Loading...

The Competitiveness of West African Economies in the Chinese Market

West African Economies in China

by S. B. Antwi (Author) E. M. M. Omoruyi (Author) L. Jihong (Author)

Research Paper (undergraduate) 2012 38 Pages

Economics - Case Scenarios

Excerpt

Abstract

West Africa is one of the regions on the African continent with abundant natural resources ranging from vast forest and arable land to mineral deposits. According to UN classification the region is endowed with about one-third of the least developed countries (LDCs)[1] in Africa. The region has come under the spot light of most emerging economies like China, India, Brazil and other developed economies with the basic interest in the region’s natural resources. How competitive West African economies are in their respective trading partners market to facilitate specialization in their exports has been a major issue. This paper analyzes the competitiveness and the pattern of trade flows of this sub region in the Chinese market to help both China and the sub region to mutually benefit from their trade partnership. Revealed comparative advantage index was used as an analytical tool with time series data from 2000-2010. The results indicated that West Africa enjoys revealed comparative advantage in ten out of the 63 product groups.

Keywords: Revealed Comparative Advantage, Trade, West Africa

1. Introduction

According to United Nations (UN) geopolitical definition, West Africa comprises of sixteen countries[2] which were either colonized by the English, the French or the Portuguese in the 19th century with the exception of Liberia. The region covers an approximate area of 5 million km2 (i.e. 1.25 times the size of the European Union) inhabiting 315 million residents in 2007 and a projected population of 480 million in 2030. The establishment of Economic Community of West African States (ECOWAS) on 28th May 1975 aimed at promoting economic integration across the region. With its GDP average growth rate of 4.5 percent since 2000, the sub region continues to improve on its low GDP per capita records. In 2007, the region’s GDP per capita was US$700 with external trade representing three quarters of regional GDP. By 2011, the region’s GDP per capita has increased to US$2,500 with an estimated total GDP of US$703,279 billion. The sub region connects to the rest of the continent under the African Union (AU), whose objective is to render irreversible the integration dynamics of the continent by promoting regional cooperation.[3] Divergence across the sub region reflects the differences in economic structure and policy stance. The main trade partners of this region are the European Union, the United States and China.

This paper aims to examine West Africa’s relative competitiveness and compare the structure of trade specialization in the sub region. Furthermore, the paper seeks at providing a place for strategic thinking to help West African countries and actors to be better prepared to face future common challenges. It will be an information source and decision-making tool for researchers, development partners, students, the media and all those interested in this sub region. The empirical study of the paper is based on revealed comparative advantage (RCA) for the two, three, four and five digit levels of standard international trade classification (SITC) Revision 3[4]. Even though RCA is the most preferred approach to analyzing comparative advantage and trade data, its empirical adaptation and terms of definition come with controversies giving room for other indices such as Yeat (1985), Vollrath (1991), Lafay (1992) and Memedovic (1994). For the purposes of this study, RCAs of the West African economies would be measured with respect to the Chinese market as final destination for their exports.

The paper is organized as follows. Section two of the paper reviews the empirical literature on comparative advantage. Section three outlines the trade relation between China and West African economies. An abridge review to the concept and measurement of comparative advantage is given in section four. Both static and dynamic comparative advantage analysis for China and the sixteen West African states are presented in section five. Inter-temporal variation of West African economies RCA is then presented in section six. The final section presents conclusions resulting from empirical findings.

2. Selected Literature on Revealed Comparative Advantage

In its study to examining the implications of China and India’s growing links on third countries, Jenkins and Edwards (2005) for DFID used both a version of the Balassa index and an export similarity index to examine China and India’s trade impact on twenty-one Sub-Sahara African countries. The analysis was conducted at the 3-digit SITC level with trade-poverty linkages based on the framework developed by Winters. In the study, 5 to 80 percent of imports by the 21 African countries from China and India composed of labour-intensive manufactured products such as garments, textiles and other manufactures whereas the reverse was basically primary commodities.

A similar work by Alemayehu (2006) examines the impact of China and India through trade and FDI on the African manufacturing sector. In addition to RCA, the study employed other indices such as the Flying Geese Model and Technological based Categorization of Exports, the Gravity Mode, the Partial Equilibrium Analysis Approach for Distributional Implications and the Global Model based Simulation Approach. In its conclusion, the study indicated that China and India’s growth is creating a demand surge for African commodities and as such, efforts like down-streaming linkages and local partnership be encouraged to sustain such development, else Africa would be left worse off once the boom ends.

Stevens and Kennan (2005) indicated that, those countries which produce and export goods such as raw materials, minerals and petroleum for which China is in high demand is likely to witness export growth. However, those countries which export and produce goods such as textiles and garments for which China produces and export will likely have export falls. The study noted that importing countries of such manufactured goods will reap the benefit from lower prices. There will also be distributional effect within the country between producers and consumers if importers have domestic industries competing in the local market with Chinese exports. Here consumers will reap the benefit from lower prices whereas producers will be forced to close down leading to unemployment and other social unrest issues.

In their assessment of the impact of China on Sub-Saharan Africa, Stevens and Kennan (2006) indicated that “winners” in terms of trade relationship with China are those countries for which the number of sectors recording trade gains associated with lower costs of imports or higher prices for exports is greater than the number of sectors incurring losses due to increased competition from China in third markets or higher import prices resulting from higher Chinese demand for a given product. On the other hand, “losers” are those countries for which the number of sectors incurring trade losses associated with higher costs of exports or lower prices for imports is higher than the number of sectors recording gains due to less competition from China in third markets or lower export prices resulting from lower Chinese demand for a given product. In their assessment, the overall trade balance effect for the African countries was positive except for Malawi, Ghana and Kenya which recorded two losses each whereas Nigeria and South Africa had 3 and 4 losses respectively.

Having criticized Stevens and Kennan (2006) for failing to provide an overall trade impact estimate for China-Sub-Saharan Africa relationship, Goldstein et. al. (2006) used both a version of export similarity index (ESI) and revealed comparative advantage (RCA) with 3-digit SITC data to assess China’s impact on the sub region. Their ESI findings indicated that there was limited overlapping in trade between China and Africa except for South Africa and Kenya. However, the RCA analysis indicated that there were competition between China and some countries like Burkina Faso, Ethiopia, Kenya and Mali in leather products, Lesotho and Malawi in clothing and Tanzania in textiles.

In a similar analysis, Zafar (2007) quantitative analysis on China’s impact in terms of trade on Sub-Saharan Africa from 2000 to 2005 categorized the African countries into winners, losers and mixed. According to Zafar, winners were the oil-exporting and natural resource rich countries such as Angola, Sudan, Gabon and Zambia. The mixed comprised of the resource rich in metals and cotton but oil-importing countries such as Botswana, Central African Republic, Mali and Burkina Faso. The losers were the oil-importing countries which export textiles such as Mauritius and Madagascar or exporters of agricultural commodities such as Ethiopia, Kenya, Malawi and Zimbabwe.

The Atlas on regional integration (2006/07) reported that all exports to China from West Africa are basically oil and cotton. The report indicated that cotton is a strategic supply source for the Chinese textile industry whereas oil is a marginal source to support those from other Sub-Sahara African economies.

There has thus far been no attempt to analyze especially the competitiveness of West African economies in the Chinese market to facilitate specialization and further explore other undermined sectors and product groups. Given the economic potentials of this sub region, it is imperative that an analysis of comparative advantage be conducted to identify advantageous sectors and products to better equip policy makers from West Africa in their trade deliberation with China. This paper is the first of its kind to conduct a systematic analysis of the pattern of revealed comparative advantage for West African economies in the Chinese market.

3. West Africa and China’s Trade Relationship

Political divergence in West Africa reflects the different periods of the region’s economic and trade relationship with China. However, in general the region’s interest to strategically cooperate with China in both trade and economic development dates back to 1996/97 Africa-Asia tour by both the Chinese President Jiang Zemin, and Premier Li Peng.[5] The dream for their strategic and pragmatic cooperation was realized in the 21st century when the first ministerial meeting took place from 10-12 October 2000 in Beijing leading to the establishment of the Forum on China-Africa Co-operation (FOCAC). The year 2000 was a jump start in China-Africa relation and since then four other forums had been organized with both China and Africa alternating the hosting: FOCAC 2003 in Addis Ababa (Ethiopia), FOCAC 2006 in Beijing (China), FOCAC 2009 in Sharm El-Sheikh (Egypt) and FOCAC 2012 in Beijing (China).

According to IMF (2006), the average trade volume between China and Africa from 1993 to 2004 was estimated at US$9,121 million. In 2008, China-Africa bilateral trade volume exceeded US$100 billion comprising of US$50.8 billion Chinese exports and US$56 billion imports. Between January and November in 2010, China-Africa trade volume had reached US$114.81 billion, a year-on-year growth of 43.5 %. The sub-regions in Africa are endowed with different natural resources which are of economic importance to China hence the difference in their trade volume. China’s average trade volume with the various regions on the African continent from 1993 to 2004 is displayed in Table 1.

Table 1: China’s Trade with African Sub-regions (Average 1993-2004)

illustration not visible in this excerpt

Source: Direction of Trade Statistics, IMF (2006)

Since 2000, there has been a spontaneous growth in China-Africa trade volume. The average annual growth rate of China-Africa trade between 2000 and 2008 reached 33.5%, with Africa’s proportion in China's total foreign trade volume rising from 2.2% to 4.2%, and China’s proportion in Africa's total foreign trade volume increasing from 3.8% to 10.4%.[6] This growth was not much daunted even during the 2009 global financial crisis and recovery was quick. An estimate of their trade volume in 2011 was US$160 billion representing 28 percent increase over 2010. Africa’s exports to China witnessed a one-third increase in 2011 from US$67 billion in 2010 to US$93 billion.

Economic relations between West Africa as a sub region and China have grown stronger since the beginning of the 21st century. The long-standing preferences between the two parties have resulted in China not being the only most important market for the sub region (2.76 percent of West Africa’s exports in 2010) but also one of the main market sources for imported goods (24 percent of West Africa’s imports in 2010) (see Table 2).

Table 2: West Africa and China Trade (million dollar, %)

illustration not visible in this excerpt

Source: Authors calculations based on data from UN Comtrade and UNCTADStat

The establishment of FOCAC has caused some changes in the West African trade with China (Atlas, 2006; C. Alden, 2007). Expectedly, there has been a remarkable increase especially in West African imports from China which began from less than 5 percent in 2000 to 24 percent by 2010. In 2002 as general imports for the sub region fell by 15.5 percent, imports from China increased from 4.55 percent the previous year to 11.43 percent. China reaffirmed its economic cooperation with the African continent in 2006 (Katzenellenbogen, 2006) by removing tariffs on about 440 exported items from Africa to China under the Special Preferential Tariff Treatment (SPTT). In return China has arranged for a number of most favoured nation (MFN) status for its exports. A reflection of these arrangements is witnessed in the sub region’s imports from China since 2006.

West Africa’s imports from China in 2000 (the first year of the establishment of FOCAC) amounted to US$643.1 million, representing only 3 percent of the sub region’s total imports. By 2006, imports from China had risen to US$7.42 billion with an increase of 37.8 percent from the previous year. Considering the 17.5 percent increase in West Africa’s total imports in 2006, it is palpable that the FOCAC had a certain impact on the increase in imports. Even though there was a decrease in the sub region’s total imports growth rate, imports from China were not affected. The reaffirmation of China’s commitment to Africa through FOCAC in 2006 has remarkably boosted its exports share in West Africa’s total imports. China snatched 13.85 percent of the sub region’s import share in 2006, the share increased from then to 15.33 percent in 2007, 18.18 percent in 2008, 20.62 percent in 2009 and 24 percent in 2010. Though the sub region’s imports volume from China fell by 7.3 percent in 2009, it could not slow down China’s export growth rate in the sub region. Comparatively, the fall in West Africa’s total imports volume (18.3%) was greater than from China (7.3%) signifying the essence and the crucial role China’s export products play in West African economy. Interestingly, recovery from the impact of the 2009 global financial crisis was quicker than expected as the sub region’s total import volume increased by 16.7 percent whereas imports from China recorded a massive increase of 35.9 percent.

[...]


[1] The region has 12 least developed countries: Benin, Burkina Faso, Gambia, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Senegal, Sierra Leone, Togo

[2] West African countries include: Benin, Burkina Faso, Cape Verde, Cote d’Ivoire, The Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo.

[3] Strategic framework of the Commission of the African Union 2004-2007: Final draft, March 2004

[4] The SITC Rev. 3 which was adopted in 1988 still maintains its basic 10-section structure of the previous editions. The sections have been subdivided into 67 two-digit divisions, 261 three-digit groups, 1,033 four-digit subgroups and 3,121 five-digit headings.

[5] Dr. Chris Alden, China and Africa: Assessing the Relationship on the Eve of FOCAC IV. A joint AU-SAIIA workshop on 25th September 2009, Vol. 3 No. 1

[6] www.xinhuanet.com/english/

Details

Pages
38
Year
2012
ISBN (eBook)
9783656261254
ISBN (Book)
9783656261728
File size
660 KB
Language
English
Catalog Number
v199512
Institution / College
Xiamen University
Grade
Tags
competitiveness west african economies chinese market china

Authors

Previous

Title: The Competitiveness of West African Economies in the Chinese Market