Emerging Market to Emerging Market Trade
Trade between Asia and Africa is growing significantly. Asian countries, led by China, are now among the major consumers of African commodities, primarily for the construction and energy industries. For its part, Africa is importing more manufactured goods from Asia, particularly China. Many countries across Asia and Africa are benefiting from globalisation. Those that manufacture goods at competitive costs are reaping maximum benefits. China, in particular, has significantly increased its share of the global export market over the past decade. Its sales of manufactured and consumer-durable goods are challenging traditional exporters.
Commodity exporters, particularly in Africa, have also benefited. Over the past decade, the value of African exports has risen by more than 137%. Despite this, Africa’s share of global trade has dipped slightly – not helped by slackening demand from Europe. By contrast, China and Africa’s growing demand for manufactured goods has led to stronger trade between the two regions.
This report focuses on Sino-African trade, particularly the present dynamics, the outlook and the dangers. The report reinforces the belief that trade between the two regions will remain buoyant as Chinese demand for commodities continues to increase as a result of strong sectoral growth in the medium term, and Africa remains a ready market for competitively priced consumer goods.
Over the past decade, the value of Africa’s exports has risen by 137%. However, because of significant growth in global trade, its overall market share has actually fallen. In 2004, Africa’s share of world trade was estimated at 2.5%, down from 3% in 1990. Exports of primary commodities have not been helped by tame growth in European economies. Africa needs to break through into new markets for manufactured goods. Meanwhile, China’s share of global trade has increased. In 2004, China’s share of world exports was about 7% (up 35% year-on-year). China now imports more from developing countries. Amid increasing globalisation, developing countries that export manufactured goods have experienced the steadiest growth.
Traditionally, Western Europe has been the source of most of Africa’s imports and the primary destination for its exports, mainly because of historical ties. Although trade between Western Europe and Africa is still significant, it has remained relatively stable, whereas Africa’s trade with China has been growing strongly.
Figure 2 shows how much of global demand for key commodities is accounted for by Asia, and particularly China. Note that Asia-Pacific data includes China. In 2003, the Asia-Pacific region accounted for 45% of global demand for copper, 39% of aluminium, 50% of tin and 29% of crude oil. China has become the leading consumer of copper, accounting for much of the rise in copper prices during recent months. This structural demand for commodities is likely to remain high as the Chinese economy continues to develop. This makes Africa a natural trading partner.
Africa has long relied on the sale of commodities and raw materials to sustain its export growth. Exports from Africa to Western Europe have traditionally comprised agriculture, mining and manufacturing products. By contrast, African exports to China have been mainly for the energy and construction industries. The main commodities supplied by the principal exporters to China (Angola, South Africa, Republic of Congo, Equatorial Guinea, Nigeria, Gabon, Algeria and Chad) are oil, base metals and timber. Phosphates and tea comprise part of the second-tier African exports to Asia. Figure 3 shows the top 10 African exporters to China.
In 1995, Japan accounted for 26% of African exports to Asia. However, China is responsible for much of the recent growth in trade between Africa and Asia. In 2004, total trade between China and Africa reached US$26bn, over 10 times the amount recorded in 1991. Africa now provides over 20% of China’s imported oil. China has also been the principal destination for tropical timber from Africa for the past five years, and has replaced France as the primary export market for Gabonese timber. To facilitate its trade with Africa, China has scrapped tariffs on 190 types of imported goods from 28 of the least developed African countries.
Agricultural commodities could become a key issue to focus on. Although China faces a huge problem in meeting its energy demands, feeding its population may become an even bigger problem. Urbanisation and the opening up of Western and Central China may severely limit the amount of agricultural land within China. Africa may be able to help meet any resulting food deficit (although this depends on Africa improving the efficiency of its agricultural sector).
Chinese exports to Africa comprise mainly machinery, electronics, textiles and hi-tech products. Futhermore, competitively priced Chinese textiles are an important component in Sino-Asian trade. The phasing out of the multi-fibre agreement in January 2005 led to significant growth in the Chinese textile market, with its textile trade growing 20% last year. China’s competitive advantage in this sector should further boost exports to Africa.
Demand for Chinese commodities is likely to remain strong. Ongoing industrialisation requires huge investment in infrastructure. For example, China’s consumption of copper rose by an annual rate of 24% in 2003 and is estimated to have increased by about 11% in the first eight months of 2005. It is expected to keep growing above 10% a year in the medium term, supported by the growth of China’s electricity infrastructure.
Oil has the potential to become more important in trade between the two regions. Even though China is already the world’s second biggest consumer of oil, energy consumption per capita is expected to continue to rise. Big populations and strong medium-term growth will increase energy demand. Political uncertainties in the Middle East have forced many countries to start looking for other sources of oil. Africa is a natural choice. Oil demand from China, more than any other Asian country, is crucial. During the past five years, China accounted for almost two-thirds of the growth in Asian oil demand.
China’s demand for oil will remain strong. Moreover, it is trying to build up its strategic oil reserves to 90 days by 2015, from the existing 10-30 days. Both the level of imports and the number of days’ cover is rising. Oil imports are set to rise steadily as China tries to lock in more suppliers from Africa for its national energy security plan. Recently, China’s top offshore oil producer, CNOOC Ltd, agreed to pay US$2.3bn for a stake in a Nigerian oil and gas field – its largest overseas acquisition. This follows deals struck over the past 24 months to secure raw materials in Gabon, Tunisia and South Africa.
Timber will also become more important in Asian-African trade. African timber exports to China are likely to be supported in the medium term, with continued demand for construction, furniture, interior decoration and paper. Timber consumption is forecast to remain high in the medium term, driven by large-scale infrastructure projects, including the 2008 Olympics, the Three-Gorges Dam, the development of Western China and the Shanghai World Expo in 2010.
Despite the optimistic outlook for Sino-African trade, there are concerns about Africa’s dependency on Chinese demand. Imports from Africa may be vulnerable to any sudden slowdown in China’s economic cycle. The impact of a drop in demand from China is likely to be more significant than was the case during the Asian crisis because of the increase in inter-regional trade and investment.
Growing trade ties between China and Africa reflect a structural change, suggesting that the trend for inter-regional trade is on the rise. However, the exact profile from year to year will be influenced by cyclical factors. Of these, perhaps the most immediate issue is whether China suffers a hard landing.
Since the first half of 2003, gradual and targeted policy tightening has led to early signs that the authorities may successfully engineer a soft landing. However, given the recent surge in investment to a level greater than 40% of GDP, a hard landing can’t be ruled out. Nevertheless, even if there is a hard landing, its impact is likely to be short-lived.
There is a growing emphasis on sustainable-development policies within the growth strategies of African countries. This is particularly evident in the forestry sector. China has been working with a number of countries and international organisations to promote worldwide, sustainable forest development and curb the illegal trade in forest products. Multilateral agencies have emphasised better governance in this sector and have made it a criteria for donor aid.
Greater awareness of the dangers of significantly exploiting commodities could restrict the global supply of timber. For instance, in 2003, Chinese imports of tropical hardwood slowed to 20% year-on-year (having risen by 59% in 2002), partly because of export bans in major supplying countries, including Cameroon. However, in many African countries, the drive to restrict excessive logging is matched by a desire to add value to timber exports. While curbing supplies, compliance with sustainable-development policies may lead to an improvement in the value of African exports in the longer term.
The profile of global trade is changing. This change has led to an increase in Sino-African trade. China is increasingly looking to Africa to satisfy its growing demand for commodities. The potential for even further growth in trade between the two regions is high. This is due to strong demand from China for African commodities and growing demand from Africa for Asia-made consumer durables.
However Africa’s growing dependency on China leaves the region more vulnerable to changes in policy or economic cycles in China. Nevertheless, there is evidence that the encouraging trend in Sino-African trade is set to continue in the medium term, as China continues to post respectable growth and gain greater market share in Africa.