Download The Rise of China: A New Fear of Trade

ICITI 2011
ISSN: 16941225
The Rise of China: A New Fear of Trade Competition for Mauritius?
Dr Baboo M Nowbutsing
&
Sonalisingh Ramsohok
University of Mauritius, Reduit, Republic of Mauritius
Abstract
The relationship between China and Mauritius date back to centuries due to the Chinese
diaspora in Mauritius. The rise of China in the global economy has raised several
questions. China is investing massively in several nations. The question remains whether
it is for mutual benefits or the Chinese quest for world dominance. China is the second
top importing partner of Mauritius. However, the main export destinations of Mauritius
remain Europe and USA. This paper addresses the impact of the emergence of China on
the Mauritian economy. Using two indexes of trade competition, it is found that both
countries have similar export structure. We presume that it will be impossible for
Mauritius to compete with China mainly because of the latter’s cheap labour advantage
and natural resources availability. Further, we found that while Mauritius is consolidating
its revealed comparative advantage (RCA) in its two top exporting products, China RCAs
is increasing in those products where that of Mauritius is decreasing. Finally, we found
that an increase in real GDP per capita will have a positive impact on Mauritius and there
is no relationship between the two countries openness.
JEL: F10
Keywords: Trade Competition & Trade Structure
1.
Introduction
Mauritius is probably the most agile economy in Africa. Its success has been based upon
its ability to liberalise and diversify away from a single commodity dependent economy.
Mauritius is no longer dependent upon the export of sugar and is emerging as a
successful African economy that has created new growth drivers in tourism, offshore
finance, trade and increasingly textile & clothing (T&C) manufacturing. It would not be
out of place to characterize Mauritius as the Dubai of Africa.
One of the distinctive features of trade liberalization in Mauritius has been its gradual
approach to reducing import protection and reforming other aspects of its industrial
regime over the last 17 years. This was divided into three distinct periods, each with a
different rate of reform and coverage. The first two years (1983-1985) saw the rapid
elimination of most quantitative restrictions on imports and their replacement by tariffs.
The next decade (1983-1993) saw a gradual reduction in the effective protection of
industry and more vigorous export promotion through preferential interest rates on
development loans, tax concessions and the establishment of the Mauritius Export
Development and Investment Authority to provide overseas marketing support. The third
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period (1994 to date) cut protection further by reducing import tariffs and the government
began to develop skill intensive exports by setting up new institutions such as the
Mauritius Productivity and Competitiveness Council, created in 2000, and a separate
Board of Investment established in 2001 to attract high-skill foreign investment.
Since 1978, China has reformed and opened its economy. The Chinese leadership has
adopted a more pragmatic perspective on many political and socioeconomic problems
and has reduced the role of ideology in economic policy. China’s ongoing economic
transformation has had a profound impact not only on China but on the world. In 2010,
China overtook Japan to become the world’s second- largest economy in terms of gross
domestic product, behind the United States. China is firmly committed to economic
reform and opening to the outside world. The stunning emergence of China on the global
stage has become a matter of concern of everyone, both developing and developed
countries. Every country is interested to know the resulting impact of an emerging China
on their economies. While some portray China as an opportunity, others view China as a
threat. Assuming that all goods produced by China and the other countries are
homogeneous ,it is out of question to be able to compete with the Chinese products and
one of the main reason for this is because it is able to sell its goods at a very low cost. It
is almost impossible to compete with the cheap Chinese products for several reasons.
Firstly, there is an abundance of natural resources in china and hence China saves a lot in
terms of raw materials. Secondly, china is known for its cheap labor.
Most countries which are engaged in some sort of free trade regime in this global
becoming world often find themselves exposed to some sort of Chinese product sooner or
later. Trade competition with China has taken another dimension whereby it is almost
impossible to compete with the cheap Chinese products if we assume that all the goods
produced by China and the other countries are homogeneous goods. The Chinese low
cost labor intensive products have triggered an unbalanced competition whereby
countries that have a similar exporting structure with China are bound to lose if not
competitive. In a more global becoming world, competition on the international stage
concerning trade is emerging as a major issue. The removal of trade barriers by countries
implies acquiring more potential buyers for their goods and services but at the same time
it means exposing its nationals to foreign goods which in the long run might affect
negatively its home industries if not competitive. But the main presumption underlying
competition is that vigorous competition between firms in an industry will foster
efficiency and thus economic welfare (Hoekman and Mavroidis, 2002).
The structure of the paper is as follows: section 2 provides a brief literature review on the
topic in hand; section 3 provides an overview of the trade policies of Mauritius and
China; section 4 addresses the Mauritian and Chinese trade structure; section 5 focuses
on the Mauritius China trade relations; the statistical analysis of trade competition is
presented in section 6; section 7 concentrates on the regression analysis and section 8
concludes.
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A Brief Literature Review
Trade liberalization can be viewed as the driver of trade competition. Trade liberalization
can be portrayed as the source behind the considerable increase in trade around the world.
Ever since the world has entered the globalization era, there has been greater competition
from low cost and high volume producers on a more leveled playing field. Trade
openness or liberalization is a two way lane whereby a local firm’s market share which
has been hit by foreign imports is most likely to be compensated by participation in
foreign market.
It is generally believed and accepted that competition policy is to improve economic
welfare. They have mainly been formulated with the aim of improving trade between
countries. The majority of the policies targets anti-competitive measures taken by
governments, which aims at protecting the country’s interest only, even though it has
been found that anti-competitive measures in the long run hurts more than it helps. The
main objective of competition policy therefore is to maintain a healthy degree of rivalry
among firms and in different markets. Among other objectives include protecting
consumers from monopoly market power, improve the efficiency of the firms, promote
trade internationally, etc. It is good to note that competition laws can come from different
parties. For example, countries can set their own competition laws that must be followed
by local firm. These laws are normally put in order to ensure that the markets are
competitive so that it leads to the maximization of national welfare (Hoekman and
Mavroidis 2002). Competition policies or laws can also come from international
organizations. The WTO, since it started its operations in the 1990s has formulated a set
of policies that concerns competitions and requires its members to abide by those
policies.
As countries open up their economy to foreign trade, they acquire more potential buyers
for their goods and services. Trade exports can be defined as the selling of goods and
services which are produced in one country to another country. A country would
normally export those goods in which it has a comparative advantage and as countries
exports grow, they tend to specialize in that particular production. The presence of
multinational companies in countries has played an important role when it comes to
exports. Poddar (2004) found that MNCs were well aware of exports markets and they
just had to start exporting to those markets as trade was liberalized. This helped domestic
firms gain knowledge about those markets and therefore started exporting to those
markets as well. Studies have also found that many exporting firms tend to collide, some
of them after having the supports of governments. Colliding allows firms to raise prices
in exporting market, generating higher revenues and improving the country’s terms of
trade (Hoekman and Mavroidis 2002). This is considered as an anti-competitive measure
since foreigners have to pay higher prices for the same good.
Countries opening up to free trade often find themselves being flooded with imported
good which very often hurt to local firms. Teshima (2008) studied local Mexican firms
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closely and found that they were investing hugely on research and development and paid
special attention to innovation in order to be able to compete with imported goods.
Import competition also increases the elasticity of demand of domestic firms, forcing
them to reduce their prices (Thompson 2001). Many economists argue that a liberal trade
and investment policy stance is the cheapest and most effective competition policy
instrument available to a government. Import competition can be said to be exerting good
discipline upon the behavior of domestic firms and this is widely experienced by those
countries which had high barriers to entry.
Chen, Imbs and Scott (2006) studied the impact which openness has on the domestic
market. In the short run, when analyzing the relationship between relative prices and
import penetration, they found that domestic openness affect domestic prices negatively
while foreign openness affected them positively. Again in the short run, when they based
their study on productivity, they found that domestic openness resulted in an increase in
domestic productivity while foreign openness had a tendency to reduce it. When it comes
to the long run however, it was found that domestic openness exerted an upward pressure
on relative prices while foreign openness acted negatively on prices. Concerning
productivity in the long run, Chen, Imbs and Scott data showed a complete reversal of
situation form the short run where relative productivity apparently fell on the larger
horizon.
Licandro and Navas-Ruiz (2007) developed an endogenous growth model with specific
innovations, cournot competition on a continuum of Oligopolistic markets and free trade
between identical countries were developed. It was found that international trade induces
growth in participant countries through an increase in competition. Their study was
focused on preferential trade liberalization agreements between countries whereby. They
showed that countries liberalizing trade between each other tend to grow more than those
countries which are not part of any trading agreements. This is mainly because countries
which have entered preferential trade liberalization agreements have gained in
competitiveness and therefore are bound to affect the growth of countries en route to
trade liberalization unless there has been any trade agreement.
Poddar (2004) analyse the effect of removal of trade barriers on competition among
domestic firms. It was found that many of the domestic firms in India which were already
exporting goods focused more on their exports. This had also lead to a rise in the number
of multinational corporations operating in India. This led an increase in competition
among the exporting firms forcing them to improve on quality of their products and
become more efficient. The Indian example as showed by Poddar was therefore a clear
case where competition led to more innovation and efficiency by the domestic firms.
Erk and Direkci (2000) studied the effect of low wages as a means of competition
between countries. It is often argued that countries which have low wages always have a
competitive edge over countries which pay its labor higher wages. Erk and Direkci
(2000) studied the competitiveness of the Turkish manufacturing sector for the years
1988-2000 and have found that higher wages usually match with higher productivity,
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which is one the factors that increase the export competitiveness of higher wage
countries. They concluded their study claiming that the Turkish government should focus
on qualified labor creation and employment versus the pauper labor argument.
Lidoy, Rodriguez and Santiso (2006) while assessing the impact of emerging china on
Latin America found that both regions needed each other. It would have been initially
believed that Chinese products would have flooded the Latin America countries with low
cost produced goods. Lidoy, Rodriguez and Santiso (2006) found that the removal of
trade barriers instead improved the terms of trade between those two blocs and the Latin
American countries were benefiting more from Chinese imports which needs those
imports to fuel its growing economy. Trade volume has risen from $2 billion in 1990s to
$15 billion in 2001 according to Chinese computations. Trade competition was also low
between Latin America and China with the exception of Mexico. Using the coefficient of
specialization and coefficient of conformity to measure the degree of competition, their
study clearly showed low signs of trade competition against China. Most of the Latin
American countries were scored below 0.5 out of 1 whereby 1 means perfect trade
competition and zero means no competition at all.
Some studies have found that dealing with trade barriers and government regulation that
restrict competition can be generating higher rate of return. Empirical evidences have
showed that the removal of government created regulations and other barriers to
competition allows for a higher payoff. Most empirical studies have however not focused
on competition laws with the exception of Kee and Hoekman (2002) who investigated the
impact of competition law on estimated industry markups over costs. The conclusion held
was that antitrust legislation, independently had no impact on markups, while imports and
lower entry barriers have a significant effect in reducing markups. Competition law does
have an indirect effect, however, by reducing the first order marginal effect of imports
and reinforcing the marginal effect of domestic competition, an effect that is statistically
significant for larger economies.
3.
Trade Policies of Mauritius and China
China is continuing to open its economy. This is reflected in the downward trend of
tariffs. However tariffs remain the main border measures. The average applied MFN
tariff rate was 9.5% in 2009 compared to 9.5% in 2007. Applied rates are close to bound
rates and bound rates are low, thereby imparting the tariff with a high degree of
predictability. Nonetheless, China's tariff could be complex, as its applied MFN tariff,
for example, contains 60 different ad valorem rates. Tariff exemptions are provided for,
inter alia, goods imported in bond under processing trade (which accounted for about
40% of China's international trade), if they are exported within a certain period. China
bound all its tariff lines at ad valorem rates. The applied MFN tariff rates are close to the
bound rates and bound rates are low, thereby imparting a high degree of predictability to
China’s MFN tariff (Table 1). Bound rates vary from zero to 65% for agricultural
products, and from zero to 50% for non-agricultural products
Table 1: China Tariff Structure (2005, 2007, 2009)
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MFN applied
Final
1
Bound tariff lines (% of all tariff lines)
2005
100
2007
100
2009
100
bound
100
2
Simple average rate
Agricultural products (HS 01-24)
9.7
14.6
9.7
14.5
9.5
14.5
9.9
14.6
Industrial products (HS 25-97)
8.9
8.8
8.6
9.1
WTO agricultural products
WTO non-agricultural products
Textiles and clothing
ISIC 1 - Agriculture, hunting and fishing
ISIC 2 – Mining
ISIC 3 – Manufacturing
Manufacturing excluding food
processing
First stage of processing
Semi-processed products
15.3
8.8
11.5
11.2
2.3
9.8
15.3
8.8
11.5
11.2
2.1
9.7 c
15.2
8.6
11.5
11.1
1.9
9.5
15.3
9
11.5
11.3
2.8
9.9
9
9.6
7.3
9
9.6
7.2
8.8
9.5
7.1
9.2
9.9
7.3
Fully processed products
Domestic tariff "peaks" (% of all tariff
lines)
International tariff "peaks" (% of all tariff
lines)
11.1
11.1
10.8
11.3
2.6
2.3
2.0
2.4
15.6
15.4
14.6
15.9
Overall standard deviation of tariff rates
Coefficient of variation of tariff rates
Tariff quotas (% of all tariff lines)
Duty-free tariff lines (% of all tariff lines)
Non-ad valorem tariffs (% of all tariff
lines)
Nuisance applied rates (% of all tariff
lines)
7.6
0.8
0.7
8.6
7.5
0.8
0.6
8.7
7.4
0.8
0.6
9.4
7.6
0.8
0.6
7.6
0.7
0.7
0.7
0
2.6
2.7
2.7
2.6
3
4
5
6
7
8
9
10
Source: WTO (2010)
Apart from import prohibitions (to protect public interest, environment, or in accordance
with international commitments), China has continued to use non-tariff border measures
(such as import and export licensing) as instruments of its trade and industrial policies.
State trading is still used to manage trade in certain imports and exports of, inter alia,
some agricultural products and crude and processed oil. Further, the administrative and
legislative framework on standards, voluntary or mandatory, remains the same. The
General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) has
reformed its entry-exit inspection procedures and introduced a direct release system to
facilitate trade.
China's export regime is still characterized by various restrictions, notably prohibitions,
licensing, quotas, taxes, and less than full rebates of VAT on exports. Export taxes and
VAT rebates on exports are adjusted from time to time, according to the authorities, to
reflect the changing international environment, or to save energy, protect the
environment, and conserve natural resources. Nonetheless, the effectiveness of some of
these export restraints in achieving their objectives can be questioned; indeed, the
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Government is considering alternative measures, such as levying an environmental tax,
for example, on some natural resource products.
During the last decades, Mauritius has undertaken some major trade-related reforms.
With the aim of transforming Mauritius into a duty-free island, the maximum tariff rates
have been reduced, and the number of duty-free lines increased. This has helped to lower
the simple average applied MFN tariff (including ad valorem equivalents (AVEs)) from
19.9% in 2001 to 6.6% in 2007. Some 79% of all tariff lines are now duty-free. The use
of specific duties, however, increased from two tariff lines in 2001 to 5.9% of total tariff
lines in 2007, the AVEs varying from 0.1% to 277.5%. The number of bands (excluding
AVEs) has been reduced from 9 in 2001 to 4 in 2007. Manufacturing is the most tariff
protected sector, with a simple average tariff of 6.8% and rates ranging up to 277.5%.
Protection is especially high in footwear (50.7%), wearing apparel (34.3%), tobacco
(27.9%), knitted and crocheted fabrics (27.7%), sugar products (25.7%), and beverages
(23.6%).
Table2: Mauritius Tariff Structure, 2007
2007
1. Bound tariff lines (% of all tariff lines)
2. Duty-free tariff lines (% of all tariff lines)
3. Non-ad valorem tariffs (% of all tariff lines)
4. Tariff quotas (% of all tariff lines)
5. Non-ad valorem tariffs with no AVEs (% of
all tariff lines)
6. Simple average tariff rate
Agricultural products (WTO
definition)
Non-agricultural products (WTO
definition)
Agriculture, hunting, forestry and
fishing (ISIC 1)
Mining and quarrying (ISIC 2)
Manufacturing (ISIC 3)
7 Domestic tariff "spikes" (% of all tariff lines)
8. International tariff "peaks" (% of all tariff
lines)
9. Overall standard deviation of applied rates
10. "Nuisance" applied rates (% of all tariff
lines)
15.7
79
5.9
0
0.7
6.6
8.5
6.3
4.9
1.5
6.8
11.4
11.6
18.7
0
Source: WTO (2008)
The simple average of Mauritius' 2007 MFN tariff (including AVEs) was 6.6%, down
from 19.9% in 2001; the coefficient of variation is 2.8 and reflects the dispersion of the
rates from zero (the modal rate which applies to 79% of the 6,238 tariff lines at the HS
eight-digit level) to 277.5% (Tables 2). In 2005, Mauritius eliminated the differentiation
of customs duties applied to imports depending on their source ("scheduled" territories,
i.e. Commonwealth and certain major trading partners, and "non-scheduled" territories,
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i.e. other countries). The same differentiation in excise duties was eliminated already in
2001. The differences between the rates of the excise duty applied to imports and local
goods were also eliminated in July 2006. The standard rate of the value-added tax (VAT)
has been raised from 10% in 2001 to 15%. In addition, other duties and charges apply to
imports of tea (a cess of MUR 0.20 per kg and a 20% Tea-Board fee) although they have
been bound at 17% on this product. Mauritius has been implementing the WTO
Agreement on Customs Valuation since 1 January 2000.
Several non-tariff barriers continue to be maintained on various grounds. Imports of
table potatoes and salt are still subject to quantitative restrictions, and numerous products
remain subject to import controls, by means of permit, or import ban. Several parastatal
bodies, such as the State Trading Corporation and the Agricultural Marketing Board, still
hold exclusive rights over imports of "strategic products" (including wheat flour, ration
rice, petroleum products, seed and table potatoes, and whole onions and garlic). There
are several other parastatal bodies (that market or supply products or services) through
which the State intervenes in economic activities. The contribution of state-owned
enterprises to the GDP during the review period has been estimated at slightly above
14%; their most important contribution was in the transport, storage and communication
subsectors.
4.
Mauritius and China Trade Structure
In order to analyse the short-term impact derived from the Chinese trade evolution, it is
necessary to study first the exporting and importing structure of the country. The first
relevant point is that while Mauritius has a negative net export, China has a huge trade
surplus. For this section, we use the COMTRADE database, SITC 2 data.
Table 3: Mauritius Export Structure (2005-2010, SITC 2)
Year
2005 2006 2007 2008 2009
2010
Food and Live Animals
25.18 26.15 26.73 25.69 31.68 34.64
Beverages and Tobacco
0.32
0.39
0.67
0.88
0.84
0.87
Crude Materials, inedible, except fuels
0.73
1.16
1.23
1.43
1.55
1.80
Minerals fuels, lubricants and related materials
0.08
0.10
0.15
0.03
0.03
0.38
Animals and vegetables oils, fats and waxes
0.05
0.04
0.07
0.07
0.17
0.11
Chemicals and related products, not included elsewhere
1.32
1.12
1.85
2.63
3.45
3.54
Manufactured goods classified chiefly by materials
7.95
7.47
8.22
7.75
9.12
9.79
Machinery and transport equipment
15.12 16.29
5.78
5.46
2.29
2.92
Miscellaneous manufactured Articles
40.93 39.21 46.00 41.44 49.33 44.36
Commodities and transactions, not included elsewhere
8.31
8.06
9.30 14.61
1.53
1.60
Source: Computed from COMTRADE data
Referring to table 3, a large proportion of Mauritius export consists mainly of
miscellaneous manufactured articles (44.6% share of total exports in 2010) and food and
live animals (34.64% share of total exports in 2009). Exports within these two categories
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are dominated by articles of apparel and clothing and exports of fish and fish preparations
respectively.
Year
Table 4: Mauritius Import Structure (2005-2010, SITC 2)
2005 2006 2007 2008
2009
2010
Food and Live Animals
14.81
14.97
16.55
18.01
18.61
18.23
Beverages and Tobacco
0.9
0.82
1.26
1.6
1.78
1.83
2.06
2.22
2.56
2.68
2.51
2.30
16.45
16.8
18.35
21.42
15.75
19.18
0.9
0.62
0.95
1.19
1.12
0.87
7.61
6.8
7.57
7.67
8.83
9.01
Manufactured goods classified chiefly by materials
21.04
19.24
20.75
19.31
18.52
18.96
Machinery and transport equipment
28.03
31.04
22.63
19.73
23.21
20.08
Miscellaneous manufactured Articles
7.92
7.17
7.71
8.17
9.37
9.02
Commodities and transactions, not included elsewhere
0.27
0.32
1.67
0.22
0.31
0.53
Source: Computed from COMTRADE data
Crude Materials, inedible, except fuels
Minerals fuels, lubricants and related materials
Animals and vegetables oils, fats and waxes
Chemicals and related products, not included elsewhere
Referring to table 4, it can be noted that Mauritian’s imports are mainly machinery and
transport equipment (20.08% share of total imports in 2010), food and live animals
(18.23% share of total imports in 2010), manufactured goods classified chiefly by
material (18.96% share of total imports in 2010) and minerals fuels, lubricants and
related materials (19.18% share of total imports in 2010).
Table 5 shows the China’s export structure for the year 2005 to 2010. From the exports
side, we find three key sectors in 2010: manufactured goods (15.98%), machinery and
transport equipment (49.53%) and, finally, miscellaneous manufactured goods (23.80%).
These three sectors add up to 89.3 % of total exports.
Table 5: China Export Structure (2005-2010, SITC 2)
Year
2005
2006
2007
2008
2009
2010
Food and Live Animals
2.95
2.65
2.52
2.29
2.71
2.61
Beverages and Tobacco
0.16
0.12
0.11
0.11
0.14
0.12
Crude Materials, inedible, except fuels
0.96
0.79
0.72
0.76
0.64
0.69
Minerals fuels, lubricants and related materials
2.32
1.84
1.72
2.23
1.70
1.70
Animals and vegetables oils, fats and waxes
0.04
0.04
0.03
0.04
0.03
0.02
Chemicals and related products, not included elsewhere
4.62
4.51
4.86
5.46
5.07
5.45
Manufactured goods classified chiefly by materials
17.09
18.16
18.19
18.34
15.53
15.98
Machinery and transport equipment
46.25
47.17
47.44
47.37
49.28
49.53
Miscellaneous manufactured Articles
25.41
24.48
24.24
23.29
24.76
23.80
Commodities and transactions, not included elsewhere
9
0.21
0.24
0.18
0.12
0.14
0.10
Source: Computed from COMTRADE data
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Table 6: China Import Structure (2005-2010, SITC 2)
Year
2005
2006
2007
2008
2009
2010
Food and Live Animals
1.42
1.26
1.20
1.24
1.47
1.54
Beverages and Tobacco
0.12
0.13
0.15
0.17
0.19
0.17
10.62
10.49
12.31
14.71
13.99
15.18
Minerals fuels, lubricants and related materials
9.76
11.32
11.07
15.02
12.41
13.62
Animals and vegetables oils, fats and waxes
0.51
0.50
0.78
0.94
0.77
0.65
Chemicals and related products, not included elsewhere
11.58
10.78
11.02
10.30
10.92
10.47
Manufactured goods classified chiefly by materials
12.28
10.91
10.71
9.42
10.72
9.42
Machinery and transport equipment
44.07
45.21
43.23
39.07
40.60
39.36
Miscellaneous manufactured Articles
9.34
9.14
9.28
8.74
8.58
8.26
Commodities and transactions, not included elsewhere
0.31
0.26
0.26
0.39
0.33
1.32
Source: Computed from COMTRADE data
Crude Materials, inedible, except fuels
As far as imports are concerned, we find that machinery and transport equipment
(39.36% in2 010), crude materials, inedible, excepts fuel (15.18%) and chemicals and
related products, not included elsewhere (10.47%). Thus, these add up to 64.4% of total
imports. We note can more or less similar structure of exports and imports. This suggests
that a significant intra-industry trade is taking place. In fact, this evidence reflects that
China has turned into a regional production centre and manufacturing point for reexports.
5.
Mauritius- China Trade Relations
Prior to the year 2000, Mauritius relied primarily on France for its imports. After the
formation of SADC in 2000, South Africa was the top importing partner until 2004,
Mauritius’s main import source. Since 2005 China has replaced South Africa as
Mauritius’ main source of imports. Lately, India has replaced China as the main source of
Mauritius’ imports. Figure 1 shows import from China for the period 1980 to 2010. It can
be seen that imports has increased considerably over the years. However during the
period 2009 to 2010, a small decline was observed because of the financial crisis.
Manufacturing goods classified chiefly by materials, machinery and transport equipment
and miscellaneous manufactured articles are the main categories imported from China. In
2010, these categories represented 39.5%, 31% and 19.5% of total import from China
respectively. The main products imported were textile yarn; telecommunication and
sound-recording and reproducing apparatus and equipment; office machines and
automatic data-processing machine and office stationary. In 2010, China occupies 6.7%
of total Mauritian imports.
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Figure 1: Import from China, 1980 – 2010
700000000
600000000
US $
500000000
400000000
300000000
200000000
100000000
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
0
Year
10000000
9000000
8000000
7000000
6000000
5000000
4000000
3000000
2000000
1000000
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
US $
Figure 2: Export to China, 1990 – 2010
Year
European markets feature prominently among the top Mauritius export destination UK
and France absorbing 23.7% and 16.2%, respectively, of Mauritius’ exports.
Miscellaneous manufactured articles (mainly wearing apparel), food and live animals and
beverages and tobacco are the main exported export to Europe. The US market, with 11%
of exports in 2010, comes in third place. Mauritius’ exported mainly wearing apparel
under the Africa Growth and Opportunity Act (AGOA). Over 80% of Mauritius’ exports
to the US consist of textiles and clothing, which benefit from duty-free access under the
AGOA. Figure 2 shows export to China from 1990 to 2010. There is a hike of 33% from
the year 2000 to 2001. This is mainly due to an increase in the range of product exported
to China.
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6.
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Statistical Analysis
In order to assess the short-term costs stemming from Chinese competition, we have built
two indexes of trade competition. The aim of these indexes is to compare the exporting
structure of China with Mauritius in a particular period of time. If the exporting structure
between the two countries is quite similar, then trade competition is more likely. These
indexes are built using COMTRADE database. The indexes are modified versions of the
well-known coefficient of specialisation (CS) and coefficient of conformity (CC). These
two indexes examine and compare the exporting structure of Mauritius and China to
finally show the degree of trade competition between the two economies.
CS  1 
1
aitn  a njt

2
CC 
a a
n
it
n
jt
n
 (a )  (a
n 2
jt
n
it
)2
n
In the above equations, a n it and a n jt show the share of exports of a commodity “n” out
of total exports for countries “i” and “j” at time “t”. In our case, one country will be
Mauritius and the other one China. The two indexes demonstrate that if the two countries
have a perfectly similar exporting structure , the values of CS and CC will be 1,thus
showing that there exists a strong competition among the exports of the two countries
while a CS and CC equal to 0 shows no competition at all. CS and CC basically show
approximately the same result meaning that the results of CS and CC will be supporting
each other in our case.
Table 7: Coefficient of Specialisation and Coefficient of Conformity
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
CS
0.979
0.979
0.981
0.981
0.986
0.99
0.986
0.984
0.989
0.99
0.99
0.992
0.994
0.994
0.995
0.995
12
CC
0.954
0.941
0.955
0.961
0.967
0.986
0.962
0.954
0.956
0.939
0.932
0.925
0.921
0.923
0.92
0.918
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Table 7 and Figure 3 shows the Coefficient of Specialization and Coefficient of
Conformity. The results in the table clearly demonstrate that trade competition between
Mauritius and China is very high. In fact, the results can be near perfect trade competition
since all the results are above 0.9 which is close to the perfect competition result of 1.
Figure 3: Coefficient of Specialisation and Coefficient of Conformity
1
0.98
0.96
0.94
CS
0.92
CC
0.9
0.88
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0.86
Table 8: Reveal Comparative Advantage Index for the 10 Main Exports of Mauritius
2000
2010
SITC
Rank Code Description
China
Mauritius China
Mauritius
1
2
8454
8415
3
4
8414
8437
5
8453
6
8442
T-Shirts, singlets and other vests, knitted or
crocheted
Shirts, not knitted
Trousers, bib and brace overalls, breeches &
shorts men's/boys'
Shirt, knitted
Jerseys, pullovers and similar articles, knitted
or crocheted
Suits, ensembles, jackets, blazers, skirts,
divided skirts, trousers
7
8
9
10
8426
8427
8448
8455
Trousers, bib and brace overalls, breeches &
shorts women's/girls'
Blouses, shirts and shirt blouses
Nightwear
Ladies' undergarments
2.81
3.33
67.99
60.55
3.01
3.02
85.2
75.5
2.84
0.43
31.01
17.95
2.74
2.21
22.3
50.64
3.8
20.22
4.5
10.21
4.66
8.54
7.5
7.5
2.32
2.95
3.57
2.29
21.17
7.11
0.73
6.32
3.11
2.55
4.6
2.71
15.74
12.23
8.67
8.71
Table 8 shows the reveals comparative advantage index for the ten main exports of
Mauritius. The following observations can be made: (1) Mauritius biggest comparative
advantage is in knitted T-shirts (SITC 8454) and non-knitted shirts (SITC 8415).
Between 2000 and 2010, this advantage has been consolidated. China’s RCA in knitted
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shirt (SITC 8437) has increased over the past decade. This not augurs well for the
Mauritian clothing sector. (2) Mauritius competitiveness has declined in jerseys,
pullovers and similar articles, knitted or crocheted (SITC 8453) and suits, ensembles,
jackets, blazers, skirts, divided skirts and trousers (SITC 8442). While Mauritian
competitiveness has declined in these products, that of China has experienced a general
rise.
7.
Regression Analysis
To analyse the impact of import competition from China, the following regressions are
invoked:
Model 1
 FDI 
LRGDPCm   0  1 LRGDPC c   2 LOPEN M   3 LOPEN C  L

 GDP  M
Model 2
 FDI 
LOPEN M   0  1 LRGDPC c   2 LRGDPCM   3 LOPEN C  L

 GDP  M
LRGDPCm
LRGDPCc
LOPENM
LOPENC:
 FDI 
L

 GDP  M
: Log of Real GDP per capita for Mauritius
: Log of Real GDP per capita for China
: Log of Openness for Mauritius
: Log of Openness for China
: Log foreign direct investment as a percentage of GDP
Model 1 shows the impact of the different explanatory variables on the economic growth
of Mauritius. This model goes in line with the objective of our study itself whereby we
are trying to measure the impact of an emerging China on the economic growth of
Mauritius. Model 2 is a model that will assess the trade competitiveness of Mauritius. In
this model openness of Mauritius is being used as a proxy to measure trade
competitiveness. This model shall help us understand what happens to trade
competitiveness of Mauritius as China becomes a major trader of goods and services with
the world.
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Table 9: Test for Stationarity in Level Form
Variable Name
Lag Number
Test- Statistic
Decision
LGDPPCMt
LGDPPCCt
1
3
-2.761
0.986
Not I (0)
Not I (0)
LOPENMt
2
-3.208
Not I (0)
LOPENCt
LFDI/GDPMt
2
1
-1.925
-1.479
Not I (0)
Not I (0)
Table 10: Test for Stationarity in First Difference
Variable Name
Lag Number
Test- Statistics
Decision
∆LGDPPCMt
0
-4.600
I (0)
∆LGDPPCCt
4
-3.412
I (0)
∆LOPENMt
0
-3.276
I (0)
∆LOPENCt
1
-1.670
I (0)
∆LFDI/GDPMt
0
-7.625
I (0)
We adopt the two step procedures of Engle-Granger as our econometric methodology.
Table 9 and 10 shows the ADF stationarity test for all variables in level form and first
difference respectively. Table 9 reveals that none of the variables are stationary in level
form. All the variables are stationary in first difference as reveal by Table 10. Given the
stationarity properties, we proceed in estimating the LR cointegrating regression. The
results for model 1 are reported in Table 11. Only one variable is not significant namely
openness of China. LGDPPCC is positive and significant implying that a growing
Chinese economy has a positive impact on the Mauritian economy. This clearly supports
the fact that a richer China has a positive impact on the Mauritian economy. An
improvement in the standard of living of the Chinese might mean that they have more
money to spend and as a result they might start shifting their consumption of local goods
to those of foreign goods. Mauritian goods and services are thus bound to have more
success with a Chinese economy that has money to spend.
Table 11: LR Equation, Model 1, Dependent Variable: LRGPPCM
Variable Name
Coefficient
Standard Error
P-Value
LGDPPCt
0.444439
0.04254
0.000
LOPENMt
0.3801039
0.1054181
0.000
LOPENCt
0.0364702
0.0740572
0.227
LFDI/GDPMt
0.0162942
0.0127571
0.000
Constant
3.176466
0.5057401
0.000
R2 = 0.9858
Adj R-Squared = 0.9832 F (4, 22) = 381.42
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The variable LOPENM also shows a positive coefficient implying that the openness of
Mauritius is beneficial to the economy. This goes in line with the work of many scholars
who have studied the impact of trade openness on economic growth and concluded that
the more open economies appeared to grow faster over time. FDI/GDP has a positive
coefficient from the regression results, implying that it has a negative effect on the model.
A 1% increase in FDI/GDP for example shall lead to a rise of 0.016% in RGDPCM. Note
that the estimated regression is free from serial correlation and multicollinearity.
Table 12: Error Correction Model. Model 1, Dependent Variable: LRGPPCM
Variable Name
Coefficient
Standard Error
P-Value
∆LGDPPCCt
0.3875107
0.0538947
0.000
∆LOPENMt
0.0331609
0.0812658
0.019
∆LOPENCt
0.1318455
0.0516918
0.219
∆LFDIGDPMt
0.0128938
0.0064191
0.008
RESt-1
-0.4756694
0.1504627
0.005
R2 = 0.8155
Adj R-Squared =0.7694
F ( 5, 20) = 17.68
ADF test on the estimated residuals reveals the presence of cointegration (test statistics =
- 11.45). Thus, we proceed in estimating the ECM. Table 12 shows the error correction
model for Model 1. All the variables have the same sign as the LR equation. According to
the ECM, there is a discrepancy of 0.47 between the actual and long run LRGPPCM.
Table 13: LR Equation, Model 2, Dependent Variable: LOPENM
Variable Name
Coefficient
Standard Error
P-Value
LGDPPCMt
0.9772201
0.2710225
0.002
LGDPPCCt
-0.5352815
0.1212911
0.000
LOPENCt
0.1601833
0.1144085
0.175
LFDIGDPMt
0.0533827
0.0178856
0.007
Constant
-0.1432984
1.3549
0.917
2
R = 0.6139
Adj R-Squared = 0.5437
F ( 4, 22 ) = 8.74
Table 13 shows the LR estimates for Model 2. All the variables except openness of China
are significant. Further, they have the expected sign. RGDPCM has a positive coefficient
implying that a rise of 1% in RGDPCM will result in an increase of 0.97% in OPEN. A
rise in real GDP per capita implies that workers become richer. Increases in earnings by
individuals often tallies with an increase in productivity and in our case an increase in
RGDPCM will increase the competitiveness of Mauritian products vis-à-vis the Chinese
products. An increase of 1% in RGDPCC in our model shall cause a fall of 0.53% on the
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dependent variable OPEN. Contrary to RGDPCM, a rise in the earnings of individual
Chinese raises their competitiveness when compared to the Mauritian population which
causes a fall in the trade competitiveness of Mauritius. Openness of China does not seem
to have an effect on the openness of Mauritius. Here we should note that while China is
Mauritius second trading partner in terms of imports, Mauritius main export partners
remain USA and EU. The coefficient of FDI/GDP is positive, thus indicating that
FDI/GDP will cause OPEN to increase. An increase of 1% in FDI/GDP for example will
cause OPEN to increase by 0.11%. An increase in inward FDI causes the FDI to GDP
ratio to rise which can theoretically be explained by the fact that inwards FDI usually
results in an increase in economic activity, more specifically on employment. This results
in an increase in the trade competitiveness of the Mauritian products.
Table 14: Error Correction Model. Model 2, Dependent Variable: LOPENM
Variable Name
Coefficient
Standard Error
P-Value
∆LGDPPCMt
0.2783361
0.7517889
0.015
∆LGDPPCCt
-0.22952
0.3639092
0.001
∆LOPENCt
0.0846033
0.1457904
0. 129
∆LFDIGDPMt
0.025445
0.0264811
0.005
RESt-1
-0.376782
0.3285915
0.005
R2 = 0.4561
Adj- R2 = 0.4231 F ( 5, 20) = 17.48
The ADF test on the residual produced a test statistics of -9.3194 which indicates the
presence of cointegration. Thus, we proceed in estimating the ECM, Table 14 shows the
ECM for model 2. All the variables have expected sign as the LR equation. Further, a
discrepancy of 0.37 is corrected each year.
6.
Conclusion
The impact of trade competition from the rise China can be viewed as an opportunity to
some and as a treat by others. The emergence of China in the world can mainly be
explained by its economic reforms that China engaged itself into in the late 1970s. From
a gradual opening up of its economy to a full accession in the WTO in 2001, China’s
march towards economic prosperity has been a well planned one. This has resulted in a
huge trade volume between the whole world and China whereby many companies have
been shifting their operations to China in order to benefit from the huge pool of cheap
labour available.
For the case of trade competition between China and Mauritius, it can be said that
Mauritius is in a very difficult position to compete directly with the Chinese products.
Not only does Mauritius not possess any natural resources but it also very dependent on
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preferential trade agreements which when they are all phased out might pose some
serious problems in the Mauritian trading exports. The empirical evidence which has
been shown about the trade competition between China and Mauritius shows clearly that
both countries have a similar exporting structure and therefore a very high trade
competition. Mauritius has consolidated its reveal comparative advantage in its two top
exporting products namely SITC 8454 and SITC 8415. However, for some products
while Mauritius RCAs have decreased that of China has experienced a general hike. Our
econometric analysis showed that a rising Chinese economy will have a positive impact
on the Mauritian economy. Further, an increase in the real GDP per capita of China
would have a negative impact on the trade competitiveness of Mauritius. However, the
openness ratios of the two countries do not seem to be related. .
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