South Africa’s (SA) largest trading partner is China. The bilateral trade flows between these two economies have been increasing since the end of the global financial crisis. There are several factors that determine the trade flows between these two economies.
The research studies the impact of the real exchange rate, market size and economic size on the trade flows between SA and China, applying the gravity model of trade. Time series data for the period of 1995–2014 have been used and a multiple linear regression model was employed in the evaluation process.
To determine the impact of the three underlying variables on the bilateral trade flows of SA and China, the ordinary least squares method was used. The explanatory variables consist of the product of SA’s gross domestic product (GDP) and China’s GDP, which act as the proxy for economic size, the product of South Africa’s population and China’s population, which act as the proxy for market size, and the real exchange rate between SA and China.
Results revealed that the economic size and the market size have a strong positive impact on trade flows between SA and China and this is consistent with economic theory. On the other hand the real exchange rate has a negative impact on trade flows between SA and China.
If two countries each have a large economic and population size trade, this results in high trade flows between the countries as compared to trading with smaller economies. Trade volume is also reduced if the countries trading have a highly volatile exchange rate. Based on the findings of the research, the article recommends that the Department of Trade and Industry should target trade with countries of big economic and market size. The research also shows that the absolute and comparative advantages are not the only basis of trade but other factors should be considered, such as exchange rate, economic size and market size. The central bank should maintain a stable exchange rate between the SA rand and partner countries’ currencies before trading. This enhances trade and leads to strong economic growth.
Most countries are linked with each other through trade and financial agreements. Some African countries are becoming successful because of the strong economic links they hold with other countries in the world. According to the Organisation for Economic Co-operation and Development (OECD
South African trade volumes in goods measured in current United States dollars.
Net trade is the difference between exports and imports.
Dornbursh, Fischer and Startz (
East Asian countries like China, Japan and Taiwan have always been SA’s largest trading partners (TIPS
The gravity model has been used intensively in literature to investigate factors influencing the level of trade between Vietnam and 23 European countries (EC23) in the OECD and to evaluate whether there are potentials for growth in trade between Vietnam and those countries (Thai
Hilbun (
Weckstrom (
South Africa’s bilateral trade with China increased from R205 billion in 2012 to R270 bn 2014, which is a 32% increase, but the composition of the trade was a matter of concern as SA’s exports comprised mainly raw materials (Ensor
South Africa, a leading economy on the African continent, and China, the largest developing country in the world, have forged a unique partnership and are operating at bilateral, continental and multilateral levels; their governments are actively striving to realise the comprehensive strategic partnership envisaged in 2010 (Alden & Yushan
There is clear evidence that there is a strong relationship between SA and China. The existence of a Chinatown in most parts of South Africa confirms this evidence. It all started when the South African mining companies organised a formal labour recruitment scheme in what was to become the Union of South Africa, which brought several thousand Chinese workers to the country (Alden & Yushan
The SA exports to China comprise mainly raw materials. About 90% of SA’s top 10 exports to China are raw materials. Hence the DTI is promoting the export of value-added manufactured products to China, mainly by means of trade exhibitions (Ensor
Alden and Yushan (
South Africa top 10 exports to China.
Commodities | Value of commodities (expressed in US$) |
---|---|
Ores, slag and ash | 5.6 bn |
Iron and steel | 1.2 bn |
Wood pulp | 343.4 m |
Gems, precious metals, coins | 216.2 m |
Wool | 209.1 m |
Oil | 203.2 m |
Copper | 170.5 m |
Plastics | 102.6 m |
Machines, engines, pumps | 98.5 m |
Nickel | 89.4 m |
US$, United States dollar; Bn, billion; m, million.
SA–China relations are strengthened by the comparative advantage between these countries, which forms a basis for trade. South Africa has a comparative advantage in various primary sector commodities (metal ores, gold and coal).
In many years, SA’s exports performance to China has been fluctuating but remained positive except during 2008–2010 as shown by
Percentage growth of South Africa exports to China.
South Africa’s export growth to China has been positive in all years from 1995 to 2013 but it was negative during the years 2008–2010. During this period the economy was affected by the global financial crisis and hence the balance of trade worsened into a deficit. The financial crisis affected many economies including the SA economy. The economy performance started diminishing, price inflation was growing and there was high unemployment adding to the crisis.
About 100% of the top South African imports from China are manufactured products (Workman
According to Workman (
Top 10 South Africa imports from China.
Commodities | Value of commodities (US$ denominations) |
---|---|
Electronic equipment | 3.8 billion |
Machines, engines and pumps | 3.3 billion |
Footwear | 621.1 million |
Plastics | 495.4 million |
Knit or crochet clothing | 478.3 million |
Clothing (not knit or crochet) | 466.6 million |
Furniture, lighting and signs | 414.9 million |
Iron or steel products | 396.2 million |
Vehicles | 392.6 million |
Iron or steel | 373.2 million |
The comparative advantage theory is very useful in explaining SA and China trade. China seems to have a comparative advantage in various secondary sector commodities (textiles and certain foodstuffs, for example). Due to specialisation China will export these commodities to SA. They will accumulate as imports to the SA side.
Percentage growth of South Africa imports from China.
SA import growth has been positive most years 1995 to 2013, falling to negative only in 1999 and 2009. The 2008–2009 financial crisis also dampened the growth of SA’s imports from China. This shows that the crisis reduced trade overall. In all years import growth has been above export growth in SA. This resulted in a negative trade balance between SA and China.
The growth of bilateral, multilateral and south-south relations has tightened the relationship between SA and China. These relationships influence trade. Following diplomatic recognition of the People’s Republic of China (PRC) in 1998, South Africa and China have exchanged a number of high-level visits that resulted in a range of agreements covering various issues including economic cooperation (Grimm et al.
According to the PMG (2010, in Grimm et al.
SA–China relations did not just start with trade. History proves that there is political interest between China and SA. In SA, Beijing supported the Pan-African Congress (PAC); this was because the USSR had already secured relations with the ANC, thus precluding closer ANC-China relations (Grimm et al.
According to Grimm et al. (
South Africa has a significant impact on China’s economy. The support from South Africa has provided China with a base in the international community and international organisations and agencies. According to Niu (2011, cited in Grimm et al.
For China, SA is the most significant trade partner on the continent and bilateral trade makes up nearly 20% of China’s total trade with the continent (Shinn & Eisenman 2012:349–350, in Grimm et al.
It is clear that the relations between SA and China are strengthened by the multilateral relations they hold. According to Molepolle (
Alden and Yushan (
Alden and Yushan (
According to Alden and Yushan (
In an effort to upgrade to the comprehensive strategic partnership between China and SA, China invited SA to join the BRIC group (Xiong
Through the BRICS grouping, SA has managed to work together with China. Regarding BRICS and global issues, the various summit declarations highlighted the fact that the BRICS countries shared similar needs, for example, for the democratisation of international institutions and an approach to climate change that took into account developing countries’ interests (Alden & Yushan
Finally, as the only African member of the G20, the South African government has a privileged position to work with other leading economies in shaping a coordinated response to the global financial crisis (Alden & Yushan
It can be concluded that currently SA’s participation in BRICS is to a certain degree implicitly reliant on and intertwined with its bilateral relationship with China. South Africa and China’s relationship became strong after the formation of their bilateral relations. The relations at a bilateral level were created for example as a result of the Bi-National Commission (BNC) and its committees. Xiong (
According to Xiong (
China and SA seek to increase trade between one another. Both governments seek to further solidify and coordinate bilateral engagements through forming the comprehensive strategic partnership in 2010, which may be assumed to be one of the determining factors in the prelude to SA’s invitation into BRICS at China’s insistence (Xiong
According to Alden and Yushan (
In 2005, negotiations to create a free trade agreement (FTA) – reportedly initiated by Beijing – began with SA’s DTI and hence the proponents of the FTA with China argued that it would help SA to correct the trade imbalance, improve employment and draw new sources of investment into the mining sector while others pointed out that it would offer more economic gains to SA and China while disadvantaging the other Southern African Customs Union countries, whose existing exports already enter China duty free, or nearly so (Alden & Yushan
Alden and Yushan (
According to the Presidency (
According to the Presidency (
A 5–10 Year Strategic Programme on Cooperation between the People’s Republic of China and the Republic of South Africa: this agreement focuses on various bilateral cooperations including Political Mutual Trust and Strategic Coordination, Mutual Beneficial Economic Cooperation and Trade, People-to-People Exchanges and Cooperation, African Affairs and China-Africa Relations as well as Cooperation in International Affairs and BRICS-related issues (The Presidency
Agreed minutes on further improving economic cooperation in trade and investment between the Ministry of Trade and Industry of the Republic of South Africa and the Ministry of Commerce of the People’s Republic of China (The Presidency
Action plan on Agriculture Cooperation between Republic of South Africa and the People’s Republic of China (
Protocol of phytosanitory requirements for the export of maize from the Republic of South Africa to the People’s Republic of China (The Presidency
Protocol of phytosanitory requirements for the export of apple fruit from the Republic of South Africa to the People’s Republic of China (The Presidency
Protocol of phytosanitory requirements for the export of dates from the People’s Republic of China to the Republic of South Africa (The Presidency
Markusen (
One of the traditional trade theories is mercantilism. This theory shows that national wealth is reflected by the country’s holding of precious metals and trade is a zero sum game (Appleyard et al.
Appleyard et al. (
According to Appleyard et al. (
Adam Smith also critisised the mercantilism views and stated that a nation’s wealth is reflected in its productive capacity and trade is a positive sum game (Appleyard et al.
According to Appleyard et al. (
Ricardian comparative advantage challenged these statements made by Smith that there is no trade if one country has an absolute advantage in the production of both commodities. This theory does make it clear that even if a country is absolutely more or less efficient in the production of all commodities, a basis for trade still exists if there is a difference in the degree of relative efficiency across commodities (Appleyard et al.
The Heckscher-Ohlin theory also supported the Ricardian comparative advantage theory. Heckscher-Ohlin assumes that relative factor intensities are different across commodities and that these differences are consistent across countries, which leads to pre-trade price differences (Appleyard et al.
The Heckscher-Ohlin theory states that countries trade because of differences in the factor abundance and the factor intensities of the goods they produce (Markusen
The inequality shows that the ratio of capital to labour in country A exceeds the ratio of capital to labour in country B. Therefore, Appleyard et al. (
The new trade theory shows that trade happens not because of comparative advantage but the principal motives for trade are scale economies, imperfect competition and product differentiation (Markusen
The theory of intra-industry trade assumes that because of intra-industry specialisation, each country will import some products even in industries in which it is a net exporter, and vice versa; that is, there will be intra-industry trade (Krugman
The other model is the Krugman model. This model rests on two features, that is, economies of scale and monopolistic competition (Appleyard et al.
Appleyard et al. (
To introduce international trade, suppose the home country is country X and the other country is country Y. Country Y is identical to country X in terms of its tastes, technology and other characteristics of factors in production (country Y might be identical in size) (Appleyard et al.
Appleyard et al. (
As Krugman’s theory of trade patterns makes several very strong simplifications compared to the real world, it cannot be directly applied to empirics, as it is (Weckstrom
The Linder theory has also an important implication regarding trade. Linder is concerned only with manufactured goods. Linder implies that international trade in manufactured goods will be more intense between countries with similar per capita income levels than between countries with dissimilar per capita income levels (Appleyard et al.
The most important theory of trade that is relevant to the study is the gravity model of trade. According to Weckstrom (
The Economic Watch (2010) explains that the gravity model of trade predicts the bilateral trade flows based on the economic sizes of (often using gross domestic product [GDP] measurements) and distance between two countries. The aim of this thesis is to predict the trade volume between SA and China and thereby use these results to test the trade balance hypothesis. Kowalski, Lattimore and Bottini (
The basic form of the gravity model is given as:
Economic Watch (2010) argues that while the model in its basic form consists of factors that have more to do with geography and spatiality, the gravity model is used to test hypotheses rooted in purer economic theories of trade as well. The gravity model estimates the pattern of international trade. The gravity equation of international trade is often motivated using new trade theory models, which are models of increasing returns (Economic Watch 2010). Nowadays there is more trade between countries. The research uses this model to show trade flows between SA and China. It is important in modelling and understanding international trade flows.
According to Lipsey and Lancaster (1956–1957) in Snorrason (
The theory of second best addresses this by stating that, in the presence of distortions, if not all the conditions for Pareto optimality can be satisfied, then the removal of some of the distortions does not necessarily increase welfare, nor does the addition of other distortions necessarily decrease it (Snorrason
The World Trade Report (
The commitment theory focuses on a domestic source of inefficiency. When setting trade policy, a government may be unable to make credible economic or political commitments to the private sector or the parliament (World Trade Report
According to Melitz and Ottaviano (
The market size of countries has influence on international trade. The market size of a particular country is measured using the country’s population size. The higher the population the, higher the productivity and less the cost of production since there will be abundant labour. Hence, countries with a high population tend to trade more with other countries. According to Matha (
According to Dell’Ariccia (
Baak (
Nicita (
The relative distance between the trading partners should also have a negative impact on trade patterns. Trade costs tend to increase together with distance. The longer the distance between the two trading partners, the higher the trading costs. Assuming that the countries have a FTA, the cost of trade includes the cost of transportation and the cost of insurance, storage cost and other costs. The longer the distance, the higher these costs. Distance has a negative coefficient as expected which means that trade is higher for two countries that are closer to each other (Khumalo et al.
Binh, Duong and Cuong (
Sisaki (
According to Doumbe and Belinga (2015) the purpose of their empirical analysis is to investigate, based on the gravity model, Cameroon’s bilateral trade flows with 28 European Union countries, signatories of the EU-Cameroon FTA on 15 January 2009. Although said agreement enforcement day was scheduled for 4 August 2014, it is important to analyse the trade trends among these 29 countries. The research findings reveal that Cameroon’s bilateral trade with European Union countries is affected positively by economic size and per capita GDP and influenced negatively by the distance between the trading partners. The result of applying the gravity model reveals that the product of two countries’ GDPs has positive and significant impact on bilateral trade; indeed, a 1%-point increase in product of the GDPs leads to an increase in the bilateral trade volume of Cameroon with the concerned trade partners by 1.2808% and about the distance factor, 1% point increase in distance leads to decrease in the bilateral trade volume of Cameroon by 2.0306%.
Nuroglu (
There are few studies that are aimed at evaluating the bilateral trade relationships between SA and China. The article is therefore aimed at covering this gap.
From all the trade theories, the gravity theory of trade is used to evaluate the bilateral trade flows between South Africa and China. The gravity model has been widely used to analyse bilateral trade flows between country pairs. According to Teweldemedhin and Van Schalkwyk (
In this model:
This gravity model will be estimated with ordinary least squares (OLS) regression analysis. The multiple linear regression model will be used since the model consists of more than two variables. The equation consists of logarithms both sides, leading to a log log model. The above equation shows the natural logarithm and the error term
The coefficient can be interpreted as follows: if SA’s GDP in year
The gravity model of trade is used to determine the bilateral trade flows between two or more countries (Thai
The research thesis will estimate the bilateral trade between SA and China while at the same time showing the positive and negative effect caused by several variables within these two countries. The model contains the SA–China annual trade flows to the left, that is, the dependent variable (
The right-hand side of the equation starts with the
The first group of data gives the product of SA’s and China’s GDP and is measured in current US dollars.
The next set of data shows the product of the two countries’ population.
The exchange rate between two countries also affects trade. According to Sibanda (
In order to estimate the influence of GDP, population and exchange rate that are hypothesised to influence the trade volume between SA and China, the OLS estimation method has been employed.
The robustness checks the dynamic fit of the variables to the model in relation to whether their presence will affect the outcome of the results. The individual relationship of the variables and the interaction effects help to show the overall relevance of the variables and their worth in ascertaining that the previous GDP, population and exchange rate largely contribute to the volume of trade between two countries
The diagnostic tests on the other hand test for heteroscedasticity, autocorrelation and normality of the variables which help to examine the relationship between trade flows and influential variables so as to validate the parameter evaluation outcomes achieved by the estimated model. These checks test the stochastic properties of the model such as residual autocorrelation, heteroscedasticity, normality and goodness of fit.
The sequence of random variables is heteroscedastic if the random variables have different variances. On the other hand, a sequence of random variables with a constant variance are said to be homoscedastic. There are a number of formal statistical tests for heteroscedasticity. One such popular test is the white test for heteroscedasticity.
The test is useful because it has the secondary advantage of testing for specification bias which helps us assess whether the model is spurious or well fitted. After running the regression the residuals are obtained and then the test regression is established by regressing each product of the residuals on the cross products of the regressors and testing the joint significance of the regression. The null hypothesis for the white test is homoscedasticity and if we fail to reject the null hypothesis then there is homoscedasticity. If the null hypothesis is rejected then there is heteroscedasticity:
Reject H0 if the white test result (
The Lagrange Multiplier (LM) test centres on the value of the
The test can be done by using the following identity:
In this identity,
The aim is to use stationary data. Stationary data means that the series evolves around the constant mean or the zero mean. Unfortunately, time series data is inherent to this principle. Time series data result in stationarity problems. In other words, the data do not evolve around the constant mean. If this data are used without making it stationary, it will produce biased results. The results will not be accurate. Hence, the model was turned into a log log linear regression model the data turned to logarithms. In this study we have taken explicit account of non-stationarity and have applied the augmented Dickey-Fuller unit root test in which we tested for unit root in the second difference. It is worth knowing that there is no multicollinearity between the variables used in this model.
The estimation results of bilateral trade between SA and China using the linear gravitational model equation are given in
Estimation results.
Variable | Coefficient | Probability | |
---|---|---|---|
log (YitYjt) | 1.657628 | 4.772431 | 0.0004 |
log (NiNjt) | 9.570439 | 2.750156 | 0.0465 |
Erijt | –0.876111 | –2.802378 | 0.0150 |
Note: Variable, log of SA trade volume with China.
The gravitational equation of trade runs through the OLS method in this study. However, after the tests were made, the estimated coefficients have the expected signs. The determinants of bilateral trade between SA and China, according to this study, are the economy size, the market size and the real exchange rate.
The results from the OLS method show that there is a positive relationship between trade flows and economy size. If the sizes of the economies (measured by the two countries’ GDP) increase by 1%, the bilateral trade flows between SA and China will increase on average by 1.66%. It can be concluded that although the results show a positive relationship, the increase of the economic size has no huge effects on the trade flows of these two trading partners. According to the World Bank (
The market sizes of SA and China have a significant and strong positive effect on their bilateral trade flows. If market sizes of SA and China (measured by the population size) increases by 1%, the bilateral trade will increase by 9.57% on average. Market size has quite huge effects on the two countries’ bilateral trade as compared to the economy size. Based on the previous years’ (2000–2016) data, population growth rate for China on average was 0.553267% (World Bank
The estimated coefficient for the real exchange rate is significant but negatively correlated with trade variation between SA and China. What this means is that a 1% depreciation of SA currency will increase bilateral trade by about 0.88% on average. The South African rand is losing its value. The rand value is falling. Hence, according to the results, if the rand continues to fall, the trade flows between SA and China will also decline.
The findings of this article are consistent with other empirical work in explaining bilateral trade variation using the gravity model. According to Thai (
Time effects of trade between South Africa and China.
The purpose of this research is to evaluate the impact of economy size, market size and real exchange rate on trade flows between SA and China for the period 1995–2015 applying the OLS method.
The results revealed a positive relationship between trade flows and the two variables tested, namely economy size and market size. The results of the last variable test have proven a negative relationship between trade flows and exchange rate.
There is a positive relationship between economy size and bilateral trade flows between SA and China. This indicates that trade improves with increase in GDP between these two countries or decreases as the GDP between these countries falls.
The other variable tested for was market size which is determined by the size of the population. The bilateral trade flow increases together with growth in population. There is a positive relationship between population size and bilateral trade flow between SA and China.
The results show evidence of a small but significant negative effect of the real exchange rate on bilateral trade between SA and China. Exchange rate volatility has an impact on trade but its contribution to trade is quite limited. The results computed from this model are in line with the theoretical findings.
The empirical results have a number of policy implications. China seem to be the fastest growing SA trading partner. Several studies indicate that with the current economic performance in China, China will be the most powerful and leading state in economic performance and is likely to be a controlling state in the whole world. Therefore, SA must maintain and also make efforts to strengthen the bilateral relations with China so that as the economy grows there are spillover benefits from trading. Since there is a positive relationship between economic size and bilateral trade flows between SA and China, policies to boost economic growth in SA should be implemented so as to increase the volumes of trade. Female-owned business could be a source of job creation, generating diversity of the business population, stimulating innovation and change in production and marketing practices; therefore, the government must promote policies that create a more gender balanced economy to expand growth (IMF
On the other hand, a growth in population also increases trade volume. Population is a proxy for market size. A high population entails a high market for both foreign and local goods. The government of SA must raise the value of their child support grant, they must make primary education free for all and subsidise secondary and tertiary education. This boosts the population and has a long-term positive effect on trade.
Real exchange rate volatility has negative impacts on trade. The South African Reserve Bank must manage the exchange rate movements more efficiently in order to encourage trade. A fixed exchange rate policy must be adopted. The government should keep enough reserves in order to remain secure when the exchange rates moves from its controlled level. This can work only if the government has sufficient foreign reserves to control any disturbance to the fixed exchange rate. The Department of Trade and Industry should target trading with countries with larger economies and markets. The government should loosen trade restrictions on countries with larger economies and markets.
The authors declare that they have no financial or personal relationships that may have inappropriately influenced them in writing this article.
S.M. was responsible for the introduction, overview of South Africa and China trade and the theoretical and empirical literature. L.J. wrote the methodology and conclusion.