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 Table: SA Trade with China by Type of Product (%) Exports 2000 2010 Imports 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% 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 Meat, fish, fruit, vegetables, oils Dairy products Beverages Knitted and crocheted fabrics Clothing Footwear Sawmilling/planing of wood Basic chemicals Other chemicals Non-metallic mineral products Basic iron and steel Structural steel products General purpose machinery Household appliances Electrical motors, generators TV, radio and other electronics Motor vehicles Bodies for motor vehicles Total Manufacturing Country ranking of China as source of imports by sector 1995 2010 20 8 23 18 49 17 5 1 1 1 1 1 41 4 13 1 15 4 8 1 19 1 21 3 15 1 2 1 13 1 11 1 25 8 6 1 10 1 Share Chinese imports in total SA imports 1995 2010 0.8 4.3 0.0 0.8 0.0 0.2 5.4 66.7 29.0 75.1 35.5 76.8 0.0 5.8 1.4 12.6 0.8 7.2 5.1 25.0 0.9 16.4 0.4 13.4 1.1 23.8 13.7 62.6 1.2 23.4 2.2 33.5 0.0 3.0 1.4 32.6 10 2.0 18.5 Trend in Chinese Imports as Share Domestic Demand 11 Chinese Imports Share of Domestic Consumption Industry Footwear Knitted and crocheted fabrics Television, radio and other electronic equipment Electric lamps and lighting equipment Clothing General purpose machinery Household appliances Leather and leather products Spinning and weaving Furniture Other textiles Special purpose machinery Electrical motors, generators and transformers 2010 46% 42% 32% 31% 28% 23% 21% 19% 18% 15% 13% 11% 11% 12 Measuring the Impact of Chinese Import Competition on Manufacturing Industries 13 Increased imports from China Falling domestic prices Import competing industries Import using industries Falling profit margins Rising profit margins Exit of least efficient firms Falling production Defensive innovation by survivors Productivity changes Falling Employment Wages Increased production Increased employment Increased wages 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 41 384 Gain from Domestic Producers (R mn.) As % of Total Gain 7 161 98.9% 30 296 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 Knitted and crocheted fabrics Footwear Clothing General purpose machinery Household appliances Television, radio and other electronic equipment Special purpose machinery Medical appliances, measuring and controlling equip. Growth in Manufacturing Loss to China Sales 60.50% -23.50% 45.30% 2.40% 31.10% -7.60% 28.50% -19.10% 26.40% 16.90% 21.50% 11.00% 18.70% 1.80% 18.00% 17.00% Electric lamps and lighting equipment Leather and leather products 13.30% 12.90% 0.30% 30.00% Electrical motors, generators and transformers Other textiles Spinning and weaving 12.30% 11.10% 10.50% -7.30% -19.70% -41.70% 18 Supported by Econometric Results: Output Growth Slowest in Sectors With Highest Chinese Import Penetration, 2000-2010 Change in log sales volume against change in Chinese import penetration, 2000-2010 Change in log sales volume 0.8 0.6 0.4 0.2 0.0 -10% -0.2 0% 10% 20% 30% 40% -0.4 -0.6 -0.8 Change in Chinese import penetration 19 With Remarkably Similar Estimates of Output Loss Actual Counterfactual difference 1992 (R bill) 484 484 2000 (R bill) 579 584 -6 Change 1992- Annual 2009 09 log (R bill) (R bill) growth 632 148 1.6% 667 183 1.9% -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 19922010 • 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, 19922001 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 24 Estimated Job Losses as a Result of Increased Import Penetration from China, 2001-2010 Clothing General purpose machinery Special purpose machinery Knitted and crocheted fabrics Other textiles Spinning and weaving Footwear TV, radio and other electronic equipment Other chemicals Other electrical equipment Other fabricated metal products Furniture Total decline in Employment employment Loss (%) 22 640 -45% 12 717 51% 7 224 15% 3 991 -53% 3 053 -22% 2 851 -37% 2 521 -55% 2 453 -17% 2 442 30% 2 059 5% 1 983 -4% 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 VARIABLES Employmentt-1 Real Wage Output Tariff Import penetration, other Import penetration, China Export orientation Constant Empl: static within -0.038 0.238+ 0.347 -0.344 -2.084** 0.633** 1.964** -0.588 Empl: instrume nt Empl: dynamic within -0.065+ 0.312** 0.396** -0.185 -1.444** 0.535** 1.553** -0.272 0.819** -0.078** 0.102** 0.144* -0.036 -0.289* 0.120+ -0.164 -0.158 0.668** -0.169* 0.230** 0.23 0.091 -0.417 0.202 -1.55 -1.23 748 0.829 704 Long-run effect Import penetration, China Observations R-squared 792 0.399 792 Empl: gmm diff 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) 0.60 0.50 0.40 0.30 0.20 0.10 Pchina/P Developing 2009 2008 2007 2006 2005 2004 2003 2002 2001 0.00 Pchina/P Developed 30 Import Prices, Top Imported Chinese Products, US$ HS code and description Unit Emergin Highg income China 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 852520 Transmission Apparatus Incorporating Reception Apparatus 852810 Colour Television Receivers Item 171.1 499.8 542.6 Item 64.8 151 226.3 Item 83.4 206.5 295.1 31 Econometric Estimates: Impact of Chinese Import Penetration on Producer Prices Annual log growth, 1992- Annual log growth, 2009 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 32 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 labourintensive 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?