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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 1 ICITI 2011 ISSN: 16941225 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. 2 ICITI 2011 2. ISSN: 16941225 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 3 ICITI 2011 ISSN: 16941225 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, 4 ICITI 2011 ISSN: 16941225 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) 5 ICITI 2011 ISSN: 16941225 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 6 ICITI 2011 ISSN: 16941225 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, 7 ICITI 2011 ISSN: 16941225 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 8 ICITI 2011 ISSN: 16941225 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 ICITI 2011 ISSN: 16941225 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. 10 ICITI 2011 ISSN: 16941225 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. 11 ICITI 2011 6. ISSN: 16941225 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 ICITI 2011 ISSN: 16941225 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 13 ICITI 2011 ISSN: 16941225 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. 14 ICITI 2011 ISSN: 16941225 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 15 ICITI 2011 ISSN: 16941225 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 16 ICITI 2011 ISSN: 16941225 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 17 ICITI 2011 ISSN: 16941225 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. . References CHEN, N. AND IMBS, J. AND SCOTT, A., 2006. The dynamics of trade and competition. National Bank of Belgium, 200610-3, Working Paper , 91 . ERK, N. AND DIREKCI, T., 2000. Test of Pauper Labor argument: The case of the Turkish manufacturing sector. Cukurova University, Department of Economics, Turkey. HOEKMAN, B. AND MAVROIDIS, P.C., 2002. Economic Development, Competition Policy and the World Trade Organisation. 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