Comparative Advantage of Sub-Sahara African Exports in China

Abstract

The paper employs revealed comparative advantage (RCA) to assess the competitiveness of the case study countries in the Chinese market. The empirical analysis revealed that even though there was a fierce competition in the labour-intensive manufacturing industry with most of the case study countries exports. However, further disaggregation revealed otherwise. It also indicated that the establishment of the Special Preferential Tariffs Treatment (SPTT) by China since 2005 has contributed to the increasing number of exported commodities to the Chinese market. The effect is reflected in the increased export revenue of most of the least developed countries (LDCs) and a secured market for such countries export products.

Keywords: Bilateral Trade, China, Revealed Comparative Advantage, Sub-Saharan Africa

1. Introduction

China’s bilateral trade with Sub-Saharan Africa and Africa as a continent is on the ascendency. China began formal diplomatic ties with the African continent in the 1950s and the last up to date in 2006.^[1] Its ties with Africa in the early years of 1950 to late 1970s was politically motivated and had little to do with trade and economic development as compared to 1980s and the period after the cold war. The Bandung Conference organized in April 1955 in Java (Indonesia) provided opportunity for China to forge closer links with the African continent especially the newly independent states.

After the Bandung Conference, China adopted a new course of policy based on economic reform and reintegration into the global economy in the late 1970s and as a result, its focus on the African continent shrunk. Its attention was shifted to rebuilding economic partnership with developed economies in Europe and the United States. This relation started bearing fruits in the 1990s with huge increase in foreign direct investment (FDI) from these developed economies. This phase of China’s less attention on the African continent was crowned in 2001 with its entry into World Trade Organization (WTO) after fourteen years of negotiations.

China re-engaged actively with the African continent in the 1990s but this time, the emphasis was on economic relations. This was due to the fact that by this time around it has built an economy and industries with intense and burgeoning energy and resource needs which were not easily satisfied domestically. China became a net importer of oil in 1993 and despite its large deposits of coal, started to import increasing amount of coal in 2006. It also became the world’s largest user of concrete, copper, aluminum, iron, steel and most other metals and minerals in the early 2000s. These economic situations prompted China to re-establish relation with energy and resource rich countries in Africa, Asia, Latin America and the Middle East. China’s influence on the reconfiguration of international dynamics became remarkable and has since continued to play a key role in international economics.

Although historical connections between the two entities date back through many centuries of economic interaction, however, modern Sino-African relation based on pragmatic economic consideration began in the 21st century with the launch of the Forum on China-Africa Cooperation (FOCAC) in 2000. Sino-African trade volume was US$ 12 million in 1950, but this grew to US$34.7 million in 1955 and US$250 million in 1965. Since the launch of China’s Reform and Open-Up policy in the 1980s, it has attached great importance to the friendly cooperation with African countries and has since then witness an annual average trade growth of about 3.6 percent. Bilateral trade volume in 2000 for the first time exceeded US$10 billion and by 2008, had reached US$106.8 billion.

The bilateral trade between China and Africa climbed to $160 billion in 2011, indicating a percentage increase of 28 from the previous year. By 2012, China’s bilateral trade volume with Africa had increased to $198.5 billion making it the continent’s largest trading partner. China’s economic dynamism is reshaping the balance of power established on the African continent since independence. Its impact is forcing traditional partners – Europe and the United states – to reconsider their relation with Africa.

African leaders and their elites see the development assistance from China as a means to developing their economy. However, this is a myth. This is due to the fact that many African countries still lack the knowledge and expertise to transform the technology and opportunity windows opened to them from China’s position to their advantage. Since African leaders have failed to realize these opportunities, it now falls on the young African elites to rethink about China’s economic relation with the continent and how to maximize the continent’s benefit.. Moreover, many questions echoing the halls of academic circles include, “Why is China interested in Africa?”, “Does China have clearly identifiable policy for Africa?”, “Can China’s path of economic development offer good lessons for Africa’s development today?” These are some of the questions this paper will try to answer based on the implications of their economic relation with evidence from Angola, Ghana and Sudan.

Sudan is Africa’s largest country plagued with north-south civil war for more than two decades. China is Sudan’s largest economic partner with China National Petroleum Corporation (CNPC) owning 40 percent - the largest single share - of the Greater Nile Petroleum Operating Company (GNPOC), a consortium that dominates Sudan's oil fields in partnership with the national energy company and firms from Malaysia and India. It also supplies about 8 percent of total Sudanese armament.^[2]

Angola is China’s biggest trading partner in Africa and exported roughly 465,000 barrels of oil per day to China in the first six months of 2007. China secured a major stake in future oil production in 2004 with a $2 billion package of loans and aid that includes funds for Chinese companies to build railroads, schools, roads, hospitals, bridges and offices; lay a fiber-optic network; and train Angolan telecommunications workers. In 2006, as part of Chinese Prime Minister Wen Jiabao’s visit to Angola in June, he offered a US$9 billion loan for infrastructure improvements in return for petroleum. China is a credit lifeline to Angola whereas Angola supplies China with the needed oil to fuel its manufacturing engine for accelerated growth.

Ghana is one of the countries in the Sub-Saharan Africa that has enjoyed political stability since 1992 with sustainable economic development and plays a positive role in safeguarding peace in Africa. It established diplomatic ties with the People’s Republic of China (PRC) in 1960, three years after gaining independence from Britain and adheres to the ‘One China’ policy seeing Taiwan as an inalienable part of China. Ghana is one of the trading partners of China and between 2001 and 2005, the value of imports from China increased more than four-fold, from US$ 160.5 million to $740.1 million (IMF, 2006). In 2004, the value of the bilateral trade between the two countries reached $500 million, up 70% over the 2003 figure. As part of China’s debt relief package of $10 billion to African countries, Ghana had $25 million of its debt which has been accumulated since 1985 written off.

This research paper used secondary data from several sources including the World Bank, the International Monetary Fund (IMF), UNCTAD^[3], AERC Scoping Studies^[4], the US Department of Commerce, National Bureau of Statistics (NBS), Africa Development Bank (AfDB) as well as published materials and relevant websites. As part of the methodology, graphs, charts and tables had been used to explain hidden information and make comparisons between countries and sectors.

2. Literature Review

Empirical work from existing literature has shown that trade values between China and Africa had grown significantly. Zafar (2007) found that trade values between the two has increased from $10 billion in 2002 to more than $40 billion in 2005 and more than $50 billion by 2006. According to Jenkins and Edwards (2005) some African countries place much value on China as an important destination for their export products such as oil. For example, countries like Angola, Congo, Nigeria and Sudan exported between 86 and 100 percent of oil to China. Another case is the Democratic Republic of Congo, which exported about 99.6 percent of its basic metal to China (Kaplinsky et. al., 2008).

Jenkins and Edwards (2005) further explained that some African countries source a significant share of their total imports from China and they include Sudan (14.2 percent), Ghana and Tanzania (9.1 percent), Nigeria (7.1 percent), Ethiopia and Kenya (6.4 percent) and Uganda (5.1 percent). A World Bank report concluded that on the basis of existing specialization, the potential for future bilateral trade growth between China and the sub Saharan Africa is not strong but it could be if China’s growing demand for commodities were to be sustained (World Bank 2004a).

Jenkins and Edwards (2006) further argue that most of these imports into Sub-Saharan Africa have substituted for imports from the industrialized countries, with the possible exception of Ethiopia and Nigeria, suggesting little displacement of domestic production and few negative impacts on employment and local production. Furthermore, Kaplinsky et. al., (2008) argue that outside of textiles, timber and cotton, there appears to be little trade between China and sub Saharan Africa in intermediate goods and little incorporation of China and SSA into coordinated global value chains.

From a general perspective, most literature assessing China’s impact on Sub- Saharan Africa and Africa as a whole find China as a major threat to countries which produce and export goods similar to its exports. Furthermore, growing tension in the academic spheres is gradually presuming that it is becoming almost impossible for poor countries especially those in Africa to compete with China head to head in labour intensive manufactures and as such suggests re-specialization into primary products in the medium term.

In a call to positioning the export structure of African manufacturing industries on a dynamic growth path like those in Asia, World Bank (2000) emphasized the need for most African governments to support the pattern of their manufacturing industries. The call was re-echoed by Mengistae and Pattillo (2004) which analyzed manufacturing data from Ethiopia, Ghana and Kenya. The study highlighted the fact that export manufacturers in the Sub-Sahara African region have efficiency (total factor productivity, TFP) gains over non-exporters. The

3. Stylized Facts of China’s Trade with Africa

As at 2009, there were approximately 922 million people living in 54 different countries in Africa, representing about one-sixth of the world’s population. Sub Saharan Africa is a habitat for more than 80 percent of Africa’s total population. Landlocked population takes about 40 percent of the entire continent’s population in thirteen countries^[5] as compared to only two countries (Bolivia and Paraguay) in Latin America and one country (Laos) in South-East Asia, making internal transportation expensive and hindering free flow of goods and services across national borders. Africa’s nominal GDP stood at US$1.184 trillion in 2009 as compared to US$1.282 trillion in 2008 representing a decline of 7.6 percent in output. This drop in output was attributed to the 2008 financial crisis which spilled into 2009 resulting in falling commodity prices as well as decreased demand for Africa’s natural resources. In 2009, Africa’s output accounted for only 2 percent of world total production.

Africa’s economy did not experience much growth in the twentieth century as it is doing in the twenty-first century. Since 2002, most African economies^[6] have attained high and sustainable steady growth which is partly driven by political stability, buoyant global demand for oil and industrial raw materials and improvement in domestic supply response. Since the turn of the twenty-first century, Africa’s economic growth has surpassed the world average, West Asia and Latin America. Africa had an impressive output growth of 5.5 percent in 2006 for which the OECD and the African Development Bank projected a 5.9 percent and 5.7 percent growth in 2007 and 2008 respectively. The top five fastest real GDP growth economies in Sub-Saharan Africa in 2010 were Congo (10.6%), Botswana (8.4%), Ethiopia (8.0%), Nigeria (7.4%) and Zambia (7%)^[7]. Whereas growth in net oil exporting economies continues to be more robust, growth in net importing economies was either slow, marginal or negative. This situation explains the degree of dependency of the African economy on international economic situations. In 2005, oil exporting economies grew at an estimated figure of 7.0 percent but fell slightly to 6.9 percent the following year. This fall was as a result of the decline in output in some of the largest oil exporting economies like Angola, Nigeria, the Republic of Congo and Chad. Net importing oil economies grew below 5 percent with much of this growth output coming from East and West Africa.

In 2007, global merchandise exports grew by 17.5 percent reaching US$424.14 billion as compared to US$360.9 billion in 2006. Intra-Africa merchandise trade accounted for only 9.5 percent of the global trade with manufactured products accounting for 42.5 percent, fuels and mining products 35.4 percent and agricultural products taking 17.1 percent. North America and EU continued to be Africa’s major trading partners in 2007 with a cumulative share of exports of over 61 percent. Between 2005 and 2007, the importance of Asia, especially China, as Africa’s trading partner grew with Africa’s exports reaching nearly 50 percent. These exports were concentrated in fuels and mining products which accounted for 78 percent. Africa’s weak continental integration as a result of lack of common infrastructure was mirrored in the low-level of its intra-trade.

According to an IMF Secretariat Report (2011), Africa had the fastest average rate of GDP growth than any other region over the last five years (4.7 percent between 2005 and 2010). In 2008, Africa recorded a GDP growth rate of 4.8 percent which fell to 2.1 percent in 2009 but bounced back to 4.7 in 2010 (see Table 1).

Table 1 GDP and Merchandise Trade by Region, 2007-2010
(annual % change)

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Source: WTO Secretariat Report, “World Trade 2010, Prospects for 2011.

Note: a – indicates the Caribbean, b – indicates Hong Kong, China, Republic of Korea, Singapore and Chinese Taipei

Africa’s output growth in 2010 exceeded the world average of 3.6 whereas North America and Europe were below the world average of 3.6 percent with 3.0 percent and 1.9 percent respectively. Between 2008 and 2010, Africa’s exports grew from 1.2 percent in 2008 to 6.5 percent in 2010 and as result of the global downturn; it did record a negative export growth of 4.2 percent before bouncing back to its 2010 figure. However, imports had a different picture of decline from 14.6 percent in 2008 to -5.0 percent in 2009 and 7.0 percent in 2010. Africa’s exports rebound in 2010 could be explained by the higher primary commodity prices triggered by import demand from the fast-growing developing economies like China and India. Its exports were up 6 percent in volume terms and 28 percent in dollar terms. Not only is Africa benefiting from investment, trade and aid, but also from the macroeconomic, political and strategic advantages that the rise of the emerging economies are producing.

Among the primary commodity group, prices for metals rose faster than the rest with annual average increase of 12 percent, followed by energy with 11 percent. Over the last ten years (2000-2010), prices of agricultural raw materials had continued to stagnate with an average yearly increase of 2 percent (see Table 2)

Table 2 Exports Prices of Selected Primary Products, 2000-2010 (annual % change)

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Source: IMF International Financial Statistics, 2011

Note: a – Comprises of coffee, cocoa beans and tea

Although in 2010, higher commodity prices lifted foreign exchange earnings in regions that export a lot of primary products thereby helping to boost imports, Africa’s import volume growth of 7.0 percent was the lowest as compared to 22.7 percent from South and Central America and 20.6 percent from Commonwealth of Independent States (CIS).

Table 3 Trade Volume between China and Africa (US$ million), 2006 and 2007

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Source: National Bureau of Statistics of China, China Statistical Yearbook 2008 (Beijing: China Statistical Press, 2009), Table 17-8.

From Table 3 below, it can be deduced that the trade volume between China and Africa is still small as compared to China’s trade with other countries and regions (EU US$425, the US US$334 billion, Japan US$267 billion and South Korea US$186 billion), but its growth since the turn of the 21st century has been tremendous (from US$10 billion in 2000 to almost US$107 billion in 2008).^[8]

A new era of good economic relation between Africa and the emerging economies has emerged in the twenty-first century. Trade volume between China and Africa amounted to US$198.49 billion in 2012 representing a year-on-year growth of 19.3 percent. Out of this value, China’s exports to Africa consisted of US$85.319 billion up 16.7 percent and US$113.171 billion imports from Africa up 21.4 percent over the previous year.^[9]

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Source: China Daily

Figure 1 China-Africa Trade Volume (2000-2012) Unit: US$100 million

4. The Driving Force of China-Africa Trade Relation

4.1 Demand Driven Factors

The centripetal force that seems to bring China and Africa closer together through trade and investment hinges on four vital compromising factors: African demand for infrastructure, China’s demand for natural resources especially oil and metals, markets for exports and China’s approach to financing. However, supporting mechanisms fueling and facilitating the fast pace of their trade and investment relations had been the Chinese government’s global mission of market outreach strategy. Even though certain degree of collaboration exists between the African leaders and the Chinese government in some aspect of their engagement, the sole effort by the Chinese government and its citizens to cement this relationship had been government institutions and policies as well as the entrepreneurial efforts of the private sector.

4.2 Demand for Infrastructure

African economies have enjoyed a sustainable and unprecedented growth rate of over 5 percent for the past decades, beginning from the 1990s and recording an overall real GDP growth rate of 5.8 percent in 2007. The consistency in Africa’s economic growth indicates a high demand for infrastructure in sectors such as power, telecommunications and transport. Inadequate financial resources on the continent hinders the provision and expansion of such facilities in Africa paving the way for discussion on issues such as private finance in facilitating infrastructure development at the sub national level as well as public-private partnership (PPP) in infrastructure delivery. Western donors’ assistance has been channeled to social sectors like water and sanitation which tend to have direct impact on household health leaving a huge gap in physical infrastructure.

One major apprehension has been China’s involvement in bridging the gap to supply Africa with the needed infrastructure at a cost of African economic diversification and environmental issues. Africa indeed has an infrastructure deficit whereas China has both capital and the construction industry capacity to meet African economic needs. A World Bank Report released in July 2008 titled “Building Bridges” estimated that Chinese financing commitments in infrastructure development in Africa increased from less than US$1 billion per year in 2001-2003, to about US$6 billion per year 2006-2007. Between 2001 and 2007, Chinese infrastructure finance commitments in Sub Saharan Africa by sector were electricity (33.4%), Transport (33.2%), ICT (17.4%), general infrastructure (14%) and water (2%).^[10]

4.3 Demand for Natural Resource

China’s economic growth which hovers around 9 percent for the past three decades rides on the back of its migrant low labor cost, preferential policies initiated at the beginning of its reform in the late 1970s and outward looking export oriented economic model. It has come of age to emerge as one of the powerful economic houses in global economy. Being the hotspot of the world’s factory, its preferential policies coupled with low migrant labor cost and huge market base had attracted a number of companies from both developed and emerging economies. According to China’s National Bureau of Statistics, in 2007 the country’s share in world exports reached 8.8 percent making it the world’s 2nd largest exporter after Germany. In the same period exports rose from US$9.8 billion in the 1970s to US$1,217.8 billion whereas imports gained from US$10.9 billion to US$956 billion. This unprecedented growth comes with the task of sustainability which hinges on acquisition of natural resources to feed the engine of growth which happens to be the industries.

Being a net oil exporter in the 1970s, China’s oil exports reached its optimum in 1985 at 30 million tons. As a result of its rapid economic development, inefficient use of energy as well as increased demand for oil domestically turned China into net importer in 1993 and net crude oil importer in 1996. Since then, China has developed its energy security strategy to acquire oil and raw materials from regions shunned by the West as well as developing economies in exchange for development assistance. China’s oil imports from Africa began from nil in the 1990s to 23 percent in 2003 and increasing to over 30 percent in 2010. Sudan and Angola are the core exporting countries of oil to China.

4.4 Export Markets

China’s rapid economic development comes with fierce domestic competition forcing many firms and companies to seek market opportunities in foreign countries. Africa has been one of those markets where China’s cheap products meet the pockets of low income earners. Featuring prominently in African imports from China are industrial equipment, manufactures such as electrical appliance, textiles and garments as well as transport equipment. On the other hand, African exports to China comprise mainly of oil, metals and other raw materials. The creation of market opportunities for both China and Africa in their respective markets serve as one the magnetic forces strengthened their economic relation. According to a report published by Renaissance Capital, two way trade between China and Africa reached a record high of UD$129 billion in 2010 compared to US$10 billion in 2000, making China top trading partner with Africa.

5. Trade Empirical Analysis

The empirical analysis of the study aims at examining China’s growing impact on sub-Saharan Africa based on the case study countries (Angola, Ghana, Sudan) revealed comparative advantage (RCA). 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 case study countries would be measured with respect to the Chinese market as final destination for their exports (Antwi et. al., 2012).

In analyzing China’s role in Sub-Saharan Africa’s trade development, the study uses Balassa (1965) derived index called the Balassa index which measures a country’s comparative advantage. The index tries to discover whether a country has a “revealed” comparative advantage rather than to determine all the underlying sources of comparative advantage. The Balassa index (RCA) is expressed as follows:

RCAij = ( Xij / Xik ) / ( Xpj / Xpk) = ( Xij / Xpj ) * ( Xik / Xpk )

where X represents exports, i is a country, j is a commodity (or industry), k is a set of commodities (or industries) and p is a set of countries. The index, RCAij, measures a country’s exports of a commodity (or industry) relative to its total exports and to the corresponding exports of a set of countries. The simple interpretation for RCA is that, if RCAij is greater than one, then the said country has comparative advantage in the commodity or industry. However, if RCAij, is less than one, then that country has comparative disadvantage in the commodity or industry.

One advantage in using RCA is its ability to consider the inherent advantage of a particular export commodity or industry whiles being consistent with changes in an economy’s relative factor endowment and productivity. However, it cannot be used to distinguish improvements in factor endowments and pursuit of appropriate trade policies by a country.

[...]

^[1] China established relations with Egypt, Algeria, Morocco, Sudan and Guinea in the 1950s, Ghana, Mali, Somalia, Zaire (DRC), Uganda, Burundi, Kenya, Benin, Central African Republic, Tunisia, Tanzania, Zambia, Congo (Brazzaville), Mauritania in the 1960s, Mauritius, Madagascar, Nigeria, Rwanda, Togo, Senegal, Upper Volta (Burkina Faso) and Cameroun in the 1970s, Lesotho, Niger, Central African Republic, Guinea Bissau, South Africa in the 1990s, Senegal and Chad in the 21st century. As at 2006, only five countries out of 54 states still recognized the Island of Formosa (Taiwan): Burkina Faso, the Gambia, Malawi, Swaziland and Sao Tome and Principe. Source: The Atlas on Regional Integration (an ECOWAS – SWA/OECD initiative), financed by the development co-operation agencies of France, Switzerland and Luxembourg, 2006-2007, www.atlas-westafrica.org and Taylor, supra note 16, pp. 23.

^[2] Stockholm International Peace Research Institute (SIPRI): an organization that conducts scientific research into questions of conflict and cooperation of importance for international peace and security.

^[3] United Nations Conference on Trade and Development

^[4] Africa Economic Research Consortium

^[5] Landlocked countries in Africa include: Mali, Niger, Burkina Faso, Chad, Central African Republic, Ethiopia, D. R. Congo, Uganda, Malawi, Zambia, Zimbabwe, Botswana and Lesotho.

^[6] Countries like Mauritania (19.8%), Angola (17.6%), Sudan (9.6%), Mozambique (7.9%), and Malawi (7.8%) had economic growth above world average rates.

^[7] Source: IMF Fund, World Economic Output, October 2010

^[8] US-China Business Council, ‘US-China Trade Statistics and China’s World Trade Statistics’, http//www.uschina.org/statistics/tradetable.html

^[9] China Daily ( August 29th, 2013), “China-Africa Economic and Trade Cooperation” http://www.chinadaily.com.cn/china/2013-08/29/content_16929568_2.htm

^[10] World Bank-PPIAF Chinese Projects Database, 2007.