The Growing African—Asian Trade and Investment Connection What Do the Two Continents Bring to the Table For Each Other?

1. The Growing African—Asian Trade and Investment ConnectionWhat 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

2. 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 Africa’s 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 countries

3. 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

4. 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 countries–Ghana, 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 sectors—construction, 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

5. Africa’s export growth to Asia has surpassed all other regions over the last decade; Asia now third most important export destination, after US and EU 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.

6. Africa’s exports to Asia are more sectorally—and geographically—concentrated than are Africa’s imports from Asia Exports: mainly raw commodities; Imports: more value-added Africa’s leading merchandise imports from Asia: 2004 Africa’s leading merchandise exports to Asia: 2004

7. Within Asia very rapid growth of African exports to China and India Data sources: COMTRADE, using Asia countries’ reported data on imports from Africa, except for Thailand and Vietnam, where the Africa’s export information was used. Africa’s 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.

8. Country Distribution:African Exports to China and IndiaOrigins of African exports to India are different and more concentrated than African exports to China The shares of Africa’s exports to China: 2005 The shares of Africa’s exports to India : 2003 Data sources: China Statistical website and WITS COMTRADE.

9. Country Distribution: African Imports from China and India Destination of African imports from China and India more similar and less concentrated The shares of Africa’s imports from China: 2005The shares of Africa’s imports from India: 2004 Data sources: China Statistical website and WITS COMTRADE.

10. Product Distribution:African Exports to China and IndiaAfrica mainly exports petroleum and raw materials to China, and mainly exports minerals to India Data sources: WITS SITC revision3 Aggregates code, India oil imports were estimated from the data reported by Nigeria and Gabon.

11. Product Distribution: African Imports from China and IndiaAfrica mainly imports value-added commodities from both China and India; imports from China a bit more concentrated Data sources: WITS SITC revision3 Aggregates code.

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

13. Role of Trade Policy RegimesAcross broad product categories, many Chinese products face higher African import tariffs than do the same products from India

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

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

16. 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 nutsIndia’s 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)

17. Current Chinese FDI Outflows to Africa Compared to the WorldChinese FDI outflows to Africa total about $300 million, a small share of China’s global FDI outflows… 2004 Chinese FDI Statistics Bulletin (2004 年度中国对外直接投资公报）

18. 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 2004 Chinese FDI Statistics Bulletin (2004 年度中国对外直接投资公报）

19. Current Indian FDI Outflows to Africa, By CountryIndia’s FDI outflows to Africa are mostly to Mauritius and Sudan* Data sources: UNCTAD: India’s outward FDI, a giant awakening? October 2004. *Based on incomplete data series on Indian FDI outflows to Africa

20. Determinants of Chinese FDI in AfricaChinese firms engaged in FDI rank Africa as one of the least attractive destinations worldwide (compared to investing in China) 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.

21. Determinants of Chinese FDI in AfricaChinese firms investing in Africa consider “market seeking” and “Chinese government support” as key variables in the location decision 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.

22. Network Trade/Trade-FD Linkages: Statistical EvidenceAggregate statistics show little or weak correlation between FDI and exports among non-oil African countries, but among African oil countries such correlation is visibleTrade-Investment Links in Sub-Saharan Africa Data sources: IMF WEO, oil countries include Angola, Chad, Congo, Equitorial Guinea, Nigeria and Sudan.

23. 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 environment—especially competition—also 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.

24. 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 can’t 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 expand informal network; respect small local firms (nuts)

25. 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 RTA’s don’t work • But also market segmentation

26. : 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

27. Study’s 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