A local employee works in a shoe factory invested by China in Addis Ababa, Ethiopia, in December 2018 (ZHANG YU)

Africa is often touted as the last continent still to industrialize. Overall, the continent has struggled to translate its resource wealth into greater prosperity and higher living standards for its people. With the United Nations expecting that there will be more Africans than Chinese by 2025, the need for economic transformation is clear.

This transformation is something that events like the First China-Africa Economic and Trade Expo, which will be held from June 27 to 29 in Changsha, Hunan Province, hope to address. The expo was announced by Chinese President Xi Jinping at the Forum on China-Africa Cooperation Beijing Summit in 2018 and is expected to provide new opportunities for African economies to showcase their trade and value-added investment potential to the Chinese market.

However, for Africa, following a manufacturing-led growth path has been difficult. Manufacturing value added in Africa as a share of global manufacturing value added has been around 1 percent over the past three decades or so. The Sub-Saharan African average for manufacturing value added as a share of GDP has declined over the past decades, and was only around 10 percent in 2017.

Economic diversification has been limited. This is particularly visible in the Africa’s export profile. Export baskets are over reliant on a single commodity and lack value addition, adversely exposing African countries to swings in commodity prices. In 2017, commodity exports accounted for more than 70 percent of merchandise exports in half of Africa’s economies. While the portfolio of exports did not expand, what has changed over time has been the destination of African exports. In 2001, the top four markets were the United States (16 percent), Italy (11 percent), France (10 percent) and the United Kingdom (7 percent). By 2016, China led the pack with 10 percent, followed by the United States (7 percent), France (6 percent) and India (6 percent).

It was in 2009 that China became Africa’s single largest trading partner, surpassing the United States. Sino-African trade value reached $204 billion last year, and China has subsequently become one of Africa’s most important commercial partners.

The challenge has been not only to diversify export baskets, but also to reduce the trade imbalance that Africa runs with major trading partners by replacing the low-technology, labor-intensive manufactured goods it imports from across the world. The latter is the case, despite the existence of a large semi- or unskilled African labor force that could produce these imported goods locally.

Trade initiatives

What then are some of the initiatives underway, by China and by Africa itself, that could see a change in Africa’s trade and economic diversification fortunes?

For one, offshoring manufacturing investment from China, particularly in parts of East Africa, has increased the capacity of industrial activity in a number of economies. According to news reports by Xinhua News Agency, at the end of last year, 3,700 Chinese companies had been established on the continent, and invested over $46 billion. In Ethiopia and Tanzania, for example, investment by Chinese companies has contributed to the development of value-added export-orientated industries in the footwear and glass production sectors respectively.

Chinese companies have also set up more than 50 economic cooperation zones in more than 20 African countries, including Ethiopia, Zambia and Nigeria. Although successes have varied, these have focused on boosting value-added exports from African countries, not only to China, but also to other parts of the world - benefiting from Africa’s preferential trade agreements with third markets. Also, China’s currency swap deals with a number of African countries could further support commercial ties, including trade facilitation.

Moreover, the Belt and Road Initiative has created new waves of infrastructure investments in Africa. This is making the continent more connected with itself, with China, and with the rest of the world. For example, according to Deloitte’s 2018 Africa Construction Trends report, one in three infrastructure and capital projects under construction in Africa (and valued at $50 million or more) are being constructed by China. One in five is being financed by China.

Estimates by the Heritage Foundation pin Chinese investment and construction activity across Sub-Sahara Africa at $300 billion over the last 13 years or so. Similar to what Deloitte’s report finds, this activity has been concentrated in the transport (33 percent) and energy (32 percent) sectors - both crucial sectors for reducing production and transaction costs, and enabling value added activity in any economy.

China’s investment in trade-enabling transport infrastructure, coupled with the African Union’s Agenda 2063 and the Program for Infrastructure Development in Africa, which pushes for greater regional integration, could see inland, hinterland and naval connections boost Africa’s logistical and export capacity. This would reduce shipping costs of African products, and possibly increase turnover. Regional cooperation on infrastructure improvement is important and could be especially significant for landlocked countries.

Intra-Africa trade

Additionally, with limited regional value chains and a lack of integration into global value chains, improving connectivity and logistics could be integral for promoting African exports. Rail capacity and network improvements coupled with cross-border transport infrastructure could foster intra-Africa trade, as well as boost investment, associated technology and skill transfers, and up the growth in African economies. Indeed, a report published by the World Bank expects a boost to foreign direct investment (FDI) in Africa by 7.4 percent from the Belt and Road Initiative transportation network investments alone.

Beyond greater physical connectivity through infrastructure construction, one of the most noteworthy recent developments is that African countries have prioritized to trade more with one another. The African Continental Free Trade Area (AfCFTA) agreement, which entered into force on May 30, will create a single market of 1.2 billion people, with a combined GDP of $3.4 trillion. AfCFTA looks to up the current low intra-regional trade of the continent (intra-Africa exports stand at only 16-17 percent), largely by reducing key barriers to trade - both tariff and non-tariff barriers (NTBs). The framework agreement creates the largest single market since the establishment of the World Trade Organization.

This could have multiple benefits for Africa’s own value-added exports capacity. Estimates by the United Nations Economic Commission for Africa see intra-Africa trade increase by over 50 percent through the reduction of tariffs (import duties). Decreasing NTBs could see this increase in intra-Africa trade double. Simply put, a paper published in Foresight Africa 2019 by the Brookings Institution earlier this year showed, “When African countries trade with themselves they exchange more manufactured and processed goods, have more knowledge transfer, and create more value.”

Arguably, a less fragmented and more coordinated Africa and resulting higher intra-Africa trade (especially by tackling NTBs and having greater access to more open markets) could have various positive spillovers. It could boost export sophistication of African economies, integrate them into regional and global value chains, build resilience to commodity price downswings, boost small and medium-sized enterprises, attract greater FDI, enhance productivity and foster innovation.

While this cannot happen in isolation and needs to be coupled with effective export strategies, industrialization policies and so forth, Chinese investments in industrial activities in Africa, together with the focus of a more connected Africa - both in terms of physical infrastructure rollout and greater openness to trade - could not only help address Africa’s trade imbalances, but ultimately craft a more inclusive growth path for many African economies.

(The writer is an associate director at Deloitte Africa)

(Comments to niyanshuo@chinafrica.cn)