The Growing AfricanAsian Trade and Investment Connection What Do the Two Continents Bring to the Table For

Each Other?

Harry G. Broadman Economic Adviser Africa Region The World Bank ABCDE Tokyo May 29, 2006

Study is identifying: what are the patterns of trade and investment relations between Sub-Saharan Africa and Asia, why are such patterns evident, and how to strengthen these trade and investment flows to enhance Africas development prospects.

Study is focusing on: Role of at-the-border formal trade and investment policies, in both Asian and African countries Between-the-border logistical and informational factors that affect Africa-Asia trade and investment flows Behind-the-border conditions in Asian and African 2 countries

Propositions examined:

At-the-border factors often perceived as the major bottleneck affecting South-South trade and investment flows Study posits that the effects of formal trade and investment policies are likely to be of secondary importance compared to between-the-border and behind-the-border conditions in both African and Asian countries These are thus likely to be priority areas for policy reform to both increase African-Asian trade and investment flows and to use them as a lever for growth and poverty reduction in Sub-Saharan Africa

Methodology/Data:

analysis of existing firm-level micro data from World Bank Investment Climate Assessments (ICAs) in African and Asian countries, special emphasis given to China and India analysis of newly collected firm-level survey data on 400+ African firms with Chinese and/or Indian affiliation in four focus countriesGhana, Senegal, South Africa, and Tanzania (May 2006) analysis of originally developed 16 individual business case studies carried out in the field in the four focus countries, focusing on four sectorsconstruction, food, textiles and apparel, and general manufacturing (May 2006) gravity model analysis of African bilateral trade flows worldwide to assess barriers to trade with China and India
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Africas export growth to Asia has surpassed all other regions over the last decade; Asia now third most important export destination, after US and EU

40% 35% 30% 25% 20% 15% 10% 5% 0%

Africa's average merchandise export growth rate by destination: 1990-2005 38%

Share of Africa exports by region: 2005

Other 15% 20% 20% 13% Asia 23% ASIA AFRICA US EU Africa 10%

EU 27%

US 25%

Data sources: IMF Direction of Trade, as of April 9, 2006. The 2005 export was based on the data for the first 10 months export, adjusting for November and December export with the average monthly export of January to October, 2005. Asia includes Afghanistan, Bangladesh, Brunei, Cambodia, China (include Hong Kong and Macao), India, Indonesia, Japan, Korea, Lao, Malaysia, Maldives, Mongolia, Myanmar, Nepal, North Korea, Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam.

Africas exports to Asia are more sectorallyand geographicallyconcentrated than are Africas imports from Asia Exports: mainly raw commodities; Imports: more value-added
Africas leading merchandise exports to Asia: 2004 Africas leading merchandise imports from Asia: 2004

Mauritania Senegal Guinea-Bissau Cape Verde Guinea Mali Niger Chad Sudan Burkina Faso Benin GhanaTogo Cote d'Ivoire Nigeria Central African Republic Cameroon Equatorial Guinea Sao Tome and Principe Gabon Congo, Rep. Uganda Kenya Rwanda Burundi Congo, Dem. Rep. Tanzania Ethiopia Somalia Eritrea

Mauritania Senegal Cape Verde Gambia, The

Mali

Niger Chad Sudan Nigeria Central African Republic Cameroon Equatorial Guinea Uganda Congo, Rep. Gabon
Rwanda

Eritrea

Sierra Leone

Burkina Faso Guinea-Bissau Guinea Benin Sierra Leone Cote d'Ivoire Togo Liberia Ghana

Ethiopia

Somalia

Liberia

Sao Tome and Principe

Kenya

Congo, Dem. Rep. Burundi Tanzania

Seychelles

Seychelles Angola Zambia Comoros

Angola Zambia Mozambique Zimbabwe Namibia Botswana Swaziland Lesotho South Africa Comoros Malawi

Malawi

Leading Imports by Product Group

Madagascar

Mozambique Zimbabwe Namibia Botswana

Madagascar

Leading Exports by Product Group Agricultural Raw Materials Cotton Crude Petroleum Machinery, Transport Equipment, and Manufactures Metals, Mineral Ores, and Precious Stones Source: UN COMTRADE 2004

Semi-Processed and Processed Food Mauritius

Mauritius

Textiles and Apparel Machinery and Telecommunications Equipment

South Africa Swaziland Lesotho

Motor Vehicles and Transport Equipment Ships, Boats and Floating Structures Source: UN COMTRADE 2004

Within Asia very rapid growth of African exports to China and India
Average annual merchandise export growth rate, Africa to Asia 60% 50% 40% 48% Rest of Asia China
1999-2004

Africa's merchandise exports to Asia by destination, 2004

Percent

40%

30% 20% 20% 10% 0% China India

1990-94 1999-2004 1990-94

51%

India 9%

1990-94

14%
1999-2004

7%

14%

13%

Total 2004 Africa's exports to Asia: $37 billion

Rest of Asia

Data sources: COMTRADE, using Asia countries reported data on imports from Africa, except for Thailand and Vietnam, where th e Africas export information was used. Africas petroleum exports to India was adjusted for missing values. Asia includes Cambodia, China (including Hong Kong and Macao), Indonesia, Japan, Korea Republic, Malaysia, Philippines, Singapore, Thailand, Vietnam, Bangladesh, India, Pakistan and Sri Lanka.

Country Distribution: African Exports to China and India Origins of African exports to India are different and more concentrated than African exports to China
The shares of Africas exports to China: 2005
100% Rest of Africa 90% 80% 70% 60%
Gabon Nigeria 90%

The shares of Africas exports to India : 2003

100% Rest of Africa Ghana Guinea-B Benin 80% 70% 60% Kenya Nigeria Cote d'Ivoire T anzania Senegal

Equitorial Guinea Congo

Sudan
Percent

Percent

50% South Africa 40% 30% 20% 10% 0%

90%

50% 90% 40% 30% 20% 10% 0% 68% South Africa

Angola

Data sources: China Statistical website and WITS COMTRADE.

Country Distribution: African Imports from China and India Destination of African imports from China and India more similar and less concentrated
The shares of Africas imports from China: 2005
100% Rest of Africa 90% 80% 70% 60% 50% 40% 30% 20% South Africa 10% 0% Angola Kenya T ogo Ghana Benin Sudan 90% Nigeria Rest of Africa Cote d'Ivoire Guinea Congo Liberia Mauritius Madacascar Ethiopia T anzania Angola Kenya T ogo Ghana Benin Sudan Nigeria South Africa 10% 0% 20% South Africa 40% 30% 50% 60% T ogo Sudan Kenya 85% 80% 70% T anzania Ghana Mauritius 90% Rest of Africa Rest of Africa Angola Senegal Uganda Mozambique Congo, Rep. Cote d'Ivoire T anzania Ghana Mauritius Nigeria T ogo Sudan Kenya Nigeria South Africa

The shares of Africas imports from India: 2004

100%

Data sources: China Statistical website and WITS COMTRADE.

Product Distribution: African Exports to China and India Africa mainly exports petroleum and raw materials to China, and mainly exports minerals to India
Africa's merchandise exports to China, 2004 Agricultural Raw materials Africa's merchandise exports to India: 2003

M anufactured materials

17%

Textile, apparel and footwear 6% 5% 2% 1%

19%

M achinery and Transportation Equipment Processed food and beverages

61% 14% 4%

62%

Oil and Natural Gas

0.1% 2%

Ores and metals

Data sources: WITS SITC revision3 Aggregates code, India oil imports were estimated from the data reported by Nigeria and Gabon.

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Product Distribution: African Imports from China and India Africa mainly imports value-added commodities from both China and India; imports from China a bit more concentrated

China merchandise exports to Africa: 2004

Agricultural Raw materials

India merchandise exports to Africa: 2004

Manufactured materials Textile, apparel and footwear 18% Machinery and Transportation Equipment 33% 36% Processed food and beverages
9% 29% 11% 12% 11% 17%

1%

0%

9%

3%

Oil and Natural Gas Ores and metals

11%

Data sources: WITS SITC revision3 Aggregates code.

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Role of Trade Policy Regimes On a cross-country basis, on exports to Africa, China faces higher tariffs than India
India China

Mauritania Cape Verde Niger Mali Chad Senegal Sudan Burkina Faso Guinea-Bissau Guinea Benin Nigeria Sierra Leone Cote d'IvoireGhanaTogo Central African Republic Liberia Cameroon Eritrea

Ethiopia

Somalia

Equatorial Guinea Uganda Kenya GabonCongo, Rep. Rwanda Congo, Dem. Rep.Burundi Tanzania Seychelles

Average Tariff Rates Low (5% - 10%) Medium Low (11% - 15%) Medium High (16% - 20%) High (21% - 30%)

Angola Zambia

Malawi

Mozambique Zimbabwe Botswana Swaziland South AfricaLesotho

Madagascar

Mauritius

t i u s

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Role of Trade Policy Regimes Across broad product categories, many Chinese products face higher African import tariffs than do the same products from India
Differences in African Tariff Rates on Chinese and Indian Exports (2005)
Tariffs (China minus India)

4.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% -2.0% 1.2%

3.9% 2.6% 2.1% 1.2% 0.1% 1.5% 1.7% 1.6% 0.7% 2.8%

Petroleum Products

Coal

Non Metallic Manufacturing

Apparel and Footwear

Electrical Machinery

Machinery and Transport

Other Manufacturing

-1.0% -2.0%

Source: UNCTAD TRAINS

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Role of Trade Policy Regimes: Does Africa Face Untapped Export Market Opportunities in China? Africa exports virtually only cotton to China, where the tariff is relatively high, rather than exporting more value-added textile products, where the tariff is lower
Total Chinese Textile Imports from the World, 2004

3,500 3,000

27% Tariff, right-axis

30% 25%

Rest of the World

2,500

20% 15% 10% 5% 5%

$m

2,000 1,500 1,000 500 0

10%

Tariff, R right-axis

Africa 0% Cotton, not carded or combed Woven fabrics of cotton Cotton yarn (other than sewing thread)

% of import values

Data sources: WITS WTO integrated database as of 11/29/2004, HS combined code.

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Role of Trade Policy Regimes: Does Africa Face Untapped Export Market Opportunities in China? Chinese consumers are becoming fond of chocolate, but Africa is exporting mostly only cocoa beans to China
China's total imports of cocoa and cocoa products: 1997-2004
120000
30000

Africa's cocoa and cocoa product exports to China: 1997-2004

80000
$000'

Chocolate

100000

25000

Chocolate

20000

Cocoa powder Cocoa powder 40000 Cocoa paste

Cocoa beans Cocoa beans

60000

$000'

15000

10000

Cocoa paste

20000

5000

1997 1998 1999 2000 2001 2002 2003 2004

1997

1998

1999

2000

2001

2002

2003

2004

Data sources: WITS, STIC revision 2 code, mainland China only.

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Role of Trade Policy Regimes: Does Africa Face Untapped Export Market Opportunities in India?

Business Case Study: Indian cashew firm in Tanzania faces higher tariffs in India for processed nuts than for raw nuts

Indias tariff on processed cashews is 37%; for raw cashews it is 0%

Currently the firm sells 90% of exports to the US, Canada and South Africa (high quality nuts); 10% of exports to India (raw nuts)
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Current Chinese FDI Outflows to Africa Compared to the World Chinese FDI outflows to Africa total about $300 million, a small share of Chinas global FDI outflows
Chinese total FDI outflows by locality $million, 2004

$126 $171 $120 $298

$19 $372

Rest of Asia Hong Kong India Latin America Africa $2,628 Europe North America Pacific

$1,763 $0.4 Total 5.5 billion $US

North Africa

2004 Chinese FDI Statistics Bulletin (2004

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Current Chinese FDI Outflows to Africa Compared to the World but the growth rate of Chinese FDI outflows to Africa is surpassing all other regions
Chinese FDI outflow growth rate, by region, 2004

Chinese FDI outflow growth rate %, 2003-04

3.5 3 2.5 2 1.5 1 0.5 0

327% 291% 255%

119%

100% 70% 13%

Africa

North Africa

Pacific

North America

Asia

Latin America

Europe

2004 Chinese FDI Statistics Bulletin (2004

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Current Indian FDI Outflows to Africa, By Country

Indias FDI outflows to Africa are mostly to Mauritius and Sudan*
India FDI outflows by destination

Sudan 18% Other 38% Sudan Mauritius US Mauritius 18% UK 11% US 15% UK Other

Data sources: UNCTAD: Indias outward FDI, a giant awakening? October 2004.

*Based on incomplete data series on Indian FDI outflows to Africa

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Determinants of Chinese FDI in Africa Chinese firms engaged in FDI rank Africa as one of the least attractive destinations worldwide (compared to investing in China)
Better
Australia & New Zealand West Europe East Asia North America Latin America South & Southeast Asia Africa East Europe & Former Soviet States Middle East North Korea

Same

Worse

0.0

20.0

40.0

60.0

80.0

100.0

% of firms
Data sources: Yang Yao and Yin He Chinese outward investing firms, August 2005. These results are based on a survey of 150 parenting firms in China who have invested abroad. Because some firms make multi investments, the total number of firms abroad is 251.

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Determinants of Chinese FDI in Africa Chinese firms investing in Africa consider market seeking and Chinese government support as key variables in the location decision
Percent firms invested in Africa consider the following factors important in driving FDI
100 90 80 70 60 50 40 30 20 10 0
y er t isk ng ng ets y y ng isk in g Oth b ro ad eki rn men ou ntr trateg seek seeki ic ass pacit nal r ssets r j um pi e s s a o e c ve t ov e ga ncy trateg tio n c p erati uce a ariff urc rk e o st ti s tin T d S d uc o e Ma es tic g the h peti Reso fficie e v e R E n om s in pro Red uc do m icies i bal c ito r tic t s m e o l e l o p G m t fr om I po f do cc p or le FD i o p t s e u e b S us ora ke d om m Fav Ma o e fr su r s e Pr

Data sources: Yang Yao and Yin He Chinese outward investing firms, August 2005. These results are based on a survey of 150 parenting firms in China who have invested abroad. Because some firms make multi investments, the total number of firms abroad is 251.

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Network Trade/Trade-FD Linkages: Statistical Evidence Aggregate statistics show little or weak correlation between FDI and exports among non-oil African countries, but among African oil countries such correlation is visible
Trade-Investment Links in Sub-Saharan Africa
The corre lation coe fficie nt be twe e n FDI as % of GDP and me rchandise e xports as % of GDP 120%
Average 2003~2005 export growth

The Correlation coefficient between FDI growth and export growth 60 50 40 30 20 10 0 -100 -10 -20 Average 2001~2003 FDI growth % 0 100 200 300 400 500 y = -0.001x + 13.181 R = 0.000
2

Exports as % of GDP, 2005

y = 0.05x + 34.26 R2 = 0.50

100%

y = 1.9x + 0.4 R2 = 0.6

80%

60%

40% y = 0.97x + 0.20 R2 = 0.05

20%

0% 0% 10% 20% FDI as % of GDP, 2004 30% 40%

Data sources: IMF WEO, oil countries include Angola, Chad, Congo, Equitorial Guinea, Nigeria and Sudan.

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Gravity Model: Preliminary Findings

Traditional economic/geographic factors significant Trade policy matters to some extent. But PTAs (AGOA, EBA) more powerful than general openness to imports. Africa under-trading in manufacturing with China and India; but over-trading in oil with them

Domestic business environmentespecially competitionalso significant

Governance also important: transparency, property right enforcement, government revenue management Trade logistics matter, particularly for exporting side
A reduction of one document required for exports would increase exports by 14% on average.
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Competition of Chinese/Indian Firms in Africa: Business Case Studies (Preliminary Evidence)

Entry to Africa a reaction to too much competition in Asia

Many Chinese firms SOEs with soft budget constraints or operate under State to State deals; Indian firms largely private, State to State largely for TA
African businesses are learning to just not compete with Chinese: either form sub-contracts/JVs (If you cant beat them, join them) or avoid head-to-head competition (construction, textiles)

Some Chinese firms pursue enclave strategy for control: limited domestic spillovers; Indians integrate more
Chinese investments sometimes embody transferred work teams and capital inputs (but local materials); HQ control; product delivery control from A-Z: from shipping to final product (road signs) Indian firms as African businesses; get into municipal govts to 24 expand informal network; respect small local firms (nuts)

Competition of Chinese/Indian Firms in Africa: Business Case Studies (Preliminary Evidence)

Product quality questioned; standards not world class wash and cry blankets; road maintenance Indian/Chinese creating African product diversification, regional integration (horizontal), entry into services trade intra-African construction firms; vehicles; beverages; textiles but engaging in horizontal integration since RTAs dont work But also market segmentation
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Sourcing from China and India Businesss Case Studies (Preliminary Evidence)

China and India sources of sophisticated capital goods for African domestic firms
Chinese tower cranes for use in construction; aviation petrol pumps Indian nut finishing machine; bottling machines

But also reverse tech transfer: shipping of used capital goods from Africa to China and India
Dismantling and reassembling: synthetic polymer plant (China); power station (India)

Between the Border problems: Africans find sourcing from India and China problematic
opaqueness; reliability of supply
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Studys Policy Recommendations ?

Will focus on how Africa can leverage trade and investment with Asia by exploiting emerging cross-regional complementarities to:

diversify exports like the East Asia (Mauritius) engage in intra-industry, global production networks to further process/add value to resource-based exports like Chile and Brazil (Botswana)

expand back-office services like India (Ghana and Senegal)

strengthen inter-enterprise competition to enhance efficiency of African firms and create/exploit economies of scale through regional integration to enhance competitiveness of exports improve governance, property rights protection and commercial dispute resolution mechanisms and trade-related institutions (customs) enhance trade facilitation, logistics and poor infrastructure development, including roads and ports
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