An evaluation of the trade relationship between South Africa and China: An empirical review 1995-2014

South Africa’s (SA) largest trading partner is China. The bilateral trade flows between these two economies have been increasing since the end of the global financial crisis. There are several factors that determine the trade flows between these two economies. Research studies the impact of the real exchange rate, market size and economic size on the trade flows between SA and China, applying the gravity model of trade. Time series data for the period of 1995–2014 have been used and a multiple linear regression model was employed in the evaluation process. To determine the impact of the three underlying variables on the bilateral trade flows of SA and China, the ordinary least squares method was used. The explanatory variables consist of the product of SA’s gross domestic product (GDP) and China’s GDP, which act as the proxy for economic size, the product of South Africa’s population and China’s population, which act as the proxy for market size, and the real exchange rate between SA and China. Results revealed that the economic size and the market size have a strong positive impact on trade flows between SA and China and this is consistent with economic theory. On the other hand the real exchange rate has a negative impact on trade flows between SA and China. If two countries each have a large economic and population size trade, this results in high trade flows between the countries as compared to trading with smaller economies. Trade volume is also reduced if the countries trading have a highly volatile exchange rate. Based on the findings of the research, the article recommends that the Department of Trade and Industry should target trade with countries of big economic and market size. The research also shows that the absolute and comparative advantages are not the only basis of trade but other factors should be considered, such as exchange rate, economic size and market size. The central bank should maintain a stable exchange rate between the SA rand and partner countries’ currencies before trading. This enhances trade and leads to strong economic growth.