Sustaining African-Chinese Cooperation

An abbreviated version of the author’s “Sustaining African-Chinese Cooperation,” BusinessDay Nigeria, March 25, 2013

Ever since the Bandung Conference in 1955, China and several nations in Africa have had a special relationship. The Afro-Asian meeting was one of the first steps toward the anti-colonial Non-Aligned Movement, which Indonesia’s first president Sukarno named the “newly emerging forces.”

Now, let’s fast forward half a century. “The days of the Non-Aligned Movement that united us after colonialism are gone,” cautions Nigeria’s central bank governor Lamido Sanusi in a recent commentary, which was released before the impending BRICS summit hosted by South Africa.

“China is no longer a fellow under-developed economy,” Sanusi added, “it is the world’s second-biggest, capable of the same forms of exploitation as the west.”

What’s going on?

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The modern Africa–China relations were initiated in the postwar era, following the establishment of the People’s Republic of China in 1949. In China many African nations saw a more equal partner – another developing nation. In turn, African nations have had a special place in Chinese hearts, particularly since Zhou Enlai’s African tour in 1964.

During the era of decolonization, China, unlike the western powers, had close ties with African liberation and anti-apartheid movements, while the support of African nations was vital when China joined the UN in 1971.

When Deng Xiaoping initiated economic reforms and opening-up policies in China, the mainland began its historical catch-up with advanced economies. After the creation of the Forum on China-Africa Cooperation in 2000, China committed to a policy of accelerated engagement. A year later, China joined the World Trade Organization (WTO). Since then, trade between China and Africa has soared 20-fold. Last year, it exceeded $200 billion.

By any measure, the past decade has been a period of dramatic growth, thanks to the Chinese demand for African resources. On the other hand, the critics argue that this boom in commodities, services and consumer spending has coincided with the relative decline of African manufacturing from 12.8 percent to 10.5 percent of regional GDP.

Cheap Chinese goods, coupled with second-hand European imports, have become a sensitive political issue.

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What the current debate may ignore is the dynamic pace of change. As industrialization is shifting within China – from the 1st and 2nd tier megacities in the coastal regions toward other tiers, inland and the west – Beijing’s new leadership is preparing for a massive growth shift, which has huge implication to China’s trade and investment.

Through the Hu Jintao-Wen Jiabao era, China’s growth model emphasized investment, while the mainland’s integration into the world economy occurred primarily through exports. In the impending Xi Jinping-Li Keqiang era, China will gradually shift from investment and net exports to consumption, while in its external relations exports will be augmented by foreign direct investment (FDI).

As China is moving higher in the value-added chain, FDI to manufacturing has stagnated in China, while FDI to services is soaring. As the global value chains of foreign multinational corporations adjust to this massive shift, their FDI is relocating, within China and into emerging Asia. Meanwhile, Chinese FDI is refocusing worldwide, shifting from emerging Asia into the developed markets, including the United States and the Eurozone.

In the coming years, Chinese multinationals will seek to sustain their cost efficiencies, not just in Southeast and South Asia, but in Africa. Indeed, the special historical relationships between Africa and China could serve as foundation for new bilateral relations, based on Chinese FDI in manufacturing, and African industrialization.

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Recently, African leaders and the African Development Bank have urged governments to work with each other to maximize benefits from relations with China, their leading trade partner. While such concerns are understandable, they often ignore the effects of foreign FDI in China.

First of all, “Made in China” signifies production location, not necessarily ownership. Even today, 50-60 percent of Chinese exports are, products manufactured by foreign multinational corporations in the mainland. Typically, despite cheap prices, only a fraction (less than 5-10%) of the final value of Apple’s iPod goes to the Chinese labor.

Second, while critics acknowledge that the Chinese have set up huge operations and built infrastructure in much of Africa, they argue that Chinese companies have done so using equipment and labor imported from home. But things are changing. In China, the most advanced multinationals build long-term relationships and pay increasing attention to local work force. They know that transferring skills to local communities is vital to good corporate citizens worldwide.

Third – and most importantly, China’s growth shift will refocus Chinese presence in Africa, from trade to investment. In a benign scenario, this FDI has potential to accelerate African economic growth. In many African nations, current economic growth relies on commodities. While that is not sustainable, it can provide cushion as industrial structure grows more diversified.

While China and African nations may occasionally idealize and even romanticize their respective histories, they understand each other better than the far wealthier advanced economies. They share similar life styles, and comparable dreams. And it is these emerging and developing nations that today drive global growth prospects.