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Cheap Chinese imports in Africa: Implications and remedies

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Cheap Chinese imports in Africa: Implications and remedies

6th March 2014

By: In On Africa IOA

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The negative effects of the trade relationship between China and Africa, particularly its balance of economic power in the former’s favour, have attracted a great deal of academic as well as media commentary. One of the allegations levelled against China is that it is using its economic dominance to dump its goods in African countries, and that this practice has anti-competitive effects in domestic markets. While in some instances evidence of actual dumping has been seen, in other situations a number of commentators have wrongly termed the sale of China’s cheap goods in Africa as dumping. It is important to clearly differentiate between the two practices in order to know how to solve the challenges that they bring to the development of African economies.

Legal remedies against dumping are readily available in the form of anti-dumping measures under international trade law. However, because the World Trade Organisation (WTO) does not encourage restriction of trade, injury to the market resulting from the sale of imports at low and fair prices in the normal and ordinary course of trade does not have readily available remedies. Although cheap imports benefit consumers, in the long run, their effects on economic development are akin to those of dumping.

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There is a dearth of literature from the field of trade law on the legal and economic implications of cheap Chinese imports in Africa. By comparing the implications of dumping and those of the sale of cheap Chinese imports in Africa, this CAI paper examines the ramifications of the latter from a trade law perspective. The discussion reveals that dumping may in fact be the lesser of two evils, which highlights the need to minimise the negative effects of cheap Chinese goods on African markets. The paper then offers recommendations in this regard.

Dumping

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In international trade law, dumping is one of the most common forms of price discrimination. Dumping occurs when an exporting country sells a product at a lower price than it sells the same product in its domestic market. Another instance in which dumping occurs is when an exporting country sells its products below production cost.(2) Although selling below cost may happen with or without discrimination, economists have nevertheless embraced this latter definition as encompassing dumping. Dumping is therefore the sale of goods in another market below their normal value. ‘Normal value’ refers to the comparable value in the normal course of trade for a like product when intended for consumption in the exporting country. Based on these definitions, the practice of trading cheap imports under fair and competitive conditions does not constitute dumping.

A number of reasons drive an exporting country into dumping. Three of these reasons are worth mentioning.(3) Firstly, when one or more exporting countries are competing amongst each other over a limited market, lowering prices of goods is one of the key techniques employed to make their goods appealing to the importing market. Secondly, exporting markets may want to get rid of surplus products from their domestic trade zones. In this scenario, charging below production cost for a product would be a ‘half a loaf is better than none’ situation. In that way the exporting country can keep production high and continue to have a viable economy. Thirdly, dumping may occur when an exporting market intends on taking over the market share by abusing its economic dominance in another country. This is known as predatory dumping because the exporting country sells at prices lower than the market value of the goods in their own market with the intention of driving competition away and monopolising the market. Once the exporting country gains a monopoly over the market, it starts raising prices. This last form of dumping is the most feared because its effects have the likelihood of crippling domestic markets through the abuse of dominance by the exporting country. This paper argues that such effects are similar to those resulting from the sale of cheap Chinese imports.

Dumping is not prohibited under the policies of the WTO. However, when it causes material injury to another market, it is condemned as being anti-competitive.(4) According to the WTO, China is at the top of the list of countries subject to anti-dumping investigations. Statistics published by the WTO indicate that between 1995 and 2012 there have been 32 countries worldwide that have initiated anti-dumping investigations of around 664 cases against Chinese products. Of these cases, 20 are from African countries; 19 from South Africa alone.(5) In several cases in which China has been accused of dumping, similarities exist in respect to the material injury suffered by different applicants, both African and non-African firms/countries. In the following section, dumping effects are discussed in order to show their implications on domestic markets.

The effects of dumping on domestic markets

In an analysis by the Centre for Transitional Economics,(6) anti-dumping cases initiated in the European Union (EU) against China are characterised by a destructive market displacement due to price undercutting. According to the study, within a space of four years, the amount of glyphosate (a herbicide) imported from China increased from 48 tonnes to 1,397 tonnes. This resulted in the growth of the Chinese market share from 1% to 11%. Similarly, Chinese imports in the EU of schoolbags and briefcases increased by more than 200%, while market share increased by over 300%, and price undercutting was 74%. The growth of market share resulted in the decline of the EU market share. Loss of profits was another result of Chinese dumping in the EU - cotton fabrics indicated a massive decline in profitability from 100% to 25%. This resulted in 88 firms closing down and 8,625 people losing their employment.

A similar picture can be seen in Africa. In South Africa, an application lodged with the International Trade Administration Commission of South Africa (ITAC) by Graftech South Africa, accused China of dumping its graphite electrodes used in furnaces.(7) The alleged dumping was based on the comparison between the export price from China and the normal value, which in this case was the highest comparable price of similar products when exported to another country. In the preliminary investigation, the ITAC found that China was undercutting its prices in the Southern African Customs Union (SACU) region by 338.57%. The commission held that this indicated a prima facie case of dumping. The applicant’s evidence further indicated that due to price undercutting, there was a decline in sales which led to reduction in profit as well as negative effects on cash flow, return on investments and ability to raise capital. In addition, the SACU firms lost their market share and eventually some employees had to lose their jobs. Based on this, the commission found that there was a prima facie proof of material injury to the applicant caused by the alleged dumping.(8)

Furthermore, in the case initiated by Sappi Southern Africa on behalf of SACU, the applicant cited loss of market share, decline in sales and profits as well as significant losses caused by increased coated paper imports originating from China.(9) In its determination, the ITAC found that there was clear evidence that due to undercutting by 14.14%, China was dumping. In another case, Franke Kitchen Systems South Africa (a major South African producer of steel kitchen sinks in the SACU region) complained of China’s dumping of like items in South Africa.(10) After investigations, the ITAC determined that steel kitchen sinks originating from China were being dumped in the SACU region. Material injury was established as being caused by a decline in sales and profit.

Although this is by no means an exhaustive list of dumping cases against China, it shows that dumping has similar effects across different industries, and that these effects are very damaging to local companies.

Cheap Chinese goods and their consequences in African markets

When a foreign firm sells its products at a cheaper price compared to like goods in the local market, the latter views it as a competitor and a threat to business. This is especially true in developing countries with a majority of price sensitive consumers, since price is a crucial factor for determining whether or not to make a purchase. It has always been said that a local market is a ‘dumping ground’ for the excess goods of an exporting market when the latter sells their products in the former at extremely low prices. However, the sale of cheaper foreign goods does not necessarily indicate dumping, especially when there is neither price discrimination nor selling below cost.

There is much controversy surrounding the effect that large amounts of cheap Chinese goods are having on Africa’s domestic industries. While consumers may benefit from the availability of cheaper goods, industries in African countries are slowly being forced out of trade. Research by the Southern Africa Labour Development and Research Unit (11) indicates that South African local industries have been under pressure as a result of cheap Chinese imports. The analysis was drawn from a database of 44 manufacturing industries over the last decade. Among others, the results showed how cheap Chinese imports contributed towards the relatively slow growth in output, loss of profits and the decline in employment in the South African manufacturing industry.

The products that were significantly affected by Chinese imports were textiles and clothing, footwear and leather, electrical and electronic products, and machinery. These products are also those that dominated Chinese imports. Within the 10-year period, the manufacturing industries that had competitionfrom Chineseimports did have minor increases in sales volumes, but in one year, domestic producers lost their market share to Chinese products by 5% of the value of sales. This amount was significant taking into account that over the same period, domestic sales increased by 14%. In addition to loss of market share and decline in sales, job losses also resulted from Chinese import penetration. Towards the end of the 10-year period, increased Chinese imports reduced employment by more than 75,000 jobs, representing 70% of the total loss resulting from increased imports. Furthermore, the study found that within the 10-year period Chinese imports cost the domestic market ZAR 30 million (US$ 2.7 million). This is a huge number considering the modest growth of the South African manufacturing industry in the period of the study. In other parts of Sub-Saharan Africa, many textile industries have also indicated being under pressure due to China’s domination. A Consultancy Africa Intelligence paper that lucidly examined the effects of China’s domination in the textile manufacturing industries of seven countries showed that several African manufacturers closed down, losing 37% of domestic production capacity.(12) Due to job losses, 250,000 people lost their livelihoods.

From the examples above, it is clear that the effects of selling cheap Chinese goods on Africa’s domestic industries are wide-ranging: from decline in sales, reduction in profit, and effect on cash flow and return on investments, to the ability to raise capital. In return, industries are forced to shut down, leading to significant job losses. These are similar to the effects of dumping as shown in the anti-dumping cases discussed above.

Remedies under international trade law

Under international trade law, remedies are available for governments that intend to take action against imports which are causing injury to their local industries. These are anti-dumping actions, countervailing duty measures and safeguard actions. Two of these remedies, anti-dumping actions and safeguard actions, are relevant to the issues discussed in this paper.

Article VI of the General Agreement on Tariffs and Trade (GATT) of 1994, read together with the WTO Anti-Dumping Agreement, allows governments to take action against imports from countries allegedly selling their goods at dumped prices.(13) The complainant is required to prove that dumping is taking place. This is done by calculating the extent of dumping, that is, the difference between the ‘fair price’ and the price charged for export (known as the dumping margin). Furthermore, the complainant needs to prove that the alleged dumping causes actual material injury or threatens to cause material injury. If these elements are satisfactorily proven, the relief obtained is charging extra import duty on the dumped product. This is done so as to bring its price nearer to the normal value and to remove the injury suffered by the local industry. Anti-dumping measures are therefore intended to ensure fair competition. Accordingly, the law regards dumping as an objectionable trade practice, which, if left unchallenged, affords exporters the opportunity to exploit the market, resulting in negative consequences for the importing countries’ industries.

In addition to anti-dumping measures, it may be argued that the effects of cheap Chinese imports can be cured through the WTO’s ‘safeguard measures’. This is a trade remedy provided under Article XIX of the GATT, also known as the GATT ‘escape clause’.(14) Under this remedy, governments are allowed to impose temporary measures to protect domestic industries that have been ‘seriously injured’ or those that exhibit threat of such injury as a result of a sudden surge of imports.

The appellate body of the WTO has, in most decisions, failed to lucidly state set guidelines as to when safeguard measures are permissible. In addition, the body has made it very difficult for WTO members to utilise safeguard measures.(15) For one, this is because of the strict standard used to determine serious injury to market disruptions. Under Article 4.1 of the safeguard agreement, serious injury is defined as a “significant overall impairment in the position of a domestic industry.”(16) The WTO appellate body has clearly stated that “this standard is higher and stricter than ‘material injury’” required in anti-dumping measures.(17) This is why every safeguards measure that has been challenged has been held to be a violation of WTO law.(18) Furthermore, because safeguard measures occur under normal competitive conditions, import restrictions are viewed as extraordinary in comparison to anti-dumping measures that occur under unfair trade conditions. These difficulties in proving serious injury to overall domestic markets due to import surges make safeguard measures an inefficient form of protectionism.

While dumping has legal remedies, selling cheap products without any price discrimination or without selling at prices below production cost has no redress. By selling goods at low prices, China is taking advantage of business opportunities, and having good business acumen is not illegal. After all, the goods are being sold to poor people who would surely be willing and happy to pay the lower prices. However, with the implications that cheap products have in African markets, it is important to curb the effects that come with cheap Chinese goods through good economic and legislative reforms.

Conclusion and recommendations for African countries

Under international trade law, the selling of cheap Chinese imports under fair and competitive conditions is not, and should not be, considered dumping. Although this is the case, this paper has demonstrated that it has similar adverse effects on the domestic economies as those of dumping. The reality is that Africa’s largest trading partner is an economic giant that has the capacity to produce and sell goods at very low cost. It is thus vital that countries trading with China have sound legal and economic policies that will ensure that they get the most out of the relationship.

African countries must always weigh the economic benefits of allowing cheap imports against their negative effects. For instance, where domestic markets are struggling, it is prudent to allow cheap imported goods. This will not only ensure the availability of necessary goods that Chinese imports can offer, but also offers necessary competition for the benefit of consumers. It is crucial, however, that governments simultaneously take advantage of technology transfer agreements (and negotiate new ones) in order to benefit from the technical know-how and skills from China necessary to efficiently develop and run the ailing industries. In this way, trade with China will add real economic value to African markets.

On the other hand, in those industries where African domestic markets are doing well and there is evidence of a healthy environment for industries to thrive, including the presence of good infrastructure, skills acquisition programmes and technology transfer, regulation may be used to limit the surge of Chinese imports, through import limitation policies, as is the case in Nigeria, for example.(19) With proper surveillance, consultations with consumers and advice from trade and economic experts, policies that restrict imports may work in protecting existing local industries and reducing overreliance on foreign products.(20) If however, such restrictions pose a real threat to significant portions of the economy (importers and traders are likely to be negatively affected by import restrictions)(21) and to consumer welfare, African countries may instead consider increasing import tariffs, rather than restricting imports, so as to balance the decline in profits emanating from the availability of cheap imports.

In addition, governments need to conduct research through Research and Development schemes as well as prioritise the promotion of domestic brands within Africa and abroad. Governments need to continuously find out what new export products can be promoted. With the help of the private sector, capital can be shifted into future export industries. Through public and private partnerships, growth can be increased via the service sector through the maximisation of the economic power of the tourism industry, which has great potential in Africa. According to a World Bank report, in the next 10 years tourism has the potential to create 3.8 million jobs in Africa.(22) In 2012, Africa attracted 33.8 million tourists, up from 6.7 million tourists in 1990. Over US$ 36 billion in revenue was realised from tourism in this year, contributing 2.8% to the gross domestic product of the region.(23) Zambia alone created 25,000 jobs in 2012.(24) Similarly, Africa has rich soils and pleasant climate that allow for a flourishing agricultural industry. Exports in organic food from Africa to the rest of the world can aid in Africa’s economic growth. These are examples of some of the unique assets that African countries can use to balance or offset the imports from China. The increased employment resulting from the development of diverse economic sectors will also have the knock-on effect of providing governments with increased tax revenue which can be directed to areas where capital is required for economic growth.

Written by Rosena Nhlabatsi (1)

NOTES:

(1) Rosena Nhlabatsi is a Research Associate with CAI with an interest in international economic law. Contact Rosena through Consultancy Africa Intelligence's Asia Dimension Unit ( asia.dimension@consultancyafrica.com). Edited by Nicky Berg.
(2) ‘Technical information on dumping’, World Trade Organisation, http://www.wto.org.
(3) Ojha, S., ‘The economic and legal analysis of dumping’, Global Politician, 10 January 2008, http://www.globalpolitician.com.
(4) ‘Technical information on dumping’, World Trade Organisation, http://www.wto.org.
(5) ‘Anti-dumping measures reporting member vs exporting country 01/01/1995 - 31/12/2012’, WTO, http://www.wto.org.
(6) Liu, X. and Vandenbussche, H., ‘EU antidumping cases against China: An overview and future prospects with respect to China’s WTO membership’, LICOS discussion paper 119/2002, July 2002, http://www.econstor.eu.
(7) ‘Increase on the rate of customs duty on graphite electrodes’, International Trade Administration Commission of South Africa report no. 438, 7 October 2013, http://www.itac.org.za.
(8) Ibid.
(9) ‘Investigation into the alleged dumping of coated paper originating in or imported from the People’s Republic of China (PRC) and the Republic of Korea: Preliminary determination’, International Trade Administration Commission of South Africa report no. 445, 20 August 2013, http://www.itac.org.za.
(10) ‘Investigation into the alleged dumping of steel kitchen sinks originating or imported from China and Malaysia’, International Trade Administration Commission of South Africa report no. 314, 17 September 2009, http://www.itac.org.za.
(11) Edwards, L. and Jenkins, R., ‘The impact of Chinese import penetration on the South African manufacturing sector’, Southern Africa Labour and Development Research Unit working paper series number 102, July 2013, http://opensaldru.uct.ac.za.
(12) Dhliwayo, R., ‘A continent vs. a country: China putting strain on Africa’s clothing and textile industries’, Consultancy Africa Intelligence, 3 September 2012, http://www.consultancyafrica.com.
(13) ‘Article VI General Agreement on Tariffs and Trade’, 1994, Marrakech, WTO, http://www.wto.org; ‘Agreement Establishing the World Trade Organization, 1994 Marrakech, WTO, http://www.wto.org.
(14) ‘A WTO analytical index: GATT 1994. General Agreement on Tariffs and Trade 1994’, WTO, http://www.wto.org.
(15) Sykes, A., ‘The safeguards mess: A critique of WTO jurisprudence’, John M. Colin Law & Economics working paper no. 187, May 2003, http://www.law.uchicago.edu.
(16)Technical Information on safeguard measures, WTO, http://www.wto.org.
(17) Van den Bossche, P., 2008. The law and policy of the World Trade Organization (second edition). Cambridge University Press: Cambridge.
(18) Sykes, A., ‘The safeguards mess: A critique of WTO jurisprudence’, John M. Colin Law & Economics working paper no. 187, May 2003, http://www.law.uchicago.edu.
(19) Oyejide, A., Ogunkola, A. and Bankole, A., ‘Import prohibition as a trade policy instrument: The Nigerian experience’, WTO case study, http://www.wto.org.
(20) Ibid.
(21) See, for example, Oyejide, A., Ogunkola, A. and Bankole, A., ‘Import prohibition as a trade policy instrument: The Nigerian experience’, WTO case study, http://www.wto.org.
(22) ‘Tourism in Africa: Harnessing tourism for growth and improved livelihoods’, World Bank, http://www.worldbank.org.
(23) Ibid.
(24) ‘Tourism to energize the Zambian economy boosting growth and livelihoods’, World Bank press release, 13 November 2013, http://www.worldbank.org.

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