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Exam (elaborations) ECS3702 - International Trade (ECS3702) JAN/FEB SUPPLEMENT EXAM MEMO
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ECS3702 JAN/FEB SUPPLEMENT EXAMQUESTION 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]
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