The Power of the Chinese Dragon

Implications for African Development and Economic Growth

Spencer Henson, Fiona Yap, Spencer Henson, Fiona Yap

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN:
  9781349577651
  9781137574480
• eBook ISBN:
  9781137574497
• Topic: Economía
• Subtopic: Negocios internacionales

This important reader brings together published articles from Palgrave's journal The European Journal of Development Research on the development between China and Africa as well as emerging national economies in the BRICs group. Topics include trade relations, investment in sub-Saharan Africa, global politics of development and more.

1

Do Chinese Exports Crowd-out African Goods? An Econometric Analysis by Country and Sector

Giorgia Giovannetti^a and Marco Sanfilippo^b

^aDepartment of Economics, University of Florence, Italy

^bDepartment of Economics, University of Florence, Italy

Trade is one of the key channels through which Chinese economic growth affects the world economy and especially developing countries. African manufacturing sector is confined to few traditional sectors. Even if at times, and in some sectors, African exports have been favored by preferential treatments, Africa has proven to be particularly vulnerable to the competitive threat posed by China in third markets, including other African countries. With the intensification of economic relations, in fact, China has started flooding African markets with its low-cost manufactures, often at the expense of local producers. Furthermore, in Africa’s main trade partners, namely United States and European Union, most Chinese goods are likely to crowd-out cheap African manufactures. We measure the indirect impact of China on African exports. Using disaggregated data for the period 1995–2005, we present significant evidence on the existence of a displacement effect at different levels: sector, product, region and market.

C’est à travers la croissance économique chinoise que se manifeste l’un des plus grands impacts de la chine sur l’économie mondiale et plus particulièrement sur celle des pays en développement. Le secteur manufacturier africain se limite à quelques productions traditionnelles. Même si, à certaines périodes et dans certains secteurs, les exportations africaines ont bénéficié de traitements préférentiels, l’Afrique s’est avérée particulièrement vulnérable à la menace compétitive exercée par la Chine sur les marchés tiers, y compris sur d’autres marchés africains. En effet, avec l’intensification des relations économiques, la Chine a commencé à inonder les marchés africains avec des produits manufacturés à bas coûts, souvent au détriment des producteurs locaux. De surcroît, aux Etats Unis et en Europe, principaux partenaires des pays africains, les produits chinois sont aussi susceptibles d’évincer des produits manufacturés africains bon marché. Nous mesurons l’impact indirect de la concurrence chinoise sur les exportations africaines. En utilisant des données désagrégées sur la période 1995–2005, nous mettons en évidence l’effet de déplacement au niveau des secteurs, des produits, des régions et des marchés.

Introduction

The buoyant growth of China in the past 20 years, an average rate of around 10 per cent a year, has had a very positive impact on the world economy. Trade is one of the key channels (together with Foreign Direct Investment and Aid) through which Chinese growth impacts on developing countries (Kaplinsky et al, 2006). Most countries, especially raw material producers, have benefited by this strong and increasing demand, since Chinese imports have grown at an average annual rate of 18 per cent since 1992, making China the third importer of manufacturing in 2007 (after United States and Germany). However, Chinese exports have grown even more, increasing competition in destination markets, and most likely crowding-out (some) non-Chinese goods. As China’s competitive advantage still lays in low value-added manufacturing products (Schott, 2008), despite the recent impressive changes in its productive structure and specialization, the more likely to be crowded-out are low-tech manufacturing productions, such as those of Africa.

Most African countries do not yet have a very developed manufacturing sector and rely on few traditional productions. While, at times and in some sectors, African exports might have been favored by preferential treatments, Africa is therefore vulnerable to the competitive threat posed by China in third markets. With the intensification of economic relations, in fact, China has started flooding African markets with its low-cost manufactures, often at the expense of local producers.

In this paper, we measure the indirect impact of China on African exports to its main trading partners, United States and European Union (EU), and to other African countries. Using disaggregated data at 6-digit level of the harmonized system (HS) classification for the period 1995–2005, we present significant evidence on the existence of a displacement effect at sector, product, region and market level.

The paper proceeds as follows. The first section describes the main trends of trade relationships between African countries and its main trading partners. The second provides the analytical framework and reviews the literature on the impact of China on Africa through the trade channel. We then specify the econometric model, and detail data and methodology. The results of our estimation are then reported. Our results show that Chinese exports have a significant and negative impact on African exports to main trade partners as well as inside Africa, where the demand for non-sophisticated low-quality goods is expected to be high. The results are robust, also at different level of disaggregation. We finally conclude drawing some policy implications.

Africa Trade in Manufactures: With Whom and What

Following a sharp increase in overall economic relations (Biggeri and Sanfilippo, 2009), in 2006 China has become the second trade partner (and the first exporter to) of Africa, after the United States. More precisely, Europe is the main trade partner of North African countries, whereas United States is of sub-Saharan African (SSA) countries. Intra-regional trade is relevant for SSA countries. The UNCTAD Economic Development in Africa Report shows that African exports are mainly directed to a group of traditional partners, whose import shares have experienced little changes since the 1960s (UNCTAD, 2008, pp. 24–27). The emergence of Asia as a rapidly growing market has, however, represented a source of diversification, though only in terms of destination market and not of sectoral composition of exports (Broadman, 2007).

The EU, the largest destination market for African manufactures, accounts for around 50 per cent of Africa exports. Intraregional trade comes second, with 27 per cent, up from 20 per cent in the mid-1990s, while African exports to North America have been fairly constant over the last decade, ranging between 10 and 13 per cent. The situation is clearly asymmetric when we consider imports: Africa accounts for a mere 1 per cent of total manufacturing imports of the EU. The share of EU imports from Africa on total imports in the manufacturing sector has peaked in 2001 and has decreased slightly thereafter.

This pattern is mainly because of a decline in imports from North Africa, despite the existence of special trade provisions in the context of the Euro-Mediterranean partnership.¹ SSA countries have kept their share almost constant, also thanks to preferential agreements: the Lomé Convention (1975) the Cotonou agreement (2000) and Everything but Arms (EBA) initiative (2001). Under the EBA initiative, all imports to the EU from the least developed countries are duty free, with the exception of arms. One of the main consequences of these agreements is that, following the removal of the Multi-Fiber Arrangement (MFA) in the clothing and textiles sector, SSA countries did not experience a reduction in their exports to the EU. Nonetheless, trade in textiles and clothing has not even improved since the entry into force of EBA (Collier and Venables, 2007).

African exports to North America have soared since 2002, as a consequence of the choice of United States to diversify its oil imports away from Middle East and, with regards to the manufacturing sector, thanks to the entry into force of the African Growth and Opportunity Act (AGOA). AGOA is a preferential agreement that extend the Generalized System of Preferences (GSP) to a larger number of products,² especially in the clothing and textiles sector (Kaplinsky and Morris, 2008) and has proven to be particularly beneficial at the expiration of MFA (end of 2004). Collier and Venables (2007) for instance show that, in the apparel sector, African exports to the United States, which during the 1990s had similar values than those directed to EU, increased fourfolds from 2000 to 2005, most likely as direct effect of the AGOA. SSA countries are the main US partners, with a high geographical concentration on both export and import. Much of the rise of African shares in America manufacturing imports took place from 2000 onwards. After a sharp decline between 2004 and 2005, exports from most of the least developed countries included in the AGOA (for example Lesotho, Kenya, Madagascar, Swaziland) recovered by 2006 (Collier and Venables, 2007; World Bank, 2007; Kaplinsky and Morris, 2008). The same, unfortunately, did not happen to the main African exporters (South Africa and Mauritius) that during the period 2004–2006 have reduced considerably their exports to the United States (Frazer and Van Biesebroeck, 2007).

Intra-regional trade, contrary to Asia, has never represented a primary source of trade for Africa. In 2006, 8 per cent of total exports from Africa were directed to other African countries. This, according to UNCTAD (2008), is because of three main reasons: the first is the similarity of the exports structures which – in absence of regional production networks – inhibits bilateral exchanges; the second has to do with high transaction costs and the presence of many barriers to trade. Against this background, Broadman (2007) and UNECA (2008) argue that non-tariff barriers, such as high bureaucracy and lack of an adequate net of internal infrastructures, increase substantially the costs of internal trade. Lastly, the large number of sub-regional agreements did not prove yet to be effective. Nonetheless, as far as the share of manufacturing sector on total exports is concerned, intra-African trade seems to be more oriented towards the secondary sector. This is because of the reduced relevance of natural resources exports on the total. Interestingly, data show that African markets are more relevant for SSA countries compared to North African, whose share of imports has been stable over the last decade and that the role of other African exporters in the continent, after having peaked in 2003, has started to decline, possibly because of the entry of new exporters.

Africa’s exports shares of manufacturing in EU, United States and Africa shrank during the last decade, with an acceleration from 2000. This slowdown goes together with a reduced weight of the manufacturing sector in overall African export structure (UNCTAD, 2008), as the relative decline of textiles and clothing has not been offset by growth in other sectors. Data from UNCTAD Handbook of Statistics show that Africa has kept a share of about 2 per cent of total world exports in wood-related manufacturing products. Africa (and especially SSA countries) also holds a relevant position in the production of iron- and steel-related manufacturing products, which nonetheless have been characterized by a declining trend in market shares over the period 1995–2006. However, some countries started producing and exporting in sectors with increasing world demand. This is the case, for instance, of South Africa, where the volume of trade in industries such as machinery and mechanical appliances; electrical equipment, vehicles and transport equipment has been growing substantially since 2000.³ For instance, the automotive sector accounts for 7 per cent of South Africa GDP and, according to some authors ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Notes on Editors
• About EADI
• Introduction: Can Africa Manage the Power of the Chinese Dragon?
• 1. Do Chinese Exports Crowd-out African Goods? An Econometric Analysis by Country and Sector
• 2. China’s Growth and the Agricultural Exports of Sub-Saharan Southern Africa
• 3. China–Africa Trade Relations: Insights from AERC Scoping Studies
• 4. Part of the Disease Or Part of the Cure? Chinese Investments in the Zambian Mining and Construction Sectors
• 5. Chinese FDI in Sub-Saharan Africa: Engaging with Large Dragons
• 6. China’s Private Enterprises in Africa and the Implications for African Development
• 7. Chinese Migrants in Africa as New Agents of Development? An Analytical Framework
• 8. Beyond the BRICs: Alternative Strategies of Influence in the Global Politics of Development
• 9. Another BRIC in the Wall? South Africa’s Developmental Impact and Contradictory Rise in Africa and Beyond
• 10. The EU’s Response to China’s Africa Safari: Can Triangular Co-operation Match Needs?
• Index