South Africa represents around 20% of China’s trade with the entire continent, on a par with oil rich Angola. According to the Asian Development Bank, South Africa took the lion’s share of the Chinese foreign investment going to Africa, 64% over 2003 – 2008, although these figures are notoriously unreliable, as investment difficult to measure, compared to merchandise trade which can be more easily measured as it travels through a port. FDI measures often miss smaller deals which fall under the radar of official counts, and their accuracy is dependent on estimates and figures extracted from businesses, which are not wholly accurate.
Chinese – South African trade and investment have grown from almost nothing 20 years ago to China becoming South Africa’s single biggest trade partner (save the EU as a single block). For China, South Africa is a sub-set of its trading relations with Africa, which compared to its trade with Japan, USA and EU is fairly small. So in pure number terms, South Africa is unimportant, but the metals it supplies and its position as a gateway to the Sub-Saharan Africa allow it to play a more important role than its size would first suggest.
Zuma’s intervention at FOCAC V underscored the widespread view that China is gaining more from their relationship than the South Africa is. Perhaps there is a feeling that the current pattern of trade reflects old colonial relationships. South Africa has certainly benefited to some extent in the short and medium term, the demand for South African resources and the global rise in commodity prices generally, means that the mining sector has benefited, but has this strangled South Africa’s manufacturing sector and if so does this matter, as a relatively advanced economy like South Africa should be looking to expand its service sector and more advanced parts of its economy. The manufacturing sector is not a monolithic block, there are a variety of subsectors which require a nuanced approach when analysing the sector.
Unfair Competition or Poor Industry Standards?
In the first half of 2011, 52 clothing factories closed in South Africa, a continuation of a long term trend, according to the National Bargaining Council which mediates between labour and management in factory disputes. The factories blame the losses on rising wages, strikes and government regulation. Many are moving to landlocked Lesotho or neighbouring Mozambique, where there is less concern for workers’ rights and wages are lower.
The University of East Anglia published a report claiming that South Africa had lost jobs (77,000 over 10 years), as a result of Chinese textile imports into the country, which served to back South African fears that its industry would be decimated by Chinese imports. Textiles were protected for many years by the World Trade Organisation (WTO) multi fibre agreement (MFA), which restricted exports through a series of quotas on textiles, covering different items of clothing. South Africa produced textiles for its own home market, but also the rest of Sub-Saharan Africa. The end of the MFA in 2005 turned a stream of Chinese and Asian textile imports into a flood.
South African producers pressed the government to impose quotas or restrictions on the Chinese imports, pointing at Chinese currency manipulation and the ability of Chinese industry to produce at work bottom prices, as it had no trade unions, as well as high labour productivity relative to wages. Although South African industry was still protected by a 40% tariff wall, (compared to the MFA which provided a 100% wall), the collapse in the textile sector has been painful and obvious since the tariff has fallen.
Other observers have pinned the blame for the decline in South African textiles on internal pressures, the sector had been in decline well before the end of the MFA, labour costs are higher and the industry has remained dispersed in small producers rather than consolidating into more competitive larger companies. By contrast the Chinese textile industry restructured in the 1980s closing down small uneconomic factories and investing in new technology, setting the stage for their current success. South African producers have also gained from the Africa Growth Opportunity Act, (AGOA), passed by the United States Congress to allow African producers greater access to US markets.
It is also important to differentiate between Chinese exports to South Africa and Chinese investment in South Africa. Chinese industrialists are moving textile production (which is fairly low down the manufacturing food chain) offshore to Vietnam, Bangladesh and Africa. South Africa has seen investment in its textile industry from China, but also investment in its household appliances and electrical goods assembly production. So South Africa is simultaneously receiving Chinese FDI in the manufacturing sector, and seeing the same sector suffering in competition from Chinese imports.
Is the Decline in Textile Manufacturing a Positive for South Africa?
The decline in South Africa’s textile manufacturing sector, although unfortunate for the owners and workers involved, can be seen in a positive light. South Africa is a middle income country and it should be investing in the production of more complex goods than textiles, which can be more efficiently done elsewhere in Sub Saharan Africa. South Africa should be aiming to sell more hi-tech manufactured products, as well as services, such as banking and insurance. As a gateway to sub Saharan Africa, South Africa is well placed to serve this role for China and others.
It is instructive to look at the manufacturing sector not as a single mass, but as a number of different sub-sectors, such as hi-tech electronics, heavy manufacturing, auto-manufacturing, textiles and footwear. In this regard is far more developed than the rest of the African continent, and therefore faces Chinese competition across a variety of different industrial sub-categories.
A University of East Anglia analysis of South African – Chinese trade found that South African industrial production would have been 5% higher in the absence of Chinese exports, with a negative impact on employment, but this does not take into account the benefits for consumers in terms of lower prices and wider choice. The report also highlighted Chinese strengths in particular areas, such as footwear and knitted fabrics where they had gained 40% market share. For TVs, radios and electronic goods the corresponding figure was 30%. In general Chinese imports impacted in areas of unskilled and semi-skilled production. Part 3 is coming very soon.