Working Paper Series

Number 102
Southern Africa Labour and Development Research Unit
by
Lawrence Edwards and Rhys Jenkins
The i mpact of chi nese i mpor t penetrati on on the south
afri can manuf acturi ng sector
About the Author(s) and Acknowledgments
Lawrence Edwards
Research Associate
Southern African Labour and Development Research Unit
School of Economic
University of Cape Town
South Africa
Lawrence.Edwards@uct.ac.za
Rhys Jenkins
School of International Development
University of East Anglia
United Kingdom
R.O.Jenkins@uea.ac.uk
This paper is based on research carried out for a project on Chinese Competition and the Restructuring
of South African Manufacturing funded by the UK Economic and Social Research Council, Grant No.
ES/1035125/1. The project was administered by the Southern African Labour and Development Research
Unit at the University of Cape Town in South Africa and the School of International Development at the
University of East Anglia in the United Kingdom. This paper benefted from extensive comments by
participants of a workshop organized by the Trade and Industrial Policy Strategies in Pretoria.
Recommended citation
Edwards, L., Jenkins, R., (2013). The impact of chinese import penetration on the south african
manufacturing sector. A Southern Africa Labour and Development Research Unit Working Paper Number
102. Cape Town: SALDRU, University of Cape Town
ISBN: 978-1-920517-43-4
Southern Africa Labour and Development Research Unit, UCT, 2013
Working Papers can be downloaded in Adobe Acrobat format from www.saldru.uct.ac.za.
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Theimpactofchineseimportpenetrationonthesouth
africanmanufacturingsector

LawrenceEdwardsandRhysJenkins
SALDRUWorkingPaperNumber102
UniversityofCapeTown
July2013

Abstract

TherapidgrowthinimportsfromChinaoverthepastdecadeisseenasakeyfactor
contributingtowardstherelativelyslowgrowthinoutputandthedeclineinemploymentin
SouthAfricanmanufacturingduringthisperiod.YettheeffectsofChinesetrademaybe
complexanddifferentiatedacrosssectors.Toaccountforthesedifferentialeffects,this
analysisdrawsonadatabaseof44manufacturingindustriescoveringtheperiod19922010.
TwoapproachesaChenerytypedecompositionandeconometricestimationareusedto
evaluatetheimpactofChinesetradeonprices,productionandemploymentinSouth
Africanmanufacturing.ChinesepenetrationoftheSouthAfricanmarketisshowntohave
increasedrapidlyoverthepastdecade,inpartduetodisplacementofimportsfromother
countries,butmoreimportantlyattheexpenseoflocalproduction.Exportsof
manufacturestoChinadidnotaddsignificantlytoindustrialgrowthinSouthAfrica,whereas
labourintensiveindustrieswereparticularlybadlyaffectedbyChineseimportsimplyingthat
thenegativeimpactonemploymentwasmorethanproportionaltotheoutput
displacement.However,wealsofindevidencethatChineseimportscontributedtowards
lowerproducerpriceinflationinSouthAfrica,whichinturnwillhavemoderatedincreases
inconsumerpricesandhelpedtocurtailproductioncostincreases.

2

1. Introduction
Thelackofdynamismofthemanufacturingsectorhasbeenseenasakeyfactorexplaining
slowgrowthandhighunemploymentlevelsinSouthAfricasincetheendingofapartheid
(Rodrik,2008,DTI,2010).Concernshavebeenexpressedoverthedeindustralizationof
theeconomy(Maia,2011)reflectedinfallingsharesofmanufacturinginGDPand
employment.Althoughthesetrendshavecharacterisedtheentirepostapartheidperiod,
overthepastdecadetheyhavecoincidedwiththerapidgrowthofimportsfromChina.This
paperaskshowtradewithChinainthisperiodhasaffectedthesizeandstructureofSouth
Africanmanufacturinganditscapacitytocreatejobs.
SinceChinajoinedtheWTOin2001,bilateraltradebetweenSouthAfricaandChina
hasgrownrapidly.In2009,ChinabecameSouthAfricaslargestexportmarketaheadofthe
UnitedStatesanditslargestsupplierofimportsaheadofGermany.
1
Theseimportsare
overwhelminglyofmanufacturedgoodswhileSouthAfricasexportsaremainlynatural
resources.ThegrowthandcompositionofbilateraltradeflowswithChinahavefed
concernsaboutdeindustrializationoftheeconomy,whichhasbecomeafocuspointof
SouthAfricasengagementwithChina.ThiswashighlightedbyPresidentZumascomment
attheForumonChinaAfricaCooperation(FOCAC)inBeijinginJuly2012thatanunequal
traderelationshipbasedonthesupplyofrawmaterialswasunsustainable(Mailand
Guardian,19/7/12).
ThecommonperceptioninSouthAfricaisthattheeffectsofthegrowthoftrade
withChinahasbeennegativeformanufacturing,withseveralindustries,mostnotably
textilesandclothing,demandingincreasedprotectionfromChineseimports(Morrisand
Einhorn,2008).TheFreeTradeAgreementbetweentheSouthAfricanCustomsUnion
(SACU)andChinafirstmootedin2004,facedconsiderableoppositionbybusiness
associations(SAIIA,2005)andunions(BusinessDay,3/11/2005)withinSouthAfrica.The
currentpositionoftheMinisterofTradeandIndustry,RobDavies,isthataconventional
freetradeagreementwithChinaisnotintheinterestofthecountry(BusinessDay,
07/07/2010).
Despitethistherehavebeennocomprehensivestudieswhichattempttoanalyse
theimpactsoftradewithChinaontheSouthAfricanmanufacturingsector.Thegrowing
relationshipbetweenSouthAfricaandChinaiscontributingtochangesinthestructureof
theSouthAfricaneconomy.Thishasimplicationsforthegrowthandcompositionof
manufacturingoutputandemploymentwhichthispaperanalyses.Theseeffectsmaybe
complexanddifferentiated.Toaccountfordifferentialeffectsacrosssectors,thisanalysis
drawsonadatabaseof44manufacturingindustriescoveringtheperiod19922010(seethe
DataAppendixfordetails)
The remainder of the paper is structured as follows. The next section outlines a
framework for analysing the impact of the growth of China on the South African industrial
sector and briefly introduces the methods that are used in the paper to estimate the
impactsoftradewithChinaonproductionandemployment.Section3thendescribesthe
evolution of ChineseSouth African trade flows at the product and industry level. Section 4

1
DTIEconomicDatabaseat:http://www.dti.gov.za/econdb/raportt/rapcoun.html.
3

analyses the impact of trade with China on South African manufacturing production, while
Section5looksattheimpactonemployment.Section6concludes.

2. AFrameworkforAnalysingtheImpactofChinaonManufacturing
InanalysingtheimpactofChinaonotherdevelopingcountriesaframework,presentedin
Table1,hasbeendevelopedwhichidentifiesdirectandindirecteffectsandcompetitiveand
complementaryeffects(JenkinsandEdwards,2006;Kaplinskyetal.,2006).Directeffects
areassociatedwithbilateraltradewhereasindirecteffectsarisefromChinasglobal
economicimpact.CompetitiveeffectsoccurwhenChineseproductsareclosesubstitutes
forthoseproducedbyotherdevelopingcountries,whereascomplementaryeffectsarise
wheretheproductsconcernedarecomplements.

Table1:ExamplesoftheImpactofChineseTradeonOtherCountries
Competitive Complementary
Direct Chineseimportsdisplacing
domesticproducers
ExportstoChina
ImportsofpartsfromChina
Indirect LossofmarketsharetoChinain
thirdmarkets
InvolvementinGlobalProduction
NetworkswithChina

MuchoftheliteratureontheimpactofChinaonotherdevelopingcountrieshas
focussedontheimplicationsforexportstothirdmarkets,inotherwordsontheindirect
effectsofChinasgrowth.ThishasmainlybeenappliedtoAsiaandLatinAmericawhere
theseeffectsaremostsignificant(Santiso,2007;LallandAlbaladejo,2004;LallandWeiss,
2005;Jenkins,2010;HansonandRobertson,2009;FreundandOzden,2009;Gallagheret.
al.,2008;Athukorala,2009).TheissuehasreceivedmuchlessattentioninAfricawhere
exportsofmanufacturesarelessdevelopedandChinesecompetitionisnotregardedas
suchathreat.
2

AlthoughthethreatsandopportunitiesassociatedwithbilateraltradewithChina
receivesconsiderablemediaattention,therehavebeenfarfeweracademicstudieswhich
haveanalysedthedirectimpactsofChinesetradeonothercountriesandparticularlythe
impactsonthemanufacturingsector.CriticsstressthenegativeeffectsofChinese
competitiondisplacinglocalmanufacturers(whoareoftentheloudestvoicescallingfor
protectionfromunfaircompetitionfromChina),whileadvocatesofincreasedtradewith
ChinapointtothegainsnotonlytoconsumersfromlowcostChineseproducts,butalsoto
producerswhosecompetitivenessisincreasedbyaccesstocheaperinputsandcapital
equipment.

2
AmongthefewexceptionstothisgeneralizationareKaplinskyandMorris(2008)andGiovannetti
andSanfilippo,(2009).
4

TherearenodetailedstudiesoftheimpactofChinaonSouthAfricanmanufacturing.
TherearehoweveranumberofpreviousstudiesofSouthAfricanmanufacturingwhichhave
lookedattheimpactoftradeliberalizationorglobalizationmoregenerallyonproduction,
tradeandemployment(Edwards,2001a,2001b,2006;DunneandEdwards,2007and
Jenkins,2008).Thesepapershaveusedtwoapproachestoanalysetheimpactsofincreased
importpenetrationonSouthAfricanindustry.ThefirstapproachinvolvesusingaChenery
typedecompositionofchangesinlocalproductionbetweenchangesindomesticdemand,
importsandexportsinordertoestimatetheeffectoftradeonthemanufacturingsector.
Employmentcoefficientsattheindustrylevelarethenusedtoestimatetheeffectsonjobs.
Thesecondapproachinvolveseconometricestimationoftheimpactoftradeonproduction,
productivityandemployment(JonssonandSubramanian,2001;Fedderke,2006)
Boththeseapproachescanbeextendedtoidentifytheeffectsofincreasedtrade
withChina.Inthecaseofthedecompositionapproachthisinvolvesseparatingoutimports
fromChinaandtherestoftheworldandcalculatingtheextenttowhichthegrowthof
Chineseimportshasreducedthemarketshareofimportsfromothercountriesorthatof
localproducers.Withtheeconometricapproach,againtheimpactofChinacanbe
estimatedbyconstructingaseparatevariableforChineseimportpenetrationandthatof
therestoftheworld.
3
Furtherelaborationofthesetwoapproachesisprovidedinthe
Appendix.
ThispaperisconcernedonlywiththedirectimpactsoftradewithChinaonSouth
Africanmanufacturing.AparallelstudylooksattheindirecteffectsofChinaonSouth
Africanmanufacturedexports(EdwardsandJenkins,2012).Thenextsectiontherefore
describesthemainfeaturesofthegrowingbilateraltraderelationshipbetweenthetwo
countries.

3. ChineseSouthAfricaTradeFlows

3.1GrowthandStructureofChineseSouthAfricaTrade
TradebetweenSouthAfricaandChinahasgrowndramaticallysinceChinajoinedtheWTO
in2001.SouthAfricanimportsfromChinaincreasedfromlessthan$1.1billionin2001to
$14.2billionin2011,whileexportstoChinaincreasedfromlessthan$0.5billionto$12.4
billionoverthesameperiod(UNComtrade).Throughouttheperiod,SouthAfricahasruna
tradedeficitwithChinawhichtendedtoincreaseovertime,asshowninFigure1.

3
AsimilarapproachwasusedbyGreenawayet.al.(1999)inastudyoftheUKandCastroet.al.
(2009)forArgentina.
5

Figure1:SouthAfricasTradeBalancewithChina

Source:ownelaborationfromUNComtradedata.CategorizationdeterminedbyWorldTradeOrganization
basedclassificationsystem.

AlthoughtradebetweenSouthAfricaandChinaismainlyinmanufacturedgoods,
broadlydefined,SouthAfricanexportsarelargelyprocessedrawmaterials,whereasimports
fromChinaaremainlyconsumerproductsandincreasinglycapitalgoods(Table2).Thisis
reflectedinthetradebalancesbetweenthetwocountrieswithSouthAfricanhaving
surplusesinprocessedrawmaterialsandprimaryproductsandlargedeficitsinconsumer
andcapitalgoods(Figure1).

Table2:SouthAfricanTradewithChinabyTypeofProduct
Exports Imports
2000 2010 2000 2010
Primary 11% 15% 4% 3%
Manufacturing 89% 85% 96% 97%
ManufacturingbyWTOClassification
Capitalgoods 11% 2% 25% 42%
Consumergoods 2% 1% 55% 43%
Intermediategoods 45% 19% 20% 15%
Rawmaterials 41% 78% 0% 0%
Source:ownelaborationfromUNComtradedata.

6

3.2ProductandIndustryAnalysisofSouthAfricanImportsfromChina
Over the 15 year period from 1995 to 2010, China rose from South Africas 10
th
largest
import partner for manufactured goods with a share of 2.0 percent to its dominant source
of imports with a share of 18.5 percent by 2010 ahead of Germany, the United States of
AmericaandJapan(UNComtrade).
ThegrowingChinesepresenceinSouthAfricastotalimportsisalsoreflectedinthe
scope and dominance of imports from China in specific products and manufacturing
industries.MuchofthegrowthinimportsfromChinahasbeendrivenbytheimportationof
new products (extensive margin). For example, the number of HS6digit manufactured
products imported from China more than doubled from 1995 (1679 products) to 2010
(3492products).
China has also become the dominant supplier of many of these products. In 1995,
China was the top source of imports for 203 HS 6digit products, or 4.7 percent of all
importedproducts.Thisroseto528in2000(12.2percentofallimportedproduct)andthen
close to tripled over the next 10 years to 1423 products (35 percent of all imported
products)in2010.Germany,whichinitiallydominatedthenumberoftoprankingproducts,
isnowdistantsecondwithonly525toprankingproductsimported.
Similar trends are found in manufacturing industries classified at the 3digit
StandardizedIndustrialClassificationlevel.Table3presentsthecountryrankingofChinaas
a source of imports and the share of China in total imports by manufacturing sector. In
1995, China was the principal source of imports in just three of the 45 manufacturing
industries(clothing,footwearandothermanufactures(toys))(Table3).By2010,Chinawas
ranked as the principal source of imports to South Africa in 27 of the 45 manufacturing
industries.InsectorsincludingKnittedandCrochetedfabrics,Clothing,Leatherandleather
products, Footwear, Household appliances, Electrical lamps, Furniture and Other
manufacturing, China made up between 48 percent and 77 percent of total South African
importsofthoseproducts.
7

Table3:ChinasrankingasasourceofimportsbysectorandshareofChineseimportsin
totalimports
SIC 1995 2000 2005 2010 1995 2000 2005 2010
301 Meat,fish,fruit,vegetables,oils&fa 20 6 7 8 0.8 4.1 3.2 4.3
302 Dairyproducts 23 34 15 18 0.0 0.0 1.3 0.8
303 Grainmilling&animalfeeds 30 20 7 4 0.0 0.2 1.8 4.1
304 Otherfoodproducts 36 28 19 11 0.2 0.5 1.8 3.9
305 Beverages 49 25 31 17 0.0 0.1 0.1 0.2
306 Tobacco 15 2 14 2 0.0 17.2 0.8 14.9
311 Spinningandweaving 3 2 1 1 6.4 10.1 36.9 43.5
312 Othertextiles 6 1 1 1 4.8 12.1 25.0 38.2
313 Knittedanscrochetedfabrics 5 1 1 1 5.4 13.7 55.5 66.7
314/5 Clothing 1 1 1 1 29.0 51.9 74.2 75.1
316 Leatherandleatherproducts 4 1 1 1 10.2 17.7 38.4 49.0
317 Footwear 1 1 1 1 35.5 40.6 73.4 76.8
321 Sawmillingandplaningofwood 41 9 4 0.0 0.0 1.9 5.8
322 Woodandwoodproducts 9 5 1 1 3.1 5.2 13.2 24.6
323 Paperandpaperproducts 29 25 16 3 0.2 0.4 1.9 8.6
324 Publishing 16 14 6 6 0.5 0.9 2.7 5.7
325/6 Printingandrelatedservices 6 2 1 1 5.7 10.2 19.4 43.0
331/2/3 Cokeovenandpetroleumproducts 4 4 8 11 11.7 10.6 4.1 2.8
334 Basicchemicals 13 8 6 1 1.4 3.5 5.9 12.6
335/6 Otherchemicals 15 11 9 4 0.8 1.7 3.6 7.2
337 Rubberproducts 19 10 3 1 0.5 2.5 11.0 23.1
338 Plasticproducts 9 5 2 1 3.0 7.7 15.4 22.3
341 Glassandglassproducts 10 5 1 1 3.1 6.7 20.5 38.6
342 Nonmetallicmineralproducts 8 6 1 1 5.1 7.3 15.4 25.0
351 Basicironandsteel 19 11 4 1 0.9 3.6 7.7 16.4
352 Nonferrousmetals 12 9 5 3 1.4 2.3 4.9 9.4
354 Structuralsteelproducts 21 13 8 3 0.4 1.5 4.5 13.4
355 Otherfabricatedmetalproducts 6 4 1 1 4.3 9.9 22.4 32.2
356/59 Generalpurposemachinery 15 6 1 1 1.1 5.1 16.9 23.8
357 Specialpurposemachinery 13 12 6 1 1.0 1.5 5.4 17.8
358 Householdappliances 2 2 1 1 13.7 17.8 42.2 62.6
361 Electricalmotors,generatorsandtransf 13 6 1 1 1.2 6.2 16.3 23.4
362 Electricitydistributionandcontrolap 21 10 5 2 0.5 1.8 5.5 12.8
363 Insulatedwireandcable 17 9 1 1 1.1 4.2 13.8 24.1
364 Accumulatorsandbatteries 12 5 1 1 1.7 5.9 22.4 28.0
365 Electriclampsandlightingequipment 2 1 1 1 9.4 21.1 47.9 59.9
366 Otherelectricalequipment 17 6 3 1 0.5 3.2 9.5 18.8
371/2/3 Television,radioandotherelectronice 11 9 1 1 2.2 3.9 15.8 33.5
374/5/6 Medicalappliances,measuringandcontro 18 10 7 3 0.9 2.8 5.2 9.6
381 Motorvehicles 25 28 18 8 0.0 0.0 0.6 3.0
382 Bodiesformotorvehicles 6 19 2 1 1.4 0.7 12.5 32.6
383 Partsandaccessoriesformotorvehicles 25 16 4 4 0.1 0.8 5.3 8.6
384/5/6/7 Othertransportequipment 11 8 8 7 1.2 1.1 1.9 3.8
391 Furniture 7 4 1 1 2.4 6.1 27.8 48.1
392 Othermanufacturing 1 1 1 1 14.5 21.3 34.5 48.7
TotalManufacturing 10 6 2 1 2.0 4.9 11.7 18.5
CountryrankingofChinaassourceof
importsbysector ShareChineseimportsintotalSAimports

Source:AuthorscalculationsusingUNComtrade

The breadth of Chinese dominance is remarkable. In the mid1990s, China

dominated the traditional labourintensive sectors, but by 2010 its dominance had also
shiftedtohightechnologyelectronicandmachinerysectors.Itisonlyintheresourcebased
products(dairyproducts,otherfoodproductsandbeverages)thatChinaremainsoutsideof
the top 10 sources of imports, but even in these industries Chinas ranking improved
dramatically.
8

The extent of the impact of imports from China across manufacturing industries is
also reflected in the rising share of these goods in domestic consumption (termed import
penetration).Table4reportstheshareofChineseimportsindomesticconsumptionfor44
manufacturing industries
4
in 1995, 2000, 2005 and 2010. In aggregate, imports from China
rosefromanegligible0.4%ofdomesticconsumptionin1995to5.9%in2010withmuchof
theincreaseoccurringafter2000.Indeedduringthepastdecade,Chinahasaccountedfor
overthreequartersoftheincreaseinimportpenetrationintheSouthAfricanmarket.
Looking across the sectors, all manufacturing industries in South Africa experienced
increases in Chinese import penetration ratios between 1995 and 2010. There were,
however, significant differences across industries in the level and change in import
penetration by China over this period. The level and change in import penetration from
China were smallest (less than 1 percentage point from 1995 to 2010) in agricultural and
resourcebased products (beverages; dairy products; other food products; printing and
related services; grain milling and animal feeds; coke oven and petroleum products; meat,
fish,fruit,vegetables,oilsandfat;andsawmillingandplaningofwood).
In contrast, large increases in the share of China in domestic consumption were
recorded in the knitted and crocheted fabrics (42.8 percentage points); footwear (40.1
percentage points); television, radio and other electronic equipment (30.3 percentage
points); electric lamps and lighting equipment (27.5 percentage points); clothing (27.2
percentagepoints);andgeneralpurposemachinery(22.1percentagepoints)industries.
It is these strong increases, particularly in the labour intensive industries, that have
given rise to major concerns amongst domestic manufacturers, and in the case of clothing
products elicited the imposition of import quotas on Chinese imports in 2007 and 2008
(Morris and Reed, 2008; Edwards and Rankin, 2012; Edwards et al., 2011). Were it not for
thesequotas,thelevelandincreaseinimportpenetrationinclothing mayhavebeeneven
higher.

4
StatisticsSAdoesnotpublishproductiondataforthetobaccoindustrysothatthishasbeen
droppedfromtheoriginal45industries.
9

Table4:SouthAfricanImportPenetrationfromChina,19952010
ImportpenetrationfromChina
(annualpercentage)
SIC Industrydescription 1995 2000 2005 2010
301 Meat,fish,fruit,vegetables,oils&fat 0.13 0.61 0.50 0.87
302 Dairyproducts 0.00 0.00 0.05 0.03
303 Grainmilling&animalfeeds 0.00 0.01 0.15 0.42
304 Otherfoodproducts 0.00 0.02 0.11 0.29
305 Beverages 0.00 0.01 0.00 0.01
311 Spinningandweaving 1.41 2.84 12.31 18.15
312 Othertextiles 0.51 1.68 4.16 12.60
313 Knittedandcrochetedfabrics 0.73 3.74 26.94 42.15
314/5 Clothing 1.08 5.94 18.34 28.29
316 Leatherandleatherproducts 2.26 5.95 10.88 19.13
317 Footwear 5.69 13.65 39.34 45.83
321 Sawmillingandplaningofwood 0.00 0.00 0.34 0.76
322 Woodandwoodproducts 0.19 0.49 1.23 2.06
323 Paperandpaperproducts 0.02 0.05 0.23 1.31
324 Publishing 0.08 0.17 0.61 1.37
325/6 Printingandrelatedservices 0.04 0.10 0.19 0.44
331/2 Cokeovenandpetroleumproducts 0.24 0.77 0.61 0.73
334 Basicchemicals 0.45 1.39 2.52 5.35
335/6 Otherchemicals 0.18 0.56 1.16 2.69
337 Rubberproducts 0.08 0.59 3.46 9.61
338 Plasticproducts 0.29 1.13 2.45 3.37
341 Glassandglassproducts 0.48 1.58 4.46 8.76
342 Nonmetallicmineralproducts 0.46 1.06 2.05 4.04
351 Basicironandsteel 0.10 0.46 1.22 3.56
352 Nonferrousmetals 0.21 0.35 1.14 2.80
354 Structuralsteelproducts 0.00 0.03 0.13 1.13
355 Otherfabricatedmetalproducts 0.56 1.68 4.15 7.11
356/59 Generalpurposemachinery 0.49 3.20 12.46 22.63
357 Specialpurposemachinery 0.36 0.65 2.39 11.04
358 Householdappliances 1.84 2.90 10.58 21.11
361 Electricalmotors,generatorsandtransformers 0.26 1.68 6.14 10.89
362 Electricitydistributionandcontrolapparatus 0.27 0.99 2.34 6.59
363 Insulatedwireandcable 0.06 0.43 1.75 4.56
364 Accumulatorsandbatteries 0.22 1.66 6.31 9.49
365 Electriclampsandlightingequipment 3.09 8.77 22.05 30.58
366 Otherelectricalequipment 0.12 0.81 3.13 5.86
371/2/3 TV,radioandotherelectronicequipment 1.36 3.19 13.96 31.69
374/5/6 Medical,measuringandcontrollingequipment 0.46 1.87 3.61 7.65
381 Motorvehicles 0.00 0.01 0.24 1.50
382 Bodiesformotorvehicles 0.19 0.05 0.75 3.71
383 Partsandaccessoriesformotorvehicles 0.02 0.09 0.70 1.52
384/5/6/7 Othertransportequipment 0.42 0.62 1.42 1.87
391 Furniture 0.12 0.99 6.78 14.71
392 Othermanufacturing 1.00 2.33 4.97 8.02
Total Total 0.39 1.13 3.20 5.90
Source: Authors calculations using UN Comtrade, Industrial Development Corporation (IDC) and Statistics
SouthAfricadata.
Notes:Totalimportpenetrationiscalculatedastheratiooftotalimportstototalconsumption,withthelatter
calculatedastotalsalesvolumeplustotalimportsminustotalexports.Tobaccoproductsareexcludedassales
dataarenotprovidedbyStatisticsSA.

Yet, the fact that imports from China have increased their share of domestic
consumption of manufactured goods in South Africa does not necessarily mean that they
have displaced domestic production and employment. In some cases China may have
replacedimportsfromothercountries.Chineseimportsofintermediateandcapitalgoods
seethegrowthinimportsofmachineryandequipment,forexamplemayhaveenhanced
productivity and stimulated output growth in downstream industries. In simple accounting
10

terms, Chinese imports still represent a small proportion of overall domestic consumption,
suggestingthatdomesticfactors(suchasdemandordomesticfactorprices)maydominate
output and employment levels as well as trade flows, including imports from China. The
nextsectionofthepaperanalysesthespecificroleplayedbyChineseimportsinrelationto
manufacturingoutput.

4. TheImpactofChineseCompetitiononProduction
TheincreasingpenetrationoftheSouthAfricanmarketbyimportsfromChinadiscussedin
the previous section can have a number of different effects. It is likely to result in
downward pressure on domestic prices which works through various channels. Lowcost
exporting countries (such as China) depress prices in a domestic market by replacing more
expensive imports from other trading partners, or by inducing a lowering of the prices of
imports from these partners (Kamin et al., 2004: 5). Furthermore, in the face of growing
competition from cheaper imports, domestic firms are forced to lower their pricecost
markups. For example, Edwards and Winkel (2005), Fedderke et al. (2007) and Riham
(2007)find evidence,usingindustryleveldataduringthe1990sandearly2000sthattrade
reform helped reduce markups in South African manufacturing industries.
5
Finally, Broda
and Weinstein (2006; 2008) argue that imports lower the price index through the
introductionofnewvarieties.ThiseffectisparticularlyrelevanttothecaseofSouthAfrican
importsfromChinawheremuchofthegrowthhastakentheformofnewproducts.
The impact that such price reductions have on domestic producers will depend on
several factors: First, whether imports from China compete primarily with other exporters
to South Africa or with local producers. Second, whether the affected industries in South
Africa are import competing industries in which case they are likely to face falling profit
margins and a reduced market share, or importusing industries, in which case cheaper
Chinese inputs or capital goods would tend to lead to higher profitability and expanded
output. Third, how domestic manufacturers respond to increased competition in terms of
loweringmarkups,defensiveinnovation,downsizingorupgrading.

4.1ChineseCompetitionandPrices
The impactof Chinese competition on prices is already present in South Africa. Morris and
Einhorn (2008) show that Chinese imports reduced import prices and retail prices of
clothingproductsinSouthAfrica.EdwardsandRankin(2012)usehighlydisaggregatedretail
price data to show that the imposition of quotas on selected Chinese imports in 2007 and
2008 raised prices relative to unconstrained products by around 6 percent. Villoria (2009,
Table 4) found that Chinese imports significantly reduced import prices in SACU, especially
for garments, leather products and footwear. Finally, while Rangesamy and Swanepoel
(2008) find no convincing association between aggregate inflation in China and domestic

5
Giventhatthesestudiesuseindustryleveldata,itisnotpossibletoidentifywhethertheseindustry
leveleffectsarisefromchangesinmarkupswithinexistingfirms,orchangesinthecompositionof
firmswithinindustries.
11

pricechanges,theyfindstrongersectorspecificlinkagesbetweenpricesinChinaandSouth
Africaatthedisaggregatedlevel.
Figure2presentstheweightedaveragepriceofChineseimportsrelativetoimports
from other countries. The relative price series are constructed using the HS6digit import
dataandareweightedupusingChineseimportvaluesasweights(seenotestothefigurefor
furtherdetails).ImportsfromChinaarelessthanhalftheprice(unitvalue)ofimportsfrom
other developing countries and only a third of the price of imports from developed
countries. The price gap between Chinese and developed country imports has also
increased and by 2009 unit values of South African imports from China were on average a
quarterofthosefromdevelopedcountries.

Figure2:PriceperunitofChineseimportsrelativetoimportsfromothercountries,1992
2009
Import unit values of China relative to imports from other countries
(Chinese imports as weights)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
Pchina/P Developing Pchina/P Developed

Source:OwncalculationsusingUNComtradedata.
Notes:Basedonrelativepricescalculatedatthe6digitleveloftheHarmonizedSystem,Revision88/92.The
denominatorforeachrelativepriceistheweightedaveragepriceusingeachcountrysimportsasweights.The
averageforallproductsisconstructedusingChineseimportvaluesasweights.

For a product level comparison, Table 5 presents import unit values for the top 20
productsimportedbySouthAfricafromChinatogetherwiththeaverageimportunitvalues
of these goods from other emerging economies and highincome economies. Digital
Automatic Data Processing Machines (HS 847120), i.e. computers, made up the top (in
value) imported product from China in 2010, but were similarly priced across all regions
(558USdollarsfromChinato582USdollarsfromotheremergingeconomies).Incontrast,
unit values of imports of Transmission Apparatus Incorporating Reception Apparatus (HS
852520), i.e. mobile phones the second most important product were substantially
lower than alternative sources: 64 US dollars from China, 151 US dollars from other
emerging economies and 226 US dollars from high income countries. Imports of Cotton
Trousers (HS 620342 and HS 620462) from China were also substantially cheaper costing
12

around34USdollarsperitemcomparedto16to22USdollarsfromhighincomecountries.
Highpricegapsexistformanyoftheotherimportedproductspresentedinthetable.

Table5:ComparisonofimportunitvaluesoftopproductsimportedfromChinain2010,US$
HScodeanddescription
Unit China Emerging
High
income
Share
total
imports
from
China
(percent)

270400Coke,SemicokeofCoal,Lignite,Peat;Retort
Carbon Kg 0.5 0.3 0.7 0.63
401120NewPneumaticTyresofRubberforBusesor
Lorries Item 74.4 89.3 144.4 0.65
610910CottonTshirts,Singlets,OtherVests,
Knitted/Crocheted Item 1.4 5.5 5.4 0.64
620342Men'sorBoys'Trousers,Overalls,Breeches,
Cotton Item 3.0 12.7 22.2 0.70
620462Women'sorGirls'Trousers,Breeches,Cotton Item 3.4 9.9 16.5 0.65
640299OtherFootwear,OuterSolesandUppersof
Rubber/Plastics Pair 3.0 5.2 5.3 2.31
640419OtherFootwear,OuterSolesofRubber/Plastics Pair 2.3 11.8 18.0 0.86
844350OtherPrintingMachinery Item 343.3 339.5 1009.7 2.03
844390Parts,ofPrintingandAncillaryMachinery Kg 40.5 41.3 43.0 1.35
847120DigitalAutomaticDataProcessingMachines Item 558.6 582.3 576.1 4.99
847192InputorOutputUnits Item 46.6 121.8 219.2 1.06
847199OtherDataProcessingMachines Item 128.6 328.6 438.3 0.83
847330Parts,AutomaticDataProcessingMachines Kg 28.6 82.1 159.8 1.05
851730TelephonicorTelegraphicSwitchingApparatus Item 171.1 499.8 542.6 2.01
851740OtherApparatus,forCarriercurrentLine
Systems Item 3498.6 869.2 827.2 0.83
852520TransmissionApparatusIncorporatingReception
Apparatus Item 64.8 151.0 226.3 4.87
852530TelevisionCameras Item 68.9 389.3 596.8 0.59
852810ColourTelevisionReceivers Item 83.4 206.5 295.1 1.63
950390OtherToys Kg 6.0 12.2 13.5 1.07
950490OtherArticlesforFunfair,TableorParlourGames Item 4.1 36.3 26.9 0.75
Source:UNComtrade.ThedevelopmentstatusofcountriesisdeterminedusingtheWorldBankclassification
of countries according to income levels. Emerging economies include low and middle income countries
(excludingChina).

The large differences in import unit values across countries even within the
disaggregated HS 6digit categories are suggestive of a high degree of withinproduct
product specialisation. Similar heterogeneity in import prices within disaggregated product
categories is found for the US (Schott, 2004 & 2008; Fontagn et al., 2008; Edwards and
Lawrence, 2010). One implication of this finding is that industry level analyses such as this
onemayexaggeratetheextenttowhichChineseproductscompetewithotherimportsand
with domestically produced products. By specialising in different products, domestic firms
caninsulatethemselvesfromthecompetitiveeffectsofChineseandotherexports.
Nevertheless, the vast differences in relative prices imply that the shift in the
compositionofSAimportstowardsChinawillhavecontributedtowardsdecliningaggregate
importpricesattheproductlevel.Thisinturnwillhavecontributedtowardslowerproducer
13

and consumer prices. This effect of imports on aggregate prices can be shown using the
aggregateproducerpriceindicesforSouthAfrica.Forexample,producerpricesofimported
manufacturedgoodsroseby3percentperyearfrom2000to2011,whichwaslessthanhalf
the 6.3 percent annual increase in the producer price of South African produced
manufacturedgoods.
6

An econometric estimate of a price equation was also conducted using 44

manufacturing industries (excluding tobacco) over the period 1993 to 2009. The estimates
of a producer price equation specified in first differences are presented in Table 6.
7
Higher
production costs, measured as increases in sectoral unit labour costs or falling total factor
productivity (proxied by US total factor productivity) are found to raise domestic producer
prices.Foreignprices,proxiedbyUSproducerprices,arealsofoundtobeanimportantand
statisticallysignificantdeterminantofSouthAfricanproducerprices.
8

Table6:ChinesecompetitionandproducerpriceinflationinSouthAfrica

Dependentvariable:
Aln(SAProducerPrices)
Aln(USProducerPrices) 0.255*
(0.102)
Aln(1+tariff) 0.080
(0.049)
Aln(unitlabourcost) 0.042**
(0.014)
Aln(USTFP) 0.147*
(0.062)
Importpenetration,other 0.019*
(0.009)
Importpenetration,China 0.072*
(0.031)
Constant 0.095**
(0.007)
Observations 792
Rsquared 0.327
Notes:USTotalFactorProductivity(TFP)andproducerpriceindexdataareobtainedfromtheBureauof
EconomicAnalysisandtheBureauofLaborStatistics.USTFPisusedasaproxyforglobaltechnologicalchange.
TariffdataareupdatedfromEdwards(2005).SouthAfricanproducerpricedataareobtainedfromStatistics
SouthAfrica.Importpenetrationiscalculatedasimports/(salesexports+imports)usingsalesdatafrom
StatistcsSAandtradedatafromUNComtrade.Unitlabourcostsarecalculatedasthewagebilloversales
valueusingdataobtainedfromStatisticsSA.Robuststandarderrorsarepresentedinparentheses.
**p<0.01,*p<0.05,+p<0.1

6
CalculationsbasedonProducerPriceIndexdataobtainedfromStatisticsSouthAfrica(P0142.1)
(www.Statssa.gov.za).Consumerpriceindicesforthe44sectorsarenotavailable.
7
SeetheAppendixfordetailsofthetechniqueused.
8
Notethattheseequationsdonotadjustfortheendogeneityofimportsandunitlabourcosts(see
FedderkeandSchaling,2005),althoughthebiasfromthelatterhasbeenfoundtobesmall
(Goldstein,1974).Notaccountingfortheendogeneityofimportsislikelytobiastheestimates
towardszero.
14

Theestimatesalsoincludetheshareofimports(inlevels)fromChinaindomestic
consumptionaswellastheshareofimportsfromothercountriesindomesticconsumption.
Bothvariablesaresignificantandnegative,withthecoefficientonChineseimport
penetrationmorethanthreetimesthesizeofimportpenetrationfromothercountries.
ImportsfromChinathereforeappeartohavehadaparticularlystronginfluenceonprice
inflationinSouthAfrica.TheestimatedcoefficientsuggeststhatChineseimportpenetration
reducedproducerpriceinflationbyaround0.3percentperyearfrom2005to2010.
9

Overall,theseresultssuggestthatincreasesinimportsfromChinahavecontributed
towards lower producer price inflation in South Africa, which in turn will have moderated
increasesinconsumerpricesandhelpedtocurtailproductioncostincreases.

4.2ChineseCompetitionandDomesticProduction
Figure3providesafirstlookattherelationshipbetweenChinesecompetitionanddomestic
production.Usingdataforthe2001to2010period,itplotschangesinimportpenetration
fromChinaagainstlogchangesinsalesvolumefor44manufacturingindustries(seeTableA
in the Appendix for the data). While there is significant variation across industries, the
aggregate trend in Figure 3 suggests that the manufacturing industries that have been
subjecttogreatercompetitionfromChineseimports(reflectedinlargerchangesinthelevel
ofChineseimportpenetration)havegenerallyregisteredsmallerlogchanges(increases)in
salesvolumesoverthe20002010period.

Figure3:PlotoflogchangeinsalesvolumeversuschangeinSouthAfricanimport
penetrationfromChinabymanufacturingindustry,20012010

Source:AuthorsowncalculationsusingUNComtradedataandStatisticsSAdata.

9
Estimateswerealsoconductedusinganalternativemeasureofimportcompetition,namelythe
changeintheunitvalueindexofSouthAfricanimportsfromtheworldandfromChina,butnoneof
thecoefficientsweresignificant.Estimatesincludingthechangeinimportpenetrationalsoyield
insignificantcoefficientsfortheimportvariables.
15

Inordertoexploretherelationshipbetweenchangesinimportpenetrationandlocal
productionfurther,aChenerystyledecompositionwasusedtoseparateoutthe
contributionsofdomesticdemand,exportsandchangesinimportpenetrationtochangesin
sales.
10
Thiswasdonefortwomainperiods,19922001(theperiodpriortoChinas
accessiontotheWTO)whenimportsfromChinaremainedrelativelylowand20012010
whenChineseimportsbegantoincreasetheirpenetrationsignificantly.
Table7showsthatinthe1990schangesinsalesbySouthAfricanmanufacturers
wereequallydividedbetweengrowingdomesticdemandandincreasedexports.The
growthinexportsexceededtheincreaseintotalimportpenetration,despitethemajor
importliberalizationthatoccurredinthisperiod.However,after2001,thissituationwas
reversedwithimportpenetrationincreasingbymorethanexports,sothatthechangein
totalsaleslaggedbehindthegrowthindomesticdemand.Thetotalincreaseinimport
penetrationinconstantRandtermswasroughlythesameinthetwoperiods,butthebulk
oftheincreaseinthelaterperiodcamefromChina,whereasearlieritsrolehadbeen
marginal.

Table7:CheneryDecompositionofChangesinSouthAfricanManufacturingOutput,1992
2001,20012010(millionRand)
19922001 20012010
GrowthofDomesticDemand 93,945 120,598
ExportstoChina 1,564 4,680
ExportstoROW 92,254 23,320
Increasedimportpenetration 60,339 63,284
ChangeinSales 127,423 85,315
Source:ownelaborationfromUNComtradeandStatisticsSAdata.

Asnotedearlier,thefactthatimportsfromChinahaveincreasedtheirshareof
domesticconsumptionofmanufacturedgoodsinSouthAfricadoesnotnecessarilymean
thattheyhavedisplaceddomesticproductionsinceinsomecasestheymayhavereplaced
importsfromothercountries.Itisthereforenecessarytodividethetotalincreaseinimport
penetrationfromChinaintothatpartwhichsubstitutedforimportsfromothercountries
andthatwhichreducedthemarketshareofdomesticproducers.
11

Table8showsthatintheperiodbefore2001,theincreaseinChineseimport
penetrationdidnothaveasignificantimpactonimportsfromtherestoftheworld,but
althoughthemajoreffectwasondomesticproducers,thiswasoflimitedsignificance
becauseChineseimportsremainedrelativelylow.From2001onwards,displacementof
importsfromothercountriesaccountedforaroundaquarteroftheincreasedmarket
penetrationbyChina,butdisplacementofdomesticproductionaccountedforthebulkof
theincrease.Incontrasttotheearlierperiod,thislossofmarketbydomesticproducersto

10
SeetheAppendixfordetailsofthetechniqueused.
11
SeetheAppendixforanexplanationofhowthebasicChenerydecompositionwasextendedto
separateouttheimpactofChineseimportsonotherimportsanddomesticproduction.
16

Chineseproductsbetween2001and2010wasequivalenttoabout5%ofthevalueofsales
in2001.Althoughthismaynotseemparticularlylarge,salesfromtheSouthAfrican
manufacturingindustryonlyincreasedby14%inrealtermsoverthesameperiod.
12

Table8:LossofMarketSharebyDomesticProducerstoChina
19922001 20012010
TotalgainbyChina(R.mn.) 7242.1 41384.4
GainfromDomesticProducers(Rmn.) 7161.2 30295.8
As%ofTotalGain 98.9% 73.2%
As%ofDomesticSalesinBaseYear 1.50% 5.00%
Source:ownelaborationfromUNComtradeandStatisticsSAdata.
Theaggregatedataalsohidesconsiderablevariationsbetweenindustries.As
alreadynoted,ChineseimportpenetrationisparticularlyhighinTextilesandClothing,
FootwearandLeather,ElectricalandElectronicProductsandsometypesofMachinery.
ThesealsotendtobetheindustriesinwhichlossofmarkettoChinesecompetitionhas
beenmostsignificantsince2001(Table9).

Table9:IndustriesinwhichlosstoChineseimportsbetween200110representedmore
than10%of2001production
Source:ownelaborationfromUNComtradeandStatisticsSAdata.

Table9alsoshowsthegrowthofsalesbydomesticproducers(includingexports)in
realtermsineachindustryovertheperiod20012010.Ofthethirteenworstaffected

12
ApartialoffsettoincreasedimportpenetrationfromChinawastheincreasedexportstoChina
between2001and2010whichcameto4.6billionRand(seeTable5).Thiswassubstantiallylessthan
the30.3billionRanddisplacedbyincreasedChineseimports.
LosstoChina Growthin
ManufacturingSales
Knittedandcrochetedfabrics 60.5% 23.5%
Footwear 45.3% 2.4%
Clothing 31.1% 7.6%
Generalpurposemachinery 28.5% 19.1%
Householdappliances 26.4% 16.9%
Television,radioandotherelectronic
equipment 21.5%
11.0%
Specialpurposemachinery 18.7% 1.8%
Medicalappliances,measuringandcontrolling
equipment 18.0%
17.0%
Electriclampsandlightingequipment 13.3% 0.3%
Leatherandleatherproducts 12.9% 30.0%
Electricalmotors,generatorsandtransformers 12.3% 7.3%
Othertextiles 11.1% 19.7%
Spinningandweaving 10.5% 41.7%
17

industries,sixshowedanabsolutedeclineinsales,whileafurther3showedminimal
growth.OnlyfourindustrieswhichhadsignificantlylostmarketsharetoChinastillenjoyed
significantgrowthinsales.

5. TheImpactofChineseCompetitiononEmployment
AmajorissueofconcerninrelationtocompetitionfromChineseimportsistheeffectthat
thishasonemploymentinSouthAfrica.Thisisparticularlyimportantinviewofthe
significantimpactfoundintheprevioussectiononproductioninlabourintensiveindustries
suchasclothingandfootwear.Thesewerealsosectorsinwhichemploymentfellbylarge
numbers.
Chinesecompetitionmayinfluenceindustrylevelemploymentinvariousways.
Increasesinimportcompetitioncanraisethederivedlabourdemandelasticity,hence
depressingwagesandemploymentinthoseindustries(Rodrik,1997).Chinesecompetition
mayalsodepressoutputofexistingdomesticfirmsandleadtotheexitoflessefficient
firms,bothofwhichwillreduceaggregateindustrylevelemploymentandraiseindustry
levelproductivity(Bernardetal.,2007).Further,domesticfirmsmaydefensivelyinnovate
byupgradingcapitalstockandreducingemploymentinresponsetothecompetition(Wood,
1994).
Contrarytotheseeffects,importsoflowerpricedChineseintermediateinputsand
capitalgoodsmayenhancefirmprofitabilityleadingtoanincreaseinemployment,
although,asFeenstraandHanson(1996)showthismayalsoraisethewagepremiumof
skilledlabourwithinanindustry.Employmentgainsmayalsoaccruethroughgrowthinthe
exportsector(orsectorsretailingimportedChinesegoods).
For a preliminary insight of the net employment impact across manufacturing
industries,Figure4plotsthechangeinChineseimportpenetrationagainst(log)changesin
employment by manufacturing industry over the period 2000 to 2009. A negative
relationshipisfoundwithrelativelylargeincreasesinChineseimportpenetrationoccurring
in industries with relatively low (and mostly negative) changes in employment. The
relationship is particularly strong amongst industries with below median wages such as
Clothing,Footwear,LeatherproductsandthevariousTextileindustries.
13

Toevaluatethisrelationshipfurther,theemploymentimpactofchangesinChinese
importpenetrationwasalsocalculatedusingtheChenerydecompositiontechnique.
Averageemploymentcoefficientswerecalculatedforeachmanufacturingindustryfrom
StatisticsSouthAfricadataonmanufacturingsales(at2000prices)andnumberemployed.
GiventhedifferencebetweenthetwoperiodsbeforeandafterChinajoinedtheWTO,the
impactswereestimatedforbothperiods.

13
Highandlowwageindustriesaredistinguishedonthebasisofaveragewagesforthe20002010
period.Industriesrecordinganaveragewagebelowthemedianaveragewagefortheperiodwere
classifiedaslowwageindustries.
18

Figure4:PlotoflogchangeinemploymentversuschangeinSouthAfricanimport
penetrationfromChinabymanufacturingindustry,20012010

Source:AuthorsowncalculationsusingUNComtradeandStatisticsSAdata.
Table10showsthatthelossofjobsasaresultofincreasedimportpenetrationfrom
Chinawasrelativelylimitedbefore2001atlessthan25,000.Thelossofemploymentasa
resultofincreasedimportsfromothercountrieswasestimatedtobefivetimeshigherthan
theimpactofChinesecompetition.Inthelaterperiodhoweverthesituationwastotally
differentwithincreasedimportsfromChinareducingemploymentbymorethan75,000
jobs,whichrepresented70%ofthetotallossattributabletoincreasedimports.

Table10:ChangesinEmployment,19922001and20012010
19922001 20012010
GrowthofDomesticDemand 140,569 208,944
ExportstoChina 2,585 4,080
ExportstoROW 174,741 9,951
Increasedimportpenetration 144,734 110,318
(ofwhichChineseimportpenetration) 24,117 77,751
Productivitygrowth 352,617 226,124
TotalChangeinEmployment 179,457 113,467
Source:ownelaborationfromUNComtradeandStatisticsSAdata.

Asapointofcomparison,Table10alsoshowsthelossofemploymentattributable
toincreasedlabourproductivityinthetwoperiodsandthetotalchangeinmanufacturing
employment.Inbothperiods,thelossofemploymentduetoproductivitygrowthismore
thantwicethatattributabletoincreasedimportpenetration.Inthelaterperiodthe
negativeeffectofproductivitygrowthonemploymentisalmostmatchedbythepositive
impactofgrowingdomesticdemand.Asaresulttheeffectofincreasedimportpenetration,
thebulkofwhichisattributabletoChina,isalmostequaltotheoveralldeclinein
manufacturingemploymentinSouthAfricabetween2001and2010.
19

ExportstocountriesotherthanChinamadeasignificantcontributiontomaintaining
employmentintheperiodupto2001,butdeclineddramaticallyafterthat.Theimpactof
exportstoChinaonmanufacturingemploymentwasminimalinbothperiods.
Table11showsthoseindustriesthataccountforthebulkofthejoblossesassociated
withChineseimportpenetration.Betweenthemtheyaccountedfor85%ofthetotal
estimatedlossofemploymentbydomesticproducersattributabletoincreasedChinese
importpenetration.Eightofthetwelveindustriessawanoverallfallintotalemployment
between2001and2010.Ofthese,thefallwasrelativelysmallinOtherFabricatedMetal
Products,butinalltheothersitwassubstantialandwellabovetheaveragedeclinein
manufacturingemploymentof9%overtheperiod.Theonlysectorswhereemployment
increasedintheperiod,despiteChinesecompetitionweremachinery,otherchemicalsand
otherelectricalequipment.

Table11:EstimatedJobLossesasaresultofincreasedImportPenetrationfromChina,
20012010
EmploymentLoss Totaldeclinein
employment(%)
Clothing 22640 45.0%
Generalpurposemachinery 12717 50.9%
Specialpurposemachinery 7224 15.3%
Knittedandcrochetedfabrics 3991 52.9%
Othertextiles 3053 21.8%
Spinningandweaving 2851 37.2%
Footwear 2521 55.3%
TV,radioandotherelectronicequipment 2453 16.6%
Otherchemicals 2442 29.6%
Otherelectricalequipment 2059 4.5%
Otherfabricatedmetalproducts 1983 4.2%
Furniture 1895 40.4%
Source:ownelaborationfromUNComtradeandStatisticsSAdata.

Econometricestimatesofthewithinindustryemploymentrelationshipwerealso
conducted.FulldetailsofthespecificationandestimationarepresentedintheAppendix.As
showninTable12,thecoefficientsonthestandardproductionfunctionvariableshavethe
correctsignandaregenerallysignificant:wage()andsalesvolumes(+).Tariffratesare
positivelyrelatedtoemploymentlevels,butarenotrobusttodifferentspecificationand
estimators.Nevertheless,theysuggestthattariffliberalisationmayexplainsomeofthe
declineinemploymentduringtheperiod.
Importpenetrationisalsonegativelycorrelatedwithemploymentlevels,butonlyfor
Chineseimports.Inthefixedeffectsresults,acoefficientof2.1isestimatedonChinese
importpenetrationincolumn1,butthesizeoftherelationshipfallsto1.44whenChinese
importpenetrationisinstrumentedincolumn2.Thiscoefficientsuggeststhata1
percentagepointincreaseinChineseimportpenetrationisassociatedwitha1.44percent
declineinemploymentwithintheindustry.
20

Table12:Regressionresultsforemploymentandwagemodels
(1) (2) (3) (4)
FixedEffects GMM
Basic Instrumented 19922009 20012009
Ln(employment)
t1
0.729** 0.466**
(0.096) (0.129)
ln(realwage) 0.038 0.065+ 0.048 0.341*
(0.074) (0.037) (0.071) (0.133)
ln(salesvolume) 0.238+ 0.312** 0.165** 0.150*
(0.119) (0.051) (0.051) (0.071)
ln(1+tariff) 0.347 0.396** 0.067 0.101
(0.230) (0.153) (0.117) (0.510)
Importpenetration,other 0.344 0.185 0.074 0.259+
(0.238) (0.159) (0.216) (0.144)
Importpenetration,China 2.084** 1.444** 0.424 0.623
(0.494) (0.276) (0.304) (0.429)
Exportorientation 0.633** 0.535** 0.044 0.244+
(0.217) (0.103) (0.114) (0.135)
Constant 1.909** 1.357**
(0.604) (0.294)
Observations 792 792 748 308
Rsquared(within) 0.399 0.387
Sectors 44 44 44 44
m1 0.000 0.020
m2 0.274 0.591
Hansen 1.000 0.690
Notes:Estimatesbasedondatafrom20012009.Exportorientationismeasuredasshareofexportsinsales
usingdatafromStatisticsSAandUNComtrade.Realwagesareconstructedbydeflatingindustrywagedataby
SAproducerprices,bothobtainedfromStatisticsSA.SeeTable6foradescriptionofothervariables.
IntheGMMestimates,realwagesandimportpenetrationfromChinaaremodelledasendogenous.China's
shareinlowandmiddleincomecountryimportsisusedasaninstrumentforChineseimportpenetrationin
thetwostageleastsquareestimationofcolumn(2).
Yeardummiesareincludedinallregressions.Industryfixedeffectsareincludedincolumn(1)and(2)
estimates.
GMMresultsareonestepestimateswithheteroskedasticityconsistentstandarderrorsandteststatistics.
HansenisatestoftheoveridentifyingrestrictionsfortheGMMestimators.ThePvalueisreported.
m1andm2aretestforfirstorderandsecondorderserialcorrelation.Robuststandarderrorsarepresentedin
parentheses.
**p<0.01,*p<0.05,+p<0.1

ThesignificanceoftheChineseimportpenetrationcoefficient,however,declines
oncepersistenceinemploymentpatternsareallowedforthroughtheinclusionoflagged
employmentlevels.IntheGMMestimatedresults(column3),forexample,thecoefficient
onChineseimportpenetrationisnolongerstatisticallysignificant.TheseGMMestimates
however,shouldbetreatedwithcautionasthenumberofinstrumentsislargeeventhough
thesetofinstrumentsforthelaggedemploymentandendogenousvariables(realwages
andChineseimportpenetration)isrestrictedtoonlyincludethesecondlaggedlevel.To
21

reducethenumberofinstrumentsfurther,incolumn(4)thesampleisrestrictedtothepost
2000period,butthecoefficientonChineseimportpenetrationremainsinsignificant.
14

Thenegativeemploymentassociationisconditionalonoutput,implyingthatChinese
import penetration is linked to increased labour productivity within sectors. This can
originate from a combination of withinfirm effects arising from increased competition
and/ortheimportationoftechnologyembodiedininputs(ahighproportionofintermediate
inputsaresourcedfromwithineach3digitSICcategory)aswellasacrossfirmcomposition
effectsdrivenbyexitorsloweroutputgrowthinlowproductivityfirmsintheindustry.Firm
levelevidenceinotheremerginganddevelopedeconomies,forexample,suggeststhatboth
effectsarelikely(seeTrefler,2004andBernardetal.,2007).
There are nevertheless important crosssector composition effects. The inclusion of
interactions between the import penetration variables and a dummy for above median
wage industries indicates that Chinese competition (and in some cases import competition
from the rest of the world) had the strongest negative impact on employment (or positive
impact on sector productivity) in low wage industries. This is also reflected in the cross
sector relationship presented in the scatter plot diagram, Figure 4. This outcome
corroborates the finding by Rodrik(2008) that increased openness (Chinese competition in
this case) contributed towards shifts in the structure of manufacturing away from labour
intensiveindustries.
Interestingly, export growth as measured by share of exports in sales is positively
related to employment. In the narrow theoretically specified labour model, the positive
coefficientisindicativeofdeclinesinproductivityassociatedwithexportgrowth.Withfirm
heterogeneity, the results may also arise from shifts in the composition of firms within
sectorstowardsrelativelylowwagelabourintensiveexporters.
Table13usestheChineseimportpenetrationcoefficientof1.44todecomposethe
impact of Chinese competition on manufacturing employment. The results for industries
most adversely affected are also presented. These estimates are merely a guide as to the
possible impact. Positive and negative indirect effects arising from import penetration in
upstream or downstream industries are not included. The impact of Chinese imports on
employment in the retail sector is also not included. Access to cheap Chinese clothing
products, for example, is argued to have stimulated employment growth in the clothing
retail sector (Morris and Einhorn, 2008). Finally, improvements in productivity induced by
Chinese competition may also have had positive impacts on both employment and wage
levels.
The simulations are nevertheless insightful. Chinese competition is estimated to
have reduced employment levels (conditional on existing output) by 109 thousand, or 41
percentofthe266thousandmanufacturingjobslostovertheperiod19922009.Closeto80
percent (or 86 thousand) of the jobs lost through Chinese competition occurred over the
period 2000 to 2009. Nevertheless, manufacturing employment would have declined over
the full period even if the Chinese competition impact were not present. The relative and

14
TheHansentestofoveridentifyingrestrictionsisweakenedbymanyinstruments.Theshorter
periodreducesthenumberofinstrumentssubstantially,allowingforastrongertestofthevalidityof
theinstrumentationassumptions.
22

absolute decline in manufacturing employment cannot therefore be entirely attributed to
Chinesecompetition,althoughitsroleisneverthelesssubstantive.

Table13:SimulatedimpactofChinesecompetitiononemployment,selectedindustries
Sector Actualemployment(1000)
log
change
jobs
Counterfactual
employment(1000)
jobs'lost'
(000)
SIC 1992 2000 2009 19922009 2000 2009 19922009
Total 1439.1 1287.5 1172.7 0.20 1310.8 1281.7 109.1
Clothing 314/5 114.3 125.5 71.1 0.48 133.8 97.5 26.5
Generalpurposemachinery 356/59 26.6 23.3 35.2 0.29 24.4 47.1 11.8
TV,radioandotherelectronics 371/2/3 16.6 17.8 12.7 0.27 18.4 19.4 6.8
Furniture 391 46.7 43.9 31.4 0.40 44.6 37.1 5.7
Specialpurposemachinery 357 37.6 34.8 40.7 0.09 35.1 46.1 5.4
Footwear 317 27.2 15.7 5.9 1.54 18.6 10.5 4.6
Otherfabricatedmetalproducts 355 70.6 59.2 53.1 0.28 60.5 57.6 4.5
Spinningandweaving 311 35.8 25.3 16.7 0.76 26.0 20.9 4.2
Otherelectricalequipment 366 55.5 43.8 49.7 0.11 44.3 53.9 4.2
Knittedandcrochetedfabrics 313 15.5 10.9 5.3 1.07 11.4 8.9 3.6
Source:AuthorsowncalculationsusingUNComtradeandStatisticsSAdata.Employmentcalculationsassume
acoefficientof1.44onChineseimportpenetration.
ThesetofsectorsmostaffectedbyChinesecompetitioncorrespondcloselytothose
found using the Chenerystyle decomposition approach. The clothing sector is the most
affected with a loss of 26.5 thousand jobs reflecting a combination of relatively high
employment levels and large increases in import penetration from the early 1990s. Other
labourintensivesectorssuchasfootwear,furniture,spinningandweavingandknittedand
crocheted fabrics are also amongst the major sectors negatively affected. High technology
sectors such as general purpose machinery, TV, radio and other electronics and Special
purpose machinery are also affected, but these effects are likely to be upwardly biased as
econometric estimates separating out high wage and low wage industries indicate lower
impactsofChinesecompetitiononemploymentinthesesectors.

6. Conclusion
TheanalysispresentedhereindicatesthatChinesecompetitionhashadasignificantimpact
onSouthAfricanmanufacturingintheperiodsinceChinajoinedtheWTO.Overthepast
decade,thebulkoftheincreaseinimportpenetrationoftheSouthAfricanmarketcanbe
attributedtoChineseimports.ItisnowthelargestsourceofimportstoSouthAfricabothin
aggregateandin27outof45manufacturingindustries.Itsshareofthedomesticmarket
hasincreasedsteadilyovertheperiodfromlessthan%in1995toaround6%in2010.The
unevennatureofimportpenetrationmeansthatsomeindustriesfaceverysignificant
competitionfromChina.
AlthoughincreasedimportsfromChinahavepartlyreplacedimportsfromother
countries,itwasfoundthatmostoftheincreaseinChinesepenetrationofthemarkethas
beenattheexpenseoflocalproduction.Thepaperestimatesthatthedisplacementof
domesticproductionasaresultofincreasedChineseimportpenetrationduringthedecade
ofthe2000scametoaroundR30000million,orcloseto5percentofthevalueofoutputin
23

2001.GiventhemodestgrowthofSouthAfricanmanufacturingduringtheperiod,thisisnot
insignificant.
ExportsofmanufacturestoChinaremainedrelativelylimitedanddidnotadd
significantlytoindustrialgrowthinSouthAfrica.Evenin2010,theChinesemarketonly
accountedfor1%ofSouthAfricanmanufacturingsales.Whileexportstoothercountries
aremuchmoresignificantwedidnotanalysetheimpactofChinaonSouthAfricasexports
totheRestoftheWorldhere.Howeverinaparallelpaper(EdwardsandJenkins,2012)we
findthatSouthAfricahaslostmarketsharetoChinainitsmajorexportmarkets.
ThissuggeststhattheoverallimpactofChinesecompetitiononmanufacturing
employmentinSouthAfricawasnegative.Firsttherewasthelossofjobsassociatedwith
thedisplacementoflocalproductionbyimportedgoods.Indeed,thefactthatlabour
intensiveindustrieswereparticularlybadlyaffectedbyChineseimportsmeantthatthe
negativeimpactonemploymentwasmorethanproportionaltotheoutputdisplacement.
Theeconometricanalysisalsoshowedthat,evencontrollingforchangesinoutput,
increasesinChineseimportpenetrationtendedtoreduceemploymentattheindustrylevel.
Anumberofdifferentfactorscouldexplainthis.Firsttheexitoftheleastproductivefirms
wouldtendtoincreasetheoveralllevelofproductivityintheindustry.Secondsurviving
firmsmayrespondtoincreasedcompetitionthroughdefensiveinnovationwhichraises
productivityand/ormovingoutofthemostlabourintensivesegmentsofanindustry.Inthe
absenceoffirmleveldataandmoredisaggregatedindustrialsectors,itisimpossibletosay
whichoftheseeffectshaveaffectedemploymentinSouthAfrica,butallthreemayhave
playedapart.
Inconcluding,somecaveatsareinorderinrelationtotheinterpretationofthe
impactofincreasedChineseimportpenetration.FirstChineseimportsalsoreflectshiftsin
aggregatedemandwithinSouthAfrica.Hencetheyareanoutcomeofconsumption,
productionandinvestmentdecisionselsewhereintheeconomy.Weneedthereforetobe
waryofassumingchangesinChineseimportvaluesareaconsequenceofexogenous
(autonomous)effects,ratherthanendogenousoutcomesofdomesticinfluences.The
estimatespresentedattempttodealwithsomeoftheseconcernsbyinstrumentingChinese
importswithlaggedvaluesandtheshareofemergingeconomyimportssourcedfrom
China.
Second,wehavenotfullyaddressedthepossiblepositiveeffectsondomestic
productionofcheaperaccesstocapitalandintermediateinputswhichnowdominate
importsfromChina.Wealsodonotexploretheconsequentemploymenteffects.Increases
inoutputarisingfromcheaperintermediateinputsandcapitalwouldbeexpectedto
increaseemployment,butthesegainsmaybeoffsetbythesubstitutionofcheapercapital
forlabourortheoutsourcingofintermediateinputproductionwithineachfirm.These
relationshipsrequirefurtherinvestigation.
Thirdly,wehaveonlyaddressedtheimpactofChinesecompetitiononthe
manufacturingsectorandmanufacturingemploymentandhavenotattemptedtodraw
conclusionsatthemacrolevelwhichwouldinvolveconsideringtheimpactsontheprimary
andtertiarysectorsaswell.Asfarasservicesareconcerned,importsoflowpricedclothing
fromChina,forexample,stimulateddemandandemploymentwithintheretailsector.The
lossesinemploymentwithinclothingwerethereforepartlyoffsetbyincreasedemployment
intheretailsector(MorrisandEinhorn,2008).Thisfocusonmanufacturingisjustifiedby
24

thekeyrolethatisseenbypolicymakersinSouthAfricafortheindustrialsectorinbringing
aboutamoredynamiceconomyinSouthAfrica,andtheneedtoachievemorerapid
economicgrowthinordertotacklethecountrysseriousemploymentproblem.
25

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29

Appendix:Data

General
Thedatabaseusedinthepaperwasconstructedfromvarioussources.
Employment,priceandsalesdata(volumeandvalue)areobtainedfor45manufacturing
sectors(3digitlevelofSIC)overtheperiod19922009fromvariouspublicationsproduced
byStatisticsSouthAfrica.DisaggregatedtradedataforSouthAfricaareobtainedfrom
UNcomtradeandaggregatedtothese45sectorsusingaconcordancefilebasedona
HarmonizedSystemISICconcordanceobtainedfromtheWorldIntegratedTradeSystem
(WITS).Industrylevelforeignproducerpriceindices(proxiedbyUSPPI)andindicesfor
foreigntechnology(proxiedbyUStotalfactorproductivityindices)areobtainedfromtheUS
BureauofLaborStatistics.SouthAfricanproducerpriceindicesareobtainedfromStatistics
SouthAfrica(seriesP0142.1).TariffdataobtainedfromEdwards(2005)areupdatedto
2009usingpublishedtariffschedulesforSouthAfrica.Finallyrealcapitalstockdatafor2to
3digitSICsectorsareobtainedfromQuantec.

Employment
EvaluatingmanufacturingemploymenttrendsinSouthAfricaismadedifficultbythe
lack of consistently constructed data series. The enterprise based surveys (Survey of
Employment and Earnings (P0271) and Quarterly Employment Statistics (P0277.1)) suffer
from a number of survey sample breaks, whereas the household and labour force surveys
(October Household Surveys from 1994 to 1999, Labour Force Survey from 2000 to 2007
and Quarterly Labour force Survey from 2008 to 2010) only provide employment data are
relativelyhighlevelsofindustryaggregation.
Figure A presents different estimates of manufacturing employment constructed
using the various employment series sourced from Statistics South Africa. The variable
StatisticsSAseriescoverstherawdatafromtheenterprisesurveysandtheConstructed
Series adjusts this raw data for sample survey breaks using pre and postbreak quarterly
growthrates.Theremainingseriesdrawsonemploymentdatafromthevarioushousehold
andlabourforcesurveys.
15

The choice of series has a marked impact on the estimated level of employment in
manufacturing. According to the enterprise surveys manufacturing sector employment
declinedthroughoutthe1990s.Abriefrecoveryinemploymentfollowedintheearly2000s,
but the downward trend continued from 2005. Over the entire period, manufacturing
employmentdeclinedfrommorethan1.5millionworkersin1990tofewerthan1.2million
workersin2010(anearly24%decline).Thisplacedmanufacturingemploymentatitslowest
levelinover40years.

15
TheStatisticsSouthAfricadataischaracterisedbyanumberofbreakswhenthesampleof
manufacturingfirmsisupdated.Themainbreaksoccurin2002quarter3,2004quarter4and2006
quarter2.Quarterlygrowthrateswereusedtosplicethedifferentseriestogether.
30

This picture contrasts somewhat with that presented using data on formal sector
employment in the manufacturing sector drawn from the household and labour force
surveys.Thevariousdataseriesarecloselymatchedupto1999,butthendivergewiththe
household and labour force survey data showing an increase in employment in the
manufacturingsectorrisingfrommorethan1.4millionworkersin2000tomorethan1.5
millionworkersin2010.Nevertheless,eveninthesedataseries,manufacturingdeclinedas
aproportionofoverallemploymentinthepost2000periodwhenChinesecompetitionwas
at its strongest (share nonagricultural nonmining employment fell from 18.6 percent to
16.7percentfrom2001to2010).

FigureA:EmploymentintheSouthAfricanmanufacturingsector,19902010

Source:StatisticsSAandIDCdata.

31

TableA:ChangeinimportpenetrationfromChinaagainstlogchangesinsalesvolumes
andindustryemploymentbymanufacturingindustry,20012010
SIC Industrydescription ChangeinChinese
importpenetration,
(percentagepoint)
Logchangein
salesvolume
(percentage)
Logchangein
industry
employment,2001
2010
(percentage)
301 Meat,fish,fruit,vegetables,oils&fat 0.39 100.70 1.51
302 Dairyproducts 0.03 77.76 6.29
303 Grainmilling&animalfeeds 0.41 69.05 30.58
304 Otherfoodproducts 0.25 68.89 18.83
305 Beverages 0.01 96.93 6.41
311 Spinningandweaving 14.12 22.03 46.60
312 Othertextiles 10.97 8.94 24.54
313 Knittedandcrochetedfabrics 35.85 3.36 75.20
314/5 Clothing 21.94 11.58 59.70
316 Leatherandleatherproducts 13.35 28.89 27.75
317 Footwear 21.71 38.23 80.59
321 Sawmillingandplaningofwood 0.73 63.54 23.20
322 Woodandwoodproducts 1.47 70.75 29.74
323 Paperandpaperproducts 1.26 55.38 9.02
324 Publishing 1.23 44.03 59.44
325/6 Printingandrelatedservices 0.31 66.62 8.96
331/2 Cokeovenandpetroleumproducts 0.06 77.46 6.88
334 Basicchemicals 3.95 72.69 15.75
335/6 Otherchemicals 2.01 75.26 25.95
337 Rubberproducts 8.85 38.76 31.34
338 Plasticproducts 1.92 101.45 34.63
341 Glassandglassproducts 7.21 79.45 0.03
342 Nonmetallicmineralproducts 2.78 75.76 9.02
351 Basicironandsteel 3.08 91.38 10.56
352 Nonferrousmetals 2.52 29.54 7.99
354 Structuralsteelproducts 1.09 64.42 29.25
355 Otherfabricatedmetalproducts 5.18 78.88 4.26
356/59 Generalpurposemachinery 18.15 29.51 41.16
357 Specialpurposemachinery 10.14 37.67 14.21
358 Householdappliances 17.77 41.86 21.78
361 Electricalmotors,generatorsandtransformers 8.90 87.50 25.98
362 Electricitydistributionandcontrolapparatus 5.23 107.20 7.46
363 Insulatedwireandcable 4.00 46.89 51.20
364 Accumulatorsandbatteries 7.19 79.11 0.04
365 Electriclampsandlightingequipment 18.78 71.99 42.04
366 Otherelectricalequipment 4.73 70.55 4.43
371/2/3 TV,radioandotherelectronicequipment 26.65 34.08 18.20
374/5/6 Medical,measuringandcontrollingequipment 5.57 49.57 30.79
381 Motorvehicles 1.49 59.23 3.20
382 Bodiesformotorvehicles 3.50 103.48 2.46
383 Partsandaccessoriesformotorvehicles 1.41 54.97 34.60
384/5/6/7 Othertransportequipment 1.43 58.97 25.49
391 Furniture 12.73 60.68 51.81
392 Othermanufacturing 5.64 48.73 15.40
Source: Authors calculations using UN comtrade, IDC and Statistics SA data.
Notes:Totalimportpenetrationiscalculatedastheratiooftotalimportstototalconsumption,withthelatter
calculatedastotalsalesvolumeplustotalimportsminustotalexports.
32

Appendix:EmpiricalMethods

CheneryDecomposition
TheChenery(1979)styledecompositiontechniquedisaggregateschangesinthegrossvalue
ofmanufacturingproductionintodemandeffectsarisingfromchangesindomestic
consumption,exportsandimportpenetration.Whilesimilardecompositiontechniques
havebeenappliedtoSouthAfricandata(Edwards(2001a,2001b,2006);Dunneand
Edwards(2007)andJenkins(2008)),thesestudiesfocusondisplacementeffectsarising
fromtotaltradeandnotbilateraltradeflows.Theevaluationofdisplacementeffectsarising
fromChinesetraderequiresminormodificationstothestandardChenerystyle
decomposition.
Thedecompositionstartsfromthebasicaccountingidentitythat
Q
it
=D
it
+X
it
M
it
(1)
where
D
it
isdomesticabsorptionofindustryiattimet
Q
it
isdomesticproductionofindustryiattimet
X
it
isexportsofindustryiattimet
M
it
isimportsofindustryiattimet
Definingimportpenetrationinindustryiattimetas:
m
it=
M
it
/D
it
(2)
thenachangeinproductioninindustryibetweenbaseyear(0)andcurrentyear(1)canbe
decomposedas:
Q
i
=(1m
i0
)D
i
+X
i
+(m
i0
m
i1
)D
i1
(3)
SinceweareinterestedintheimpactofimportsfromChinaondomesticproduction,thenit
isnecessarytodisaggregatethetradedatabetweenimportsfromChinaandimportsfrom
theRestoftheWorld.
Q
i
=(1m
i0
)D
i
+X
i
+(m
Ci0
m
Ci1
+

m
Ri0
m
Ri1
)D
i1
(4)
wherem
Ci
istheshareofChineseimportsintotaldomesticabsorptionandm
Ri
istheshare
oftheRestoftheWorld.
AnincreaseinChineseimportpenetrationcancomeattheexpenseofeither
domesticproductionorimportsfromothercountries(orboth).Toestimatethe
displacementofdomesticproductionbyChineseimports,itisassumedthatinthose
industrieswhereimportpenetrationfromtheRestoftheWorldhasrisen,thentheentire
increaseinChineseimportpenetrationhascomeattheexpenseofdomesticproducers.If,
however,theshareofotherimportersintheSouthAfricanmarkethasfallen,thenpartof
theincreaseinChineseimportpenetrationhasbeenattheexpenseoftheRestofthe
World.Iftheshareoflocalproductionindomesticdemandhasincreased,thenitis
assumedthatthegrowthofChineseimportpenetrationhasbeenentirelyattheexpenseof
otherimporters.
33

OnthisbasisitispossibletoestimatetheextenttowhichChinahasdisplacedboth
otherimportsandlocalproducersoverspecificperiodsoftime.Theestimatedimpacton
domesticproducersisasfollows:Ifm
Ci
andm
Ri
inindustryiarebothpositive(or
negative),theloss(gain)bydomesticproducersto(from)Chinaism
Ci
*D
i1
.If,however,
importpenetrationbyChinaandtheRestoftheWorldchangeinoppositedirectionsthen
theimpactofChinaondomesticproducersdependsonwhetherornotthetotalshareof
importsincreasesorfalls,assetoutinthefollowingmatrix.

m
Ci
>0;m
Ri
<0 m
Ci
<0;m
Ri
>0
m
Ci
+m
Ri
>0 (m
Ci
m
Ri
)D
i1
0
m
Ci
+m
Ri
<0 0 (m
Ci
m
Ri
)D
i1

TheimpactofChinesecompetitiononemploymentinSouthAfricacanthenbe
estimatedbyapplyingemploymentcoefficients,derivedfrommanufacturingsalesand
employmentdatatotheestimatesofmarketlossesbydomesticproducerstoChinese
imports.
16

Employmentchangesarearesultofchangesinoutputandchangesinlabour
productivity,wherelabourproductivityisdefinedasEmployment(Lit)perunitoutput(Qit).
Thisrelationshipisrepresentedas:

L
i
=l
i1
Q
i
+(l
i
)Q
i0
(5)

SubstitutingEquation(3)intoEquation(5)gives:

L
i
=l
i1
(1m
i0
)D
i
+l
i1
X
i
+l
i1
(m
i0
m
i1
)D
i1
+(l
i
)Q
i0
(6)

Thefirsttermontherighthandsidemeasurestheimpactofchangesindomestic
demandonemployment,thesecondtheeffectofchangesinexports,thethirdtheimpact
ofthetotalchangeinimportpenetrationandthefinaltermindicatestheeffectof
productivitychanges.SinceweareinterestedintheeffectofChineseimportsondomestic
employment,thiscanbecalculatedbyreplacingthethirdtermbythecalculationoftheloss
bydomesticproducerstoChina,asestimatedabove.
Thereareseverallimitationstothemethodusedhere,particularlyinrelationtothe
estimationoftheemploymentimpactsofChinesecompetition.First,itonlyrelatestothe
directeffectsofChineseimportsanddoesnottakeintoaccounttheindirectimpactson
suppliersofareductionindomesticproduction.Thuscalculatedchangesinemploymentin
spinningandweaving,forexample,onlyrelatetotheimportsofChineseyarnsandwoven
fabricsanddonottakeintoaccountindirectorupstreameffectsarisingfromdisplacement

16
DisplacementofimportsfromothercountriesbyChinesegoodsisnotincludedsincethishasno
effectonemploymentinSouthAfrica.
34

ofdomesticclothingproduction,whichaffectthedomesticmarketforSouthAfricantextile
manufacturers.Thiswouldrequireestimationoftotalemploymentcoefficientsandnotjust
thedirectcoefficientsthathavebeenusedhere.
Asecondlimitationofthedecompositionanalysisisthatitassumesthatthevarious
componentsareindependentofeachother.Inpracticeitisquitelikelythatchangesin
labourproductivityarerelatedtochangesinimportpenetration.Thiscanoccurbecause
firmsneedtoincreasetheirproductivitytoremaincompetitiveinthefaceofimport
competition.Wood(1994)referstothisasdefensiveinnovationandtherelationshiphas
beenformalizedintheoreticalmodelsdevelopedbyAcemoglu(2002)andThoenigand
Verdier(2003).
17

Finally,noaccountistakenoftheimpactofChinesecompetitiononpricesand
henceontheprofitabilityofdomesticproducers.Ifdomesticfirmsmaintaintheirmarket
sharethroughreducedpricesandprofitabilityintheshortterm,thismayinthelongrun
leadtolowerlevelsofinvestmentandlossofcompetitiveness.
Theseissuescannotbeanalysedwithinthedecompositionframeworkusedhereand
needtobeexploredusingdifferentapproaches.Onesuchapproachistheapplicationof
econometrictechniquestoestimatetheconditionalrelationshipbetweenChineseimports
andoutputoremploymentinSouthAfricanmanufacturingindustries.Thisisthesecond
approachfollowedinthepaper.

EconometricEstimation
Theavailabilityofindustryleveldataovertimelendsitselftotheuseofeconometric
methodsforpaneldatamodels.Thesetechniquesareusedtoestimatetheconditional
impactsoftradewithChinaonmanufacturingemploymentandpricesinSouthAfrica.
FollowingMilnerandWright(1998),theimpactoftradeonlabourisestimatedusing
alabourdemandfunctionderivedfromastandardCobbDouglasproductionfunction.
18
The
basiclabourdemandrelationshipisspecifiedas:
0 , , , ln ln ln ln
3 2 1 3 2 1 0
> + +
|
.
|

\
|
= o o o u o o o o
it it
it
it it
Q
r
w
A L (7)
wherewiswagerate,risrental,Qisoutput,Lislabour,Aistotalfactorproductivityand
thesubscriptsiandtdenoteindustryandtimerespectively.Toincludetradeeffects
Greenawayetal.(1999)assumetechnicalefficiencytobedependentontradeand
thereforetheparameterAistakentoequal:
0 , , ,
2 1 0
2 1 0
> =

it it
T
it
X M e A
i
(8)
whereTisatimetrend,MisimportpenetrationandXisexportorientation.Substituting
Equation(8)intoEquation(7)yields

17
Thetheoreticalfoundationsoffactorcontentanalysesusedtocalculatetheimpactoftradeon
labourarealsoweak(Leamer,2000).
18
SeetheapplicationsbyDunneandEdwards(2007)onSouthAfricausing28industrialsectors
between1970and2002andCastroetal.(2009)onArgentinaovertheperiod1991to2003.
35

it it
it
it it it
T Q
r
w
X M L u o o o o o o + +
|
.
|

\
|
=
5 4 3 2 1 0
ln ln ln ln ln (9)
Thisequationformsthebasisofthelabourdemandestimationsconductedinthis
paper.Demandforlabourisanegativelyrelatedtorelativewagesandispositivelyrelated
tooutput.Negativecoefficientsonthetradevariables,indicatethattradehasinduceda
reductionintheamountoflabourperunitofoutput(improvedlabourproductivity)through
itsimpactontechnologicalchange.Totestthesensitivityoflabourdemandtocompetition
fromChina,importpenetrationissplitintothecomponentattributedtoChinaandthe
componentattributedtoimportsfromtherestoftheworld.
ToevaluatetheimpactofChineseimportcompetitionondomesticprices,asimple
pricemodelbasedonFeenstra(2004:236)isestimated

it t it it it it i it
tariff ulc P M P u o o o o q + + + + + + =
-
) 1 ln( ln ln ln ln
4 3 2 1
(10)

whereP*denotesforeignprices(proxiedbyUSProducerPricesconvertedtoSouthAfrican
localcurrency);tariffameasureofimportprotection;ulcunitlabourcostsandMan
indicatorofChineseimportcompetition.Increasesinunitlabourcosts,aproxyformarginal
productioncosts,areexpectedtoraisedomesticprices.Increasedinternational
competition,measuredeitherthroughlowerforeignprices,lowertariffsandincreasesin
importpenetrationreducedomesticpricesbyloweringmarkups,andinthecasewhere
thesevariablesrefertointermediateinputsusedbythatsector,throughlowerproduction
costs.
19

Inestimatingtheemploymentandpricerelationships,anumberofproblemsneeded
tobedealtwith.Firstly,thedatausedisrelativelyaggregated(44manufacturingindustries)
withtheconsequencethattheresultsareinfluencedbychangesoccurringwithinfirmsas
wellaschangesincompositionoffirmswithinindustries.Forexample,itisalsopossible,
particularlywherecompetitionfromlowwagecountriesisconcerned,thatthemostlabour
intensivepartsofeachindustrywillcontractordisappear,thusraisingtheaveragelevelof
productivityinthesurvivingindustry.Partofwhatisattributedtoproductivityinthe
econometricanalysis(andthedecompositionanalysis)canthereforebeanindirect
consequenceofincreasedimportpenetration.
20

Asecondconcernrelatestopotentialbiasesassociatedwiththeestimated
relationshipsabove.Labourdemandandpricesarelikelytoshowpersistence.Theinclusion
oflaggeddependentvariablesintheeconometricestimatescanaccountforthisinertia,but
leadtobiasedcoefficientsinapanelsettingwhereindustryfixedeffectsareincludedand
thetimedimensionisshort(Bond,2002).Afurtherconcernisthepotentialendogeneityof
wagesandoutputinthelabourdemandequation.Anadditionalconsiderationisthe
potentialendogeneityofimportpenetration.Importpenetrationisanoutcomeofvarious
influencesincludingprotection,foreignanddomesticdemandandsupplyconditions.

19
AccordingtotheinputoutputtablesforSouthAfrica,manyindustriessource40percentormore
oftheirintermediateinputsfromotherfirmswithinthesameindustrialsector.
20
SeeMelitz(2003)andBernardetal.(2007).
36

Domesticshocksmaythereforeaffectemployment,output,wagesandimports
simultaneous.Someoftheseeffectscanbecapturedthroughtheinclusionofindustryand
timefixedeffects,butendogeneityproblemsmayneverthelesspersist.
Theapproachfollowedinthispaperistouseavarietyofestimatorsandmodel
specificationstoidentifytheinfluenceofChinaonthevariablesofinterest.Theseincludea
simplestaticfixedeffectmodelwithindustryandtimefixedeffects,atwostageleast
squareestimationofastaticfixedeffectmodelwithimportpenetrationfromChina
instrumentedusingChinasshareoflowandmiddleincomeimports(excludingSouth
Africa),andadynamicfixedeffectsmodel(specifiedasapartialadjustmentsmodel)
estimatedusingthefirstdifferencedgeneralizedmethodsofmoment(GMM)estimatorof
ArellanoandBond(1991).IntheGMMestimator,thevariablesaredifferencedtotransform
outthefixedeffectsandlaggedlevelsarethenusedasinstrumentsforthe(now
differenced)laggeddependentvariable.IntheGMMemploymentestimatesimport
penetrationandwagesareassumedtobeendogenousandinstrumentedaccordingly(Bond
2002;Roodman,2009).

The Southern Africa Labour and Development Research Unit (SALDRU) conducts research directed at
improving the well-being of South Africas poor. It was established in 1975. Over the next two decades the
units research played a central role in documenting the human costs of apartheid. Key projects from this
period included the Farm Labour Conference (1976), the Economics of Health Care Conference (1978), and
the Second Carnegie Enquiry into Poverty and Development in South Africa (1983-86). At the urging of the
African National Congress, from 1992-1994 SALDRU and the World Bank coordinated the Project for Statistics
on Living Standards and Development (PSLSD). This project provide baseline data for the implementation
of post-apartheid socio-economic policies through South Africas frst non-racial national sample survey.

In the post-apartheid period, SALDRU has continued to gather data and conduct research directed at
informing and assessing anti-poverty policy. In line with its historical contribution, SALDRUs researchers
continue to conduct research detailing changing patterns of well-being in South Africa and assessing the
impact of government policy on the poor. Current research work falls into the following research themes:
post-apartheid poverty; employment and migration dynamics; family support structures in an era of rapid
social change; public works and public infrastructure programmes, fnancial strategies of the poor; common
property resources and the poor. Key survey projects include the Langeberg Integrated Family Survey
(1999), the Khayelitsha/Mitchells Plain Survey (2000), the ongoing Cape Area Panel Study (2001-) and the
Financial Diaries Project.
www.saldru.uct.ac.za
Level 3, School of Economics Building, Middle Campus, University of Cape Town
Private Bag, Rondebosch 7701, Cape Town, South Africa
Tel: +27 (0)21 650 5696
Fax: +27 (0) 21 650 5797
Web: www.saldru.uct.ac.za
southern afri ca l abour and devel opment research uni t