South African Quotas on Chinese Clothing

Update: South African quotas on Chinese clothing and textiles: has there been sufficient economic justification?

Taku Fundira

tralac Trade Brief No 09/2007 December 2007 1

Update: South African quotas on Chinese clothing and textiles: has there been sufficient economic justification?

by Taku Fundira

Key points: Nine months into the year – Are there any changes?

- Some increase in China imports experienced in the third quarter but no overall change in market share. - There seems to be no change in the trend outlined in the earlier report and therefore still premature to determine the effectiveness of the quotas. - Importers may assess quota levels used to date in 2007, so that there may be an increase an increase in imports from China in the fourth quota, if the quota limits have not been exceeded. - This is a short preliminary note updating the third quarter trade. When the full 2007 data becomes available, we will analyse the situation in more depth. - We also note that our report is in values whereas the quota is in volumes. This will be discussed in more detail in the full 2007 analysis.

Introduction

In late 2006 South Africa unilaterally1 imposed quotas on the importation of selected clothing lines from China. Implementation was delayed until 1 January 2007. The key motivation for these quotas has been the claimed job losses in the industry. Quotas in these categories are supposed to give South African Clothing and Textile firms space to operate with the aim of improving competitiveness in domestic and export markets in the long run.

This policy decision by South Africa has been questioned by industry and stakeholders. In some of the discussions held by tralac, questions raised include:

1. Does the South African Clothing and Textile industry have what it takes to be competitive internationally or even locally for that matter? 2. Will the quotas make any difference to the fate of those employed in the local industry or should they start looking elsewhere for employment?

1technically this is considered a Voluntary Export Restraint, but it is unilateral in the sense that RSA (a) did not consult with the major stakeholders in any meaningful way and allocated the product lines in a seemingly arbitrary manner; and (b) did not consult with its fellow SACU members.

Update: South African quotas on Chinese clothing and textiles: has there been sufficient economic justification? TB09/2007 tralac | December 2007 2

3. Can South Africa’s new Industrial Policy (released recently and available on South Africa’s Department of Trade and Industry website) address the challenges faced by the clothing and textile industry? 4. How do the Chinese quotas affect the other members of the Southern African Customs Union? 5. How are the Chinese quotas being implemented and how is implementation being monitored (keeping in mind, for example, that imports could be coming through the port of Walvis Bay in Namibia)?

The objective of this note, is to update the earlier report on “South African quotas on Chinese clothing and textiles” prepared by tralac and released in September 20072. By monitoring on a quarterly basis, we examine the changes in the selected quota imports and make preliminary assessments as to whether they may be indicating that they are meeting their specific goal of slowing the trade flows of clothing imports from China.

It should be noted that there may be slight differences in data presented in the first report to data presented in this updated version especially for 2007 data as this is continuously updated and therefore still provisional.

We maintain the hypothesis that “while the imports from China may have reduced in the selected quota lines, imports from other sources and imports from China in non-quota lines may largely compensate for any enforced reduction in the quota lines.”

We caution that (a) the nine-month time period is still not sufficient to establish definitive patterns and (b) trade data between South Africa and Lesotho, a likely source of compensatory supply, is not readily available. Thus, the results presented here are preliminary only.

Results up to September 2007

In the previous analysis we highlighted the following key points:

- Chinese imports have decreased dramatically but have been replaced by a variety of other low cost imports. - Big increases in imports leading up to the quotas have also diminished the expected impact at least for the short term.

2 Read tralac Trade Brief No 6/2007, available online: http://www.tralac.org/pdf/20070911_TB06_China_clothing_textiles.pdf

- Increasing deviations between SA and Chinese data for the past two quarters are troubling, and may suggest that enhanced monitoring is needed. - No immediate evidence exists that local industry has taken up the challenge, although this is based on export figures and for the first six months only. - Findings are preliminary, but to date the quotas have produced little economic justification for their continued existence. - The quotas may even have done more damage than good as importers have established a variety of new markets to source from in future.

In this analysis we attempt to update the results up to September 2007, more specifically the three quarter year (January to September) analysis. For comparative purposes reference is made to the analysis presented in the earlier report in order to get a clear understanding of the results.

A quarterly trend analysis of the South African quota line imports since 1996 is shown in Figure 1. Note that under the review period, both imports from the World and China followed the same trend. However, after the first quarter of 2007, imports from China move in the opposite direction and lag behind as the imports from the World begin to recover in the second quarter. Imports from China only begin to recover in the third quarter of 2007 a result likely attributed to market adjustments after the sudden shock caused by the quota implementation in the first quarter of 2007.

Figure 1: South African imports in quota lines – China vs. World (Quarterly)

) 2,000 s n o i l l i m (

R 1,500

The World China

Source: World Trade Atlas; South African (SARS) data

The trend for the third quarter year (January to September) analysis is no different to the one that the half year analysis gave which was outlined earlier. Although, the drop in Chinese figures is still much more pronounced than the aggregate World imports, there has been an increase in imports culminating from the third quarter recovery as shown above in Figure 1. Chinese imports increased by 47 percent in the 2007 third quarter, from R751 million in second quarter to R1.1 billion.

Table 1 gives an exact breakdown of the countries that have taken China’s place in the section of the South African market targeted by the quota lines for the third quarter year analysis.

In the half year analysis China’s share decreased by nearly 40 per cent from R1574 million for January to June 2006 to R953 million in January to June 2007. During that review period the countries with the biggest value gains for 2007 compared to 2006 were Pakistan, Malaysia, Mauritius, Vietnam and the UK, all with increases of between R24 million and R35 million. The rise in nearly R20 million worth of imports from Zimbabwe was somewhat surprising given the current economic difficulties facing the country. Myanmar, Malaysia and Vietnam showed significant gains from a very low base within the six month review period, considerably strengthening their position within the targeted clothing and textile lines. Myanmar increased its quota line exports to South Africa by 1451per cent, Malaysia by 1011 per cent and Vietnam by 524 per cent.3

However, the third quarter year (January to September) analysis for the 2006 and 2007 paints a slightly different picture especially regarding countries with the biggest value gains although in terms of market share China’s share decline remained constant at 40 percent. However, when you consider the biggest movers in terms of value for the review period, Pakistan and the UK do not feature and are replaced by Indonesia and Hong Kong. Imports from Hong Kong and Zimbabwe may well be originating from China (a) because of the proximity of Hong Kong to China and (b) because most industries in Zimbabwe are feeling the brunt of the economic challenges the country is facing and are most likely operating below optimum capacity to increase imports by R60 million between the 2006 and 2007 review period.

3 We note that a possible source for clothing as a substitute for Chinese imports is Lesotho, but the SARS data does not record imports from Lesotho (or the other SACU partners). However, the dominant destination for Lesotho’s clothing exports is the US and US data shows an increase in clothing imports from Lesotho during the first 6 months of 2007. This possibly suggests no or limited change in exports from Lesotho to South Africa.

Table 1: Major SA market players in HS lines targeted by Chinese Import Quotas (January to September) 2006 & 2007 Imports Imports Value R R change R (millions) (millions) %share %share %change (millions) 2006 to 2006 to Rank Country 2006 2007 2006 2007 2007 2007 0 --The World-- 5,889.61 4,876.11 100.0 100.0 -17 -1,013.50 1 China 4,513.54 2,680.25 76.6 55.0 -41 -1,833.29 2 Hong Kong 176.60 260.68 3.0 5.3 48 84.08 3 India 196.70 242.05 3.3 5.0 23 45.35 4 Zimbabwe 72.62 132.76 1.2 2.7 83 60.14 5 Mauritius 55.85 132.18 0.9 2.7 137 76.33 6 Indonesia 44.11 132.15 0.7 2.7 200 88.04 7 Pakistan 99.47 130.09 1.7 2.7 31 30.61 8 Malawi 125.49 127.88 2.1 2.6 2 2.39 9 Vietnam 17.07 111.51 0.3 2.3 553 94.43 10 Malaysia 5.18 91.41 0.1 1.9 1666 86.24 11 Thailand 56.21 85.48 1.0 1.8 52 29.27 12 Turkey 47.74 82.91 0.8 1.7 74 35.17 13 Bangladesh 36.67 76.10 0.6 1.6 108 39.43 14 Italy 69.87 75.90 1.2 1.6 9 6.03 United 15 Kingdom 40.96 63.78 0.7 1.3 56 22.82 16 Myanmar 6.15 61.69 0.1 1.3 903 55.54 17 Taiwan 47.50 48.27 0.8 1.0 2 0.76 18 United States 40.66 40.51 0.7 0.8 0 -0.15 19 Sri Lanka 3.73 29.81 0.1 0.6 700 26.09 20 France 21.74 26.80 0.4 0.5 23 5.06 Big Movers (Value 2006 to 2006 to change) 2006 2007 2006 2007 2007 2007 1 Vietnam 17.07 111.51 0.3 2.3 553 94.43 2 Indonesia 44.11 132.15 0.7 2.7 200 88.04 3 Malaysia 5.18 91.41 0.1 1.9 1666 86.24 4 Hong Kong 176.60 260.68 3.0 5.3 48 84.08 5 Mauritius 55.85 132.18 0.9 2.7 137 76.33 2006 to 2006 to Big Movers (% change) 2006 2007 2006 2007 2007 2007 1 Malaysia 5.18 91.41 0.1 1.9 1666 86.24 2 Myanmar 6.15 61.69 0.1 1.3 903 55.54 3 Sri Lanka 3.73 29.81 0.1 0.6 700 26.09 4 Vietnam 17.07 111.51 0.3 2.3 553 94.43 5 Indonesia 44.11 132.15 0.7 2.7 200 88.04 Source: World Trade Atlas; South African (SARS) data

Reconciliation between SA import data and Chinese export data

Chinese export data shows similar trends to those produced by the SARS import data (see Figure 2). There are no discrepancies from the earlier analysis prepared in the first report. This should not come as a surprise as these two figures should theoretically account for the same thing. It should be noted however, that the Chinese export data is consistently at a much higher level than the SARS import equivalent.

Figure 3 uses the respective series 1996 first quarter values as base in an attempt to account for this difference in levels. This is done reasonably successfully as the series move very close to each other for the majority of the period under investigation. Key to note is the apparent decline in the differences in levels between the two datasets as we experience the stabilisation in China customs data and the increase in South Africa SARS data in the third quarter of 2007. This is consistent with the hypothesis that the timing of the second quarter trade was such that there was substantive exports from China late in the quarter that had not actually landed in South Africa during the second quarter (but arrived in third quarter). To substantiate this argument Figure 4 gives the ratio of Chinese exports to South African imports for the quota lines. The ratio consistently fluctuated between the 0.5 and 1 level from the beginning of 2003 (the start of China’s increased role in the sector) up until the fourth quarter of 2006. However, the first two quarters of 2007 have seen the difference between the two series increase dramatically, especially the second quarter of 2007 where the ratio of Chinese exports to South African imports for the same products more than doubled the level it had been for the past three years. However we note the decline in the ratio in the third quarter of 2007 down to almost the same level as in the first quarter of 2007.

Update: South African quotas on Chinese clothing and textiles: has there been sufficient economic justification? TB09/2007 tralac | December 2007 7 Figure 2: Chinese quota line exports to South Africa (Quarterly)

3000 )

n 2500 o i l l i m ( 2000 R

South Africa

Source: World Trade Atlas; Chinese Customs data

Figure 3: South African imports vs. Chinese exports in quota lines (1996 Q1 = 100)

) 5,000 0 0 1

1 Q 4,000 6 9 9 1 (

a 3,000 V

x e d n I 2,000

South Africa imports China Exports

Source: World Trade Atlas; South African (SARS) data and Chinese Customs data

Figure 4: Ratio of Chinese exports to South African imports in quota lines (Quarterly)

2.0 s t r o p m i

S 1.5 R

s t r o p x E

n 1.0 i h C

: o i t a R

0.0 1st Qtr 2nd 3rd Qtr 4th Qtr 1st Qtr 2nd 3rd Qtr 4th Qtr 1st Qtr 2nd 3rd Qtr 4th Qtr 1st Qtr 2nd 3rd Qtr 4th Qtr 1st Qtr 2nd 3rd Qtr 2003 Qtr 2003 2003 2004 Qtr 2004 2004 2005 Qtr 2005 2005 2006 Qtr 2006 2006 2007 Qtr 2007 2003 2004 2005 2006 2007

Series1

Source: World Trade Atlas; South African (SARS) data

Exports in quota lines

Given that the stated objective of the clothing import quota restrictions was to provide support to the South African domestic sector it is instructive to examine the export profile of these same quota lines. In this updated analysis there seems to be no change in the trend outlined in the earlier report and therefore still too premature to determine whether these sectors are recovering.

References

Van Eeden J. and Sandrey R. 2007. South African quotas on Chinese clothing and textiles: has there been sufficient economic justification? tralac Trade Brief No 6/ 2007

Update: South African quotas on Chinese clothing and textiles: has there been sufficient economic justification? TB09/2007 tralac | December 2007