By Vinaye Ancharaz
The Mauritius-China Free Trade Agreement (MCFTA), signed in October 2019, entered into force on January 1, 2021. In theory, it represents a major opportunity for Mauritian exporters and investors to penetrate the large yet elusive Chinese market. In practice, Mauritius’ exports to China are negligible, and survey findings suggest that exporters have a fear of the Chinese market since they lack the capacity to meet demand on a sufficient scale. If this does not change, the FTA would do little to redress the trade imbalance between the two countries.
On the other hand, one doubts if the accord was driven by purely economic imperatives. Political-economy considerations are likely to have eclipsed any economic rationale, especially for a small country like Mauritius, which coincidentally also signed a Comprehensive Economic Cooperation and Partnership Agreement (CECPA) with India in February 2021, just one month after the China trade pact came into effect. These events can hardly be dismissed as mere coincidence. Mauritius, it seems, has become the unfortunate battlefield in which the war for economic supremacy between India and China is being fought.
China’s choice of Mauritius as the first African country with which to sign a trade pact is hardly surprising. China is known to start off on a small, experimental scale, and build up, expand and replicate. This was the approach used to build special economic zones (SEZs) at home, initially in the province of Shenzhen. It also explains why China picked New Zealand – a relatively small country – in 2008 for its very first FTA with a developed country. The same model was used to pilot SEZs outside of China, and once again, Mauritius was chosen to host the first SEZ in Africa in 2006. However, 15 years on, the much-promised SEZ, now a far cry from the original blueprint, is yet to see the day. Will the MCFTA suffer a similar fate?
Salient features of the MCFTA
The MCFTA is in the spirit of modern-day deep integration arrangements. It goes beyond the traditional, narrow focus on trade in goods to encompass services, investment, competition, intellectual property rights (IPR), and e-commerce. The Agreement includes a chapter on economic cooperation, which likens it to the Economic Partnership Agreements.
The text makes frequent references to relevant WTO agreements, which it asserts to be fully compliant with. Conversely, the ‘WTO-plus issues’ – notably, competition, IPR and e-commerce – have received little coverage in the text. Ultimately, the Agreement is focused mainly on trade in goods, trade in services, and investment, which makes it rather indistinguishable from a conventional FTA. The chapter on investment takes up one-third of the main text, testifying to the importance that the two countries attach to this area. It delves in great detail into disputes, prompting one to wonder whether the parties – or perhaps just Mauritius – expect disputes to be more likely in this area than in others.
With regard to trade in goods, the FTA envisages immediate liberalization of some 96% of trade on both sides. Mauritius is expected to benefit from immediate duty-free access to the Chinese market on some 7,500 tariff lines, with a further 723 tariff lines slated to be progressively liberalized over a maximum period of 7 years. Excluded products account for 3.6% of tariff lines and include products of export interest to Mauritius, such as green tea, woollen and cotton fabrics and machines. A tariff rate quota (TRQ) for 50,000 tons of Mauritian sugar is touted as another major attraction of the deal.
Mauritius, for its part, has committed to liberalizing 94.2% of tariff lines within 5 years. Tariffs will be phased down from 30% to 15% and from 15% to 10%, including on products such as tea, rum and spirits, and furniture, which compete directly with local industry.
With respect to services, Mauritius and China have agreed to remove restrictions in more than 100 service sectors, including some sectors in which Mauritius has an offensive interest (e.g., financial services, professional services, education and tourism). As a services-oriented economy, Mauritius already offers a rather liberal services trade regime. However, the Agreement opens up new sectors to Chinese service providers. In return, it allows Mauritians to establish businesses in China as wholly-owned entities or as joint ventures with Chinese operators. The chapter includes an annex on Chinese traditional medicine (TCM), calling on both parties to strengthen cooperation in this sector, even though in practice, China will be the major beneficiary. As regards Mode 4 (movement of natural persons), the chapter exhorts professional bodies to set up processes for the mutual recognition of qualifications and experience. A notable fact is that the chapter does not apply to government procurement.
Trade in goods
The Government of Mauritius is optimistic about the MCFTA, touting it as a major opportunity for Mauritian exporters and service providers to carve a foothold in the Chinese market. In particular, the Economic Development Board (EDB) is confident that goods of export interest to Mauritius, such as seafood products, rum and spirits, animal feed, soaps and detergents, garments, and medical devices, could benefit from preferential tariffs in China – and this, in addition to the ‘generous’ TRQ on sugar. In the services sector, Mauritius could leverage its reputation as an international financial centre to attract Chinese companies seeking to do business in Africa (and elsewhere) to set up their regional headquarters and/or register in Mauritius to take advantage of its low taxes and extensive network of tax avoidance treaties and investment promotion and protection agreements. Mauritius could also position itself as an RMB clearing hub for the region. Beyond financial services, the ICT sector and professional services are well placed to profit from improved market access to China.
The economy could also benefit from Chinese investment in sectors with high growth potential but weak capacity at the present. Artificial intelligence and robotics, the digital economy, videoconferencing facilities, ICT, pharmaceuticals and traditional medicine have specifically been singled out. The government has also welcomed the special attention that the Agreement gives to economic cooperation and expects to receive further aid and technical assistance in several priority sectors, including agriculture and food security, health, social housing, and air transport.
It takes time for exporters to respond to the opportunity that the new trade regime offers.
The above-mentioned benefits of the MCFTA should be taken with a pinch of salt, however. Even where a potential for export exists, there is no guarantee that it will be automatically realized. The bilateral trade data is unequivocal: Mauritius has hardly marked its presence in the Chinese market so far. Imports from China are closing in on the USD 1 billion mark whereas exports to China slipped to USD 23.7 million in 2020. At current trends, tariff cuts under the MCFTA are likely to cause imports from China to swell while it takes time for exporters to respond to the opportunity that the new trade regime offers. Survey findings suggest that Mauritian exporters have a fear of dealing with China because of the sheer size of its market. They worry about their capacity to meet export volume requirements.
The MCFTA has been in implementation for just two years – a period too short to allow any meaningful assessment of its impacts. Consequently, much of the information available on this subject consists of observers’ views rather than analytical insights. The ‘observers’ can be classified as stakeholders who have an interest in the MCFTA and independent experts whose opinion may be taken as more objective. Not surprisingly, the former tends to have a more favourable view of the MCFTA, flaunting its benefits to both parties, especially to Mauritius. The EDB, for example, has published a long list of Chinese import products that could be supplied by Mauritius at a preference margin. Table 1 provides a summary.
The stockholders’ optimism should be taken with a pinch of salt, however – for the EDB’s back-of-envelope analysis is flawed on several fronts. First, the preference margins in Table 1 are relatively small, and they are likely to shrink further as China continues to liberalize multilaterally. On January 1, 2022, China reduced tariffs on 954 products and it will further trim MFN tariff rates on 62 IT products on July 1, 2022. Such tariff liberalization will erode any competitive edge afforded by the MCFTA. Second, for each of the products in Table 1, EDB identifies the main countries currently exporting to China. Many of these exporters themselves have FTAs with the Asian giant. For example, South Korea is among the major exporters of fish fillet and tuna to China; Japan is a key exporter of medical devices; and Vietnam is big in clothing exports. All these countries are members of RCEP along with China and benefit from preferential tariffs. It will be rather hard for Mauritius to compete with them. Indeed, competitiveness is the third factor that Mauritian stakeholders seem to ignore.
Fourth, several of the products (e.g., black tea, rum, soap, sunglasses) eligible for duty-free access to China under the MCFTA are neither among Mauritius’ top exports to the world nor to China (Table 2). They may be emerging exports and, so, it is naïve to assume that, even if a potential to export to China exists, it will translate into actual exports. This is confirmed to some degree by the export similarity index (ESI) and trade complementarity index (TCI) shown in Table 3. The ESI is low and on a declining trend since 2018. This suggests that Mauritian and Chinese exports, which were rather dissimilar to begin with, have become more divergent over time. While the very different export structures may indicate good potential to export to each other, the TCI says otherwise. The low level of the index suggests weak complementarity between the products that Mauritius exports and those that China imports. This could be because China is a competitive producer of a wide range of goods, including many that Mauritius exports.
One product in which Mauritius has a natural advantage is sugar. Sugar is the second biggest export of Mauritius and, as a ‘wholly produced’ good, it automatically meets the rules-of-origin requirements for export under the MCFTA. For this reason, the TRQ of 50,000 tons of sugar at an in-quota tariff rate of 15% (instead of 50%) is celebrated as a key achievement of the negotiations on the MCFTA. Once again, the data suggests little cause for such exuberance. Sugar production is influenced by many factors, and Table 4 shows that since 2015, local output has been on a downward path. In 2020, Mauritius had a shortfall of more than 85,000 tons between production and exports, which it made good through imports. Against this backdrop, it is doubtful whether the TRQ of 50,000 tons of sugar exports to China could be met. Also, will such exports be at a competitive price relative to Mauritius’ traditional sugar market, notably the EU?
China is a competitive producer of a wide range of goods, including many that Mauritius exports.
In light of the above, it seems more appropriate to tag along with the experts’ view that the MCFTA may benefit China more than it would benefit Mauritius – at least in merchandise trade.
Trade in services
China is a net importer of commercial services. In 2018, China’s services imports crossed the half-trillion-dollar mark and the invisible trade deficit soared to USD 255.5 billion. While the pandemic has taken a toll on services trade, the deficit, albeit smaller, continues. Mauritius, on the other hand, is a services-driven economy. Services exports, which are dominated by travel and tourism, made up over 70% of total exports in 2019/2020. Given the country’s competitive advantage in the services sector, Mauritius is hopeful that the MCFTA will unlock new opportunities to export to China. This expectation is a legitimate one since China’s services trade regime is notoriously restrictive.
With a score of 0.42 on the OECD Services Trade Restrictiveness Index (STRI), China ranks as the fifth most restrictive economy in the world. Among the sectors with the highest STRI are accounting services (0.727), broadcasting (0.671), telecommunications (0.667), and legal services (0.478). Conversely, banking, insurance and computer services are relatively open to trade. These are the very sectors where Mauritian service providers hope to make a dash for the Chinese market, aided by enhanced access and preferential treatment.
However, that is easier said than done. Although Mauritius’ services exports to China are much bigger than its merchandise exports, China is one of the rare countries with which Mauritius has a deficit in both goods and services trade. Starting in such adverse conditions, it will be a challenge for Mauritius to grow its services exports to China substantially enough to rectify the deficit on the services account any time soon – more so because the preferential treatment promised by the MCFTA may be diluted by stricter conditions required by China’s other regional trading arrangements, notably RCEP. For example, insurance service providers in the RCEP region can establish in another member-country without any restriction whatsoever whereas there is a 51% foreign ownership requirement for Mauritian firms in a joint venture with a Chinese partner. Fortunately, there is no preference margin to RCEP firms in other service sectors of potential interest to Mauritius. Of these, banking services appear as a promising avenue under Mode 3 (commercial presence). The Bank of China was exceptionally granted a license to operate in Mauritius in 2016. The government of Mauritius can negotiate a reciprocal ‘favour’ for a local bank to set up in China. However, the power dynamics in any negotiation with the Chinese are arguably biased in their advantage. For a small country like Mauritius, MCFTA or not, the danger is that China could exact a far better deal for itself at the expense of its weaker partner.
Investment
EDB has ascertained a series of products in which Mauritius could build production capacity by attracting investment from China with a view to eventually exporting the same to China under the MCFTA. Products like LCD panels, medicaments, integrated circuits, cosmetics, chemical products and motor vehicle parts have long been under the government’s radar as part of an industrial push towards light manufacturing, and it has become more urgent in the face of the continued decline of the clothing industry.
However, the MCFTA brings only marginal improvements in the already-open and flexible investment regime of Mauritius. So, if the Chinese did not invest in light industry before – including in the original Jin Fei project, which was conceived as an industrial zone but ultimately changed into a real estate venture – why would they now? The fact is that constantly rising real wages have eroded Mauritius’ cost-based comparative advantage in labour-intensive manufacturing, and the introduction of a national minimum salary in January 2018 came as a coup de grace. Labour is in short supply, forcing businesses to hire foreign workers, and the country does not have any natural resources. These conditions mean that the manufacturing base in Mauritius is narrow and unattractive for FDI. Not surprisingly, over 80% of FDI in recent years has flowed into property development. This trend is likely to continue as the smart city and the Chinese regional headquarters in the Jin Fei zone take shape, and as Mauritius attracts further investment into real estate from China under the MCFTA. The economic value of such investment is dubious in an economy that banks on innovation and seeks to develop new growth poles. If anything, it has led to a speculative bubble, with property prices soaring out of reach of the median income-earner.
Mauritius may be prized for its strategic location as a gateway to Africa.
The MCFTA could be more beneficial to Mauritian investors since it opens up new avenues in the hitherto-closed Chinese investment regime. Whether this will translate into real opportunities and whether Mauritian investors will be able to take advantage of them remains to be seen. If data were a guide, over 62% of Mauritius’ outward FDI over the past 5 years has gone to Africa, mostly into manufacturing as Mauritian factories relocated in the region. Conversely, China has received virtually no FDI from Mauritius in recent years. Will the MCFTA reverse the trend?
Geopolitics
Is Mauritius a laboratory for China to develop and experiment with prototypes before implementing them on a real scale in Africa? One is tempted to ask this question in view of the recent history of China’s engagement in Mauritius. China conceived the first SEZ outside of its borders in Mauritius in 2006. Even if the project failed – and transformed into something else – for reasons specific to Mauritius, it nevertheless served as a springboard for Chinese SEZs elsewhere in Africa. The MCFTA marks China’s first FTA with an African country. Will it suffer the same fate as the SEZ? Time will tell.
Drawing on historical, political and geopolitical insights, we argue that Mauritius is far from the textbook example of a country with which a large, competitive and ambitious economy like China would want to sign a trade agreement. Mauritius is poor in resources, including labour; its domestic market is tiny; and the country is located far off in the Indian Ocean. But could the latter be precisely the reason? Where economic motives do not make sense, geopolitics often does. Mauritius may be prized for its strategic location as a gateway to Africa, and for its numerous islands, which are eyed as potential military bases.
Against this background, it may come as no surprise that the MCFTA’s benefits, if any, will be limited and biased in China’s favour. Mauritius’ exports to China are virtually non-existent as is Mauritian investment in the mainland. While the MCFTA will provide duty-free access to a variety of Mauritian products, it appears that the potential to penetrate the Chinese market is slim. Thus, the MCFTA may exacerbate the already-large trade deficit that Mauritius has vis-à-vis China. The scope for Chinese FDI in Mauritius, other than in real estate, is also small given the country’s narrow manufacturing base.
Mauritius is implementing the AfCFTA in parallel with the MCFTA. This may raise questions about potential interactions and the risks of trade deflection. A bigger concern is that China replicates the MCFTA with other African countries or with the AfCFTA. A China-Africa FTA can have adverse consequences for Africa’s ambitious continental integration plans, and for Mauritius’ trade with both China and Africa.
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