Trade integration and firm performance: Evidence from South Africa

This study examines the 2013 South Africa–China Strategic Trade Agreement (STA) and its implications on firms using a decade of microdata in South Africa. Exploiting the policy's quasi-exogenous nature, we show that the STA is associated with a reorientation toward Chinese capital goods, increasing firm-level capital-labour ratios. We also find suggestive evidence that gains in sales and value-added are consistent with a 'scale effect' that may have offset potential labour displacement from capital-labour substitution. This led to aggregate employment stability, albeit with a modest and upward trend in wages. Broadly, the findings suggest that lowering trade costs for capital intermediates could lead to expansion in manufacturing without necessarily triggering the negative labour market outcomes often predicted by traditional trade theory.