Trade between China and Sub-Saharan Africa (SSA) has been asymmetric and characterised by China’s importing mainly mining and other extraction products from SSA, and the latter importing manufactured goods from China. What options does SSA have to increase welfare and reduce its heavy reliance on these raw material exports, especially to China? 

Although trade between China and Sub-Saharan Africa (SSA) has increased rapidly in recent years, the latter remains a small trading partner for China. Only 2.4 percent of China’s import comes from SSA and 90 percent of these imports are crude oil and mining products. Meanwhile for SSA, China is a significant import source, supplying 10 percent of the continents’ imports. In 2008, total SSA imports from China were about USD 25 bn. 64 percent of these imports are from manufacturing (light and heavy manufacturing), 22 percent from textile and apparel and the rest (14 percent) from other sectors (raw food and agriculture, services, etc). The worry is that as raw commodity prices fluctuate, such a pattern will increase the continent’s risky dependence on mining and extraction products as a source of export revenue, and undermine the development of its agriculture and manufacturing sectors, the main sources of value addition and employment. Can this situation be reversed so that SSA exports less raw materials, especially less crude oil and mining, and higher value and processed products to China?

Trade policy options have limited effects

It appears that trade policy has only little room for manoeuvre. Bilateral tariff elimination will yield only limited gain because China is already one of the most open markets for African countries. China’s average tariffs towards least developed countries in general, and SSA in particular, are already low: between 2005 and 2010, the weighted average tariff fell from 2 to 0.5 percent (average tariff fell from 7.14 to 2.83 percent). Because SSA’s export volume to China is small, the tariff reduction has limited welfare and terms of trade effects. Similarly, subsidising the domestic agriculture and manufacturing exports is unsustainable since many SSA countries are cash-strapped; but even if manufacturing were subsidised, it would be still no match for the highly competitive nature of Chinese manufacturing in both domestic and world markets.

It is often tempting for SSA countries to revert to protectionism and import substitution: restricting the import of Chinese goods to protect their domestic sectors. There too, however, a sustained welfare growth or sudden increase in manufacturing is not guaranteed. Such restrictions would even have negative impacts on welfare because households and firms in many SSA countries currently depend heavily on cheaper intermediate and manufactured goods from China. The only sector that may benefit from the protection against Chinese import is low-skill labour intensive sector like textiles, but even this will be unable to either absorb the entirety of the labour force that moved out of the depressed sectors or offer higher skill jobs that can improve allocative efficiency. Moreover, such import restrictions would cancel any spill-over effects of trade on SSA productivity.

Additionally, simulation results agree that free trade within and among Regional Trading Arrangements (RTAs) in SSA increase employment and improve welfare for the region as a whole. Free trade within and among RTAs on the continent will also increase intra-regional trade with only a minimal loss (due to trade diversion) for China, but it is not enough to reverse the export structure heavily based on extract and mining products. Overall, the combination of the elimination of tariffs on SSA’s goods imported by China and free trade within and among RTAs has no significant effect on the structure of China-SSA trade.

Manufacturing can be the key and China can help unlock SSA’s potential to increase export processed goods…

In exploring feasible alternatives that could improve SSA’s welfare significantly from its trade with China and reduce the former’s reliance on export of extraction and mining products, it is important to examine closely the structure of these countries’ trade in general. This trade is characterised by low levels of manufactured good exports: 60 percent of SSA’s total export revenue comes from mining and extraction products and only 13.5 percent comes from manufactured goods other than food. This pattern is more pronounced in its trade with China: 90 percent of SSA’s export to China is concentrated on mining and extractions while exports of manufactured goods represent less than 5 percent. Reversing this trend, i.e. diversifying towards expanding the share of processed and manufactured products, remains an option in the search of strategies to increase trade impacts on SSA’s welfare.

China could play a big role in this export diversification towards processing and manufacturing for three reasons. First, China remains a large export market for the rest of the world; as its per capita income continues to rise, the demands for semi-processed or even processed goods will too. Second, China is a potential source of employment for the rest of the world: with the increase in income per capita in China, the opportunity costs of labour also increase, prompting manufacturers in China to outsource activities in many developing countries in Asia (e.g. Vietnam), or even re-shore some activities back to the United States. Third, increased trade (export or import) in manufactured goods with China will increase the likelihood of technology and R&D spill-over. After all, as mentioned earlier, 64 percent of SSA’s total imports from China come from the manufacturing sectors (light manufacturing 22 percent, heavy manufacturing 42 percent) and 22 percent from the textile and apparel. Overall, China’s roles as an export market destination, a provider of employment and a source of technology and R&D spill-over have been overlooked but now deserve serious consideration.

… But SSA’s human capital stock, productivity and technology needs to shift up

SSA’s manufacturing export has been lagging behind due to its low labour productivity and lack of technical progress. Projections in labour-productivity growth rates by sector in selected regions concur that China and SSA are at two opposite ends of the labour-productivity spectrum, especially in manufacturing. Skilled and specialised labour force remains scarce or less mobile across sectors. To be able to diversify exports towards semi-processed and processed goods or to benefit from spill over effects from manufacturing imports especially from China, SSA’s labour and total factor productivities in the manufacturing sector need to grow and fast. Unless its labour productivity and technology shift up quickly, SSA will be unable to take advantage of the outsourcing of China manufacturing activities. 

How much technological progress and labour-productivity increases are needed to stimulate this growth, manufacturing production and export and increase welfare? Simulation results show that even modest increases in labour productivity and technological shift at 2 percent or 3 percent per year in both agriculture and manufacturing can raise welfare significantly and increase production and export of processed goods. This high responsiveness is not surprising given the current low level of productivity in SSA. Moreover, a R&D spill over from trade with industrialised China can help. But can large increases (10-15 percent) in labour productivity and technical progress in SSA’s manufacturing sectors significantly reduce the high share (90 percent) of mining and extraction export to China? The answer is no, at least, not immediately. The reason is that the current value and share of export is too high to be reduced in a few years.

A way forward

What to do then? Free trade and increases in labour productivity and technology will raise SSA’s welfare and its manufacturing exports but are still not enough to immediately reduce the high share of raw material exports, especially mining and extraction products. Some voluntary quantitative restrictions on these exports by African countries’ governments may be needed to alter the pattern significantly. But these restrictions, unless well managed, remain controversial and can be counterproductive as they reduce government revenue and often lead to black markets especially in countries where market institutions are weak. Another option is outsourcing some parts of the processing activities to SSA to retain some value-added and provide employment. For that to happen, these countries will have to meet the levels of infrastructure and human capital necessary to run the operations.

There is indeed an urgent need for SSA to pursue high growth rates in labour productivity and technology to seize and expand the gain in trade with China and the rest of the world. Technical progress and increase in labour productivity stem mainly from effective policy aimed at building and training skilled labour force and investing in extension and research. China can help SSA to smoothen that path to industrialisation, if the R&D spill-over effects from China-SSA trade are enhanced by a direct transfer of technology and direct investment in agriculture and manufacturing, and if China’s already strong support (currently 34 percent of projects being implemented in Africa) for infrastructure development continues. But the path will even be smoother if both parties first start to agree that sustainable gains can be acquired by focusing less on trade of raw materials (such as mining and other extraction products) and more on trade of processed and manufactured goods.

Manitra A. Rakotoarisoa is a Trade Economist at the Trade and Markets Division, FAO. Cheng Fang is a Trade Economist at the Trade and Markets Division, FAO. Views expressed in this article are the authors’ own and do not represent the views of FAO.

This article is published under Bridges Africa, Volume 4 - Number 7, by the ICTSD.