Trade sanctions and Global Value Chains: A China–South Africa perspective

Abstract

China has been an important trade partner for many African countries, and in particular for South Africa, whose trade volume with China has increased significantly over the past decades. Changes of global trade and Global Value Chains (GVCs) dynamics as response of increasing trade sanctions bring substantial economic challenges for both countries directly involved and countries not directly involved by sanctions. On the one hand, trade sanctions have direct effects on sanctioned countries. On the other, sanctions can have significant indirect effects on countries not involved, as a consequence of trade diversion, changes in comparative advantages, and geopolitical realignment. The paper provides an empirical assessment of Global Value Chains’ re-organization by China and African countries in the age of trade sanctions. It explores and quantifies the intertwined relationship between trade sanctions, GVCs participation, and Revealed Comparative Advantage (RCA), with a focus on the dyad China–South Africa in a comparative perspective vis-á-vis other Chinese trade partners. The analysis is based on a purpose-built dataset covering GVCs participation indexes on 66 origin and destination countries for 68 industries (ISIC Rev.4) over the period 2005–2018. A simplified evolutionary model shows how the indirect effect of sanctions on forward GVCs could be positive and sizable, the mechanism being the displacement of (heterogeneous) inefficient firms with (heterogeneous) more efficient ones; while the indirect effect of sanctions on backward GVCs is indeterminate. By zooming onto the China–South Africa relations, the paper sheds new light on the consequences of sanctions, as perceived from both buyer’s (backward) and seller’s (forward) perspective, in a so-called South–South trade partnership.