Mauritius: China-Mauritius relations - After false starts, how the Free Trade Agreement CAN deepen economic ties

31 December 2020

1 - The agreement

The free trade agreement (FTA) between Mauritius and China has been in the works since 2017, when Beijing and Port-Louis began talks on the FTA before officially signing it in 2019. Coming into effect as from tomorrow, this is the first FTA signed by Beijing with an African country. This deal looks to eventually give Mauritius duty-free access to a range of 8,547 products as well as to service sectors on the Chinese market. The FTA is in line with Port Louis' efforts to diversify its trade and economic links towards the ASEAN states.

"It's not hard to see why China chose Mauritius with which to sign its first FTA," academic Roukaya Kasenally tells l'express, "the relationship between Mauritius and China goes back a long time since the two officially established ties in 1972." In fact, Mauritius was one of the first African states to have a full-time embassy in Beijing; it has cultural and historical links with China, and for years Port-Louis has been eager to position itself as a middleman and trade and investment conduit between Africa and Asia. "The Chinese think strategically, and Mauritius is important in the strategic sense within the Indian Ocean.

2 - Why have Mauritian exporters struggled to go to China?

Mauritius has long had a huge trade imbalance in its economic ties with China. "We import a lot from China and export very little over there," says ex-Finance Mi- nister Rama Sithanen. According to consultant and former academic Vinaye Ancharaz, who has specialized in studying Chinese-Mauritian eco- nomic relations, Mauritian exporters faced a few problems that have kept Mauritian exports from significantly penetrating the Chinese market. The first issue, he explains, is that Mauri- tian products are just too expensive and uncompetitive for the Chinese market. The higher costs have come because wages in Mauritius have grown much faster than elsewhere, including in China itself.

As a result, to remain competitive, Mauritian exporters have relied on outsourcing to countries such as Madagascar, importing more productive foreign labour and relying on rupee depreciation. In 2013, for example, the average hourly wage in the Mauritian textile industry was more than double that in China. "This problem has become even worse since then with the minimum wage, while it is true that wages in China have gone up too since then; in Mauritius they have grown much faster without significantly higher productivity meaning that Mauritian products are just not that competitive on the Chinese market," explains Ancharaz.

The second problem is the fact that Mauritian exporters are just not equipped to supply goods on the scale demanded by Chinese importers. "One of the problems that Mauritian exporters kept telling me during my research was that dealing with Chinese companies is not easy because they are accustomed to dealing in huge volumes, which Mauritian exporters are just not able to fulfil, so Chinese importers simply turn to other suppliers able to do business on a large-scale," Ancharaz adds, "a trade agreement is between governments, but the business itself will still have to be done between companies in the two countries."

The third problem is what he terms 'the problem of complementarity': what Mauritius excels at exporting, China does it too. And does it better and cheaper. "Look at the things in which Mauritius has an advantage, clothing, garments and footwear, they do it as well, the problem is that both countries export similar things; that's why the Chinese have never been very interested in our exports; we export four times more to Madagascar than we do to a large economy like China!" he points out. In fact, Mauritius' largest export, textile, is in direct competition with China. Its largest market is the US, where high tariffs levelled on Chinese garment exports (particularly after 2019 as part of Trump's trade war when tariffs on Chinese garment exports to the US were hiked) and duty-free access to Mauritian exports under the Africa Growth and Opportunity Act (AGOA) is what allows Mauritian textile to survive.

The result of all this is a growing trade imbalance in Chinese-Mauritian trade. In 2018, for example, for every rupee earned exporting to China, 21 were spent importing goods from China. In 2019, exports to China totalled just Rs1.1 billion while imports totalled Rs31.8 billion. For every rupee earned in exports to China, we are now spending Rs30 in imports from there. "China alone accounts for a quarter of our trade deficit," according to Ancharaz. But the struggle of Mauritian exporters is not something exclusive to China. "This is not just a problem with China, we have a similar trade deficit with India as well," ex-Finance Minister Rama Sithanen points out. There too, in 2019, we got Rs848 million in export earnings and spent Rs25.54 billion. 30:1.

In 2018, for example, for every rupee earned exporting to China, 21 were spent importing goods from China. In 2019, exports to China totalled just Rs1.1 billion while imports totalled Rs31.8 billion. For every rupee earned in exports to china, we are now spending rs30 in imports from there.

3 - The false starts

Aside from the ballooning imports from China, what Beijing has been good at is financing and delivering big, one-off infrastructure projects, including the Bagatelle dam, the new airport, road and drain workers to name a few. "These are strategic investments," explains Kasenally, "as part of the geopolitical push and pull between major powers in the region that we are seeing now." But attempts to deepen economic ties between Beijing and Port-Louis in other ways have not quite worked out. Mauritius wanted to be part of China's ambitious belt and road project, "but Mauritius is too far down south to be a meaningful part of it," Kasenally says. Until 2005, Mauritius also played host to Chinese workers in its textile factories. "Most of them came because factories owned by businessmen from Hong Kong have brought them over since the 1990s, but after the multi-fibre agreement ended and wages and opportunities within China grew, Chinese workers stopped coming," explains Kasenally, forcing Mauritian textile factories to look to other sources of cheap labour such as Bangladesh, India, and Madagascar instead. The most ambitious attempt to deepen ties was the Jin Fei project (originally Tianli). In 2006, the Chinese government announced it was setting up special economic zones in a few African countries, including developing 211 hectares of land in Riche-Terre for setting up light industrial plants designed for exports to Africa, which would net in an estimated $200 million annually for Mauritius and create jobs. Following the 2008 global economic crisis and a change in the Chinese companies involved in the project, the project was rebranded in 2009 from light manufacturing to real estate. The government at the time staked a lot of political capital into the project, spending Rs525 million in supplying utilities to the area and displacing 211 sugar and vegetable planters from the area.

Unlike other SEZs run by the Chinese in Africa, such as Zambia with its significant copper deposits, Ethiopia with its cheap labour, and Nigeria with its oil, Mauritius was an island far from the African mainland with no natural resources and a much smaller and much more expensive labour force. By 2015, Jin Fei was an admitted fiasco failing to even live up to its minimum targets of attracting Rs500 million in foreign investment, create at least 5,000 jobs (out of an eventual 30,000) or earn a minimum of Rs150 million in export earnings. By 2015, the then-Finance Minister Vishnu Lutchmeenaraidoo remarked in parliament that "the Jin Fei land is a great land for the marriage of dogs". Subsequently, the Mauritian government took back 80 percent of the land leased to Jin Fei, with the project whittled down to a hotel, conference centre and wedding venue. "It has become a dead duck, and no one knows where it is headed," concludes Kasenally.

More recently, Mauritius looked to woo Chinese tourists, and initially the numbers did look encouraging with the number of Chinese tourists going up from 15,133 in 2011 to a peak of 89,584 by 2015. But that too has started to shrivel. Until it fell to just 42,740 (less than half of the 2015 figure). "Why did it go down? A combination of a lack of access with other destinations in the Indian Ocean, such as the Maldives, having more flights catering to the Chinese market as well being closer to China and selling a similar tourism product," Sithanen points out, "to make up for this, we need to tailor our tourism product more for the Chinese market." Eventually airlines got the message with China Southern Airlines cutting its flights to Mauritius in 2015 and Air Asia in 2017 and Air Mauritius ceasing its flights to Beijing in 2017 and Guangzhou, Chengdu and Wuhan in 2018.

4- The expectations from the FTA

The history of false starts in attempts to dee- pen economic ties between Mauritius and Beijing underscores the importance of keeping expectations about the potential benefits of the FTA realistic. The agreement cuts ta- riffs on a number of Mauritian exports, such as fish and fish products, live animal exports and instant noodles as well lowering tariffs on sugar exports from Mauritius. Another potential sector that could benefit are jewellery exports. The Economic Development Board estimates that the FTA could potentially lead to a Rs12 billion boost to exports. "We have to be frank about this," argues Sithanen, "our potential for exports to China is very narrow; we won't be able to export garments, they do that; China is also great at producing food and agricultural products such as sugar nor will it be technology, China is arguably the best in the world at that. What will benefit are more niche products such as rum, fish and jewellery, if these can just capture a tiny sliver of that big market that's a big benefit to us."

Ancharaz's expectations are different: "What I expect to see in the short-term is for the trade deficit between Mauritius and China to widen in the short term because of the FTA, because imports from China will come in more quickly than the time it will take for our exporters to find opportunities, setup and then re-orient our exports there. Talking about potential is great, but getting it done in practice will be trickier."

But the lion's share of the benefit for Mauritius out of the FTA with China might not come out of increased exports of its manufactured goods at all. Rather it may come out of increased business with China when it comes to services. The FTA, for instance, opens up 130 service sectors in Mauritius up to Chinese investment, including communications, education, finance, tourism, culture, transport and traditional Chinese medicine. "If you are expecting to see more exports from Mauritian factories and sugar fields going to China, it won't work like that; what you have to look for is the potential for Chinese investments in things like property development or hotels," says Ancharaz. Sithanen agrees with this assessment: "Where we can really benefit is for us to become a base for Chinese exports to Africa, not in terms of goods because our manufacturing base is too narrow but in services certainly." After all he adds, "this is what Huawei has already been doing all this time."

Chinese-Mauritian economic ties

1972- China and Mauritius establish diplomatic ties

1983- Chinese-Mauritian joint commission on economic, technical and trade cooperation established.

1994- China and Mauritius sign agreement on the avoidance of double taxation and the prevention

1996- China and Mauritius sign agreement on mutual promotion and protection of investment.

2005- China and Mauritius sign agreement on bilateral labour cooperation

2003- Huawei established in Mauritius

2016- Bank of China opens branch in Mauritius

2017- China and Mauritius begin talks on Free Trade Agreement

2019- Free Trade Agreement signed.

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