Without the fluctuation of exchange rate, the economy and the world enjoys a pleasant and diplomatic trading atmosphere. Trading activities and foreign direct flows will run smoothly. No foreign currency will be exchanged leaving the home country lamenting. A country will not be afraid to allow foreign investors to invest and vice versa. The country will gain a balance of payment surplus hence the economy will boom. When exchange rates fluctuation set in, a depreciation in the home currency will lead to a lower capital investment to foreign investors, decline in export prices in a foreign currency while increasing import prices in the domestic currency causing and economy downturn.
The Chinese economy continues to grow fast by international standards as it enters the 13th Five-Year Plan period (2016-20). While growth is still high but gradually and appropriately moderating as the population ages and the economy rebalances from investment to consumption ,GDP per capital remains on course to almost double between 2010 and 2020. As a result, the Chinese economy will remain the major driver of global growth for the foreseeable future. (OECD, 2017; p.6). China’s growth has long been driven by capital accumulation, supported by high savings. China’s share of global economy was 14.8% in 2015 with nominal GDP of $11.0 trillion (visual capitalist 2017). According to Rodrik (2006, p.1), “China’s economy has expanded by leaps and bounds, at historically extraordinary rates that few economists would have found plausible or feasible ex-ante”. The rapid growth of China has also been paralleled by its emergence as a major trading power in the world. In 2014, China exported goods with a total value of more than 2.3 trillion U.S. dollars and imported goods with a value of 1.96 trillion U.S. dollars, making it the leading export and second largest import country worldwide. In 2015, China was ranked second among the countries with the largest gross domestic product, following the United States (statista 2018).
The growth of China’s trade with Africa mimics its trade in the world, though starting from a low level. Bilateral trade between China and Africa stood at $149.1 billion in 2016. Trade between Africa and China is shooting up by 19 percent every year. In the first half of 2017, they totalled more than $85.3 billion in value. Chinese imports from the African continent almost doubled by an estimated 46 percent, compared to the same period a year ago reaching around $38.4 billion China is currently Africa’s largest trading partner. China has vigorously defended its economic and trade relations with African countries. It needs more natural resources such as oil, gas, and minerals for its rapidly growing economy, while Africa needs more investment in basic infrastructure to develop its potential. Africa has already attained a trade deficit with china as the nature of its bilateral trade with china raises an alarm as exports to china are mainly focused around a limited number of products mostly classified as commodities. The level at which a slowdown in bilateral trade will affect African exports depends on how exposed these commodities are to shifts in Chinese demand.
African exporters will be affected greatly as china has started to slowdown as a result of its rebalancing towards more sustainable direction. A slowing china in the context of economic rebalancing will lead to a drop in demand for most African commodities such as minerals, iron ore and oil. This will affect mostly countries which benefit the most from Chinese trade like Cameroon. After independence, Cameroon pursued a policy of import-substitution through the promotion of the competitiveness of local industries and the processing of local raw materials, with the hope of fostering the growth and development of the country. Nowadays, Cameroon does not have any official policy to protect local industries against cheap Chinese imports. Both countries are members of the WTO, which works against trade protection and Cameroon is constrained by it sub-regional obligations from negotiating unilateral trade deals with China. It will be interesting therefore to know how Cameroon will deal with the entry of cheap imports from China and the threat to its industrialization effort. Since the introduction of the floating exchange rate system during the 1970s, many studies have been presented to show the relationship between exchange rate fluctuations and international trade. Most studies have provided evidence that the increase of exchange rate volatility dampens international trade as expected. Sherzod (2007), BAAK (2008), Kurihara (2013), Nicita (2013), Basirat et al (2014), Hou (2014), TWAMUGIZE et al (2017) showed increased exchange rate fluctuations impact negative effects on international trade, especially exports
1.1. Background and Context
Recently there is being an unusually change in exchange rate. Since mid-2014, the Dollars has appreciated in real effective terms by more than 10 %, while the Euro has lost more than 10 % of its value. In mid-2016, the devaluation of the Nigerian naira against the Dollar led to a significant imbalance in the financial sector as exchange rate volatility fell. Since the beginning of 2017, Chinese yuan has appreciated by about 10 percent against the Dollars.
This unusual large exchange rate changes is causing a typical fluctuation in currencies affecting more emerging markets and developing economies (EMDEs) than advanced economies (AEs). China has faced three sequential years of depreciation. In 2015 Chinese yuan had depreciated quite a lot against the dollars. The main reason was to make export attractive due to economy slowdown. Due to the oil crisis which affected many countries, there was sluggishness in Chinese export and the best way to stimulate the economy was by depreciation.
The CFA franc has depreciated by about 35 percent against the dollars. The CFA franc has been pegged to the Euro (1 Euro = 655.957 FCFA) with convertibility guaranteed by France since 1999 as it lost half of its value in 1994 after a serious devaluation. The CFA franc follows the appreciation and depreciation of the Euro. Normally an appreciation of the euro against the dollar makes import cheaper but reduces the value in terms of exports earnings by undermining industrial development in the CFA member countries. Moreover, because export earnings are generally reported in dollars, the CFA zone must often convert into euros. One of the benefits of the CFA franc is that it enjoys the fixed parity vis-à-vis the Euro.
It is important to know that, an exchange rate regime categorized as “pegged” does not certainly means it will have a lower exchange rate fluctuation than unpegged currencies. A currency pegged to an anchor currency exposes the country to fluctuation in the anchor against other currencies. A peg that turn out to be misaligned can create exchange market pressure and distinct changes in currency values which will further lead to exchange rate fluctuation.
Currency fluctuation has huge consequences on design of optimal policies and trade competitiveness. Standard theoretical models predicts that change in currency directly affect consumer prices. A domestic devaluation will cause a decline in export prices in a foreign currency while increasing import prices in the domestic currency, hence leads to more exports and less imports (Leigh et al, 2017).The value of trade between US-Euro area and that of the Euro area-China is less affected by currency fluctuations than US-China which is suggested that its trade imbalance is caused by many factors including exchange rate.
Exchange rate plays a significant part between a country and its global supply chains. The effects of a decrease or increase in exchange rate on any finished product might be complex since export usually include a great proportion of imports (i.e. for any given exporter, the price of imported products increases). For domestic producers, if devaluation of exchange rate reduces the cost of the final product exported, it increases the price of the imported product.
Research have shown that, exchange rate does not only affect international trade but also foreign investment flows and the debt servicing. According to Bourdon and Korinek (2011) depreciation in a country’s currency implies that the nominal value of debt denominated in foreign currencies increases relative to the country’s resources in local currency whereas its local-currency denominated debt decreases in value for foreign creditors. Therefore a depreciation in a currency will lead to a cheaper capital investment to foreign investors.
The bond between exchange rate and international trade relates to exchange rate fluctuation. The simple reason why a rise in exchange rate will lead to a decline in international trade is that of risk and transaction cost connected to exchange rate hence reducing trade. Currency exchange rates are being influenced by the balance of trade through its effect on the supply and demand for foreign exchange. When a country’s export isn’t equal to its import, it means there is either more demand or supply for the country’s currency, which affects the price of that currency on the world market.
Cameroon has been trading with China even before the establishment of diplomatic relations in1971. The value of trade leaped to more than US$2.251 billion in 2014, up from only about US$1.850 billion in 2013. In 2015, trade between the two countries dropped to US$2.049 billion. Trade between Cameroon and China has increased significantly over the past 15 years. China’s imports from Cameroon have consisted largely of oil, wood and cotton products (Jansson, 2009). Currently three Chinese companies are either prospecting or extracting iron ore or oil in Cameroon (Weng et al., 2015). One is Sino Steel, a national iron ore company based in Yaoundé, another is the Chinese private company, Hanlong Ltd., Which is linked to a controversial iron ore project in the rainforests of the Congo Basin in Southeast Cameroon. The third is a Chinese oil exploration company, Yanchang Logone Ltd, which operates in far north Cameroon. Cameroon’s main trading partners and sources of both foreign investment and development assistance are China, France, India, Spain, and the Netherlands, all members of the Organization for Economic Co-operation and Development (OECD). These countries are also the main export destinations for Cameroon. Other traditional export destinations are Nigeria and the United States.
1.2. Scope and Objectives (edited after chapter 4)
This research was conducted with profound interest in in international trade. International trade nowadays is at the heart of the global economy and is responsible for much of the development and prosperity of the modern industrialized world. Many studies have been presented to show the relationship between exchange rate fluctuations and international trade since the introduction of the floating exchange rate system. The scope of my research was to acquire the fundamental knowledge as current as possible. Cameroon was the main focus as its economy is been affected by Chinese goods.
The main objective of this study was to empirically analyse the relationship between exchange rates and international trade and assess its impact on the Cameroonian economy. The specific objectives are:
? To analyze Cameroon’s economic structure and performance, paying particular attention to the role of trade with China.
? To analyze Cameroon’s trade (export and imports) structure and evolution, by key sectors, with specific focus on China’s contribution;
? To identify and analyze opportunities derivable by Cameroon and challenges from its trading relationship with China;
? Based on the findings to make appropriate recommendations.
The achievements of this study lies on the recommendation made at the end of the study and their implementation. In general, the research is immense benefit to the following:
1. Importers and exporters who always trade and are in need of direct finance.
2. Policy makers of BEAC (Banque des Etats de l’Afrique Central) who issue guideline governing international trade practices.
3. Banks especially the commercial banks.
4. Students of banking and finance who might take a cue from the work done have to further research into the field of exchange rate fluctuations and international trade.
5. The general public who have a right to contribute and informed to the activities of our banking institutions.
It is hoped that the, findings and recommendations of this study will be of great importance to the above mentioned group.
1.4. Overview of Dissertation
Today, international trade is at the heart of the global economy and is responsible for much of the development and prosperity of the modern industrialized world. The introduction elaborates the problem statement of the research. The introductory background provides information about exchange rate and international trade and also the past and current trade between Cameroon and China and how the trade has increased significantly. Also described in the introductory chapter are my achievements and Scope and objectives of my research. The second section presents the detailed literature review of most sources of information used in the research. The third chapter of the thesis is reserved for methodology. The first part we used primary data in which a questionnaire was administered and the second part we use secondary data to explain Cameroon-China trade relations including the exports to China and imports from china. The fourth chapter is for empirical analysis where we analyse our results from the questionnaire and conclude whether there is a significant relationship between exchange rate and international trade between Cameroon and china. The last part of the thesis is the conclusion in which the research is summarized and policy suggestions are provided to help solve and avoid the current challenges faced.