The value of US trade with Africa is declining, while China’s is booming. Global Insight analyses why the US is struggling to trade on a large scale with Africa and assesses what impact the Ebola outbreak has had.
In August this year, US President Barack Obama hosted a three-day Africa Leaders Summit, the largest event any US President has held with African heads of state. The event was largely seen as America’s first step towards challenging China’s dominance in trade relations with the continent: trade between China and Africa was estimated as being worth over $200bn last year, more than double that between the US and Africa. Indeed, during the Summit Obama admitted that the level of US trade with the entire continent of Africa was only comparable to that between America and Brazil.
Since the Summit was held, all eyes have been on Africa as the alarming extent of the Ebola outbreak in the west of the continent has become apparent. ‘The challenge with Ebola is that very little is known about the disease. Most people would rather play safe,’ says IBA African Regional Forum member, Dr Dapo Olanipekun of Wole Olanipekun & Co in Lagos. And the Ebola crisis has brought the trade relationship between the US and Africa into stark relief once again. ‘Recently, major airlines and cargo firms have reviewed their African operations due to the Ebola outbreak. Many other countries have also placed restrictions and controls at border entry points. This encumbrance on movement of goods and services invariably will affect US–Africa trade,’ continues Olanipekun.
With trade levels between the two continents dwindling and the new challenges posed by the outbreak of Ebola, a different approach is clearly needed if the US is to compete with China.
African growth and opportunity
In 2000, a trade preference programme aiming to promote trade and investment in Africa was created. It aimed, in particular, to boost US trade with the continent. Yet what impact the African Growth and Opportunity Act (AGOA) may have had has certainly not been long-lived: last year, the volume of US–Africa trade was only worth $85bn, down from $98bn in 2012, and $125bn in 2011.
‘You have to have a broader view and a more long term view of Africa than a lot of American investors have, and that means education’
Appleton Luff; Chair, IBA International Trade
and Customs Law Committee
On the other hand, Africa’s trade with China grew dramatically from $10.8bn in 2001 to $150.3bn in 2011 according to the United States International Trade Commission (USITC), and reached $210.3bn last year, a figure recently announced by the Chinese Ministry of Commerce, and one which positions China as Africa’s largest trading partner for five consecutive years.
One reason for the lag in US–Africa trade under the AGOA is the termination of the World Trade Organization Agreement on Textiles and Clothing (ATC), a temporary agreement created to phase out the Multi Fibre Arrangement,which had regulated the amount developing countries could export to developed countries. ‘The problem is, what trade there was between Africa and the United States, a lot of it was textile and garment oriented,’ says Edmund Sim, partner at Appleton Luff and Chair of the IBA International Trade and Customs Law Committee. ‘When we had quotas, exports from Africa were at high levels because you couldn’t buy from other regions. Now you can and so a lot of those orders have shifted from Africa to Asia and Latin America.’
International trade lawyer and policy expert Evelyn Suarez agrees. ‘AGOA didn’t give the African countries the same benefit when the quotas went away,’ she says. She also points to the recent threat to the African textile industry posed by the possibility that certain provisions of AGOA favourable to African textile producers may not be included in the Act if it is renewed next year. ‘They
[the clothing industry] had a special rule, the “yarn forward” rule, which makes it easy for them to qualify for the preferential duty. But what happened is it was about to expire […] When there’s not predictability and certainty of whether a law is going to be extended then companies don’t invest.’
A matter of concentration
The composition of bilateral trade is one factor that cannot be underestimated. Ronny Mkhwanazi, Managing Director of South African law firm Mkhwanazi Incorporated, takes South Africa as an example: ‘During the 2008–2009 financial crisis, South Africa’s exports to its major trading partners declined sharply. China, however, was an exception as exports continued to increase.Similarly, the decline in imports from China was less significant than from the US.’ The reason for this, suggest Mkhwanazi, is that South Africa’s exports to China are ‘concentrated in minerals and non-fuel commodities’.
Sim agrees. ‘The Chinese are primarily resource driven, whereas the United States are not as concentrated on resources, but are also focused on services and investment in digital trade and e-commerce, for which Africa is not as attractive a market, at least at this stage. In the future it could be because the continent is growing very fast.’
In particular, Sim notes that: ‘China is making huge investments in the continent and so you have large capital inflows coming [to Africa] from China compared
to the US.’ Indeed, Chinese direct investment in Africa amounted to $25bn by the end of 2013, with more than 2,500 Chinese companies doing business on the continent, in sectors including finance, telecommunication, energy, manufacturing and agriculture, creating more than
100,000 local jobs.
A recent report by Brooking’s Institution’s Africa’s Growth Initiative (AGI) revealed that resource-rich countries such as South Africa and Nigeria receive more foreign direct investment (FDI) from China and the US than other
Sub-Saharan African countries, and that the sectors in which China and US invested were the mining and extractive industries. It points to the fact that China’s FDI composition tends to be more diversified than that of the US, with
15.3 per cent in manufacturing, compared to five per cent in the case of the US. As such, FDI flows to productive sectors such as manufacturing and mining could have a positive correlation with bilateral trade patterns.
A continent, not a monolith
A number of commentators point to the US’s inabilityto deal with Africa as a diverse set of entities.Suarez suggests that, for many Americans, Africa is unfamiliar. ‘There’s an education issue: many people in the US think of Africa as one country, a monolith. It’s foreign; it’s far away; we don’t have the historical connections that Europe has with Africa. All that makes it difficult.’ This tendency to see Africa as a single market explains why the US has bilateral trade agreementswith just six Sub-Saharan African countries, whereas China has agreements with 27 countries.
Moreover, although US trade with Africa is governed by AGOA, it doesn’t have a free trade agreement with any individual Sub-Saharan African country. For Sim, free trade agreements with individual countries are central to the success of regions like the EU, which trades heavily with Africa: ‘The EU, for the longest time, has had trade preference agreements with Africa and they have maintained them and come up with new generations of agreements […] whereas the trade preference [agreement] between Africa and the United States has not been as far reaching, hasn’t been updated and so that’s where things have fallen behind.’
Most commentatorsagree that China’s historical trading connection with Africa has been advantageous. ‘Historically China was very involved in southern Africa, Angola, Tanzania, dating back 50 years,’ says Sim, ‘And people remember those ties. [...] Chinese involvement in Africa is a long-standing topic: it’s not that they just came out of the woodwork five years ago or six years ago; they’ve been there a long time.’ He adds: ‘There are some natural advantages for the United States, the diaspora and such, but in terms of which countries are active in Africa and have growing markets, there is not as strong a relationship between those countries and the United States. So, for example, Nigeria and the United States: yes, oil is relatively strong but you look at other areas of trade, it’s not as developed as say Great Britain, which of course has a strong Nigerian diaspora.’
Take the long (and broad) view
For US companies to compete with China in Africa, Sim believes ‘a broader view of trade is needed’and that the solutionlies in more indirect investment on the part of US companies in areas like education and health aid. ‘You have to have a broader and a more long-term view of Africa than a lot of American investors have, and that means education.’
For Suarez, education and capacity building in Africa are central to improving trade relations between the US and Africa, ‘to help companies in Africa understand the market, understand what works in the US’. As a customs expert she points out that capacity building also involves customs modernisation and trade facilitation. She suggests looking into regional integration as a way of creating a place for African countries in the global value chain, similar to what Asian countries have achieved, enabling giants such as Apple to have their products seamlessly manufactured in different Asian countries. ‘If you’re a company that makes consumer products and you want to set up a manufacturing facility in one country and you want to serve a region, the customs and the corruption is an impediment to fulfilling that objective.’
Sim adds that African companies have to offer added-value exports. ‘Instead of exporting palm oil, export biodiesel like Indonesia has done. We’re not talking huge steps, but it’s a natural one in the evolution of trade. Or, instead of exporting raw cocoa, export cocoa powder. These are the kinds of things US companies are good at, having seen the potential of the market.’ He points to the great potential for US companies in the technology sector: Africa has overcome its infrastructural hurdles – such as a lack of landlines – by advancing straight to e-commerce via mobile phones. Given reports from the African Development Bank about the high potential presented by Africa’s growing middle class, the sector offers a credible growth area. Tech hubs like Konza Techno City in Kenya and Botswana Innovation Hub in Gaberone proves that African governments and companies are already exploring this growing potential.
Dispensing with formalities
Other advantages Chinese companies have over their American counterparts include business practices. Asian and African cultural norms are often seen as being more aligned than they are with Western ones, with the focus of deals revolving around people and relationships, rather than text. ‘I think Chinese companies are more willing, in a legal context, to live with ambiguity,’ says Edmund Sim, partner at Appleton Luff and Chair of the IBA International Trade and Customs Law Committee. ‘Not everything has to be reduced to paper.’ The US’s stringent Foreign Corrupt Practices Act (FCPA) means less formal relationships are simply not an option for American companies, as proved by instances such as the Security and Exchange Commission (SEC) customs bribery investigation against seven oil and freight companies, including Panalpina and Shell, which spread across over ten countries and resulted in a $236.5m settlement.
‘I think the underlying concern or urgency about improving the economic situation in Africa relates to security,’ says international trade lawyer and policy expert Evelyn Suarez. That’s the underlying motivation, but at the same time it’s the impediment. The [US] government is trying to promote trade and investment in a place that is quite diverse, with a growing middle class, but other areas have conflict. Then you have the other issues of inefficiencies and red tape at the border and corruption and that makes it difficult for US companies to venture out into Africa. So it’s a very complicated issue for American companies. Public companies have to protect shareholder value and so they have to mitigate the risks.’
‘It’s a very complicated issue for American companies. Public companies have to protect shareholder value and so they have to mitigate the risks’
International trade lawyer and policy expert
In order to close the trade deficit with China, Mkhwanazi says the US needs to diversify its trade with Africa beyond the traditional primary and mineral commodities, improve its FDI flows into productive sectors of the economy and improve the status of governance in countries like South Africa. Indeed, promoting good governance and reducing corruption was repeatedly listed as a prerequisite for the increase of US–Africa trade relations. International efforts such as the WTO Trade Facilitation Agreement, currently being negotiated, are seen as key to reducing corruption at the border, by providing the necessary financial backing for initiatives such as the modernisation of borders, which would improve transparency and reduce red tape.
There are, for example, plans to provide automated systems, including automated payments for customs duties, which would remove some of the discretion and corruption businesses can face at borders. Suarez is hopeful: ‘There is a lot of work being done. There is a project by the maritime industry being done with customs in Nigeria […] They’re trying to address corruption at the port and it’s a collective action effort by a number of companies.’
All the signs indicate that investors are increasingly seeking opportunities on the continent. This October, London’s Global African Investment Summitsaw300 international business leaders and government officials from across the African continent come together to discuss opportunities for private sector engagement and investment in Africa. One of the main themes was the need to enhance the continent’s financial and physical infrastructure. The variety of companies and attendees, coming from all over the world, shows that Africa has more potential trading partners than ever before. Having a variety of partners will strengthen the ability of African countries to broker deals that are favourable to their populations, which will lead to inclusive growth. As the Chair of this year’s Global African Investment Summit, former Nigerian president Olusegun Obasanjo, stated on the first day of the conference: ‘Old practices are no longer acceptable. Today we expect our partners to place the social and economic development of our citizens at the forefront of their projects’ design.’
Mayeni Jonesis a freelance journalist and can be contacted on email@example.com