STRONG TO­GETHER

Africa’s land­mark free trade area aims to trans­form global and in­tra-con­ti­nen­tal ex­changes, boost man­u­fac­tur­ing and cre­ate jobs

China Daily European Weekly - - Front Page - By LU­CIE MORANGI lucy­morangi@chi­nadaily.com.cn

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.

SONG CHEN / CHINA DAILY

PRO­VIDED TO CHINA DAILY

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.

PHO­TOS PRO­VIDED TO CHINA DAILY

CHEN CHENG / XIN­HUA

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.

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