China’s Trade Expansion in Africa: Challenges and Opportunities

Juan Carlos Gachúz and María Paula Zaldívar*

China’s Trade Expansion in Africa: Challenges and Opportunities

LEER EN ESPAÑOL 

 

INTRODUCTION

After a long period of economic isolation, China joined the World Trade Organization in 2001[1] and—in a gradual way—undertook a process of commercial opening and fostering of productive investment beyond its borders. The aim of China’s foreign policy is to drive internal development and strengthen commercial ties with other regions in the world.[2] Its government seeks to be a world leader in trade and has thus developed numerous strategies to establish and expand its economic presence and international influence.

Furthermore, energy and raw material needs of the Chinese industry have led to the search of supply sources in other countries. The Asian country has become a major consumer and producer of energy and in recent years, has taken the United States place of biggest oil importer in the world.[3] In order to guarantee the supply of hydrocarbons and other energy resources, Beijing has sought to increase its ties with the African continent.

In the last 20 years, China has exponentially increased its commercial presence in Africa, increasing investment and infrastructure, and fostering the rapprochement between the two. In this symbiotic relationship, Africa reports important benefits, like the creation of jobs, economic dynamism and infrastructure development, while China obtains valuable resources—among which minerals and oil—[4] and increases its commercial and political leadership in the region. One of the determining factors in the strengthening of relations between the two was the creation of the Forum on China-Africa Cooperation (FOCAC).

In September 2018, FOCAC took place in Beijing, where important announcements were made on the economic, political and security cooperation between China and Africa. Chinese president Xi Jinping announced it would give 60 billion dollars in financing to Africa as a way of government assistance, as well as investments and credit from financial institutions and companies. This includes 15 billion dollars in donations, interest-free and concessional loans; 20 billion dollars in lines of credit; the creation of a special fund of 10 billion dollars for the financing of development, and a special fund of 5 billion dollars to finance imports from Africa.[5] This announcement is undoubtedly a milestone in China-Africa relations and starts a new era in the cooperation between both nations.

During the FOCAC meeting in Beijing, eight initiatives aimed at improving relations between China and Africa were also announced, including investment in medical attention, education, security and cultural exchange, and the increase of Africa imports.[6]

One Belt One Road is another important project with potential to impact the Africa region. It is an initiative that seeks to improve communication channels and promote trade between China and 65 countries in central and southern Asia, Europe and the north of Africa. The aim is to reduce the cost of the transportation of goods and people through a more efficient and modern trade network.[7]

Africa has a wide variety and availability of resources. The most important are minerals and oil, which are strategic for China’s industrial sector. Also, in Africa, work and environmental regulations are laxer—although in process of reform—and Chinese investment sees less obstacles than in countries where laws are tougher and more advanced. Although many countries invest and have presence in the region, China is also Africa’s most important trade partner since 2009.[8]

A China Africa Research Initiative study from the Johns Hopkins University estimates that China has granted credits to Africa in at least 136 billion dollars since 2000.[9] For the most part, these resources were given under flexible payment conditions and as a Beijing incentive for the strengthening of trade relations between both regions. President Xi Jinping assures that credits to African countries are given in bonne foi and within a cooperation scheme, mostly in infrastructure.[10]

While some countries of Africa have reached considerable development levels in recent years, the continent’s industrialization is still low, which has slowed the development of domestic companies that exploit the wide variety of natural resources. Currently, at least 600 million people do not have electricity or any other type of basic service.[11] With the arrival of Chinese companies, more opportunities of capitalization and economic spill are expected in different sectors.[12] The biggest infrastructure development benefit and the presence of Chinese companies in the region is perhaps the creation of jobs in countries with the highest marginalization.

Cooperation between both parties has transcended only-trade matters to expand to other areas, like education. As well as resources and generating jobs, the Chinese government offers various training schemes in Chinese universities.[13]

 

“The Chinese government seeks to be a world leader in trade and has thus developed numerous strategies to establish and expand economic presence and international influence.”

 

CHINA-AFRICA TRADE RELATIONS

China is already Africa’s most important partner. It is estimated that trade between the two has grown approximately 20% per year. Similarly, China’s direct foreign investment (DFI) in the region has grown exponentially.[14]

The objectives of Chinas’ trade policy in Africa are not free of controversy. Some analysts question the positive effects of the increase in trade and investment of the Asian country in Africa and consider the risks of an extremely unequal relationship that could result in new forms of dependence and neocolonialism.

From this perspective, Chinese interests privilege the supply of natural resources, while local development, the environment and labor matters remain in the background.[15]

Although Chinese investment is reaching almost all countries in Africa, some resist. While South Africa and Ethiopia have an increasingly strong relationship with China, Kenya, Tanzania and Nigeria, are kept behind.[16] In the recent presidential campaign in Zimbabwe, opposition candidate Nelson Chamisa, of the MDC alliance, resorted to a strong anti-China rhetoric in an effort to get popular support. Chamisa promised to expel Chinese companies if he were to win the elections.[17] China has concentrated its investment in the energy country in some countries. Such is the case of Angola, which is one of the countries that exports more oil to China.

In general, African countries think the presence of China is positive.[18] In 2017, at least 10,000 Chinese companies operated in the African continent, and that figure is expected to continue going up.[19] Bilateral trade has also increased with time. Figure 1 shows the exponential growth of this activity: both exports and imports increased rapidly in the last 20 years.

China has made historical acquisitions in Africa. In 2008, for example, it bought 20% of Standard Bank’s shares in Africa. The operation had an impact on Africa’s total trade balance with China.[20] Figure 2 shows the evolution of Chinese FDI in Africa between 1995 and 2015. The increase is especially remarkable in the last 10 year, and there are no signs this trend will change.

Chinese FDI in Africa is mainly destined to the oil industry, but there are other areas in which it grows rapidly, such as financial services, manufacturing and the construction industry. Gradually, Chinese FDI in African countries has been diversifying, which has a positive impact on other industrial chains, on the generation of jobs and infrastructure development. Thanks to that, the poverty rate has been reduced and offer technology and services in various sectors of the local population. In addition, the creation of domestic companies and the expansion of the private sector have been encouraged.[21]

Almost 90% of workers that have jobs generated thanks to this injection of resources are African, while administrators and managers are usually Chinese. This structure, of most Chinese companies in Africa, has been subject to a number of criticisms: the local population believes that China is only looking for cheap labor to manufacture, while it reserves the best paid jobs for their citizens. As can be seen, one of the main problems of Chinese FDI in Africa is lack of information on the impact of companies that are established there.[22]

The performance of Chinese companies in the African continent can improve. Problems such as security, corruption and cultural barriers[23] must be addressed as soon as possible to avoid Chinese trade and investments in the region being affected.

In China’s exports to the African continent, the sectors that stand out include electrical machinery, mechanical machinery, steels articles and vehicles, among others. Figure 3 shows a deficit in Africa’s trade balance with China, since it imports more than it exports, although in recent years the gap has tended to close.

CHINESE FDI IN AFRICA: AREAS OF OPPORTUNITY

African labor and ecological laws are still very flexible. Without appropriate          legislation, it is easy for the sole purpose of companies—Chinese and from other countries—established in Africa to be to leverage cheap labor and abundant natural resources. Although not all companies in the continent have low labor, ecological and security standards,[24] Chinese business practices in the region become worrisome.[25] The institutional vacuum distorts the impact of the FDI in Africa and is a warning sign for Beijing. In the last FOCAC, president Xi Jinping declared that China and Africa “have embarked on a non-distinctive win-win cooperation path.”[26] That nation’s government has accepted its responsibility and has even collaborated for Africa to establish regulations and improve its relationship with companies who wish to establish themselves there.[27]

The Extractive Industries Transparency Initiative (EITI) is a union of governments, companies, international organizations and investors. China is not part of it, and so is not bound to meet its standards. According to the EITI,at least 130Chinese companies established in Africa have shared information. Such is the case of the China National Petroleum Corporation (CNPC) and the China National Offshore Oil Corporation (CNOOC), among others.[28]

In countries like the Democratic Republic of the Congo and Chad, however, most of the companies established decide not to cooperate. Some US and Australian companies do not share information required by the EITI.[29] This means that Chinese companies operating in the African continent do not necessarily act differently than those from other countries.

There have been labor problems in Chinese companies. In 2006, during a series of protests, 13 workers of a mine in Chambishi, Zambia, were hurt. Five years later, the same mining company fired almost one thousand people for similar reasons. Of course, Chinese companies are not the only ones with labor problems. In Xstrata, a Swiss multinational, 34 workers were massacred in 2012. This is not different to what happened in a Chinese company.[30]

 

“China is already Africa’s most important partner. It is estimated that trade between the two has grown approximately 20% per year. Similarly, China’s foreign direct investment (FDI) in the region has grown exponentially.”

 

In 2016, the International Council for Commercial Arbitration (ICCA) was celebrated in Mauritius, a congress where the economic opportunity that Africa has in terms of trade treaties—particularly China—was analyzed. In this regard, there is concern about the lack of African arbitration in resolving disputes framed in treaties. Generally, when necessary, European or US arbitration is used.[31]

A country interested in providing arbitration services requires legitimacy and good reputation. Africa does not have much experience in the matter, so arbitrations are carried out by foreigners. However, some African governments have made efforts to accommodate arbitration institutions of international relevance, for example the Cairo Regional Center for International Trade Arbitration, of Egypt, or the Arbitration Foundation of South Africa, among others. The more arbitration institutions there are in the continent, the better results can be expected from the treaties signed with other countries and foreign companies.[32]

Better African arbitration will allow positive impacts of Chinese FDI in Africa to increase and encourage fairer trade practices. African countries have a lot of potential in different areas. Tanzania, for example, is rich in gold and diamonds. Zambia has copper and cobalt. They all have important natural resources for foreign investment, mainly China’s.[33]

In March 2018, 44 of the 55 countries of the regions signed the African Continental Free Trade Agreement,[34] a pillar of the new integration process of goods and services for the expansion of trade relations in Africa. The agreement can represent the creation of the world’s biggest free trade area.[35] An increase and improvement in the regulation of foreign companies established there—including Chinese—is expected with this signing.

In Africa, the majority of the population is young. It is crucial for their countries’ economy to continue to grow and thus for foreign investment to be regulated in such a way that fairer practices ensue, real benefits are generated, infrastructure is improved, well-paid jobs are available, the environment is respected and local populations are benefited.[36]

CONCLUSIONS

In the las 20 years, China has intensified its economic and political relations with Africa. Practices of some Chinese companies that settle in this continent can improve and contribute more to the development of African economies. Problems like labor disputes, low remuneration or environmental impact are not exclusive to the Chinese FDI and it would be wrong to assume a point of view that blames this Asian country for all those practices. Action must be taken for Africa to have a new regulatory framework and for all foreign companies to fully comply. There already are companies that decide to stick to the rules and participate in institutions like EITI,even when they are not obliged to.

Finally, the One Belt One Road project is an opportunity to improve infrastructure, attract FDI and generate jobs in African countries. It is the responsibility of the continent’s governments, above all, to establish efficient regulations, build stronger institutions and negotiate agreements that provide tangible benefits to local communities and domestic companies. Balancing the economic relationship between Beijing and the countries of Africa is the main challenge.

 

*Juan Carlos is faculty and researcher at UDLAP. He holds a master’s degree in International Relations from the UNAM and a PhD from the University of Essex. He was Rajawali Fellow at the University of Harvard.

María Paula is researcher assistant in Juan Carlos Gachúz’ project on geo-economics and geopolitics in emerging economies.

 

[1]China and the WTO, 2018, https://www.wto.org/english/thewto_e/countries_e/china_e.htm

[2]Macarena Vidal Liy, “Así quiere China dominar el mundo,” El País, March 4, 2018, https://elpais.com/internacional/2018/03/02/actuali- dad/1519993755_786257.html

[3]Eleanor Albert, “China in Africa,” Council on Foreign Relations, July 12, 2017, https://www.cfr.org/backgrounder/china-africa

[4]Kinfu Adisu and Thomas Sharkey, “The Impact of Chinese Investment in Africa”, International Journal of Business and Management, 2010, https://pdfs. semanticscholar.org/46d5/da638000dc01c1b5fb7121435e062d051c71.pdf

[5]“Chinese President Xi Jinping’s Speech at Opening Ceremony of 2018 FOCAC Beijing Summit,” Xinhuanet, September 8, 2018, http://www.xinhua- net.com/english/2018-09/03/c_129946189.htm

[6]Abdi Latif Dahir, “Why 2018 Marks a Critical Milestone in China-Africa Relations (Quartz),” Center for Global development, September 10, 2018,

https://www.cgdev.org/article/why-2018-marks-critical-milestone-china-africa-relations-quartz

[7]The World Bank, “Belt and Road Initiative,” 2018,  https://www.worldbank.org/en/topic/regional-integration/brief/belt-and-road-initiative

[8]The World Bank, op. cit.

[9]Richard Harris, “Why The Billions China is Pouring Into Africa Might Not Be Smart Money,” South China Morning Post, 2018,

https://www.scmp.com/comment/insight-opinion/united-states/article/2163007/why-billions-china-pouring-africa-might-not-be

[10]Anna Fifield, “China Pledges $60 Billion In Aid and Loans to Africa, no ‘Political Conditions Attached’,” The Washington Post, 2018,

https://www.washingtonpost.com/world/china-pledges-60-billion-in-aid-and-loans-to-africa-no-strings-attached/2018/09/03/a446af2a-af88-11e8-a810- 4d6b627c3d5d_story.html?utm_term=.7fde08a17e2e

[11]Deborah Bräutigam, “U.S. Politicians Get China in Africa All Wrong,” The Washington Post, 2018,

https://www.washingtonpost.com/news/theworldpost/wp/2018/04/12/china-africa/?utm_term=.e9783e65a412

[12]Deborah Bräutigam, op. cit.

[13]Ibid.l

[14]Kartik Jayaram, Omid Kassiri and Irene Yuan Sun, “Dance of The Lions and Dragons,” McKinsey&Company, 2017,

https://www.mckinsey.com/featured-insights/middle-east-and-africa/the-closest-look-yet-at-chinese-economic-engagement-in-africa

[15]Johan Hanekom, “Is China Really Helping Africa?” Forbes Africa, 2017, https://www.forbesafrica.com/economy/2017/09/06/china-really-helping-africa/

[16]Johan Hanekom, op. cit.

[17]Richard Aidoo, “African countries have started to push back against Chinese development aid. Here’s why,” The Whashington Post, October 16, 2018,

https://www.washingtonpost.com/news/monkey-cage/wp/2018/10/16/african-countries-have-started-to-push-back-against-chinese-development-aid- heres-why/?utm_term=.7aab9dd66de1

[18]Richard Aidoo, op. cit.

[19]Panos Mourdoukoutas, “What is China doing in Africa?” Forbes, 2018, https://www.forbes.com/sites/panosmourdoukoutas/2018/08/04/china-is-treating- africa-the-same-way-european-colonists-did/#40e7a30298ba

[20]China Africa Research Initiative, “Chinese investment in Africa,” School of Advanced International Studies, Johns Hopkins University, 2018, http://www. sais-cari.org/chinese-investment-in-africa/

[21]World Bank, “China and Africa: Expanding Economic Ties in and Evolving Global Contact,” 2018 https://www.worldbank.org/content/dam/Worldbank/Event/ Africa/Investing%20in%20Africa%20Forum/2015/investing-in-africa-forum-china-and-africa.pdf

[22]Kartik Jayaram, Omid Kassiri e Irene Yuan Sun, op. cit.

[23]Johan Hanekom, op. cit.

[24]Francisco Paris, “China and the EITI,” Extractive Industries Transparency Initiative, 2010, https://eiti.org/blog/china-eiti/

[25]Namukale Chintu and Peter J. Williamson, “Chinese State-Owned Enterprises in Africa: Myths and Realities,” Ivey Business Journal, 2013, https://iveybusi- nessjournal.com/publication/chinese-state-owned-enterprises-in-africa-myths-and-realities/

[26]Chinese President Xi Jinping’s speech at opening ceremony of 2018 Focac Beijing Summit, op. cit.

[27]Ibid.

[28]Ines Schjolberg Marques, “Chinese companies as transparent as others,” Extractive Industries Transparency Initiative, 2015, https://eiti.org/blog/chinese- companies-as-transparent-as-others

[29]Ines Schjolberg Marques, “Chinese companies reporting in EITI countries,” EITI International Secretariat, 2016, https://eiti.org/document/eiti-brief-chine- se-companies-reporting-in-eiti-implementing-countries#DownloadPDF

[30]Namukale Chintu and Peter J. Williamson, op. cit.

[31]Charles N. Brower and Michael P. Daly, “A Study of Foreign Investment Law in Africa: Opportunity Awaits,” International Council for Commercial Arbitration, 2016,  https://www.arbitration-icca.org/media/7/82088225980224/brower        daly_a_study_of_foreign_investment_law_in_africa.pdf

[32]Charles N. Brower and Michael P. Daly, op. cit.

[33]Ibid.

[34]Mariama Sow, “Africa in the news: African countries sign CFTA, Mozambique conducts debt talks, Boko Haram returns kidnapped girls,” Brookings, 2018,

https://www.brookings.edu/blog/africa-in-focus/2018/03/23/africa-in-the-news-african-countries-sign-cfta-mozambique-conducts-debt-talks-boko- haram-returns-kidnapped-girls/

[35]Abdur Rahman, “Forty-four countries sign historic African Union free trade agreement,” Africa News, 2018, http://www.africanews.com/2018/03/21/forty- four-countries-sign-historic-africa-union-free-trade-agreement//

[36]Charles N. Brower and Michael P. Daly, op. cit.