Johan Fourie's blog

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Dragonomics

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China is often the scapegoat for South Africa’s economic ills. A recent Briefing Paper by Rhys Jenkins of the University of East Anglia and Laurence Edwards of the University of Cape Town does much to reinforce this view (the authors kindly sent me the paper, read a newspaper report here). In short, the paper argues that Chinese imports of manufactures has harmed the domestic manufacturing industry and particularly employment. While industrial production in South Africa grew by 14% between 2001 and 2010, “this increase would have been around 5% higher in the absence of increased Chinese import penetration.” The paper finds that at least 77,751 jobs were lost since 2001 to China, while only 4,080 jobs were created by South African firms finding new markets in China. The authors also argue that on average South African exports to the top ten exports markets in sub-Saharan Africa “would have been almost 10% higher ($900 million more) had it not lost market share to China between 2001 and 2010″. The message: China is the evil dragon that is destroying South African manufacturing jobs and especially hurting the poor.

Nothing of this is new, of course. South African trade unions and clothing and textile firms have lobbied government for protection in the form of tariffs and quotas for nearly a century (yes, the first tariffs were introduced during the Great Depression in the 1930s). As the authors’ own numbers show, most of the job losses in the clothing and textiles industry occurred before 2001 when China officially joined the World Trade Organisation (170 000 vs 139 000). China’s imports, therefore, are only the final nail in the coffin of an industry that was on life support for too long.

The main focus of the paper is on counting job losses, but little is said of the benefits of trading with the Chinese. (While they do mention that “there are positive benefits to consumers from the availability of cheaper consumer goods”, they conclude that “as far as industrial employment is concerned, the effects are clearly negative”.) As any trade economist should know, the main benefit of international trade is a fall in prices: consumers are able to buy things more cheaply than they could before, allowing them to purchase more of the same things, or more of different things, or even save more. Did China’s imports of clothing and textiles reduce prices? The figure below, using published South African CPI data, suggests an unequivocal yes.

Consumer price indices for food and clothing goods in South Africa. Courtesy of Johann van Eeden (see reference below).

What does this mean? It means that, while food prices increased by more than 50% between 2001 and 2007, clothing and footwear prices fell by 30%. The poorest South Africans, which spend the highest proportion of their budget on food and clothing, were thus able to substitute the higher food prices with the lower clothing prices. Look at what happened at the end of 2007. After successful lobbying by trade unions, the government decided to increase protection in the clothing and textiles industry: they negotiated with China a quota on clothing and textiles imports (which is, incidentally, illegal under WTO rules). The consequence? A rapid increase in the price of clothes. Even now, South Africans pay between 35% and 45% on imported clothes. Imagine paying R200 less for that Levi jean of R600. Imagine adding all those R200’s and spending it somewhere else in the economy: buying healthier food, going on holiday, or even paying off the home loan quicker. Add all those R200’s together and you will create far more jobs elsewhere in the economy than trying to protect those clothing and textile workers who will anyway be undercut by low-cost producers (even if it’s not China).

That is not to deny that some people have not lost their jobs. But the knee-jerk response is that, because unemployment is a major social issue in South Africa, we must do our best to protect as many jobs as possible. Economists, better than anyone, should know that there is not a fixed number of jobs available globally. That notion died in 1776. If China is growing, employing more people, it is to the benefit of the South African economy: we not only get more stuff cheaper, but we also have a growing market to export to. And this is happening, our exports to China has grown by 33% annually to China between 2007 and 2011 (and, remember, there was the small matter of a global recession). Just ask the cotton farmers (exports to China increased by 44% annually), polystyrene producers (by 146% annually) or lobster fishermen (by 469% annually). And, by the way, these are actually also labour-intensive industries. Given this evidence (which I retrieved from Trademap.org), the 4,080 jobs claimed by the authors seem absurdly low.

More importantly, the authors fail to think about the underlying reasons why China’s imports are so cheap. No, it’s not only because of bare-bones wages; it’s because their workers are more productive at that wage level. But this is also a static picture: China is growing at unprecedented rates, which also means their wages are increasing. In fact, I suspect China won’t be the main exporters (and competitors) of cheap clothing soon; it will be countries like Bangladesh and Tanzania that will compete in this market. In fact, when South Africa imposed quotas on Chinese exports in 2008, it wasn’t as if our domestic industry benefited: imports simply switched from China to these countries (imports from Pakistan increased by 55%, Bangladesh by 660%, Myanmar 197%, Sri Lanka by 728% and even Italy by 120%) (see Johann van Eeden and Taku Fundira’s paper on this). Given our relatively high wages, no protection will allow us to compete in this market.

China has grown rapidly over the last two decades causing significant changes in most countries of the world, creative destruction which have evidently caused some industries (like the clothing and textiles industry in South Africa) to contract and suffer job losses. But the benefits have also been monumental: even with higher tariffs, the average price of a clothing item is actually lower in 2010 than it was in 2000. This is remarkable considering that the prices of all other goods have increased by more than 50%. This has yielded significant (but less publicly proclaimed) benefits for the poorest of South Africa’s poor. South African producers have also been able to exploit the growing Chinese market, which will allow us to pay for the cheap imports from China. Moreover, China’s growth has also allowed it to invest more in South Africa, and Africa, when many had thought it too risky.

Rather than fearing the evil dragon, we need to realise, the sooner the better, that this dragon’s our friend.

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Written by Johan Fourie

September 5, 2012 at 10:43

3 Responses

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  1. Thought-provoking and insightful.
    Well done.
    Mike

    Mike Ratcliffe

    September 30, 2013 at 21:43

  2. Such an excellent piece Johan! Asked Rachel and Liezl to make this compulsory reading for the undergrad trade course.

    I would also add the following: How many jobs have been created in China due to trade with South Africa? Surely we should also consider net (worldwide, or between the trading partners) job losses/jobs created. If the net job loss/created position is positive, it becomes much more cold-hearted to argue for protection for South African workers at the expense of Chinese workers.

    I actually thought labour unions are for job creation. Or perhaps unions are not brothers at arms internationally. Hmmm…starting to wonder if the Western Cape shouldn’t do something about those people from the Eastern Cape who “steal” our jobs…

    Hassan

    September 5, 2012 at 11:15

  3. Excellent post Johan. Manufacturing groups and labour unions are narrow and vocal interest groups who find it easy to encourage fear of the dragon and ask for protection. I am glad that you are also speaking up on behalf of the average consumer. It is strange how easily people forget that they will end up paying for tariff protection or the incentives that government offers.

    Waldo Krugell

    September 5, 2012 at 11:05


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