China Influences African Manufacturing

The rise in African imports from China, and even more so other emerging partners, can be interpreted as trade creation instead of trade diversion (Berthélemy, 2009), the concepts that have been developed to analyze Free Trade Areas. Chinese development and financial assistance act as a subsidy on China’s exports to Africa, i.e. a distortion from free trade. Through trade creation, more expensive domestic production is replaced by imports from a more efficient partner country, i.e. the country starts importing within a trading bloc where it formerly did not import at all. In the case of trade diversion, a distortion from free trade leads to the replacement of initially cheaper imports from third parties by comparatively more expensive products within a trading bloc (Viner, 1950).

South-based manufacturing enhances the welfare of African consumers via prices and functionality. This report’s note on Malawi highlights that the presence of emerging partners allows Malawians to access a broader variety of goods and services. For instance, generic Indian pharmaceuticals are cheaper than brands from traditional partners. Generally, China has become over the last decade the largest single supplier of manufactured products to Africa, representing almost a fifth of all African imports in the sector, as shown in Table 6.9a.

Fast rising oil exports during the 2000s, driven by prices that rose from USD 35 a barrel on average in 2000 to USD 100 on average in 2009, make it the dominant feature of Africa’s trade over that period. Nevertheless, this feature tends to obscure the fact that African manufactured exports – including machinery, transport equipment and processed commodities but excluding processed foodstuff (SITC 6 – 9) – approximately doubled in nominal value between 2000 and 2009, when trade between African countries and emerging powers equalled that between Africa and its traditional partners (Figure 6.8).

Most of the increase in manufactured exports was absorbed by the emerging partners, the smaller ones in particular. This reflects the broad view this report adopts on emerging partners, i.e. a definition inclusive of all Southern partners, not just China or a few “giants”. Emerging partners engaging on a smaller scale than China, India, Brazil, Korea and Turkey collectively play an important role in helping Africa diversify its production. Table 6.9b below compares the relative shares of emerging partners and traditional partners as markets for African manufactured exports (as opposed to absolute volumes in Figure 6.8). In 2000, Africa exported 3.4% of such products to China and 14.8% to other emerging partners. By 2009, these shares had risen to 11.3% and 22.7% respectively, largely at the expense of the EU and, to a lesser extent, the US.

An increasing share of Africa’s manufactured exports goes to developing countries. Emerging partners other than China take more diversified imports from African countries than traditional partners, and increasingly so. By contrast, the share of miscellaneous manufactured goods in Africa’s exports to the European Union’s original 25 members, the United States and China has actually decreased since 2000.

Some progress can be observed in Africa’s manufacturing export performance, but it remains concentrated in a few countries even though the upward trend in African manufactured exports is at play across the continent. African nations need to attract a wide range of emerging partners and engage with other Southern countries. As Figure 6.9 illustrates, a significant take-off in manufacturing exports is observed in the top African industrial exporters, i.e. South Africa, Tunisia, Morocco, Egypt, Mauritius and Algeria; a similar pattern is discernible for the rest of Africa taken together. While most countries start from a very low base, the pace of growth has been actually of the same order of magnitude since 2000. Data for 2009, the latest available, have to be interpreted with caution because of the impact of the global crisis.

New opportunities for diversification arise from the rebalancing of Africa’s economic relations with emerging partners:

1. High commodity prices allow for the accumulation of foreign exchange to finance imports of capital goods necessary for upgrading;
2. Emerging partners are becoming major sources of innovation for Africa. The share of global research and development conducted in developing countries has grown substantially, spreading technology better suited to meeting the growing demand of the “bottom-of-the-pyramid” consumers. Four decades ago, just 2% of global research and development occurred in the developing world, and even then much of it was devoted to meeting the needs of high-income consumers (Singer et al.,1970). In 2010, that share had risen to more than one-fifth (Hollanders and Soete, 2010). One driver has been the fast growth in demand by poor consumers, particularly in China and India. Cirera and Markwald (forthcoming) also argue that growing intra-African trade provides additional “South-South” opportunities for diversification and technology upgrading. One example of adapted technology is the use of solar-powered mobile phone chargers linked to new LED light technologies in East Africa. For less than one US dollar a China-sourced system will charge three phones and provide electric light for a family with no connection to the power grid. These consumer benefits are not just in consumption goods, since mobile phones are also important capital goods in agriculture, and lighting helps children to learn at home and in school. Several AEO country notes confirm that emerging partners contribute to technology transfer and diversification: for example, employment creation, higher export earnings, diversification of productive capacity, and technology transfer in Uganda; technology and innovation, employment, and economic diversification in Namibia.
3. Diaspora originating from the new economic powers are an important source of technology transfer through their tacit, specialist knowledge. New techniques introduced by Chinese small investors in farming are a good example.
4. African countries want special economic zones²⁰ and to copy China’s development model by attracting FDI and enhancing the transfer of technology, knowledge and skills (Brautigam and Tang, 2011). The special zones can combine top class infrastructure, expedited customs and administrative procedures with fiscal incentives to overcome barriers to African development (Brautigam, et al., 2010). Job creation is another key goal for African countries, as in the case of the Lekki project in Nigeria (World Bank, 2011). Finally, the special zones build links with the local economy through logistics, forwarding, and insurance and financial services and also when foreign companies contract out transportation, health, catering and housing services to local firms. The AEO country notes observe that Zambia’s minerals and Egypt’s marble are processed in special economic zones.