‘Take a slow boat to China’

South Africa should manage its trade relations with China more effectively, rather than “naively pursuing” a free trade deal with the emerging-world economic giant, according to an emerging markets expert.

Martyn Davies, a director of research and strategy at the research consultancy Emerging Markets Focus, said the main barriers to entry into the Chinese market were cultural, linguistic and political and that these would not disappear with a free-trade agreement. He added that it was also unclear whether China was a free-market economy and warned that South African industry had already shed jobs to low-wage Chinese competition.

He spoke to the Mail & Guardian ahead of this weekend’s visit by China’s Deputy President Zeng Qinghong, who will chair a bilateral national commission with Deputy President Jacob Zuma.

Earlier this week, Deputy Foreign Minister Aziz Pahad confirmed that talks about a free-trade agreement between China and the South African Customs Union were under way.

According to the Department of Trade and Industry, bilateral trade between South Africa and China has more than doubled, from R9,3-billion in 1990 to R23,3-billion in 2003.

South Africa is China’s largest trading partner in Africa, accounting for 19,4% of its trade with the continent.

In addition, Chinese fixed direct investment (FDI) in South Africa, from 1990 to 2003, amounted to about $119,3-million, while South African FDI in China amounts to about $700-million. This excludes offshore investments by South African companies such as SABMiller and Anglo-American.

“What we should be looking to do is to carefully manage trade. If that eventually leads to a free trade agreement, then so be it,” Davies said.

He pointed out that the trade figures concealed South Africa’s growing trade deficit — the difference between imports and exports — in its trade with China. Using Department of Trade and Industry figures, Davies suggests that the deficit more than doubled from R4,5-billion to R9,9-billion between 2000 and 2003, .

A prolonged trade deficit has a negative impact on a country’s exchange rate. Economists often argue that a country’s trade balance with one country does not matter; the focus should rather be on a country’s overall trade picture.

Qian Jin, a spokesperson for the Chinese embassy in Pretoria, said that South Africa’s leading exports to China over the past two years were metal ores and scrap metals, non-ferrous metals and paper and pulp. Non-ferrous metals, paper and pulp grew by 123% and 130%, respectively between 2002 and 2003.

The idea of a free-trade agreement between the countries was first mooted in December 2001 by the then minister of trade and industry Alec Erwin. South Africa was among the first to propose this move, which commentators said “took China by surprise”.

Davies said the main reason not to push aggressively for a trade deal was that the main barrier to entry was not posed by tariffs and other price-determining factors. Far bigger stumbling blocks, he said, were political connections — with the motor vehicle industry being highly politicised for example — supply-chain relationships and market knowledge, including the language barrier.

Peter Draper, of the South African Institute for International Affairs, said he expects South Africa to pursue free-trade talks, but sees the issue as much broader than just a trade agreement. He said many countries are trying to deal with China “both as a threat and an opportunity”.

On the one hand, China’s cheap labour gives it a strong competitive edge, but at the same time its population of 1,3-billion represents a lucrative market.

Davies noted that China’s labour surplus gave it an advantage that South Africa was not able to compete with. Even as China’s goods improved in quality, prices tended to remain competitive.

The South African textile industry has complained about jobs lost to cheap Chinese imports.

Davies said that better coordination was needed between the government, labour and business.

“You cannot have a labour union complaining that it is losing its workforce and at the same time [have it] pressing for high wage increases,” he said.

Another problem, Davies said, was the “porous borders” of countries, in the South African Customs Union, adjacent to South Africa. This made it easier for cheap Far Eastern goods to flood the market.

Also at issue was the status of China’s economy. When the country entered the World Trade Organisation in December 2001, it was granted “non-market economy” status by the United States and Europe until 2016 — allowing it the advantage of relatively greater protection against imported goods.

China has successfully moved towards a market economy over the past decade, but there are still large swathes of the country, particularly rural provinces, that are centrally managed.

Davies said that China’s market status was “the first issue, not the last, to decide when pursuing free trade negotiations”.

This is the second sitting of the bilateral national commission, which was formalised in December 2001.

The countries now have more than 25 agreements in place, ranging from reciprocal arrangements to protect investments, to deals on trade, economic and technical cooperation and an extradition treaty.

Massive trade growth