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Ralph: +27 68 077 9615Email:theeconomistsoe@gmail.com
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,ECS3702: INTERNATIONAL TRADE
JAN 2021 SUPPLEMENTARY EXAM MEMO
QUESTION 1 [25 marks]
Question 1A
In May 2019, China was the top destination for South African exports,
accounting for 11 percent of total exports. Discuss the effect of a
stimulation of the Chinese economy on the South African economy. [15]
China's rapid economic growth has caused an increased demand for electric
power, subsequently leading to an increase in China's demand for South
Africa's coal.
Secondly, China”s economic growth has also led to an increase in China’s
demand for South Africa”s agricultural products, especially wheat, corn, rice
and sugar that are needed in feeding China’s growing population.
Thirdly, China’s economic growth has led to increased industrialisation in
China, which has increased China’s demand for South Africa’s raw materials.
These raw materials include base metals, textiles, precious and semi-precious
metal, stones and wood products that are largely used in China’s industries.
South Africa’s exports share to China grew by more than 10 per cent from
1992 to 2012. China has become South Africa’s number one export
destination ahead of USA and UK. It can be said that the growth of China’s
economy has led to South Africa moving away from its former predominant
export destinations and towards China.
The stimulation of the Chinese economy has an effect on the South African
economy as it leads to ncreased Sales and Profits. Selling goods and
services to a market the company never had before boost sales and
increases revenues. Additional foreign sales over the long term, once export
development costs have been covered, increase overall profitability.
Enhance Domestic Competitiveness. Most companies become competitive in
the domestic market before they venture in the international arena. Being
competitive in the domestic market helps companies to acquire some
strategies that can help them in the international arena.
South Africa by selling to multiple markets allows companies to diversify their
business and spread their risk. Companies will not be tied to the changes of
the business cycle of domestic market or of one specific country.
As the Chinese economy grows there is high potential that South Africa will
sell excess production capacity. Companies who have excess production for
any reason can probably sell their products in a foreign market and not be
forced to give deep discounts or even dispose of their excess production.
,Expand Life Cycle of Product. Many products go through various cycles
namely introduction, growth, maturity and declining stage that is the end of
their usefulness in a specific market. Once the product reaches the final stage,
maturity in a given market, the same product can be introduced in a different
market where the product was never marketed before.
QUESTION 1B
Globalisation has meant that countries are increasingly dependent on
each other. The current coronavirus pandemic has had a significant
immediate impact on all economies.
Discuss the potential trade channels through which the pandemic can
affect a developing economy such as South Africa. [10]
Since the outbreak of the coronavirus disease of 2019 (COVID-19), more than
1 million people have lost their lives due to the pandemic, and the global
economy is expected to contract by a staggering 4.3 per cent in 2020. Millions
of jobs have already been lost, millions of livelihoods are at risk, and an
estimated additional 130 million people will be living in extreme poverty if the
crisis persists. These are grim figures that reflect the immense challenges and
human suffering caused by this pandemic. Nor is an end to COVID-19 yet in
sight. In many countries, the number of new COVID-19 cases is rising at an
alarming rate and, for many, a second wave is already an unwelcome reality.
Much uncertainty remains about how and when the pandemic will run its
course, but the unprecedented economic shock generated by the global
health emergency has already sharply exposed the global economy’s pre-
existing weaknesses, severely setting back development progress around the
world.
The global economy entered a phase of ‘slowbalisation’ before the world
became aware of the
accelerating public health emergency surrounding the coronavirus disease
2019 (COVID-19).
Wuhan in China’s Hubei province (the source of the outbreak) is a major
industrial and transport hub with 6,000 foreign-invested companies from over
80 countries. The complexity of global supply chains means that businesses
may be reliant on Chinese products without being aware of it. (The 2011
nuclear accident at Fukushima, Japan already highlighted unexpected supply
chain dependencies.) The scope for COVID-19-induced business disruption in
South Africa is vast considering that China is South Africa’s largest trading
partner. The construction industry has already reported delays in delivery of
construction materials sourced from Asia.
According to research by the International Monetary Fund (IMF), a one
percentage point drop in Chinese growth would reduce South African growth
by 0.2 percentage points. Based on the latest
South African Reserve Bank (SARB) predictions, this would cut GDP growth
to 1.0% this year. This calculation is based on the anticipated impact of trade
disruption on the local economy. From
, an export perspective, for example, under-pressure Chinese steel and copper
manufacturing industries will have weaker demand for South Africa’s largest
exports mineral ores to China.
Many of South Africa’s industries will see an adverse impact from COVID-19,
including mobile operators, automotive manufacturers, as well as hospitality
and retail establishments. Three out
of four Chinese tourists to South Africa undertake personal shopping activities
China has a burgeoning middle class opting to spend money internationally.
The size of the potential decline in Chinese arrivals in South Africa is hard to
gauge at present. Using some simplifying assumptions, we estimate a
potential loss of at least R200 million in Chinese tourist spending.
QUESTION 2 [25 marks]
Consider the following scenarios:
Scenario A
The principle of absolute advantage refers to the ability of a party to produce a
good or service more efficiently than its competitors. Adam Smith first
described the principle of absolute advantage in the context of international
trade, using labor as the only input.
For Scenario A
Nigeria has an absolute advantage in crude oil, as it produces 16 ton/hr
compared to Ghana which only produces 4 ton/hr.
Ghana has an absolute advantage in the production of cocoa as it
produces 8 ton/hr compared to Nigeria that produces only 4.
For Scenario B
Nigeria has an absolute advantage in crude oil as is produces 16 ton/hr
and Ghana 8. Nigeria also have an absolute advantage in the production
of crude oil.
(ii) For scenarios A and B, indicate the commodity in which Nigeria and
Ghana have a comparative
advantage and disadvantage. [You must show your workings] [6]
According to the law of comparative advantage, even if one nation is less
efficient than the other nation there is still a basis for mutually beneficial trade
through specializing in producing the good with the smallest disadvantage.
Comparative advantage is an economy's ability to produce a particular good
or service at a lower opportunity cost than its trading partners.
Scenario A
Nigeria Ghana
Crude Oil [ ton/hr] 16 [ 16/4=4] 4 [4/8=0.5]
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