Africa counts gains of booming trade with Asian tigers

The explosion of commerce between emerging economies and the countries of sub-Saharan Africa is a striking hallmark of the new trend in international trade and investment.

As recently as 1990, trade between lower-middle income countries and sub-Saharan African countries accounted for only five per cent of total African trade.

Today, it accounts for more than a quarter. If the current trend continues, it is possible that in the next 10 to 15 years, lower-middle income countries’ share of African trade will equal that of high-income countries.

This acceleration in commercial exchanges among developing countries is one of the most significant features of the current global economy.

China, having recently acquired lower-middle-income country status, is leading the expansion in South-South trade. Over the course of just one decade (1999-2008), trade between China and sub-Saharan Africa has increased from $8 billion to $86 billion, an average annual growth rate of 35 per cent, which is much higher than China’s overall average trade growth rate of 17 per cent.

Trade statistics can hardly keep up with the pace of trade growth between Africa and China.

According to the Chinese Ministry of Commerce, total trade between China and Africa (North Africa included) was expected to reach $110 billion in 2010.

Yet, despite the dazzling growth rate, Africa’s trade with China in fact now only accounts for 15 per cent of its total trade, similar to sub-Saharan Africa’s share of total trade with the United States.

Chinese foreign direct investment (FDI) in Africa remains smaller still.

By 2008, China’s FDI stock in Africa totalled $7.8 billion, whereas the United States’ FDI stock totalled $69 billion.

China’s high visibility in Africa seems to reflect the speed, rather than the scale of the expansion in its trade and investment activities with the countries of this continent.

North-South trade and investment still dominate the African scene, although much less so than a decade ago.

While in the 1950s, less than a handful of sub-Saharan African countries exported to China, today, almost every country on the continent does so.

China’s dramatic entrance onto the international stage has enabled African countries to diversify their trade partners, thus reducing vulnerability to primary commodity price shocks, and to increase the competition among importers of African exports.

A good example to illustrate this point is the impact of the recent global financial crisis.

Currently, Africa is experiencing a robust economic recovery, with growth rebounding from 1.7 per cent in 2009 to 4.7 per cent in 2010, slightly lower than its five per cent—plus pre-crisis growth rate.

But if African countries still relied on exports to the markets of developed economies —as they used to – the economic recovery would have been more uncertain, given the slow recovery in the US and the continuing crisis in Europe.

Not all sub-Saharan African countries benefit equally from Africa’s booming export trade with China.

Five oil-exporting countries—Angola, Congo, Equatorial Guinea, Gabon, and Sudan —account for two-thirds of the continent’s exports to China.

And it should be noted that crude oil exporting is capital-intensive, and typically does not benefit the broad population of the exporting countries, especially if governments are weak in collecting tax and managing oil revenues.

While there is no doubt that crude oil dominates Africa’s exports to China, this concentration is not unique – Africa’s exports to the rest of world exhibit a similar pattern.

Looking in more detail at sub-Saharan African exports by commodity confirms the general trend of a growing dominance of raw material exports.

In the early 1990s, African countries’ raw material exports (petroleum, and ores and metals) to China accounted for only 42 per cent of its total exports, while a decade and a half later, it accounted for 87 per cent.

There was a similar trend in exports to the rest of the world, with the proportion of raw material exports increasing from 56 per cent of total exports in the early 1990s to 67 per cent in the late 2000s.

Africa’s dependency on raw material exports is most pronounced in its trade relationship with the US and China, while its exports to European Union countries are more diversified.

The pattern of China’s exports to sub-Saharan Africa is also very similar to the pattern of its exports to the rest of the world.

China’s man-made products, namely, manufactured goods, and machinery and transport equipment, account for about 90 per cent of its total exports, to both Africa and to the rest of world.

However, while the share of total Chinese exports to Africa represented by manufactured goods has remained high over the last decade and a half, for Chinese exports to the rest of the world, the share has diminished significantly.

China is apparently moving up the production value chain in its exports to the rest of the world, with machinery and transport equipment exports increasing over the last 15 years, from a mere 20 per cent of the total to more than 40 per cent of the total.

Import patterns

The patterns of sub-Saharan Africa’s imports from China and from rest of the world are similar and complementary to each other.

African countries almost exclusively import value-added commodities, mostly manufactured goods, machinery and transport equipment, food, and chemicals.

While the largest proportion of Africa’s imports from China is manufactured goods, from rest of the world, it is machinery and transport equipment.

This confirms that China is more competitive in exporting manufactured goods, probably mostly to the lower-end market, while the rest of the world is more competitive in exporting transport equipment and machinery.

The patterns of China’s imports from sub-Saharan Africa and from the rest of the world, however, could not be more different.

From sub-Saharan Africa, China imports mostly raw materials, while, from other countries, it imports a large proportion of manufactured goods, machinery and transport equipment, and chemicals.

It is apparent that in addition to raw materials, China also needs value-added products, which account for more than 70 per cent of total Chinese imports.

But sub-Saharan Africa has not yet been able to capture this market.

This indicates that the Sino-African trade pattern can only change if sub-Saharan African countries gain significant comparative advantages in value-added commodities on the international market.

The question is then, why don’t sub-Saharan African countries export manufactured or value-added commodities to the vast Chinese market?

The simple answer is probably that sub-Saharan African countries lack competitiveness in producing manufactured goods for both domestic and international markets.

For a country to be competitive, it must be able to utilise its human capital and natural resources to produce goods and services at competitive prices.

Each country is endowed with different resources, whether it is human or natural resources.

China is a country that was able to turn its comparative advantage, which is a well-educated labour force and good infrastructure, to produce manufactured goods for the international market.

It also avoided head-on competition with established products.

For example, while it produces three-quarters of the world’s shoes, it has not competed in the luxury shoe market, which is still dominated by shoemakers from developed countries.

The same is true for handbags and apparel. By contrast, according to the World Economic Forum’s Global Competitiveness Index, African countries lag behind in a global context.

It should also be noted that increasing manufactured exports is not the only answer. Any labour-intensive exports should deliver broad-based growth.

Thanks to ample agricultural land and good climate, several African countries have been able to expand their labour-intensive agricultural exports – for example, Mali’s mangoes, Rwanda’s coffee, Ghana’s cocoa, and Kenya’s horticulture.

Other initiatives that have turned African comparative advantages into exports include tourism in Rwanda and Cape Verde, and the transportation hub at Nairobi, Kenya.

Mutual benefit

There is no doubt that China’s spectacular economic growth is benefiting from Africa’s supply of raw materials, but sub-Saharan Africa’s economies – thanks to China’s healthy appetite for raw materials – are also benefiting from high commodity prices, and African consumers, at least in the short run, also enjoy the benefit of cheap, Chinese manufactured goods.

Before China leapt onto the international stage, Africa was repeatedly subjected to commodity price shocks and had to import most of its manufactured goods from high income countries at a higher price.

It might not be a pure coincidence that Africa is currently experiencing the longest uninterrupted growth since 1960s.

Between 2000 and 2009 – the period when China and Africa’s trade accelerated – Africa maintained an annual GDP growth above three per cent.

Most impressively, while GDP growth among advanced economies tumbled to 0.5 per cent in 2008 and to -3.2 per cent in 2009, Africa registered a GDP growth of 5.2 per cent in 2008 and 1.7 per cent in 2009.

African countries are among the countries that are recovering fastest from the global financial crisis, and the World Bank predicts that sub-Saharan Africa will rebound quickly to an above five per cent growth path in 2011 and 2012.

The question is how can sub-Saharan Africa benefit more from its association with China, especially by capturing China’s market for value-added commodities?

Since China endeavours to move up the value chain in the international market, it would be a ‘win-win’ relationship for China to collaborate with Africa by facilitating its quest for industrialisation, leading to a second phase of its renaissance to the benefit of its majority population.

Sub-Saharan African countries, however, must play a leading role in insisting on its rightful share of the benefit resulting from the trade relationships with China, with other emerging economies, as well as with the developed countries.

Xiao Ye is an economist at the World Bank. The views expressed here are the author’s, and do not represent the World Bank’s views.