852810  Colour Television Receivers Item 83.4 206.5 295.1
32
Econometric Estimates Impact of Chinese Import
Penetration on Producer Prices
  Annual log growth, 1992-2009 Annual log growth, 2000-2009
Actual 6.61 6.48
Counterfactual 6.93 6.98
Log difference 0.32 0.50
Note Based on coefficient of 0.75
33
Conclusion

• Significant impact of Chinese competition on
  South African manufacturing
• Chinas 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?