Africa’s landmark free trade area aims to transform global and intra-continental exchanges, boost manufacturing and create jobs
Before investing $400,000 (346,000 euros; £305,700) to set up a transformer manufacturing plant in Kenya, the managing director of Yocean Group Ltd, Dylan Yu, conducted a feasibility study that found manufacturing locally would be costly due to poor value chains. So Yu opted to establish a repair workshop while building his company.
Beginning in 2014, he marketed himself as a local manufacturer and competed against foreign imports, mostly from India, until 2016, when he won a lucrative government deal to supply 2,400 locally assembled transformers valued at about $16 million.
Yu, who has an established market share and competes against seven other local companies, has mixed feelings about the establishment of the African Continental Free Trade Area, an agreement launched in March after 44 African countries committed to open up their borders and ease tariffs to facilitate trade within the continent.
“I think the first beneficiaries will be manufacturers of fast-moving consumer goods,” he says, adding that they will need to have the right price for a quality product, unlike his business, in which entry requirements are stringent.
“Governments insist on companies having a presence locally. In addition, you must prove your technical capacity and qualifications, among other requirements, to be considered by utility companies that are largely state-owned. Price is sometimes not the primary issue,” Yu says.
The AfCFTA, if realized, will create the world’s biggest trading bloc — 1.2 billion people with a GDP of over $3 trillion, according to the United Nations Economic Commission for Africa. It will buoy consumer spending to about $1.4 trillion in 2020 and increase intra-Africa trade by as much as $35 billion per year, or 52 percent above the baseline, by 2022, UNECA says.
Momentum is already building. On May 13 and 14, ministers of finance, planning and economic development gathered in Addis Ababa, Ethiopia, to discuss how to phase out tariffs, scale up infrastructure investments to improve connectivity, eliminate nontariff trade barriers such as excessive documentation and customs delays, increase manufacturing and processing capacity, and prepare for the digital economy.
Africa’s manufacturing sector is growing, albeit slowly. According to UN Industrial Development Organization statistics for the third quarter of 2017, the sector grew at a rate of 1.3 percent of the world’s total manufacturing output — an increase of 0.8 percent from the previous quarter — compared with 26.8 percent for the Asia-Pacific region and 16 percent for East Asia, with China logging 19.3 percent and North America 20 percent.
The sector in Africa has remained relatively undiversified, with exports predominantly being extractive and nonextractive products such as oil, gas and minerals. Manufacturing is seen as the path to guaranteeing more sustainable growth and creating structural reforms and decent jobs for the continent’s largely youthful population.
However, it is expected to be an uphill task. Intra-Africa trade has been low, at about 16 percent of the continent’s total exports, compared with intra-Asia trade, at 59 percent, and intra-Europe trade, at 69 percent, UNECA says. Moreover, local manufacturers have faced the highest tariffs globally, at 6.9 percent, when trading within Africa.
However, one expert says Chinese manufacturers have laid the foundation for success on the continent.
“China is Africa’s biggest trading partner, and its private sector has managed to penetrate our markets,” says Stephen Karingi, the director of the capacity development division at the United Nations Economic Commission for Africa. “It is therefore possible to examine their success and strategies to enable us to design our national strategies.”
According to data from China’s Ministry of Commerce, privately owned Chinese companies are making more than 150 investments a year in the manufacturing sector in Africa, up from only two in 2000. A recent report by McKinsey & Co says more than 10,000 Chinese companies are operating on the continent, with 44 percent of the 1,073 Chinese companies interviewed in eight African countries making capital-intensive investments.
A World Bank report indicated that at the end of 2011, China’s cumulative investment stock in the manufacturing sector in Africa had grown by 10 percent year-on-year to $2.4 billion,
and in 2013, it accounted for 15 percent of Chinese foreign direct investment. In terms of green-field projects, between 2003 and 2014, the largest share of Chinese capital investment and the largest number of such projects were in manufacturing, the report said.
The report, Manufacturing FDI in Sub-Saharan Africa: Trends, Determinants and Impact, said that between 2011 and 2014, China was the top investor in Ethiopia, accounting for 2 percent of GDP.
Manufacturing is the largest recipient of foreign direct investment, both by level of investment (76 percent of the total) and number of projects (41 percent). It was also the largest nonagriculture sector in terms of job-creating FDI between 2008 and 2014, at 28 percent, compared with 54 percent for agriculture, the report said.
On infrastructure, China has expanded its participation in funding and construction. According to a World Bank report titled Building Bridges: China’s Growing Role as Infrastructure Financier for Sub-Saharan Africa, Chinese investment often goes to large-scale infrastructure projects, with a particular focus on hydropower generation and railways. “More than 35 African countries are engaging with China on infrastructure finance deals, with the biggest recipients being Nigeria, Angola, Sudan and Ethiopia,” the report said.
Meanwhile, Ethiopia is already riding on the success of a growing manufacturing sector. With sustained expansion — GDP growth averages 10 percent annually — the East African nation’s manufacturing sector exports brought in $437 million in the country’s fiscal year 2016-17. According to a World Bank report, the country’s growth in the past decade has helped to significantly reduce poverty.
Ethiopia has embarked on an ambitious program of upgrading its infrastructure, building industrial parks and formulating industrial policies and strategies to support the development of industrialization. Ethiopian Prime Minister Abiy Ahmed says this has led to meaningful improvements in foreign direct investment.
“Our efforts have yielded tangible results as evidenced in the growing share of the industrial sector’s contribution to our economy, ” he said during a conference of African ministers of finance, planning and economic development in Addis Ababa. “With the (AfCFTA) in place, and once it enters into force in particular, I am confident that the opportunities for us to attract more investments will only increase.”
The unfolding of the AfCFTA is expected to increase governments’ expenditure on infrastructure. According to the United Nations Economic Commission for Africa, the continent’s overall commitment to infrastructure development averaged $75 billion annually between 2012 and 2016.
“However, more needs to be done, as the infrastructure deficit remains high, leading to many lost opportunities,” says Vera Songwe, executive secretary of UNECA. “Energy, for example, continues to be a major hindrance
“We also need direct access to relevant government departments to ensure challenges are addressed fast.” DYLAN YU managing director of Yocean Group Ltd
in Africa’s ability to establish competitive industries.”
In addition, by creating a large consumer market, the AfCFTA is expected to give needed impetus to the China-Africa industrial partnering and industrial capacity cooperation — proposed during the Forum on China-Africa Cooperation Summit in Johannesburg, South Africa, in 2015 by President Xi Jinping — to speed up the relocation of jobs from China. The World Bank says Africa is well positioned to attract jobs outsourced by China as the latter’s domestic labor costs increase.
“A scaled-up market is attractive to Chinese manufacturers. First, it reduces the need to negotiate tariff structures with 54 different countries and customize products for each market, too. A common market is better for planning,” says Robert Kagiri, a strategy and policy consultant and adjunct lecturer at the Institute of Diplomacy and International Studies at the University of Nairobi.
Kagiri says this will augur well with the implementation of the China-proposed Belt and Road Initiative, whose aim is to connect Asia, Europe and Africa.
Kagiri says Kenya should pursue strategies similar to those that resulted in China’s meteoric economic rise. Among these are creating a conducive investment environment through incentives and by building infrastructure.
“The move will push up foreign direct investments that will be accompanied by technology transfer,” he says.
The AfCFTA will give impetus to Chinese investors to set up in the region and take advantage of the low wages as well as trade agreements with developed economies, such as the African Growth and Opportunity Act signed with the United States, Kagiri says.
“The African Continental Free Trade Area also offers immense opportunities to Chinese manufactures producing locally. It will give them a leg up as the continent shapes up to strengthen intra-African trade,” he says.
According to Anzetse Were, a development economist based in Kenya, the realization of a continental trade bloc needs a coherent infrastructure plan by African countries to ensure a seamless network of linkages. “Once this is in place, it will be easy to align with the (Belt and Road Initiative) and source financing,” she says.
While conceding that this will increase Africa’s appetite for loans, she says most African countries are yet to establish innovative and effective public-private partnership policies that would open doors to alternative financing from the private sector.
The private sector in most countries lacks the capacity to implement mega projects, which prevents them from undertaking government bids, says Were. “The interest rates are so high compared to capital costs accessed by foreign firms. Therefore, a lot needs to be done by governments toward accessibility to cheap financing as the (AfCFTA) comes into action,” Were says.
A lack of skills and technical capacity is another challenge facing Africa, she says.
“We will depend on partnerships with foreign companies to enhance our manufacturing sectors to meet demand. Otherwise, our import bill will still soar as population increases,” says Were.
She says joint partnerships with Chinese manufacturers will build the country’s technical and technological capacity. However, Kenya needs to make deliberate plans in building ecosystems that encourages manufacturing, she adds.
“We also need to undertake a comprehensive cost-benefit analysis and understand the needs of the Chinese market, then invest in these value chains to improve our products and access the Asian market,” says Were.
Policy inconsistencies are also suppressing local manufacturing, says Yu, the managing director of Yocean Group. “In Kenya, computer parts and spares are levied a 25 percent import duty, while an already assembled computer is duty-free.”
“We also need direct access to relevant government departments to ensure challenges are addressed fast,” he says.
In addition, says Yu, African governments need to make deliberate efforts to facilitate intra-Africa trade.
The realization of a free trade zone is already facing head winds. Ten countries, including Nigeria, did not sign the AfCFTA agreement, asking for time to consult with local stakeholders. According to media reports, Nigerian President Muhammadu Buhari is concerned that imports would undermine local manufacturers and entrepreneurs.
Under the AfCFTA, the phasing out of tariffs will be applied gradually over five years for developing countries and 10 years for the least-developed ones. For sensitive products, there is an even longer phase-out period of 10 years for developing countries and 13 for the least-developed.
David Luke, the coordinator of the African Trade Policy Center at UNECA, says an autonomous secretariat has been created to oversee the realization of the trade agreement. There also is a consensus that it will be financed by the African Union, he says. The second phase of negotiations, on such issues as investment, competition and intellectual property rights, is expected to begin later this year and be completed by January 2020.
“E-commerce is also considered as a possible additional topic,” says Karingi, of UNECA.
Ethiopian Prime Minister Abiy Ahmed and African ministers of finance, planning and economic development at the 1st Session of the Commission Conference in Addis Ababa.
From left: Abiy Ahmed, the prime minister of Ethiopia; Vera Songwe, the executive secretary of the UNECA.
Jack Ma, the founder and executive chairman of Alibaba Group, gives a lecture to young entrepreneurs in Nailab, a startup incubator in Nairobi, in July 2017.