Trade

USA-China Trade Tensions: Implications for Africa

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This article first appeared in my weekly column with the Business Daily on November 18, 2018

The escalating trade war between China and the United States of America (USA) has been at the forefront of global geopolitical tensions recently. While extensive analysis has been produced on the implications of the ‘trade war’ for US and Chinese entities, both public and private, far less attention has been given to the implications for Africa. The truth is that Africa, both government and private sector, view the USA and China as important partners for development and growth. What will a trade war between the two largest economies in the world, who have markedly different styles of economic engagement with Africa, mean for the continent? Simply, the trade war will have both positive and negative implications for Africa.

The US and China are embroiled in a commercial

(source: https://www.businessdailyafrica.com/analysis/ideas/4259414-4857464-8bb8pr/index.html)

In terms of the negatives, there are two key elements the first of which is commodities. African countries that continue to be commodity driven and let that define their exports to China will be hit on the commodity lines that supply Chinese manufacturing that targets US markets. Thus, African countries that provide key inputs to China that then manufacture products for US markets will be hit; particularly those products that are targets of US tariffs. The same applies to African countries supplying the USA with commodities that end up in products that target China. At the moment, the USA’s top exports to China include aircraft (USD 16 billion), machinery (USD 13 billion), vehicles (USD 13 billion), and electrical machinery (USD 12 billion). Thus, African countries need to understand the details of the China-USA trade war and its potential impact on commodity exports to both countries.

Secondly, the trade war will put Africa at the centre of a geopolitical tussle between the two countries. Africa is an important geopolitical element of strategy for both countries and the trade war accentuates this. Thus there is a real risk, that Africa may be caught in the crosswinds of the not only the economic cross fire, but in military interests as well.

But there are positives. Firstly, and ironically, commodity driven African countries, particularly oil producers stand to gain from the trade war. In the wake of the trade war, China will seek to reduce its reliance on oil imports from the USA. Thus, China will likely seek to increase the proportion of oil sourced from Africa.

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(source: https://en.wikipedia.org/wiki/Africa)

Secondly, the trade war, makes Africa even more important to each country. During FOCAC, China committed USD 60 billion to Africa. The USA also established the International Development Finance Corporation with USD 60 billion to invest in the developing world, Africa included. Thus as USA and China seek to secure their interests in the context of a trade war, Africa has actually become a beneficiary of the economic diplomacy of both countries.

Finally, the trade war will make the demographics of Africa feature more prominently in the commercial diplomacy of both countries. As both governments begin to diversify away from each other in terms of exports, Africa is one of the fastest growing markets in the world. Not only is the population in Africa growing, GDP per capita is also growing; so there are more Africans and each African is slowly getting richer. Thus, it is possible that Africa’s position as a key trading partner for both the USA and China will rise in prominence as trade tensions between them rise.

As always, it is for Africa to determine whether the trade war between the USA and China, will be a net positive or negative.

Anzetse Were is a development economist; anzetsew@gmail.com

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China International Import Expo: Implications for Africa

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As the world’s second-largest economy, China is now looking to further open up its markets to the world’s economies– particularly African countries.

I was part of a TV panel that discussed the implications of the China International Import Expo for Africa.

Dynamics of China-Kenya Trade Relations

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This article first appeared in China Daily on June 1, 2018

A few weeks ago it was revealed that Kenya refused to sign a free trade agreement that China has been negotiating with the East African Community (EAC) since 2016. The core motivation for the rejection seems to be seated in intent to protect Kenya’s nascent manufacturing sector from being dominated by China’s massive and efficient manufacturing sector.

This development highlights the concerns Kenya has with the balance of trade between the two countries. According to The East African newspaper, China accounts for less than 2 percent of Kenya’s exports yet 25 percent of Kenya’s import bill is from China. In 2017, Kenya exported goods worth USD 99.76 million to China but imported goods worth USD 3.37 billion resulting in trade deficit of USD 3.2 billion. Between January and May 2017 alone, Kenya was importing an average of goods worth USD 348.9 million from China per month.

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(source: https://hivisasa.com/posts/why-china-remains-best-bet-for-kenya-in-global-trade)

The trade deficit has made Kenya, and many other African countries in a similar position, very uncomfortable. Clearly, the trade deficit path is unwise and presents an additional financial problem the country has to address. There are also concerns by some that such massive trade deficits compromise Kenya’s ability to negotiate trade terms. Sino-phobic narratives will argue that this is a deliberate effort by China to put countries such as Kenya in a position where they cannot protect the country’s interests in trade matters.

However, it ought to be considered that the trade deficit exists between Kenya and China, not necessarily because China is pursuing this deliberately, but because China is better at producing what Kenya wants than Kenya is at producing what China wants. The trade deficit is arguably the result of market supply and demand dynamics. Top products imported from China include machinery, railway stock, iron and steel, vehicles and plastics; these compose more than 50 percent of imports from China. The truth is that Kenya largely doesn’t manufacture these and thus imports them from China.

Sadly with China, Kenya is sticking to the usual yet unwise path of exporting raw materials and importing manufactured goods; a reality that reflects the weakness of manufacturing capacity in Kenya and Africa as a whole. And sadly, even in the export of raw produce such as fish where there is growing demand in China, Kenya is not exploiting the opportunity. Kenya fish output dropped by 10.2 percent in 2016, compromising the country’s ability to exploit demand for fish in China.

The trade dynamics between Kenya and China accentuate the importance for Kenya to shift current behaviour to one that strengthens the country’s position. The first step is to enforce local content laws to limit the importation of goods in public projects and rather, procure goods manufactured locally. The good news is that there seems to be indication that for the next phase of the development of the Standard Gauge Railway, local purchases will not be lower than 40 percent of total procurement. These types of provisions are important because they provide a market for Kenyan manufactured goods thereby boosting manufacturing activity, but they also highlight the extent to which local manufacturers can (or cannot) meet large orders consistently which provides valuable lessons on what the country needs to do to improve industrial capacity.

Secondly, Kenya needs to take advantage of the off-shoring of manufacturing capacity from China to other parts of the world. Partly informed by rising wages, China has been increasingly automating and off-shoring manufacturing; and Africa is benefitting from the latter to a certain extent. A report by McKinsey last year indicated that 31 percent of Chinese firms in Africa are in manufacturing and they already handle about 12 percent of industrial production in Africa with annual revenues of about USD 60 billion; revenues in manufacturing outstrip that of any other sector listed. If Chinese private sector are domesticating manufacturing capacity from China, then indigenous Kenyan firms can do the same. The constraints preventing this ought to be analysed and addressed.

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(source: http://studies.aljazeera.net/en/reports/2014/05/2014522115544892973.html)

Thirdly, Kenya needs to develop a trade strategy for China. The government needs to audit products with growing Chinese demand and seek to build Kenyan capacity to better exploit market opportunities presented by China. Kenyan producers ought to better leverage opportunities such as the China International Import Expo and work with the Chinese Embassy to exploit opportunities and tap into supplying the domestic market in China, thereby increasing the country’s exports to China.

Finally, Kenya should focus on revenue streams coming from China and strengthen these. Tourism is a massive opportunity for Kenya; hotel bed-nights of Chinese tourists to Kenya have increased 45.8 percent in 2017 compared to 2016, preceded only by Germany, UK, and USA. Government and private sector can be more deliberate in better understanding the needs of Chinese tourists and more aggressively market Kenya as a tourist destination in China.

In short, given Kenya’s concerns with the growing trade deficit to China, the government and private sector ought to become more proactive in meeting market demand in China. The concern should provide impetus for the country to do the hard work of building manufacturing capacity as well as better understanding the Chinese market and leveraging diplomatic and private sector ties to achieve clearly defined trade strategies and goals.

Anzetse Were is a development economist; anzetsew@gmail.com

 

Risks to manage in the African Free Trade Area

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This article first appeared in my weekly column with the Business Daily on May 27, 2018

The Africa Continental Free Trade Area (AfCTA) seeks to integrate African economies and pull together a market with a consumer spending power of USD 1.4 trillion by 2020 and increase intra-African trade by USD 35 billion by 2022. While some countries may have issues with the AfCTA, most African governments are behind it and momentum will continue to build to make it a reality. AfCTA is viewed as a game changer that will allow the free movement of goods and services across the continent, allowing African businesses to tap deeper into the sizeable and growing African markets. However, there are a few risks that ought to be managed going forward.

Delegates during the African Continental Free Trade Area Business Forum in Kigali, Rwanda, in March. FILE PHOTO | NMG

(source: https://www.businessdailyafrica.com/analysis/columnists/Risks-manage-African-Free-Trade-Area-/4259356-4582538-46rg8n/index.html)

The first risk is to do with the financing of infrastructure that will interconnect the continent. Africa has an annual infrastructure financing deficit of about USD 93 billion. An obvious next step will be the business of raising funds to build the infrastructure Africa needs because without infrastructure, AfCTA will remain a good idea with no lived benefits on the ground. Given concerns with rising debt levels of African countries, coupled with queries on the management of public funds, there is a risk that AfCTA can facilitate a debt binge to finance infrastructure in a context of poor institutional controls and capacity to ensure infrastructure projects are efficiently financed and developed. African governments have to manage this by ensuring infrastructure plans are financed responsibly, that money reaches the infrastructure projects and the projects are completed in a timely manner. Without these controls, the sheer scale of financing that can be attracted to finance infrastructure in the context of AfCTA may trigger debt distress in many African countries.

The second risk is that given Africa’s underdeveloped manufacturing and propensity to export raw commodities; without coordinated policy change, AfCTA may entrench and enable this dynamic. A cynic will point out that given where Africa is now, AfCTA may do more harm than good. By opening up Africa’s borders and markets, AfCTA will make it easier than ever to extract even larger amounts of raw materials from even more of the continent. AfCTA can also open African markets even further to others and unintentionally facilitate the dumping of manufactured goods into Africa by other countries. Is Africa able to process all its oil, gold, coltan, titanium, copper, agricultural produce etc? If not, to whom is AfCTA really opening up Africa? And who will actually capture market share in Africa via AfCTA?

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(source: http://www.decode.co.za/home/clients/)

This leads to the final point which is that the implementation of AfCTA must be correlated with focused and coordinated action across Africa to industrialise. Let African industries and manufacturers get the attention required to catalyse their development. The African Development Bank has just released a report on strategies, policies, institutions and financing required to industrialise Africa. Let governments draw from such documents as they develop and implement their industrialisation policies and strategies. In doing so, Africa will be in a much stronger position to leverage AfCTA and ensure African companies capture market share in a manner that propels wealth creation and development in Africa.

Anzetse Were is a development economist; anzetsew@gmail.com

The Implications of Brexit on Africa and Kenya

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On Friday morning the world awoke to the news that the UK had decided to leave the EU.

The same day saw currencies, stocks and bonds plunge across Africa, and a slump in oil and other commodities. From an African point of view, the immediate aftermath of Brexit has exacerbated problematic trends in international markets which have already hit African growth prospects. African currencies slipped against other currencies like the USD and Yen but of course gained against the GBP. Further, in the aftermath of Brexit, some African Eurobonds plunged with yields rising for Nigerian, Ethiopian and Rwandan Eurobonds.

If one were to trace some of the short and medium term effects of Brexit on Africa, the departure of the UK from the EU complicates African access to EU markets. Countries and businesses that were using the UK as a point of entry for their goods into the EU will have to find new partners in mainland Europe. Further, any trade deals that African countries had with EU will have to be renegotiated with the UK as a standalone entity. Although it is unlikely that the UK will effect drastic departures in terms of trade deals with African countries, the process of re-negotiation will take a period of time during which African exports to the UK will be negatively affected due to the uncertainty in the limbo period.

https://i0.wp.com/www.economywatch.com/files/imagecache/story/story/eu_no_uk_1.jpg (source: http://www.economywatch.com/files/imagecache/story/story/eu_no_uk_1.jpg)

Closer to home, Kenya’s horticultural sector, particularly cut flowers, will suffer. Flowers are one of Kenya’s top exports and the UK is a major export destination. Thus again any trade deals that Kenya had negotiated with the EU will stall with regard to the UK because of Brexit; and this may well translate into losses in the short to medium term for those firms. Another example of how Brexit will negatively inform access to EU markets for African goods is the case of Kenyan tea. If Brexit leads to the tightening of access to the EU markets for UK goods, Kenyan blended tea exports will suffer because the UK has been a major re-exporter of Kenyan tea into EU markets. UK appetite for Kenyan tea was informed by this re-export function thus with Brexit, the UK may possibly lose easy access to EU markets which may lead to a cut in the volumes of tea the country imports from Kenya.

If one looks at the effect of the weakening of the GBP, Africa will be affected. Firstly, African exports to the UK will be more expensive for UK consumers and this may dampen their appetite for African products. Further, with a weaker GBP, Kenya will become a more expensive tourist destination which will negatively affect a sector that has already been under-performing as the UK is an important source of tourists for Kenya. On the other hand, a weaker GBP will be good news for an import economy such as Kenya as imports from the UK will be cheaper.

More broadly, if Brexit triggers a UK recession, there will be a more medium to long term problems with which Africa will have to contend in a context where African growth is at its slowest for decades. Not only will there be dampened appetite for African exports thus muting trade, FDI from the UK will also be negatively hit, the latter of which is particularly bad news for Nigeria for which the UK was the largest source of FDI in 2015. Further, remittances from Africans in the UK are likely to drop if the UK economy slides into a deeper recession. In terms of development assistance, it is unlikely that a new, post-Brexit government would drastically alter UK’s commitment to spend 0.7 percent of its gross national income (GNI) on development aid, but a struggling UK economy would translate to a decline, in absolute terms, in the amount of aid Africa will receive.

https://i2.wp.com/www.travlang.com/money/uk10.jpg (source: http://www.travlang.com/money/uk10.jpg)

Another key negative effect of the UK leaving the EU is that the country has been a proponent of African interests on certain issues in the EU. For example, the UK has been a voice in the EU calling for a reduction of EU subsidies to farmers, subsidies that negatively affect African farmers by keeping the price of EU agricultural produce artificially low. With the UK leaving the EU, the interest of African farmers will no longer have a voice in the bloc. Secondly, a decision was recently made to cut EU funding to the African Union mission in Somalia (AMISOM) by 20 percent; the UK opposed this. The departure of the UK from the EU means that African countries will have to look at the EU anew and identify which countries can be pulled in as allies on key issues.

However, Brexit can be seen as good news in this context because the UK will no longer have to live with EU decisions and regulations concerning Africa with which they don’t agree. Indeed, the UK Minister to Africa said Brexit will allow the U.K. to “focus more on our bilateral relationships with Africa” allowing the country much more flexibility when interacting with Africa than was possible while working under the EU.

It will be interesting to see what the post-Brexit UK government African strategy and policy will look like. In terms of Kenyan interests, given the deep and longstanding ties the country has with the UK, aid, trade and investment are likely to continue. In fact, an analyst made the point that in all of Africa, perhaps Kenya may benefit the most from Brexit as the UK may be particularly eager to establish bilateral ties with Kenya after leaving the EU, giving Kenya exceptional leverage.

Anzetse Were is a development economist; anzetsew@gmail.com

My thoughts on Brexit- TV Interview

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Yesterday I shared my initial thoughts on Brexit and the implications for Africa and Kenya.

Why Kenya needs to reorient its economy

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This article first appeared in my column with the Business Daily on January 24, 2016


Kenya is an import economy and the country’s journey as an import economy has made key flaws of this economic orientation evident. One clear problem is having a chronic and substantial Current Account Deficit, secondly government has to be hawk eyed about KES depreciation to keep import bills manageable, thirdly the country is unable to generate forex to pay foreign-denominated debt and finally Kenya’s import economy exacerbates the country’s unemployment problem. How? Well as an import economy we are essentially exporting jobs by hiring people from other countries to make goods for us to purchase.

Thus there is reason for a serious conversation to be had on how to reorient the economy to be one driven by exports, and not the export of raw commodities, but manufactured goods. If Kenya becomes a net exporter of raw commodities be they agricultural commodities or fuels and metals, the country will simply fall into the resource trap in which so many African countries find themselves where they cannot and do not determine the value of the commodities they export and thus fall victim to fluctuating commodity prices. Export orientation rooted in industry and manufacturing is a means of avoiding this trap and will allow the country to have greater control of the pricing of exported goods.

(source: https://conceptdraw.com/a1704c3/p10/preview/640/pict—business—vector-stencils-library.png–diagram-flowchart-example.png)

Further, export orientation is advantageous because momentum will shift from having a CAD to a Current Account Surplus, and this would be good news for several reasons. Not only would government be comfortable with the devaluation of the KES (where the momentum is at the moment), exports generate forex that government can not only use to build up reserves but also more easily pay off foreign denominated debt without having to go through the expensive headache of selling KES.

Secondly, export orientation has, time and again, proven to be an effective means of pulling millions out of poverty. As a net exporter, a more serious dent can be made in Kenya’s unemployment problem as the country will be in a position where it is Kenyans being hired by companies locally to make goods for people in other countries. In the most simple terms, being a net goods exporter generally means you are a net job importer. This set-up is obviously a plus in not only putting Kenya’s labour market to good use, export orientation rooted in waged employment builds disposable income developing the local consumer market where more people have more money with which they can purchase more goods and services thereby fueling economic growth. Further, export orientation can be a useful risk mitigation technique as companies that export will have an easier time riding out fluctuations in the Kenyan economy and are more likely to stay in business.

(source: http://www.niras.com/~/media/images/niras-com/jobs/job-vacancies/job-vacancies-550×210.ashx)

Finally, as an export economy serving numerous external consumer markets, not only will it allow more companies to hire more people, targeting a massive external market is a much more effective strategy for generating sales and profits beyond the limited domestic market. As a result, Kenyan owners of businesses of all sizes can be in charge of profitable businesses that build their wealth and that of the country. This will also be good news for government because a larger number of profitable companies will translate into higher tax collection and revenue generation. Thus government will become more self-reliant in financing key development projects.

Clearly export orientation has its challenges; exporting comes with regulatory, commercial and financial challenges businesses would not have otherwise faced if they just focused on growing revenues in their domestic market. Further, as was seen in the 2008-09 financial crises, if external consumer markets are hit by financial troubles, it will affect exporters. However these are risks that can be mitigated. For example, government can provide more effective direction on the requirements of exports into various markets and with the private sector, help businesses to access the export finance they need to grow. Further, Kenyan companies can begin by focussing on export markets within Africa where the trend is consumer market growth.

 Anzetse Were is a development economist; anzetsew@gmail.com